UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
DC  20549





FORM
10-K




(Mark
One)


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




For the
fiscal year ended December 31,
2008




OR




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




For the
transition
period from _________ to




Commission
file number 0-22245




NEXMED,
INC.


(Exact
Name of Registrant as Specified in Its Charter)




Nevada
                    
                    87-0449967(State or Other Jurisdiction of Incorporation orOrganization)
                    
                    (I.R.S.
      EmployerIdentification
No.)





89 Twin Rivers Drive, East
Windsor, NJ 08520


(Address
of Principal Executive Offices)   (Zip Code)




(609)
371-8123


(Registrant’s
telephone number, including area code)




Securities
registered pursuant to Section 12(b) of the Act:




Title of Each Class
                      
                      Name of Exchange on Which
      RegisteredCommon
      Stock, par value $.001
                      
                      The
      NASDAQ Capital
Market




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




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




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.Yes x No
 ̈




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




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check
one):  Large accelerated filer  ̈  Accelerated
filer x
Non-accelerated filer  ̈ (do
not check if a smaller reporting company)  Smaller reporting
company   ̈




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




As of
March 10, 2009, 84,410,736 shares of the common stock, par value $.001, of the
registrant were outstanding.  The aggregate market value of the common
stock held by non-affiliates, based upon the last sale price of the registrant’s
common stock on June 30, 2008, was approximately $109 million.





NEXMED,
INC.


INDEX TO
ANNUAL REPORT ON FORM 10-K FILED WITH


THE
SECURITIES AND EXCHANGE COMMISSION


YEAR
ENDED DECEMBER 31, 2008




ITEMS IN FORM
10-K




PART
      I.
                    
                    
                    3Item
      1.
                    BUSINESS
                    
                    3Item
      1A.
                    RISK
      FACTORS
                    
                    8Item
      1B.
                    UNRESOLVED
      STAFF COMMENTS
                    
                    14Item
      2.
                    PROPERTIES
                    
                    14Item
      3.
                    LEGAL
      PROCEEDINGS
                    
                    14Item
      4.
                    SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                    
                    14PART
      II.
                    
                    
                    14Item
      5.
                    MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
                    
                    14Item
      6.
                    SELECTED
      FINANCIAL DATA
                    
                    17Item
      7.
                    MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                    
                    17Item
      7A.
                    QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                    
                    23Item
      8.
                    FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                    
                    24Item
      9.
                    CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                    
                    51Item
      9A.
                    CONTROLS
      AND PROCEDURES
                    
                    51Item
      9B.
                    OTHER
      INFORMATION
                    
                    52PART
      III.
                    
                    
                    52Item
      10.
                    DIRECTORS,  EXECUTIVE
      OFFICERS AND CORPORATE GOVERNANCE
                    
                    52Item
      11.
                    EXECUTIVE
      COMPENSATION
                    
                    56Item
      12.
                    SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
                    
                    68Item
      13.
                    CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                    
                    69Item
      14.
                    PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                    
                    70PART
      IV.
                    
                    
                    70Item
      15.
                    EXHIBITS
      AND  FINANCIAL STATEMENT SCHEDULES
                    
                    70


2





PART
I.





ITEM
      1.
            BUSINESS.





Some of
the statements contained in this Report discuss future expectations, contain
projections of results of operations or financial condition or state other
“forward-looking” information. Those statements include statements regarding the
intent, belief or current expectations of the Company and its management team.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those projected in the
forward-looking statements. These risks and uncertainties include but are not
limited to those risks and uncertainties set forth under the heading “Factors
That Could Affect Our Future Results” in Item 1A of this Report.  In
light of the significant risks and uncertainties inherent in the forward-looking
statements included in this Report, the inclusion of such statements should not
be regarded as a representation by us or any other person that our objectives
and plans will be achieved.





General





We are a
Nevada corporation and have been in existence since 1987. Since 1994, we have
positioned ourselves as a pharmaceutical and medical technology company with a
focus on developing and commercializing therapeutic products based on
proprietary delivery systems. We are currently focusing our efforts on new and
patented topical pharmaceutical products based on a penetration enhancement drug
delivery technology known as NexACT®, which
may enable an active drug to be better absorbed through the skin.





The
NexACT®
transdermal drug delivery technology is designed to enhance the absorption of an
active drug through the skin, overcoming the skin's natural barrier properties
and enabling high concentrations of the active drug to rapidly penetrate the
desired site of the skin or extremity. Successful application of the NexACT®
technology would improve therapeutic outcomes and reduce systemic side effects
that often accompany oral and injectable medications. We have applied the
NexACT®
technology to a variety of compatible drug compounds and delivery systems, and,
on our own or through development partnerships, are in various stages of
developing new topical treatments for male and female sexual dysfunction, nail
fungus, psoriasis, and other dermatological conditions.  We intend to
continue our efforts developing topical treatments based on the application of
NexACT®
technology to drugs: (1) previously approved by the U.S. Food and Drug
Administration (“FDA”), (2) with proven efficacy and safety profiles, (3) with
patents expiring or expired and (4) with proven market track records and
potential.





Research
and Development





Our
research and development expenses for the years ended December 31, 2008, 2007
and 2006 were $5,410,513, $5,022,671 and $5,425,137,
respectively.  Since January 1, 1994, when we repositioned ourselves
as a medical and pharmaceutical technology company, through December 31, 2008,
we have spent $96,903,215 on research and development.





NM100060
Anti-Fungal Treatment





We have
an exclusive global licensing agreement with Novartis International
Pharmaceutical Ltd. (“Novartis”) for NM100060, our proprietary topical nail
solution for the treatment of onychomycosis (nail fungal infection). Under the
agreement, Novartis acquired the exclusive worldwide rights to NM100060 and has
assumed all further development, regulatory, manufacturing and commercialization
responsibilities as well as costs. Novartis agreed to pay us up to $51 million
in upfront and milestone payments on the achievement of specific development and
regulatory milestones, including an initial cash payment of $4 million at
signing.  In addition, we are eligible to receive royalties based upon
the level of sales achieved.





The
completion of patient enrollment in the Phase 3 clinical trials for NM100060
triggered a $3 million milestone payment from Novartis to be paid 7 months after
the last patient enrolled in the Phase 3 studies.  However, the
agreement also provided that clinical milestones paid to us by Novartis would be
reduced by 50% until we received an approved patent claim on the
NM100060.  As such, we initially received only $1.5 million from
Novartis.


3


On October 17, 2008, the U.S. Patent
and Trademark Office issued the Notice of Allowance on our patent application
for NM100060.  This triggered a $2 million milestone payment from
Novartis.  On October 30, 2008 we received a payment of $3.5 million
from Novartis consisting of the balance of $1.5 million of the patient
enrollment milestone and the $2 million patent milestone.





In July
2008, Novartis completed testing for the Phase 3 clinical trials for
NM100060.  The Phase 3 program required for the filing of the New Drug
Application (“NDA”) in the U.S. for NM100060 consisted of two pivotal,
randomized, double-blind, placebo-controlled studies.  The parallel
studies were designed to assess the efficacy, safety and tolerability of
NM100060 in patients with mild to moderate toenail
onychomycosis.  Approximately 1,000 patients completed testing in the
two studies, which took place in the U.S., Europe, Canada and
Iceland.   On August 26, 2008, we announced that based on First
Interpretable Results of these two Phase 3 studies, Novartis had decided not to
submit the NDA at this time.  As a result of this decision, we will
not receive a $6 million milestone payment for positive Phase 3 results and a $7
million milestone payment for the filing of the NDA has been postponed
indefinitely.





Novartis
has confirmed that it intends to complete patient testing in the ongoing
comparator study which they had initiated in March 2007 in ten European
countries.  Over 900 patients with mild to moderate onychomycosis are
participating in this open-label study, which is designed to assess the safety
and tolerability of NM100060 (terbinafine 10% topical formulation) versus
Loceryl®
(amorolfine) 5% nail lacquer, a topical treatment for onychomycosis that is
approved in Europe. The comparator study is expected to be completed by early
2009 and the data will be available in mid-2009.  If the results of
the comparator study are positive and the total clinical database is deemed to
be sufficient for filing, we expect Novartis to begin filing for marketing
approval in selected European countries while they develop a new plan of action
for the U.S. market.  If the results are negative, we expect Novartis
to terminate the global licensing agreement, which it can do at any time, and
the rights to NM100060 would revert back to us with no compensation for
termination.





Vitaros®





We also
have under development, a topical alprostadil-based cream treatment intended for
patients with erectile dysfunction (“Vitaros®”), which
was previously known as Alprox-TD®.   Our
NDA was filed and accepted for review by the FDA in September and November 2007,
respectively.  During a teleconference with the FDA in early July
2008, our use of the name Vitaros® for the
ED Product was verbally approved by the FDA.





On
November 1, 2007, we licensed the U.S. rights of Vitaros® to
Warner Chilcott Company, Inc. (“Warner”).  Warner paid us $500,000
upon signing and agreed to pay us up to $12.5 million on the achievement of
specific regulatory milestones and to undertake the manufacturing investment and
any other investment for further product development that may be required for
product approval.  Additionally, Warner was responsible for the
commercialization and manufacturing of Vitaros®.





On July
21, 2008, we received a not approvable action letter (the “Action Letter”) from
the FDA in response to our NDA.  The major regulatory issues raised by
the FDA were related to the results of the transgenic (“TgAC”) mouse
carcinogenicity study which NexMed completed in 2002.   The TgAC
concern raised by the FDA is product specific, and does not affect the
dermatological products in our pipeline, specifically NM100060.





On
October 15, 2008, we met with the FDA to discuss the major deficiencies cited in
the Action Letter and to reach consensus on the necessary actions for addressing
these deficiencies for our Vitaros®NDA.  Several key regulatory concerns were addressed and
agreements were reached at the meeting. The FDA agreed to: (a) a review by the
Carcinogenicity Advisory Committee (CAC) of the 2 two-year carcinogenicity
studies which were recently completed; (b) one Phase 1 study in healthy
volunteers to assess any transfer to the partner of the NexACT®
technology and (c) one animal study to assess the transmission of sexually
transmitted diseases with the design of the study to be
determined.  The FDA also confirmed the revision on the status of our
manufacturing facility from “withhold” to “acceptable”, based on our adequately
addressing the deficiencies cited in their Pre-Approval Inspection (“PAI”) of
our facility in January 2008.  It is also our understanding that at
this time the FDA does not require a one-year open-label safety study for
regulatory approval.  After the meeting we estimated that an
additional $4 to $5 million would be needed to be spent to complete the
abovementioned requirements prior to the resubmission of the
NDA.


4





On
February 3, 2009, we announced the sale of the U.S. rights for Vitaros®and
the specific U.S. patents covering Vitaros®to
Warner which effectively terminated the previous licensing
agreement.   Under the terms of the agreement, we
received gross proceeds of $2.5 million as an up-front payment and are
eligible to receive an additional payment of $2.5 million upon Warner’s receipt
of an NDA approval from the FDA.  In addition, Warner will pay a total
of $350,000 for the manufacturing equipment for Vitaros®.  The
purchase agreement with Warner gives us the right to reference their work on
Vitaros® in our
future filings outside the U.S.  This is important as we move ahead
with international partnering opportunities because the additional data may
further validate the safety of the product and enhance its potential
value.  While it is our understanding that Warner is currently moving
forward in pursuing NDA approval for Vitaros®, they
are not obligated by the purchase agreement to continue with the development of
Vitaros® and the
filing of the NDA.





On
February 21, 2007, the Canadian regulatory authority, Health Canada, informed us
that the lack of a completed 12-month open label safety study would not preclude
them from accepting and reviewing our New Drug Submission (“NDS”) in Canada,
which was accepted for review on February 15, 2008.  On May 2, 2008,
we announced that our manufacturing facility received a GMP compliance
certification from Health Canada, which is essential for the ultimate approval
and marketing of Vitaros® in
Canada.  We received a Letter of Deficiences (“LOD”) on November 12,
2008 which cited similar regulatory issues as previously cited by the
FDA.  On February 18, 2009 we responded to the LOD.  There
is no assurance that our response will be sufficient to convince Health Canada
to approve our product.





On April 20, 2007, the United Kingdom
regulatory authority, Medicines and Healthcare Products Regulatory Agency (the
“MHRA”), also informed us that the safety data that we have compiled to date was
sufficient for the Marketing Authorization Application (“MAA”) to be filed and
accepted for review in the United Kingdom.  We had another guidance
meeting with the MHRA in January 2008 and received additional input for the
preparation of our MAA.  However, the MHRA has recently informed us
that due to the backlog of MAA filings, they would not be able to receive and
start reviewing our MAA until October 2010.  Even though we are
encouraged by the initial positive feedback from the MHRA, the risk remains that
we may not be successful in convincing the MHRA and other European regulatory
authorities to approve our product for marketing.





Femprox® and
Other Products





We are
also developing Femprox®, which
is an alprostadil-based cream product intended for the treatment of female
sexual arousal disorder. We have completed nine clinical studies to date,
including one 98-patient Phase 2 study in the U.S. for Femprox®, and
also a 400-patient study for Femprox® in
China, where the cost for conducting clinical studies is significantly lower
than in the U.S.  We do not intend to conduct additional studies for
this product until we have secured a co-development partner, which we are
actively seeking.





We have
also continued early stage development work for our product pipeline with the
goal of focusing our attention on product opportunities that would replicate the
model of our licensed anti-fungal nail treatment.  Our current efforts
are focused on the development of viable topical treatments for psoriasis, a
common dermatological condition.





Restructuring
Plans





In
December 2008, we began to implement a restructuring program with the goal of
reducing costs and outsourcing basic research and development.  As
part of our restructuring plan, we announced on January 22, 2009 a memorandum of
understanding (“MOU”) with Pharmaceutics International, Inc. or
Pii.   The purpose of this collaboration is to broaden the
promotion of our technology as well as permit us access to Pii’s research and
development and commercial manufacturing infrastructure.Pii is a privately-held
contract research and manufacturing organization with over 400 employees located
near Baltimore, Maryland.  Their capabilities range from product
research and development to commercial manufacturing.  Pursuant to our
MOU, Pii will promote our NexACT technology to its clients and may independently
identify new product development opportunities for this collaboration with
NexMed.  We will provide technical guidance and oversight in the
development of new products.  In addition, as part of our
restructuring plan, we are discussing with Pii the opportunity to co-develop our
early stage products which will enable us to further reduce our monthly overhead
expenses.





The
partnership with Pii allows us to continue the development of our early stage
projects while we reduce our  research and development staff and
infrastructure.  As a result, we expect to see our monthly operating
overhead burn rate reduced to approximately $300,000 per month by the end of the
first quarter of 2009.  Access to Pii’s state of the art facilities
also allows us to further improve our cash position by selling our facility and
redundant equipment.  We plan to sell our facility during 2009 which
would further reduce our monthly operating expenses to approximately $200,000
per month after the sale of the facility is completed.


5





During
2009, we plan to work with Pii to complete the development of the psoriasis
project and then license the product to a co-development and marketing
partner.  We also plan to license the rights to Vitaros®
for territories outside the U.S., including Canada, South America, and
Europe.  The purchase agreement with Warner gives us the right to
reference their work on Vitaros® in our
future filings outside the U.S.  This is important as we move ahead
with international partnering opportunities because the additional data may
further validate the safety of the product and enhance its potential
value.  Additionally, the future work done by Warner regarding the
safety of Vitaros® may
enhance the value of Femprox®as
we work to find a marketing and co-development partner during
2009.  In addition, we remain open to opportunities to co-develop
products utilizing our NexACT technology and we will be actively pursuing
strategic opportunities that would leverage our NexACT platform and generate
partnership revenues to fund our development efforts.





Patents





We have
either acquired or received thirteen U.S. patents out of a series of patent
applications that we have filed in connection with our NexACT®
technology and our NexACT® -based
products under development. To further strengthen our global patent position on
our proprietary products under development, and to expand the patent protection
to other markets, we have filed under the Patent Cooperation Treaty
corresponding international applications for our issued U.S. patents and pending
U.S. patent applications.





The following table identifies the
thirteen U.S. patents issued for NexACT®
technology and/or our NexACT®-based
products under development, and the year of expiration for each
patent:





Patent Name
              
              Expiration DateBiodegradable
      Absorption Enhancers ***
              
              2008Biodegradable
      Absorption Enhancers ****
              
              2009Compositions
      and Methods for Amelioration of Human Female Sexual
      Dysfunction
              
              2017Topical
      Compositions for PGE1 Delivery
              
              2017Topical
      Compositions for Non-Steroidal Anti-Inflammatory Drug
    Delivery
              
              2017Prostaglandin
      Composition and Methods of Treatment of Male Erectile Dysfunction **
              
              2017Medicament
      Dispenser
              
              2019Crystalline
      Salts of dodecyl 2-(N, N-Dimethylamino)-propionate *
              
              2019Topical
      Compositions Containing Prostaglandin E1
              
              2019CIP:
      Topical Compositions Containing Prostaglandin E1
              
              2019Prostaglandin
      Composition and Methods of Treatment of Male Erectile Dysfunction **
              
              2020CIP:
      Prostaglandin Composition and Methods of Treatment of Male Erectile
      Dysfunction **
              
              2020Topical
      Stabilized Prostaglandin E Compound Dosage Forms
              
              2023




*Composition of matter patent
on our NexACT®
technology




**Sold to Warner on February
3, 2009




***Expired June 1,
2008




****Expired on January 21,
2009





While we have obtained patents and have
several patent applications pending, the extent of effective patent protection
in the U.S. and other countries is highly uncertain and involves complex legal
and factual questions.  No consistent policy addresses the breadth of
claims allowed in or the degree of protection afforded under patents of medical
and pharmaceutical companies.  Patents we currently own or may obtain
might not be sufficiently broad to protect us against competitors with similar
technology.  Any of our patents could be invalidated or
circumvented.


6


While we
believe that our patents would prevail in any potential litigation, the holders
of competing patents could determine to commence a lawsuit against us and even
prevail in any such lawsuit.  Litigation could result in substantial
cost to and diversion of effort by us, which may harm our business. In addition,
our efforts to protect or defend our proprietary rights may not be successful
or, even if successful, may result in substantial cost to
us.  Additionally, we have indemnified Warner against challenges to
the patents that they acquired from us on February 3, 2009.





Segment
and Geographic Area Information





You can
find information about our business segment and geographic areas of business in
Note 16 of the Notes to Consolidated Financial Statements in Item
8.





Employees





As of
March 12, 2009, we had 13 full time employees, 3 of whom are executive
management and 4 of whom are engaged in research and development
activities.   We also rely on a number of
consultants.  None of our employees are represented by a collective
bargaining agreement.  We believe that we have a good relationship
with our employees.





Executive
Officers of the Registrant





The
Executive Officers of the Company are set forth below.





Name
                
                Age*
                
                TitleVivian
      H. Liu
                
                47
                
                Director,
      President and Chief Executive Officer and SecretaryHemanshu
      Pandya
                
                37
                
                Vice
      President and Chief Operating OfficerMark
      Westgate
                
                39
                
                Vice
      President and Chief Financial Officer and
  Treasurer




*As of
March 1, 2009





Vivian H.
Liu is, and has been, our President and Chief Executive Officer since June 2007
and Secretary since 1995, and also a Director of the Company since June
2007.  Ms. Liu served as the Company’s Executive Vice President and
Chief Operating Officer from January 2006 to June 2007,  Vice
President of Corporate Affairs from September 1995 until December 2005, Acting
Chief Executive Officer from December 2005 until January 2006, Chief Financial
Officer from January 2004 until December 2005, Acting Chief Financial Officer
from 1999 to January 2004 and Treasurer from September 1995 through December
2005.  In 1994, while the Company was in a transition period, Ms. Liu
served as Chief Executive Officer. From 1985 to 1994, Ms. Liu was a business and
investment adviser to the government of Quebec and numerous Canadian companies
with respect to product distribution, technology transfer and investment issues.
Ms. Liu received her MPA in International Finance from the University of
Southern California and her B.A. from the University of California,
Berkeley.





Hemanshu
Pandya is, and has been, our Vice President and Chief Operating Officer since
October 2007.  Mr. Pandya most recently served as Chief Commercial
Officer for Putney, Inc., a start-up veterinary pharmaceutical company, from
March 2007 to July 2007.  From August 2005 to December 2006, and prior
to its merger with Watson Pharmaceuticals, Inc., Mr. Pandya was Senior Vice
President of Business Development and Strategic Alliances for Andrx
Pharmaceuticals, Inc., where he managed the licensing and co-development
opportunities with strategic global partners.  From August 2002 to
August 2005, Mr. Pandya served as Vice President of Corporate Development and
Commercial Operations for Able Laboratories, Inc.  Prior to August
2002, Mr. Pandya served in various senior management positions with Ivax
Pharmaceuticals, Inc. and Faulding/Purepac Pharmaceutical Company (subsequently
Alpharma, Inc.).   He received his Bachelor’s Degree from Rutgers
University.





Mark Westgate is, and has been, our
Vice President, Chief Financial Officer and Treasurer since December
2005.  From March 2002 to December 2005, Mr. Westgate served as our
Controller.  He has over seventeen years of public accounting and
financial management experience.  From August 1998 to March 2002, Mr.
Westgate served as Controller and Director of Finance for Lavipharm Laboratories
Inc., a company specializing in drug delivery and particle
design.  Prior to joining Lavipharm, he was a supervisor at Richard A.
Eisner & Company, LLP where he performed audits and provided tax advice for
clients in various industries including biotech.  Mr. Westgate is a
Certified Public Accountant and a member of the New York State Society of
Certified Public Accountants.  He holds a B.B.A. in public accounting
from Pace University.


7





WHERE
YOU CAN FIND MORE INFORMATION





We file annual, quarterly and special
reports, proxy statements and other information with the Securities and Exchange
Commission, and we have an Internet website address at http://www.nexmed.com.
We make available free of charge on our Internet website address our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports filed or furnished pursuant to Sections
13(a) or 15(d) of the Exchange Act as well as our proxy statements as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC.  You may also read and copy any document we
file at the Securities and Exchange Commission's public reference room located
at 100 F Street, N.E., Washington, D.C. 20549. Please call the Securities and
Exchange Commission at 1-800-732-0330 for further information on the operation
of such public reference room. You also can request copies of such documents,
upon payment of a duplicating fee, by writing to the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 or obtain copies of
such documents from the Securities and Exchange Commission's website at http://www.sec.gov.





ITEM
      1A.
            RISK
      FACTORS.





FACTORS
THAT COULD AFFECT OUR FUTURE RESULTS





RISKS RELATED TO THE
COMPANY





We
continue to require external financing to fund our operations, which may not be
available.





Our
current cash reserves provide us with sufficient cash to fund our operations
into the first quarter of 2010.  We will need additional sources of
cash to fund the development and eventual marketing and sales of our psoriasis
product, Femprox®, and
Vitaros®
in territories outside of the U.S.  We intend to seek development
partners to advance our products under development because we will also need
significant funding to pursue our overall product development plans. In general,
products we plan to develop will require significant time-consuming and costly
research and development, clinical testing, regulatory approval and significant
investment prior to their commercialization. Even if we are successful in
obtaining partners who can assume the funding for further development of our
products, we may still encounter additional obstacles such as research and
development activities may not be successful, our products may not prove to be
safe and effective, clinical development work may not be completed, and the
anticipated products may not be commercially viable or successfully
marketed.





In July
2008, Novartis completed testing for the Phase 3 clinical trials for
NM100060.  The Phase 3 program required for the filing of the NDA in
the U.S. for NM100060 consisted of two pivotal, randomized, double-blind,
placebo-controlled studies.  The parallel studies were designed to
assess the efficacy, safety and tolerability of NM100060 in patients with mild
to moderate toenail onychomycosis.  Approximately 1,000 patients
completed testing in the two studies, which took place in the U.S., Europe,
Canada and Iceland.   On August 26, 2008, we announced that based
on First Interpretable Results of these two Phase 3 studies, Novartis had
decided not to submit the NDA at this time.  As a result of this
decision, we will not receive a $6 million payment for positive Phase 3
results.  In addition, a $7 million milestone payment for the filing
of the NDA has been postponed indefinitely.





Novartis
has confirmed that it intends to complete patient testing in the ongoing
comparator study which they had initiated in March 2007 in ten European
countries.  Over 900 patients with mild to moderate onychomycosis are
participating in this open-label study, which is designed to assess the safety
and tolerability of NM100060 (terbinafine 10% topical formulation) versus
Loceryl®
(amorolfine) 5% nail lacquer, a topical treatment for onychomycosis that is
approved in Europe. The comparator study is expected to be completed by early
2009 and the data will be available in mid-2009.  If the results of
the comparator study are positive and the total clinical database is deemed to
be sufficient for filing, we expect Novartis to begin filing for marketing
approval in selected European countries while they develop a new plan of action
for the U.S. market.  If the results are negative, we expect Novartis
to terminate the global licensing agreement, which it can do at any time, and
the rights to NM100060 would revert back to us with no compensation for
termination.


8


On
February 3, 2009, we terminated the licensing agreement and sold the U.S. rights
for Vitaros®and
the specific U.S. patents covering Vitaros®to
Warner.  Under the terms of the agreement, we received gross
proceeds of $2.5 million as an up-front payment and are eligible
to receive an additional payment of $2.5 million upon Warner’s receipt of an NDA
approval from the FDA.  As such, we are no longer responsible for the
regulatory approval of Vitaros®and
will no longer be eligible to receive royalties in the future based upon the
level of sales achieved by Warner.  In addition, Warner will pay a
total of $350,000 for the manufacturing equipment for Vitaros®.




Our
current cash reserves of approximately $4.5 million as of the date of this
report, which includes the $2.5 million received from Warner on February 3,
2009, should provide us with sufficient cash to fund our operations into the
first quarter of 2010.  This projection is based on the restructuring
plan we implemented in December 2008 whereby we have reduced our current monthly
operating expenditures to $350,000 and plan to further reduce these expenditures
to approximately $300,000 per month by the second quarter of 2009.  In
addition, as part of our restructuring plan, we are discussing with Pii the
opportunity to co-develop our early stage products which will enable us to
further reduce our monthly overhead expenses and allow us to sell our facility
and redundant equipment.  We have also initiated efforts to sell the
facility housing our corporate office, research and development laboratories and
manufacturing plant located in East Windsor, New Jersey.  If we can
successfully sell our facility and repay the existing mortgage, we should be
able to reduce our monthly operating expenditures to approximately $200,000 per
month.  However, there is no assurance that we will be able to sell
our facility at an acceptable price or otherwise successfully complete our
restructuring plan.





Our
principal product under development, NM100060, has not met Novartis’ expectation
for filing a New Drug Application in the U.S., and, depending upon European
comparator study results, Novartis may terminate its global licensing agreement
with us.





In September 2005, we announced a
global licensing agreement with Novartis, pursuant to which Novartis acquired
the exclusive worldwide rights to NM100060, our topical anti-fungal nail
treatment product.  While Novartis has decided not to submit an NDA
for NM100060 to the FDA at this time, it has confirmed that it intends to
complete a European comparator study.  If positive results are
achieved, we expect Novartis to obtain regulatory approval of NM100060 in
selected countries in Europe.  If the results are negative, we expect
Novartis to terminate the global licensing agreement with the rights to NM100060
reverting to us.





Our
near-term prospects for deriving any return on our investments in NM100060 and
Vitaros® are
dependent upon decisions to be made by Novartis and Warner in their
discretion.




We are
dependent upon Novartis to complete its European comparator study and obtain
regulatory approval in Europe for us to derive any near-term return on our
investment in the development of NM100060.  While we expect Novartis
to do both, it is not required by any agreement with us to do
either.  For us to derive any near-term return on our investment in
the development of Vitaros®, we are
dependent upon Warner to move forward in pursuing NDA approval for Vitaros® in the
U.S., which it is not required to do.  While if Novartis elects to
terminate the global licensing agreement, the rights to NM100060 will revert to
us, and if we are to derive revenue from NM100060 in the future, we will need to
find new development partners.  As for Vitaros®, if
Warner does not pursue NDA approval for Vitaros®, we will not have the
additional data generated by Warner to enhance the value of the product for
non-U.S. development partners which may make it more difficult to find such
development partners.  In either case, it may not be possible for us
to enter into such partner relationships in a timely manner, if at
all.





We
will continue to incur operating losses.





Our current business operations began
in 1994 and we have a limited operating history.  We may encounter
delays, uncertainties and complications typically encountered by development
stage businesses. We have not marketed or generated revenues in the U.S. from
our products under development. We are not profitable and have incurred an
accumulated deficit of $139,689,300 since our inception and through December 31,
2008. Our ability to generate revenues and to achieve profitability and positive
cash flow will depend on the successful licensing or commercialization of our
products currently under development. However, even if we eventually generate
revenues from sales of our products currently under development or from
licensing fees, we expect to incur significant operating losses over the next
several years. Our ability to become profitable will depend, among other things,
on our (1) development of our proposed products, (2) obtaining of regulatory
approvals of our proposed products on a timely basis and (3) success in
licensing, manufacturing, distributing and marketing our proposed
products.


9


Our
independent registered public accounting firm has doubt as to our ability to
continue as a going concern.





As a result of our losses to date,
expected losses in the future, limited capital resources and accumulated
deficit, our independent registered public accounting firm has concluded that
there is substantial doubt as to our ability to continue as a going concern, and
accordingly, our independent registered public accounting firm has modified
their report on our December 31, 2008 consolidated financial statements included
in this annual report on Form 10-K in the form of an explanatory paragraph
describing the events that have given rise to this uncertainty. These factors
may make it more difficult for us to obtain additional funding to meet our
obligations. Our continuation is dependent upon our ability to generate or
obtain sufficient cash to meet our obligations on a timely basis and ultimately
to attain profitable operations. We anticipate that we will continue to incur
significant losses at least until successful commercialization of one or more of
our products, and we may never operate profitably in the future.





We
will need partnering agreements and significant funding to continue with our
research and development efforts, and they may not be available.





Our
current cash reserves provide us with sufficient cash to fund our operations
into the first quarter of 2010.  We will need additional sources of
cash to fund the development and eventual marketing and sales of our psoriasis
product, Femprox®, and
Vitaros®
in territories outside of the U.S.  We intend to seek development
partners to advance our products under development because we will also need
significant funding to pursue our overall product development plans. In general,
products we plan to develop will require significant time-consuming and costly
research and development, clinical testing, regulatory approval and significant
investment prior to their commercialization.





Our
research and development expenses for the years ended December 31, 2008, 2007
and 2006 were $5,410,513, $5,022,671 and $5,425,137,
respectively.  Since January 1, 1994, when we repositioned ourselves
as a medical and pharmaceutical technology company, through December 31, 2008,
we have spent $96,903,215 on research and development.  Given our
current level of cash reserves and low rate of revenue generation, we will not
be able to fully advance our products under development unless we enter into
additional partnering agreements. If we are successful in entering into
additional partnering agreements for our products under development, we may
receive milestone payments, which will offset some of our research and
development expenses.





We
currently have no sales force or marketing organization and will need, but may
not be able, to attract marketing partners or afford qualified or experienced
marketing and sales personnel.





In order to market our proprietary
products under development, we will need to attract additional marketing
partner(s) that will need to spend significant funds to inform potential
customers, including third-party distributors, of the distinctive
characteristics and benefits of our products. Our operating results and long
term success will depend, among other things, on our ability to establish (1)
successful arrangements with domestic and additional international distributors
and marketing partners and (2) an effective internal marketing
organization.  Consummation of partnering arrangements is subject to
the negotiation of complex contractual relationships, and we may not be able to
negotiate such agreements on a timely basis, if at all, or on terms acceptable
to us.





Pre-clinical
and clinical trials are inherently unpredictable.  If we or our
partners do not successfully conduct these trials, we or our partners may be
unable to market our products.





Through pre-clinical studies and
clinical trials, our products must be demonstrated to be safe and effective for
their indicated uses. Results from pre-clinical studies and early clinical
trials may not allow for prediction of results in later-stage
testing.  Future clinical trials may not demonstrate the safety and
effectiveness of our products or may not result in regulatory approval to market
our products.  Commercial sales in the United States of our products
cannot begin until final FDA approval is received.  The failure of the
FDA to approve our products for commercial sales will have a material adverse
effect on our prospects.


10


Patents
and intellectual property rights are important to us but could be
challenged.





Proprietary protection for our
pharmaceutical products is of material importance to our business in the U.S.
and most other countries. We have sought and will continue to seek proprietary
protection for our products to attempt to prevent others from commercializing
equivalent products in substantially less time and at substantially lower
expense. Our success may depend on our ability to (1) obtain effective patent
protection within the U.S. and internationally for our proprietary technologies
and products, (2) defend patents we own, (3) preserve our trade secrets, and (4)
operate without infringing upon the proprietary rights of others.  In
addition, we have agreed to indemnify our partners for certain liabilities with
respect to the defense, protection and/or validity of our patents and would also
be required to incur costs or forego revenue if it is necessary for our partners
to acquire third party patent licenses in order for them to exercise the
licenses acquired from us.





We have either acquired or received
thirteen U.S. patents out of a series of patent applications that we have filed
in connection with our NexACT®
technology and our NexACT®-based
products under development. To further strengthen our global patent position on
our proprietary products under development, and to expand the patent protection
to other markets, we have filed under the Patent Cooperation Treaty
corresponding international applications for our issued U.S. patents and pending
U.S. patent applications.  The two patents covering the first
generation of the NexACT®
technology enhancer have expired, and we have sold three patents covering
Vitaros®to
Warner.  While we believe there are significant disadvantages to using
the permeation enhancers that are covered by the two patents which expired in
2008 and 2009, including the difficulty of formulation, there is always a risk
that once our enhancers are off patent, they can be used by other parties to
develop competitive products.





While we have obtained patents and have
several patent applications pending, the extent of effective patent protection
in the U.S. and other countries is highly uncertain and involves complex legal
and factual questions.  No consistent policy addresses the breadth of
claims allowed in or the degree of protection afforded under patents of medical
and pharmaceutical companies.  Patents we currently own or may obtain
might not be sufficiently broad enough to protect us against competitors with
similar technology.  Any of our patents could be invalidated or
circumvented.





While we believe that our patents would
prevail in any potential litigation, the holders of competing patents could
determine to commence a lawsuit against us and even prevail in any such
lawsuit.  Litigation could result in substantial cost to and diversion
of effort by us, which may harm our business. In addition, our efforts to
protect or defend our proprietary rights may not be successful or, even if
successful, may result in substantial cost to us. Additionally,
we have indemnified Warner against challenges to the patents that they acquired
from us on February 3, 2009.





We
and our licensees depend upon third party manufacturers for chemical
manufacturing supplies.





We and our licensees are dependent on
third party chemical manufacturers for the active drugs in our NexACT®-based
products under development, and for the supply of our NexACT®
enhancers that are essential in the formulation and production of our topical
products on a timely basis and at satisfactory quality levels.  If our
validated third party chemical manufacturers fail to produce quality products on
time and in sufficient quantities, our results would suffer, as we or our
licensees would encounter costs and delays in revalidating new third party
suppliers.





We
face severe competition.





We are engaged in a highly competitive
industry. We and our licensees can expect competition from numerous companies,
including large international enterprises, and others entering the industry with
regard to our products. Most of these companies have greater research and
development, manufacturing, marketing, financial, technological, personnel and
managerial resources. Acquisitions of competing companies by large
pharmaceutical or healthcare companies could further enhance such competitors'
financial, marketing and other resources. Competitors may complete clinical
trials, obtain regulatory approvals and commence commercial sales of their
products before we could enjoy a significant competitive advantage. Products
developed by our competitors may be more effective than our
products.





We
may be subject to potential product liability and other claims, creating risks
and expense.





We are also exposed to potential
product liability risks inherent in the development, testing, manufacturing,
marketing and sale of human therapeutic products.  Product liability
insurance for the pharmaceutical industry is extremely expensive, difficult to
obtain and may not be available on acceptable terms, if at all. We currently
have liability insurance to cover claims related to our products that may arise
from clinical trials, with coverage of $1 million for any one claim and coverage
of $3 million in total, but we do not maintain product liability insurance for
marketed products as our products have yet to be commercialized.  We
may need to acquire such insurance coverage prior to the commercial introduction
of our products. If we obtain such coverage, we have no guarantee that the
coverage limits of such insurance policies will be adequate. A successful claim
against us if we are uninsured, or which is in excess of our insurance coverage,
if any, could have a material adverse effect upon us and on our financial
condition.


11





INDUSTRY
RISKS





We
are vulnerable to volatile market conditions.





The market prices for securities of
biopharmaceutical and biotechnology companies, including ours, have been highly
volatile. The market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. In addition, future announcements, such as the results of
testing and clinical trials, the status of our relationships with third-party
collaborators, technological innovations or new therapeutic products,
governmental regulation, developments in patent or other proprietary rights,
litigation or public concern as to the safety of products developed by us or
others and general market conditions, concerning us, our competitors or other
biopharmaceutical companies, may have a significant effect on the market price
of our Common Stock.





Instability
and volatility in the financial markets and the global economic recession are
likely to have a negative impact on our ability to raise necessary funds and on
our business, financial condition, results of operations and cash
flows.





During
recent months, there has been substantial volatility and a decline
in financial markets due at least in part to the deteriorating global
economic environment. In addition, there has been substantial uncertainty in the
capital markets and access to financing is uncertain.  These conditions are
likely to have an adverse effect on our industry, licensing partners, and
business, including our financial condition, results of operations and cash
flows.




To the
extent that we do not generate sufficient cash from operations, we may, if
available, need to incur indebtedness to finance plans for growth. However,
recent turmoil in the credit markets and the potential impact on the liquidity
of major financial institutions may have an adverse effect on our ability to
fund our business strategy through borrowings, under either existing or newly
created instruments in the public or private markets on terms that we believe to
be reasonable, if at all.





We
and our licensees are subject to numerous and complex government regulations
which could result in delay and expense.





Governmental authorities in the U.S.
and other countries heavily regulate the testing, manufacture, labeling,
distribution, advertising and marketing of our proposed products. None of our
proprietary products under development has been approved for marketing in the
U.S. Before any products we develop are marketed, FDA and comparable foreign
agency approval must be obtained through an extensive clinical study and
approval process.





The studies involved in the approval
process are conducted in three phases.  In Phase 1 studies,
researchers assess safety or the most common acute adverse effects of a drug and
examine the size of doses that patients can take safely without a high incidence
of side effects. Generally, 20 to 100 healthy volunteers or patients are studied
in the Phase 1 study for a period of several months. In Phase 2 studies,
researchers determine the drug's efficacy with short-term safety by
administering the drug to subjects who have the condition the drug is intended
to treat, assess whether the drug favorably affects the condition, and begin to
identify the correct dosage level. Up to several hundred subjects may be studied
in the Phase 2 study for approximately 6 to 12 months, depending on the type of
product tested. In Phase 3 studies, researchers further assess efficacy and
safety of the drug. Several hundred to thousands of patients may be studied
during the Phase 3 studies for a period from 12 months to several years. Upon
completion of Phase 3 studies, a New Drug Application is submitted to the FDA or
foreign governmental regulatory authority for review and approval.





The failure to obtain requisite
governmental approvals for our products under development in a timely manner or
at all would delay or preclude us and our licensees from marketing our products
or limit the commercial use of our products, which could adversely affect our
business, financial condition and results of operations.


12


Because we intend that our products
will be sold and marketed outside the U.S., we and/or our licensees will be
subject to foreign regulatory requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursements. These requirements vary
widely from country to country. The failure to meet each foreign country's
requirements could delay the introduction of our proposed products in the
respective foreign country and limit our revenues from sales of our proposed
products in foreign markets.





Successful commercialization of our
products may depend on the availability of reimbursement to the consumer from
third-party healthcare payers, such as government and private insurance plans.
Even if one or more products is successfully brought to market, reimbursement to
consumers may not be available or sufficient to allow the realization of an
appropriate return on our investment in product development or to sell our
products on a competitive basis. In addition, in certain foreign markets,
pricing or profitability of prescription pharmaceuticals is subject to
governmental controls. In the U.S., federal and state agencies have proposed
similar governmental control and the U.S. Congress has recently considered
legislative and regulatory reforms that may affect companies engaged in the
healthcare industry. Pricing constraints on our products in foreign markets and
possibly in the U.S. could adversely affect our business and limit our
revenues.





RISKS RELATED TO OWNING OUR
COMMON STOCK





Our
stock may be delisted from Nasdaq, which may make it more difficult for you to
sell your shares.





Currently, our Common Stock trades on
the Nasdaq Capital Market.  On October 9, 2008, we were notified by
The Nasdaq Stock Market (“Nasdaq”) that for the previous 30 consecutive trading
days our Common Stock has closed below the minimum $1.00 per share requirement
for continued inclusion by Marketplace Rule 4310(c)(8)(D).  Pursuant
to Marketplace Rule 4310(c)(8)(E), we were provided 180 calendar days, or until
April 7, 2009, to regain compliance.




On
October 22, 2008, we were notified by Nasdaq that effective October 16, 2008 it
had suspended enforcement of the bid price requirement until January 16,
2009.  Further, on December 23, 2008 we were notified by Nasdaq that
it had again suspended the enforcement of the bid price requirement until April
20, 2009.  As such, since we had 174 days remaining in our compliance
period, we now have 174 days from April 20, 2009, or until October 10, 2009, to
regain compliance.




Accordingly,
our Common Stock must achieve a minimum bid price of $1.00 for a minimum of 10
consecutive days during the period ended October 10, 2009 in order to maintain
our listing on the Nasdaq Capital Market.




If we fail to achieve the minimum bid
price requirement of the Nasdaq Capital Market by October 10, 2009 or fail to
maintain compliance with any other listing requirements during this period, we
may be delisted and our stock would be considered a penny stock under
regulations of the Securities and Exchange Commission and would therefore be
subject to rules that impose additional sales practice requirements on
broker-dealers who sell our securities. The additional burdens imposed upon
broker-dealers by these requirements could discourage broker-dealers from
effecting transactions in our Common Stock, which could severely limit the
market liquidity of the Common Stock and your ability to sell our securities in
the secondary market. In addition, if we fail to maintain our listing on Nasdaq
or any other United States securities exchange, quotation system, market or
over-the-counter bulletin board, we will be subject to cash penalties under
investor rights agreements to which we are a party until a listing is
obtained.





We
do not expect to pay dividends on our Common Stock in the foreseeable
future.





Although our shareholders may receive
dividends if, as and when declared by our board of directors, we do not intend
to declare dividends on our Common Stock in the foreseeable future. Therefore,
you should not purchase our Common Stock if you need immediate or future income
by way of dividends from your investment.


13


We
may issue additional shares of our capital stock that could dilute the value of
your shares of Common Stock.





We are authorized to issue 130,000,000
shares of our capital stock, consisting of 120,000,000 shares of our Common
Stock and 10,000,000 shares of our preferred stock of which 1,000,000 are
designated as Series A Junior Participating Preferred Stock, 800 are designated
as Series B 8% Cumulative Convertible Preferred Stock and 600 are designated as
Series C 6% Cumulative Convertible Preferred Stock. As of March 10, 2009,
84,410,736 shares of our Common Stock were issued and outstanding and 15,487,035
shares of our Common Stock were issuable upon the exercise or conversion of
outstanding options and warrants.  As of March 10, 2009, there were no
shares of Series A, Series B or Series C Preferred Stock
outstanding.  In light of our possible future need for additional
financing, we may issue authorized and unissued shares of Common Stock at below
current market prices or additional convertible securities that could dilute the
earnings per share and book value of your shares of our Common
Stock.





In addition to provisions providing for
proportionate adjustments in the event of stock splits, stock dividends, reverse
stock splits and similar events, certain warrants, provide (with certain
exceptions) for an adjustment of the exercise price if we issue shares of Common
Stock at prices lower than the then exercise or conversion price or the then
prevailing market price. This means that if we need to raise equity financing at
a time when the market price for our Common Stock is lower than the exercise or
conversion price, or if we need to provide a new equity investor with a discount
from the then prevailing market price, then the exercise price will be reduced
and the dilution to shareholders increased.





ITEM
      1B.
            UNRESOLVED
      STAFF COMMENTS.





None.





ITEM
      2.
            PROPERTIES.





We
currently have our corporate office, laboratories and manufacturing plant in a
31,500 square foot facility in East Windsor, NJ, which we own.  We
have invested approximately $9.4 million for the land, building and
upgrade.  The facility is subject to a mortgage as discussed in Note 6
of the Consolidated Financial Statements.   We have also recently
initiated efforts to sell the facility and have taken an impairment charge of
approximately $884,000 in 2008.





ITEM
      3.
            LEGAL
      PROCEEDINGS.





We are subject to certain legal
proceedings in the ordinary course of business.  We do not expect any
such items to have a significant impact on our financial position.





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





No
matters were submitted to a vote of security holders during the fourth quarter
of 2008.





PART
II.





ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES.





Our
Common Stock is traded on the NASDAQ Capital Market System (“NASDAQ”) under the
symbol “NEXM.”





On March
10, 2009, the last reported sales price for our Common Stock on NASDAQ was $0.11
per share, and we had 7,623 holders of record of our Common
Stock.


The
following table sets forth the range of the high and low sales prices for our
Common Stock as reported by NASDAQ for each quarter from January 1, 2007 to
December 31, 2008.




14




Price of Common Stock ($)High
                  
                  
                  Low2008First
      Quarter
                  
                  
                  1.70
                  
                  
                  
                  1.19Second
      Quarter
                  
                  
                  1.37
                  
                  
                  
                  1.04Third
      Quarter
                  
                  
                  1.53
                  
                  
                  
                  0.12Fourth
      Quarter
                  
                  
                  0.16
                  
                  
                  
                  0.052007First
      Quarter
                  
                  
                  1.54
                  
                  
                  
                  0.72Second
      Quarter
                  
                  
                  2.05
                  
                  
                  
                  1.24Third
      Quarter
                  
                  
                  1.90
                  
                  
                  
                  1.47Fourth
      Quarter
                  
                  
                  1.71
                  
                  
                  
                  1.34





Dividends




We have
never paid cash dividends on our Common Stock and do not have any plans to pay
cash dividends in the foreseeable future.  Our board of directors
anticipates that any earnings that might be available to pay dividends will be
retained to finance our business.





Performance
comparison of total return of NexMed, Inc., the U.S. NASDAQ Stock Market and
NASDAQ Pharmaceuticals Stocks




The following graph shows the yearly
change in cumulative total stockholder return on NexMed Common Stock compared to
the cumulative total return on the Nasdaq Stock Market (U.S.) and Nasdaq
Pharmaceutical Stocks for the past 5 fiscal years (assuming a $100 investment on
December 31, 2003 and quarterly reinvestment of dividends during the
period).


15




COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
 Among
NexMed, Inc., The NASDAQ Composite Index
 And The
NASDAQ Pharmaceutical Index







*$100
invested on 12/31/03 in stock & index-including reinvestment of
dividends.
 Fiscal
year ending December 31.





12/03
                      
                      
                      
                      12/04
                      
                      
                      
                      12/05
                      
                      
                      
                      12/06
                      
                      
                      
                      12/07
                      
                      
                      
                      12/08NexMed,
      Inc.
                      
                      
                      100.00
                      
                      
                      
                      37.59
                      
                      
                      
                      19.30
                      
                      
                      
                      16.79
                      
                      
                      
                      35.59
                      
                      
                      
                      3.51NASDAQ
      Composite
                      
                      
                      100.00
                      
                      
                      
                      110.08
                      
                      
                      
                      112.88
                      
                      
                      
                      126.51
                      
                      
                      
                      138.13
                      
                      
                      
                      80.47NASDAQ
      Pharmaceutical
                      
                      
                      100.00
                      
                      
                      
                      110.22
                      
                      
                      
                      111.87
                      
                      
                      
                      114.89
                      
                      
                      
                      106.37
                      
                      
                      
                      97.32





Unregistered
sales of equity securities and use of proceeds




None.


16





ITEM
      6.
            SELECTED
      FINANCIAL DATA.





The
following selected financial information is qualified by reference to, and
should be read in conjunction with, the Company’s consolidated financial
statements and the notes thereto, and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” contained elsewhere
herein.




Income Statement Data


2008
                                
                                
                                2007
                                
                                
                                2006
                                
                                
                                2005
                                
                                
                                2004RevenueProduct
      sales and royalties
                                
                                $
                                1,891
                                
                                
                                $
                                4,036
                                
                                
                                $
                                7,243
                                
                                
                                $
                                9,702
                                
                                
                                $
                                9,519Licensing
      and research and development fees
                                
                                $
                                5,955,600
                                
                                
                                $
                                1,266,331
                                
                                
                                $
                                1,859,684
                                
                                
                                $
                                2,389,459
                                
                                
                                $
                                349,850Total
      Expenses, net
                                
                                $
                                (11,128,689
                                )
                                
                                $
                                (10,057,595
                                )
                                
                                $
                                (9,910,180
                                )
                                
                                $
                                (17,841,599
                                )
                                
                                $
                                (17,383,017
                                )Net
      Loss
                                
                                $
                                (5,171,198
                                )
                                
                                $
                                (8,787,228
                                )
                                
                                $
                                (8,043,253
                                )
                                
                                $
                                (15,442,438
                                )
                                
                                $
                                (17,023,648
                                )Basic
      and Diluted Loss per Share
                                
                                $
                                (0.06
                                )
                                
                                $
                                (0.11
                                )
                                
                                $
                                (0.12
                                )
                                
                                $
                                (0.32
                                )
                                
                                $
                                (0.39
                                )Weighted
      Average Common Shares Outstanding Used for Basic and Diluted Loss per
      Share
                                
                                
                                83,684,806
                                
                                
                                
                                82,015,909
                                
                                
                                
                                66,145,807
                                
                                
                                
                                52,528,345
                                
                                
                                
                                43,603,546Balance Sheet DataDecember
      31,
                                
                                
                                December
      31,
                                
                                
                                December
      31,
                                
                                
                                December
      31,
                                
                                
                                December
      31,2008
                                
                                
                                2007
                                
                                
                                2006
                                
                                
                                2005
                                
                                
                                2004Total
      Assets
                                
                                $
                                9,441,783
                                
                                
                                $
                                10,672,706
                                
                                
                                $
                                19,933,634
                                
                                
                                $
                                13,331,943
                                
                                
                                $
                                20,272,661Total
      Long Term Liabilities
                                
                                $
                                5,625,517
                                
                                
                                $
                                3,538,051
                                
                                
                                $
                                1,058,098
                                
                                
                                $
                                4,122,997
                                
                                
                                $
                                6,801,826Stockholders’
      Equity
                                
                                $
                                2,416,400
                                
                                
                                $
                                4,804,757
                                
                                
                                $
                                11,504,475
                                
                                
                                $
                                640,354
                                
                                
                                $
                                11,401,285





We do not
have any off-balance sheet arrangements.





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





General




We are
currently focusing our efforts on new and patented topical pharmaceutical
products based on a penetration enhancement drug delivery technology known as
NexACT®, which
may enable an active drug to be better absorbed through the skin.





We have
applied the NexACT®
technology to a myriad of drug compounds and delivery systems, and are in
various stages of developing new topical treatments for sexual dysfunction, nail
fungus, psoriasis, and other dermatological conditions.





We intend
to pursue our research, development, and execute a business strategy with the
goal of achieving a level of development sufficient to enable us to attract
potential strategic partners with resources sufficient to further develop and
market our proprietary products both domestically and
internationally.





Liquidity,
Capital Resources and Financial Condition.




We have
experienced net losses and negative cash flows from operations each year since
our inception.  Through December 31, 2008, we had an accumulated
deficit of $139,689,300.  Our operations have principally been
financed through private placements of equity securities and debt
financing.  Funds raised in past periods should not be considered an
indication of our ability to raise additional funds in any future
periods.





In July
2008, Novartis completed testing for the Phase 3 clinical trials for
NM100060.  On August 26, 2008, we announced that based on First
Interpretable Results of  two Phase 3 studies, Novartis had decided
not to submit an NDA to the FDA at this time.  As a result of this
decision, we will not receive a $6 million milestone payment for positive Phase
3 results, and a $7 million milestone payment for the filing of the NDA has been
postponed indefinitely.


17


Novartis
has confirmed that it intends to complete patient testing in the ongoing
comparator study which they had initiated in March 2007 in ten European
countries.  Over 900 patients with mild to moderate onychomycosis are
participating in this open-label study, which is designed to assess the safety
and tolerability of NM100060 (terbinafine 10% topical formulation) versus
Loceryl®
(amorolfine) 5% nail lacquer, a topical treatment for onychomycosis that is
approved in Europe. The comparator study is expected to be completed by early
2009 and the data will be available in mid-2009.  If the results of
the comparator study are positive and the total clinical database is deemed to
be sufficient for filing, we expect Novartis to begin filing for marketing
approval in selected European countries while they develop a new plan of action
for the U.S. market.  If the results are negative, we expect Novartis
to terminate the global licensing agreement, which it can do at any time, and
the rights to NM100060 would revert back to us with no compensation for
termination.





On
February 3, 2009, we sold the U.S. rights for Vitaros®and
the specific U.S. patents covering Vitaros®to
Warner and terminated the licensing agreement.  Under the terms of the
purchase agreement, we received gross proceeds of $2.5 million as an up-front
payment and are eligible to receive an additional payment of $2.5 million
if and when Warner receives an NDA approval from the FDA.  As such, we
are no longer responsible for the regulatory approval of Vitaros®and
will no longer be eligible to receive royalties in the future based upon the
level of sales achieved by Warner.  Warner will, however, pay us a
total of $350,000 for the manufacturing equipment for Vitaros®.  While
it is our understanding that Warner is currently moving forward in pursuing NDA
approval for Vitaros® they are
not obligated by the purchase agreement to continue with the development of
Vitaros® or
obtain approval of Vitaros® from the
FDA.





Our
current cash reserves of approximately $4.5 million as of the date of this
report which includes the $2.5 million received from Warner on February 3, 2009,
should provide us with sufficient cash to fund our operations into the first
quarter of 2010.  This projection is based on the restructuring plan
we implemented in December 2008 whereby we have reduced our current monthly
operating expenditures to $350,000 and plan to further reduce these expenditures
to approximately $300,000 per month by the second quarter of 2009.  In
addition, as part of our restructuring plan, we are discussing with Pii the
opportunity to co-develop our early stage products which will enable us to
further reduce our monthly overhead expenses and allow us to sell our facility
and redundant equipment. We have also initiated efforts to sell the facility
housing our corporate office, research and development laboratories and
manufacturing plant located in East Windsor, New Jersey.  If we can
successfully sell our facility and repay the existing mortgage, we should be
able to reduce our monthly operating expenditures to approximately $200,000 per
month.  However, there is no assurance that we will be able to sell
our facility at an acceptable price or otherwise successfully complete our
restructuring plan.





As a
result of our losses to date, expected losses in the future, limited capital
resources and accumulated deficit, our independent registered public accounting
firm has concluded that there is substantial doubt as to our ability to continue
as a going concern for a reasonable period of time, and have modified their
report in the form of an explanatory paragraph describing the events that have
given rise to this uncertainty. These factors may make it more difficult for us
to obtain additional funding to meet our obligations.  Our
continuation is based on our ability to generate or obtain sufficient cash to
meet our obligations on a timely basis and ultimately to attain profitable
operations.   We anticipate that we will continue to incur
significant losses at least until successful commercialization of one or more of
our products.  There can be no assurance that we can operate
profitably in the future.





At
December 31, 2008 we had cash and cash equivalents and short term investments of
approximately $2.8 million as compared to $3.5 million at December 31,
2007.   Our net decrease in cash in 2008 is the result of our
average fixed monthly overhead costs of approximately $525,000 per month, in
addition to approximately $600,000 for 2007 bonuses which were paid to employees
in March 2008 and $60,000 in severance paid as part of our restructuring program
implemented in December 2008.  Additionally, we spent approximately
$690,000 in direct costs to support our NDA and NDS filings for Vitaros®,
$300,000 for a cancellation fee as discussed in Note 15 of the Consolidated
Financial Statements,  $96,000 in direct expenses on our psoriasis
project, $161,000 for legal fees in connection with a patent lawsuit in which we
are the plaintiff suing for patent infringement on our herpes treatment medical
device, and approximately $106,000 in closing costs on June 30, 2008 as well as
a $1 million principal repayment on December 31, 2008 related to the convertible
notes closed on June 30 as discussed in Note 6 of the Consolidated Financial
Statements.  This cash usage in 2008 was mostly offset by the receipt
of $5 million in milestone payments from Novartis as discussed in Note 3 of the
Consolidated Financial Statements and the net proceeds of approximately $2.6
million received upon the issuance of the convertible notes on June 30, 2008 as
discussed in Note 6 of the Consolidated Financial
Statements.   Additionally, we received approximately $938,000
from the sale of our New Jersey tax credits pursuant to the Technology Tax
Certificate Transfer Programas discussed in Note 14 of
the Consolidated Financial Statements.


18


At
December 31, 2008, we had $1,029,486 in accounts payable and accrued expenses as
compared to $621,668 at December 31, 2007.  The increase is
attributable to approximately $592,000 accrued and expensed at December 31, 2008
for a cancellation fee related to the cancellation of a clinical research
agreement for a one-year open-label study, as discussed in Note 15 of the
Consolidated Financial Statements.





At
December 31, 2008, we had $296,135 in payroll related liabilities as compared to
$693,774 at December 31, 2007. The decrease is attributable to the payment of
2007 bonuses in March 2008. Our bonuses were accrued and expensed in 2007 but
were not paid until the first quarter of 2008.  There were no bonuses
accrued or paid in 2008.





At
December 31, 2008, we had convertible notes of $4,690,000.  As
discussed in Note 6 of the Consolidated Financial Statements we issued
$5,750,000 of the convertible notes on June 30, 2008 and repaid $1,060,000
during 2008.




At
December 31, 2007, we had a note payable of $2,538,705.  The note was
paid in cash on June 30, 2008 with the proceeds received from the convertible
notes discussed above.  Therefore, at December 31, 2008, there is no
remaining balance due to the holder of the note.





For the
year ended December 31, 2008 we incurred loss on disposal of fixed assets
(included in general and administrative expenses in our consolidated statement
of operations) of $904,902 as compared to $10,121 in 2007.  The
significant increase in the loss on disposal of fixed assets resulted from an
impairment charge of approximately $884,000 to reduce the carrying amount of our
land and building to reflect the current commercial real estate market as we
have initiated efforts to sell this facility.  Since 2000, we have
spent approximately $9.4 million in total for the land, building, manufacturing
and lab equipment, related to our East Windsor facility which we are currently
occupying.





The
following table summarizes our contractual obligations and the periods in which
payments are due as of December 31, 2008:





Less
      than
                      
                      
                      1
      - 3
                      
                      
                      3
      - 5
                      
                      
                      More
      thanContractual
      Obligations
                      
                      Total
                      
                      
                      1 year
                      
                      
                      years
                      
                      
                      years
                      
                      
                      5 yearsLong-term
      debt *
                      
                      $
                      5,510,750
                      
                      
                      $
                      328,300
                      
                      
                      $
                      5,182,450
                      
                      
                      $
                      0
                      
                      
                      $
                      0Purchase
      obligations **
                      
                      
                      592,000
                      
                      
                      
                      592,000
                      
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      0Other
      long-term liabilities***
                      
                      
                      1,228,800
                      
                      
                      
                      109,900
                      
                      
                      
                      329,700
                      
                      
                      
                      329,700
                      
                      
                      
                      459,500Total
                      
                      $
                      7,331,550
                      
                      
                      $
                      1,030,200
                      
                      
                      $
                      5,512,150
                      
                      
                      $
                      329,700
                      
                      
                      $
                      459,500





*
            Long-term
      debt consists of a convertible note secured by a mortgage totaling $4.69
      million plus all related interest.


**
            Purchase
      obligations consist of a penalty fee for a clinical research agreement
      that was cancelled on September 30,
2008.


The
penalty for our cancellation of this $4,182,700 agreement was approximately
$892,000.


$300,000
was paid on December 31, 2008 with the remaining $592,000 due in two
installments on March 31, and June 30, 2009.


***
            Represents
      payments to be made according to a deferred compensation
      agreement.  The present value of these payments is recorded on
      the balance sheet under deferred compensation in the amount of
      $1,009,762.





Off-Balance
Sheet Arrangements





We do not have any off-balance sheet
arrangements.


19





Critical
Accounting Estimates





Our
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America.  Note 2 in the Notes to the Consolidated Financial
Statements, includes a summary of the significant accounting policies and
methods used in the preparation of our Consolidated Financial
Statements.   The preparation of these financial statements
requires our management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities.  Our accounting
policies affect our more significant judgments and estimates used in the
preparation of our financial statements.  Actual results could differ
from these estimates.   The following is a brief description of
the more significant accounting policies and related estimate methods that we
follow:





Income Taxes –In preparing
our financial statements, we make estimates of our current tax exposure and
temporary differences resulting from timing differences for reporting items for
book and tax purposes.  We recognize deferred taxes by the asset and
liability method of accounting for income taxes.  Under the asset and
liability method, deferred income taxes are recognized for differences between
the financial statement and tax bases of assets and liabilities at enacted
statutory tax rates in effect for the years in which the differences are
expected to reverse.  The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment
date.  In addition, valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be
realized.





Critical
Estimate:In consideration of our
accumulated losses and lack of historical ability to generate taxable income to
utilize our deferred tax assets, we have estimated that we will not be able to
realize any benefit from our temporary differences and have recorded a full
valuation allowance.  If we become profitable in the future at levels
which cause management to conclude that it is more likely than not that we will
realize all or a portion of the net operating loss carry-forward, we would
immediately record the estimated net realized value of the deferred tax asset at
that time and would then provide for income taxes at a rate equal to our
combined federal and state effective rates, which would be approximately 40%
under current tax laws.  Subsequent revisions to the estimated net
realizable value of the deferred tax asset could cause our provision for income
taxes to vary significantly from period to period.





Long-lived assets —We review
for the impairment of long-lived assets whenever events or circumstances
indicate that the carrying amount of an asset may not be
recoverable.  An impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of the asset and
its eventual disposition are less than its carrying amount.  If such
assets are considered impaired, the amount of the impairment loss recognized is
measured as the amount by which the carrying value of the asset exceeds the fair
value of the asset, fair value being determined based upon discounted cash flows
or appraised values, depending on the nature of the asset.





Critical
Estimate:We
have initiated efforts to sell the facility housing our corporate office,
research and development laboratories and manufacturing plant located in East
Windsor, New Jersey.  We have performed a review for impairment of our
facility based on discussions with our real estate agent regarding the likely
selling price of our facility and the commercial real estate market in
general.  Accordingly, in 2008 we have taken a write-down of
approximately $884,000 to the carrying value of the facility to approximate the
current market value.  Overestimating the potential selling price of
our facility in a planned sale may lead to overstating the carrying value of the
manufacturing facility by not identifying an impairment loss.





Revenue recognition —Revenues from product sales are recognized upon delivery of products to
customers, less allowances for returns and discounts.   Royalty
revenue is recognized upon the sale of the related products as reported to us by
our distribution partner, provided the royalty amounts are fixed or determinable
and the amounts are considered collectible.  Revenues earned under
license and research and development contracts are recognized in accordance with
the cost-to-cost method outlined in Staff Accounting Bulletin No. 101, as
amended, whereby the extent of progress toward completion is measured on the
cost-to-cost basis; however, revenue recognized at any point will not exceed the
cash received.  If the current estimates of total contract revenue and
contract cost indicate a loss, a provision for the entire loss on the contract
would be made.  All costs related to these agreements are expensed as
incurred and classified within “Research and development” expenses in the
Consolidated Statements of Operations and Comprehensive Loss. Research and
development expenses include costs directly attributable to the conduct of our
research and development, including salaries, payroll taxes, employee benefits,
materials, supplies, depreciation on and maintenance of research equipment,
costs related to research and development fee agreements, the cost of services
provided by outside contractors, including services related to our clinical
trials, clinical trial expenses, the full cost of manufacturing drugs for use in
research, pre-clinical and clinical development, and the allocable portion of
facility costs.


20





Also,
licensing agreements typically include several elements of revenue, such as
up-front payments, milestones, royalties upon sales of product, and the delivery
of product and/or research services to the licensor. We follow the accounting
guidance of SEC Staff Accounting Bulletin No. 104 (which superseded SEC
Staff Accounting Bulletin No. 101), and  EITF No. 91-6 and
EITF No. 00-21 (which became effective for contracts entered into after June
2003). Non-refundable license fees received upon execution of license agreements
where we have continuing involvement are deferred and recognized as revenue over
the estimated performance period of the agreement. This requires management to
estimate the expected term of the agreement or, if applicable, the estimated
life of its licensed patents.





In
addition, EITF No. 00-21 requires a company to evaluate its arrangements under
which it will perform multiple revenue-generating activities. For example, a
license agreement with a pharmaceutical company may involve a license, research
and development activities and/or contract manufacturing. Management is required
to determine if the separate components of the agreement have value on a
standalone basis and qualify as separate units of accounting, whereby
consideration is allocated based upon their relative “fair values” or, if not,
the consideration should be allocated based upon the “residual method.”
Accordingly, up-front and development stage milestone payments are and will be
deferred and recognized as revenue over the performance period of such license
agreement.





Critical
Estimate:In calculating
the progress made toward completion of a research contract or licensing
agreement, we must compare costs incurred to date to the total estimated cost of
the project and/or estimate the performance period.  We estimate the
cost and/or performance period of any given project based on our past experience
in product development as well as the past experience of our research staff in
their areas of expertise.  Underestimating the total cost and/or
performance period of a research contract or licensing agreement may cause us to
accelerate the revenue recognized under such contract.  Conversely,
overestimating the cost may cause us to delay revenue recognized.





Stock based compensation - In
preparing our financial statements, we must calculate the value of stock options
issued to employees, non-employee contractors and warrants issued to
investors.  The fair value of each option and warrant is estimated on
the date of grant using the Black-Scholes option-pricing model.  The
Black-Scholes option-pricing model is a generally accepted method of estimating
the value of stock options and warrants.





Critical
Estimate:The
Black-Scholes option pricing model requires us to estimate the Company’s
dividend yield rate, expected volatility and risk free interest rate over the
life of the option.  Inaccurately estimating any one of these factors
may cause the value of the option to be under or over estimated.  See
Note 2 of the Consolidated Financial Statements for the current estimates used
in the Black-Scholes pricing model.  We adopted the provisions of SFAS
123R commencing January 1, 2006.





Comparison
of Results of Operations between the Years Ended December 31, 2008 and
2007





Revenues. We recorded
revenues of  $5,957,491 during 2008 as compared to $1,270,367 during
2007.  The increase in revenue in 2008 is primarily attributable to
the milestone payments received in 2008 from Novartis under the licensing
agreement for NM100060. As discussed in Note 3 to the Consolidated Financial
Statements, we received $1.5 million from Novartis in March 2008 and another
$3.5 million in October 2008.  These milestones were recognized as
revenue during 2008.





Research and
Development Expenses. Our
research and development expenses increased from $5,022,671 in 2007 to
$5,410,513 in 2008.    Research and development expenses in
the third quarter of 2008 increased primarily due tothe expense of approximately $892,000for a cancellation fee
related to the cancellation of a clinical research agreement for a one-year
open-label study forVitaros® as discussed in Note 15 of the
Consolidated Financial Statements.  This increase was partially offset
by reduced spending in 2008 on our development programs includingapproximately $1.2 million
attributable toVitaros®, as compared to approximately $2
million forVitaros®during 2007. Wehave continued to spend modestly on
the early stage development of our topical treatment for
psoriasis.  During 2008 we initiated and have spent approximately
$341,000 on the psoriasis project.  We plan to spend considerably less
on research and development in 2009 as we actively seek co-development partners
for our early stage products under development, including our topical treatment
for psoriasis.


21


General and Administrative
Expenses.  Our general and administrative expenses have
increased from $5,634,479 in 2007 to $5,720,832 in 2008.   The
increase is due to a loss on disposal of fixed assets in 2008 of $904,902 as
compared to $10,121 in 2007.  The significant increase in the loss on
disposal of fixed assets resulted from an impairment charge of approximately
$884,000 to reduce the carrying amount of our land and building to reflect the
current commercial real estate market as we have initiated efforts to sell this
facility.   The increase in loss on disposal of fixed assets was
partially offset by a decrease in salary expense of approximately $180,000 as a
result of no bonuses accrued or paid in 2008 and a reduction in consulting fees
of approximately $239,000, as our Chief Operating Officer hired in late 2007 and
Chief Executive Officer appointed in June 2007 have taken over most of the
responsibilities handled by consultants in 2007. We also reduced the cost of
printing and designing our annual report by approximately $63,000 in
2008.  Additionally we had a one-time expense of approximately
$257,000 in 2007 for New Jersey State sales tax paid as a result of a sales tax
audit covering the period from 2000 to 2007.





Interest  Expense.  We
recognized $1,006,794 and $481,862 in interest expense in 2008 and 2007
respectively.  The increase is primarily due to the interest on the
$5,750,000 principal amount of convertible notes issued on June 30, 2008 and the
amortization of debt issue costs for warrants issued in connection with a line
of credit obtained in May 2008 as discussed in Note 8 to the Consolidated
Financial Statements compared to interest expense on lesser debt of $2,000,000
in 2007.





Net Loss.  The net
loss was $5,171,198 or $0.06 per share and $8,787,228 or $0.11 per share in 2008
and 2007, respectively.  The decrease is primarily attributable to the
significant increase in revenues attributable to the milestones received in 2008
from Novartis under the licensing agreement for NM100060.  As
discussed in Note 3 to the Consolidated Financial Statements, we received $1.5
million from Novartis in March 2008 and another $3.5 million in October
2008.  These milestones were recognized as revenue during
2008.





Comparison
of Results of Operations between the Years Ended December 31, 2007 and
2006





Revenues. We recorded
revenues of  $1,270,367 during 2007 as compared to $1,866,927 during
2006.  The decrease in revenue in 2007 is primarily attributable to
the method used to recognize revenue from the $4 million up-front payment
received in 2005 from Novartis under the licensing agreement for NM100060. As
discussed in Note 3 to the Consolidated Financial Statements, the Novartis
agreement was amended in February 2007 such that beginning with the first
quarter of 2007 we are recognizing the initial up-front payment and preclinical
reimbursement revenue from this agreement based on a straight-line basis over
the 18 month period ended June 30, 2008 rather than the cost-to-cost method over
the 32-month period estimated to complete the remaining preclinical studies for
NM100060. Accordingly, the Company recognized significantly more revenue in the
first quarter of 2006 because the high costs to initiate the preclinical studies
in 2005 and early 2006 resulted in a larger portion of revenue recognized under
the cost-to-cost method in 2006.  This decrease in revenue is
partially offset by the $111,000 in revenue recognized in 2007 attributable to
the up-front payment received in November 2007 from Warner as discussed in Note
3 of the Consolidated Financial Statements.





Research and Development
Expenses. Our research and development expenses decreased from $5,425,137
in 2006 to $5,022,671 in 2007.    Research and development
expenses in 2007 included approximately $2 million attributable to Vitaros®  and
the balance attributable to other NexACT®
technology based products and indirect overhead related to research and
development, as compared to approximately $940,000 for NM100060 and $997,000 for
Vitaros® during
2006.  The majority of our expenses in 2007 were related to the filing
of the NDA and NDS for Vitaros®  in
2007.  We no longer have research and development expenses related to
NM100060, as we are no longer obligated to complete the remaining preclinical
studies for NM100060.   Novartis has taken over all
responsibilities related to the remaining preclinical studies whereas in 2006,
we incurred the preclinical study costs and were reimbursed by
Novartis.





General and Administrative
Expenses.  Our general and administrative expenses have
increased from $5,570,765 in 2006 to $5,634,479 in 2007.   The
modest increase in 2007 is primarily due to New Jersey State sales tax paid of
approximately $257,000 as a result of a sales tax audit covering the period from
2000 to 2007, approximately $175,000 in consulting fees for business development
and market research activities related to identifying potential commercial
partners for Vitaros®  and
an increase of approximately $300,000 in legal fees related tothe national filings of
patent applications for Vitaros®  as
well as legal fees in connection with a patent lawsuit in which we are the
plaintiff suing for patent infringement of our herpes treatment medical
device.   In 2006 we recorded a loss on disposal of equipment of
approximately $473,000 as a result of the consolidation of our operations in
that year.


22


Interest  Expense.  We
recognized $481,862 and $380,860 in interest expense in 2007 and 2006
respectively.  The increase is primarily due to the $3 million
mortgage note executed in October 2007 as discussed in Note 7 of the
Consolidated Financial Statements whereby we began amortizing $51,255 of the
note discount in 2007.  Additionally, as discussed in Note 7 of the
Consolidated Financial Statements, in 2007 we incurred ten months of interest
expense on the $2 million Note that was repaid in October 2007 as compared to
only one month of interest in 2006.





Other
income.Other income was $0 in 2007 as compared to
$627,455 in 2006.  The 2006 other income consisted of a one-time
payment received when Schering elected to terminate the supply and distribution
agreement for Vitaros® without cause.  Pursuant to the agreement,
Schering was obligated to pay a termination fee of 500,000 Euros or
$627,455.





Net Loss.  The net
loss was $8,787,228 and  $8,043,253 in 2007 and 2006,
respectively.  The increase is primarily attributable to the decrease
in revenues primarily attributable to the method used to recognize revenue from
the $4 million up-front payment received in 2005 from Novartis under the
licensing agreement for NM100060. As discussed in Note 3 to the Consolidated
Financial Statements, the Novartis agreement was amended in February 2007 such
that beginning with the first quarter of 2007 we are recognizing the initial
up-front payment and preclinical reimbursement revenue from this agreement based
on a straight-line basis over the 18 month period ended June 30, 2008 rather
than the cost-to-cost method over the 32-month period estimated to complete the
remaining preclinical studies for NM100060. Accordingly, the Company recognized
significantly more revenue in 2006 as the preclinical studies were initiated
because the high costs to initiate the preclinical studies in 2005 and early
2006 resulted in a larger portion of revenue recognized under the cost-to-cost
method in 2006.





Net Loss applicable to Common
Stock.The net loss applicable to Common Stock was $8,787,228
or $0.11 per share as compared to  $8,108,414 or $0.12 per share for
2006.  The increase in net loss applicable to Common Stock is
primarily attributable tothe decrease in revenue as
discussed above.





Quarterly
Results





The
following table sets forth selected unaudited quarterly financial information
for the years ended December 31, 2008 and 2007.  The operating results
are not necessarily indicative of results for any future period.





For
the Three Months Ended





March
      31, 2008
                        
                        
                        June
      30, 2008
                        
                        
                        September
      30, 2008
                        
                        
                        December
      31, 2008Total
      Revenues
                        
                        $
                        951,787
                        
                        
                        $
                        1,199,612
                        
                        
                        $
                        305,943
                        
                        
                        $
                        3,500,149Income
      (Loss) from Operations
                        
                        $
                        (1,520,702
                        )
                        
                        $
                        (1,090,169
                        )
                        
                        $
                        (2,896,791
                        )
                        
                        $
                        333,808Net
      Income (Loss)
                        
                        $
                        (1,642,187
                        )
                        
                        $
                        (1,628,723
                        )
                        
                        $
                        (3,040,094
                        )
                        
                        $
                        1,139,806Basic
      & Diluted Income (Loss) Per Share
                        
                        $
                        (0.02
                        )
                        
                        $
                        (0.02
                        )
                        
                        $
                        (0.04
                        )
                        
                        $
                        0.01March
      31, 2007
                        
                        
                        June
      30, 2007
                        
                        
                        September
      30, 2007
                        
                        
                        December
      31, 2007Total
      Revenues
                        
                        $
                        286,959
                        
                        
                        $
                        283,417
                        
                        
                        $
                        296,390
                        
                        
                        $
                        403,601Loss
      from Operations
                        
                        $
                        (2,023,819
                        )
                        
                        $
                        (1,975,228
                        )
                        
                        $
                        (2,007,823
                        )
                        
                        $
                        (3,379,913
                        )Net
      Loss
                        
                        $
                        (2,039,309
                        )
                        
                        $
                        (1,991,021
                        )
                        
                        $
                        (2,026,378
                        )
                        
                        $
                        (2,730,520
                        )Basic
      & Diluted Loss Per Share
                        
                        $
                        (0.03
                        )
                        
                        $
                        (0.02
                        )
                        
                        $
                        (0.02
                        )
                        
                        $
                        (0.03
                        )





ITEM
      7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.





We do not
hold derivative financial investments, derivative commodity investments, engage
in foreign currency hedging or other transactions that expose us to material
market risk.  The interest rates on our existing debt are
fixed.


23


ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA.





INDEX TO
FINANCIAL STATEMENTS





PAGEReport
      of Independent Registered Public Accounting Firm 2008, 2007 and
      2006
                
                25Financial
      Statements:
                
                27Consolidated
      Balance Sheets - December 31, 2008 and 2007
                
                27Consolidated
      Statements of Operations and Comprehensive Loss for the years ended
      December 31, 2008, 2007 and 2006
                
                28Consolidated
      Statements of Changes in Stockholders' Equity for years ended December 31,
      2008, 2007 and 2006
                
                29Consolidated
      Statements of Cash Flows for the years ended December 31, 2008, 2007 and
      2006
                
                30Notes
      to the Consolidated Financial Statements
                
                31Schedule
      II – Valuation of Qualifying Accounts
                
                71


24




Report
of Independent Registered Public Accounting Firm
  To the
Board of Directors
 Stockholders
of NexMed, Inc.
 
 We have
audited the accompanying consolidated balance sheets of NexMed, Inc. and
subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity and cash flows for the years
ended December 31, 2008, 2007 and 2006.  Our audits also include the
financial statement schedule included in Item 15.  We also have
audited NexMed, Inc.’s internal control over financial reporting as of December
31, 2008, based on criteria established in Internal Control-Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).  NexMed, Inc.’s management is responsible
for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial
Reporting.  Our responsibility is to express an opinion on these
financial statements and financial statement schedule and an opinion on the
Company’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects.  Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation.  Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk.  Our audits also included performing such other
procedures as we considered necessary in the circumstances.  We
believe that our audits provide a reasonable basis for our
opinions.
 
 A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) 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.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
  25
 
 In our
opinion, the financial statements and financial statement schedule referred to
above present fairly, in all material respects, the financial position of
NexMed, Inc. and subsidiaries as of December 31, 2008 and 2007, and the results
of its operations and its cash flows for the years ended December 31, 2008, 2007
and 2006 in conformity with accounting principles generally accepted in the
United States of America.  Also in our opinion, NexMed, Inc. and
subsidiaries maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2008, based on criteria established
in Internal Control-Internal
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring losses and negative cash flows
from operations and expects to incur future losses that raise substantial doubt
about its ability to continue as a going concern.  Management’s plans
in regard to these matters are also described in Note 1.  The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
 
 /s/
Amper, Politziner & Mattia, LLP
  March 16,
2009
 Edison,
New Jersey
 26
  NexMed,
Inc.
 Consolidated
Balance Sheets
 
 December 31,2008
                                      
                                      
                                      2007AssetsCurrent
      assetsCash
      and cash equivalents
                                      
                                      $
                                      2,862,960
                                      
                                      
                                      $
                                      2,735,940Short
      term investments
                                      
                                      
                                      -
                                      
                                      
                                      
                                      750,000Debt
      issuance cost, net of accumulated amortization of $43,283 and
      $7,565
                                      
                                      
                                      30,368
                                      
                                      
                                      
                                      68,081Prepaid
      expenses and other current assets
                                      
                                      
                                      83,761
                                      
                                      
                                      
                                      127,659Total
      current assets
                                      
                                      
                                      2,977,089
                                      
                                      
                                      
                                      3,681,680Fixed
      assets, net
                                      
                                      
                                      5,519,652
                                      
                                      
                                      
                                      6,956,986Debt
      issuance cost, net of accumulated amortization of $86,607 and
      $3,782
                                      
                                      
                                      60,771
                                      
                                      
                                      
                                      34,040Total
      assets
                                      
                                      $
                                      8,557,512
                                      
                                      
                                      $
                                      10,672,706Liabilities
      and Stockholders' EquityCurrent
      liabilitiesAccounts
      payable and accrued expenses
                                      
                                      $
                                      1,029,486
                                      
                                      
                                      $
                                      621,668Payroll
      related liabilities
                                      
                                      
                                      296,135
                                      
                                      
                                      
                                      693,774Deferred
      revenue
                                      
                                      
                                      -
                                      
                                      
                                      
                                      953,528Deferred
      compensation - current portion
                                      
                                      
                                      74,245
                                      
                                      
                                      
                                      60,929Total
      current liabilities
                                      
                                      
                                      1,399,866
                                      
                                      
                                      
                                      2,329,899Long
      term liabilitiesConvertible
      notes payable
                                      
                                      
                                      4,690,000
                                      
                                      
                                      
                                      -Note
      payable, net of debt discount of $461,295
                                      
                                      
                                      -
                                      
                                      
                                      
                                      2,538,705Deferred
      compensation
                                      
                                      
                                      935,517
                                      
                                      
                                      
                                      999,345Total
      liabilities
                                      
                                      
                                      7,025,383
                                      
                                      
                                      
                                      5,867,949Commitments
      and contingincies (Note 15)Stockholders'
      equity:Common
      stock, $.001 par value, 120,000,000 shares authorized,84,350,361 and
      83,063,002 shares issued and outstanding, respectively
                                      
                                      
                                      84,352
                                      
                                      
                                      
                                      83,065Additional
      paid-in capital
                                      
                                      
                                      141,137,077
                                      
                                      
                                      
                                      139,239,794Accumulated
      deficit
                                      
                                      
                                      (139,689,300
                                      )
                                      
                                      
                                      (134,518,102
                                      )Total
      stockholders' equity
                                      
                                      
                                      1,532,129
                                      
                                      
                                      
                                      4,804,757Total
      liabilities and stockholders' equity
                                      
                                      $
                                      8,557,512
                                      
                                      
                                      $
                                      10,672,706
 The
accompanying notes are an integral part of these consolidated financial
statements.
  27
  NexMed,
Inc.
 Consolidated
Statements of Operations
 For
      the Year EndedDecember
      31,2008
                                        
                                        
                                        2007
                                        
                                        
                                        2006Revenues,
      principally license fee revenue
                                        
                                        $
                                        5,957,491
                                        
                                        
                                        $
                                        1,270,367
                                        
                                        
                                        $
                                        1,866,927Costs
      and expensesResearch
      and development
                                        
                                        
                                        5,410,513
                                        
                                        
                                        
                                        5,022,671
                                        
                                        
                                        
                                        5,425,137General
      and administrative
                                        
                                        
                                        5,720,832
                                        
                                        
                                        
                                        5,634,479
                                        
                                        
                                        
                                        5,570,765Total
      costs and expenses
                                        
                                        
                                        11,131,345
                                        
                                        
                                        
                                        10,657,150
                                        
                                        
                                        
                                        10,995,902Loss
      from operations
                                        
                                        
                                        (5,173,854
                                        )
                                        
                                        
                                        (9,386,783
                                        )
                                        
                                        
                                        (9,128,975
                                        )Other
      income (expense)Other
      income
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        627,455Interest
      income
                                        
                                        
                                        71,793
                                        
                                        
                                        
                                        275,508
                                        
                                        
                                        
                                        271,730Interest
      expense
                                        
                                        
                                        (1,006,794
                                        )
                                        
                                        
                                        (481,862
                                        )
                                        
                                        
                                        (380,860
                                        )Total
      other income (expense)
                                        
                                        
                                        (935,001
                                        )
                                        
                                        
                                        (206,354
                                        )
                                        
                                        
                                        518,325Loss
      before benefit from income taxes
                                        
                                        
                                        (6,108,855
                                        )
                                        
                                        
                                        (9,593,137
                                        )
                                        
                                        
                                        (8,610,650
                                        )Benefit
      from income taxes
                                        
                                        
                                        937,657
                                        
                                        
                                        
                                        805,909
                                        
                                        
                                        
                                        567,397Net
      loss
                                        
                                        
                                        (5,171,198
                                        )
                                        
                                        
                                        (8,787,228
                                        )
                                        
                                        
                                        (8,043,253
                                        )Deemed
      dividend to preferred shareholdersfrom beneficial conversion
      feature
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (49,897
                                        )Preferred
      dividend
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (15,264
                                        )Net
      loss applicable to common stock
                                        
                                        $
                                        (5,171,198
                                        )
                                        
                                        $
                                        (8,787,228
                                        )
                                        
                                        $
                                        (8,108,414
                                        )Basic
      and diluted loss per share
                                        
                                        $
                                        (.06
                                        )
                                        
                                        $
                                        (.11
                                        )
                                        
                                        $
                                        (.12
                                        )Weighted
      average common shares outstanding used for basic and diluted loss per
      share
                                        
                                        
                                        83,684,806
                                        
                                        
                                        
                                        82,015,909
                                        
                                        
                                        
                                        66,145,807
  The
accompanying notes are an integral part of these consolidated financial
statements.
  28
  NexMed,
Inc.
 Consolidated
Statements of Changes in Stockholders’ Equity
 ForeignCommon
                                          
                                          
                                          Common
                                          
                                          
                                          Additional
                                          
                                          
                                          
                                          
                                          
                                          Currency
                                          
                                          
                                          TotalStock
                                          
                                          
                                          Stock
                                          
                                          
                                          Paid-In
                                          
                                          
                                          Accumulated
                                          
                                          
                                          translation
                                          
                                          
                                          Stockholders'(Shares)
                                          
                                          
                                          (Amount)
                                          
                                          
                                          Capital
                                          
                                          
                                          Deficit
                                          
                                          
                                          
                                          
                                          
                                          EquityBalance
      at January 1, 2006
                                          
                                          
                                          55,699,467
                                          
                                          
                                          $
                                          55,700
                                          
                                          
                                          $
                                          118,281,871
                                          
                                          
                                          $
                                          (117,687,621
                                          )
                                          
                                          $
                                          (9,596
                                          )
                                          
                                          $
                                          640,354Issuance
      of common stock upon exercise of stock options and warrants,
      net
                                          
                                          
                                          208,095
                                          
                                          
                                          
                                          208
                                          
                                          
                                          
                                          97,108
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          97,316Issuance
      of compensatory options to employees and consultants
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,214,403
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,214,403Issuance
      of common stock in payment of interest on convertible
notes
                                          
                                          
                                          392,467
                                          
                                          
                                          
                                          393
                                          
                                          
                                          
                                          303,774
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          304,167Issuance
      of compensatory stock to the board of directors
                                          
                                          
                                          197,264
                                          
                                          
                                          
                                          197
                                          
                                          
                                          
                                          143,804
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          144,001Issuance
      of common stock from private placement, net of offering
    costs
                                          
                                          
                                          22,664,191
                                          
                                          
                                          
                                          22,664
                                          
                                          
                                          
                                          16,318,993
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          16,341,657Issuance
      of common stock upon conversion of preferred stock, including dividends
      paid in stock
                                          
                                          
                                          1,124,421
                                          
                                          
                                          
                                          1,125
                                          
                                          
                                          
                                          873,875
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          875,000Amortization
      of beneficial conversion feature, discount and issuance costs related to
      preferred stock
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (207,170
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (207,170
                                          )Discount
      on Note payable for issuance of warrants
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          138,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          138,000Net
      loss
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (8,043,253
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (8,043,253
                                          )80,285,905
                                          
                                          
                                          $
                                          80,287
                                          
                                          
                                          $
                                          137,164,658
                                          
                                          
                                          $
                                          (125,730,874
                                          )
                                          
                                          $
                                          (9,596
                                          )
                                          
                                          $
                                          11,504,475Balance
      at December 31, 2006Issuance
      of common stock upon exercise of stock options and warrants,
      net
                                          
                                          
                                          1,717,943
                                          
                                          
                                          
                                          1,718
                                          
                                          
                                          
                                          219,175
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          220,893Issuance
      of compensatory options to employees and consultants
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          776,835
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          776,835Issuance
      of compensatory stock to employees and consultants
                                          
                                          
                                          609,000
                                          
                                          
                                          
                                          609
                                          
                                          
                                          
                                          89,391
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          90,000Issuance
      of common stock in payment of interest on notes
                                          
                                          
                                          145,614
                                          
                                          
                                          
                                          146
                                          
                                          
                                          
                                          190,602
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          190,748Issuance
      of compensatory stock to the board of directors
                                          
                                          
                                          304,540
                                          
                                          
                                          
                                          305
                                          
                                          
                                          
                                          288,693
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          288,998Net
      offering costs from issuance of common stock
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (2,110
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (2,110
                                          )Discount
      on Note payable for issuance of warrants
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          512,550
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          512,550Realized
      gain on foreign currency exchange
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          9,596
                                          
                                          
                                          
                                          9,596Net
      loss
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (8,787,228
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (8,787,228
                                          )Balance
      at December 31, 2007
                                          
                                          
                                          83,063,002
                                          
                                          
                                          $
                                          83,065
                                          
                                          
                                          $
                                          139,239,794
                                          
                                          
                                          $
                                          (134,518,102
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          $
                                          4,804,757Issuance
      of common stock upon exercise of stock options and
warrants
                                          
                                          
                                          526,909
                                          
                                          
                                          
                                          527
                                          
                                          
                                          
                                          459,221
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          459,748Issuance
      of compensatory options to employees and consultants
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          138,511
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          138,511Issuance
      of compensatory stock to employees and consultants
                                          
                                          
                                          382,500
                                          
                                          
                                          
                                          382
                                          
                                          
                                          
                                          704,350
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          704,732Issuance
      of compensatory stock to the board of directors
                                          
                                          
                                          377,950
                                          
                                          
                                          
                                          378
                                          
                                          
                                          
                                          480,451
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          480,829Discount
      on Note payable for issuance of warrants
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          114,750
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          114,750Net
      loss
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (5,171,198
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (5,171,198
                                          )Balance
      at December 31, 2008
                                          
                                          
                                          84,350,361
                                          
                                          
                                          $
                                          84,352
                                          
                                          
                                          $
                                          141,137,077
                                          
                                          
                                          $
                                          (139,689,300
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          $
                                          1,532,129
  The
accompanying notes are an integral part of these consolidated financial
statements.
 29
  NexMed,
Inc.
 Consolidated
Statements of Cash Flows
 For
      the Year EndedDecember
      31,2008
                      
                      
                      2007
                      
                      
                      2006Cash
      flows from operating activitiesNet
      loss
                      
                      $
                      (5,171,198
                      )
                      
                      $
                      (8,787,228
                      )
                      
                      $
                      (8,043,253
                      )Adjustments
      to reconcile net loss to net cash used in operating
    activitiesDepreciation
      and amortization
                      
                      
                      486,420
                      
                      
                      
                      621,869
                      
                      
                      
                      842,087Non-cash interest, amortization of debt discount
      anddeferred financing
      costs
                      
                      
                      693,316
                      
                      
                      
                      408,538
                      
                      
                      
                      328,050Non-cash
      compensation expense
                      
                      
                      1,324,072
                      
                      
                      
                      1,155,832
                      
                      
                      
                      1,358,403Net
      gain on foreign currency exchange
                      
                      
                      -
                      
                      
                      
                      9,596
                      
                      
                      
                      -Impairment
      charge and loss on disposal of property and equipment
                      
                      
                      904,902
                      
                      
                      
                      10,121
                      
                      
                      
                      473,312Changes
      in assets and liabilitiesDecrease
      (increase) in other receivable
                      
                      
                      
                      
                      
                      
                      183,700
                      
                      
                      
                      (183,700
                      )Decrease
      in prepaid expense and other assets
                      
                      
                      43,898
                      
                      
                      
                      37,239
                      
                      
                      
                      791,477(Decrease)
      increase in deferred revenue
                      
                      
                      (953,528
                      )
                      
                      
                      (740,389
                      )
                      
                      
                      (1,091,884
                      )(Decrease)
      increase in payroll related liabilities
                      
                      
                      (397,639
                      )
                      
                      
                      537,207
                      
                      
                      
                      156,567(Decrease)
      increase in deferred compensation
                      
                      
                      (50,512
                      )
                      
                      
                      (58,036
                      )
                      
                      
                      (59,889
                      )Increase
      (decrease) in accounts payable and accrued expenses
                      
                      
                      407,818
                      
                      
                      
                      33,918
                      
                      
                      
                      (1,238,184
                      )Net
      cash used in operating activities
                      
                      
                      (2,712,451
                      )
                      
                      
                      (6,587,633
                      )
                      
                      
                      (6,667,014
                      )Cash
      flows from investing activitiesProceeds
      from sale of fixed assets
                      
                      
                      75,000
                      
                      
                      
                      -
                      
                      
                      
                      178,769Capital
      expenditures
                      
                      
                      (28,988
                      )
                      
                      
                      (100,875
                      )
                      
                      
                      (76,553
                      )Purchases
      of short term investments
                      
                      
                      -
                      
                      
                      
                      (3,000,000
                      )
                      
                      
                      (6,000,000
                      )Proceeds
      from sale of short term investments
                      
                      
                      750,000
                      
                      
                      
                      3,250,000
                      
                      
                      
                      5,500,000Net
      cash provided by (used in) investing activities
                      
                      
                      796,012
                      
                      
                      
                      149,125
                      
                      
                      
                      (397,784
                      )Cash
      flows from financing activitiesIssuance
      of common stock, net of offering costs
                      
                      
                      -
                      
                      
                      
                      (2,110
                      )
                      
                      
                      16,341,657Proceeds
      from exercise of stock options and warrants
                      
                      
                      459,748
                      
                      
                      
                      220,893
                      
                      
                      
                      97,316Issuance
      of convertible notes payable, net of debt issue costs
                      
                      
                      5,643,711Issuance
      of notes payable, net of debt issue costs
                      
                      
                      -
                      
                      
                      
                      2,886,532
                      
                      
                      
                      1,975,000Repayment
      of notes payable
                      
                      
                      (4,000,000
                      )
                      
                      
                      (2,000,000
                      )Repayment
      of convertible notes payable
                      
                      
                      (60,000
                      )
                      
                      
                      (3,000,000
                      )
                      
                      
                      (3,000,000
                      )Principal
      payments on capital lease obligations
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (233,823
                      )Net
      cash provided by (used in) financing activities
                      
                      
                      2,043,459
                      
                      
                      
                      (1,894,685
                      )
                      
                      
                      15,180,150Net
      increase (decrease) in cash and cash equivalents
                      
                      
                      127,020
                      
                      
                      
                      (8,333,193
                      )
                      
                      
                      8,115,352Cash
      and cash equivalentsBeginning
      of year
                      
                      
                      2,735,940
                      
                      
                      
                      11,069,133
                      
                      
                      
                      2,953,781End
      of year
                      
                      $
                      2,862,960
                      
                      
                      $
                      2,735,940
                      
                      
                      $
                      11,069,133Cash
      paid for interest
                      
                      $
                      324,314
                      
                      
                      $
                      119,307
                      
                      
                      $
                      91,912Supplemental
      disclosure of non-cash investing and financing activities:Payment
      of interest in common stock
                      
                      
                      -
                      
                      
                      
                      190,748
                      
                      
                      
                      304,167Amortization
      of debt discount
                      
                      
                      461,295
                      
                      
                      
                      178,640
                      
                      
                      
                      10,615Conversion
      of preferred stock to common stock
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      859,736Preferred
      stock dividend paid in common stock
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      15,264
  The
accompanying notes are an integral part of these consolidated financial
statements.
 30
  NexMed,
Inc.
 Notes
to Consolidated Financial Statements
 1.
                Organization
      and Basis of Presentation
  The
Company was incorporated in Nevada in 1987.  In January 1994, the
Company began research and development of a device for the treatment of herpes
simplex.  The Company, since 1995, has conducted research and
development both domestically and abroad on proprietary pharmaceutical products,
with the goal of growing through acquisition and development of pharmaceutical
products and technology.
  The
accompanying consolidated financial statements have been prepared on a basis
which contemplates the realization of assets and the satisfaction of liabilities
and commitments in the normal course of business.  The Company has an
accumulated deficit of $139,689,300 at December 31, 2008 and expects that it
will incur additional losses in the future completing the research, development
and commercialization of its technologies.  These circumstances raise
substantial doubt about the Company's ability to continue as a going
concern.  Management anticipates that the Company will require
additional financing, which it is actively pursuing, to fund operations,
including continued research, development and clinical trials of the Company’s
product candidates.  Although management continues to pursue these
plans, there is no assurance that the Company will be successful in obtaining
financing on terms acceptable to the Company.  If the Company is
unable to obtain additional financing, operations will need to be
discontinued.  The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
  2.
                Summary
      of Significant Accounting
Principles
  Significant
accounting principles followed by the Company in preparing its financial
statements are as follows:
  Principles
of consolidation
 The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries.  All significant intercompany accounts and
transactions have been eliminated.
  Cash
and cash equivalents
 For
purposes of the balance sheets and the statements of cash flows, cash
equivalents represent all highly liquid investments with an original maturity
date of three months or less.
  Short
term investments
 A
significant amount of our short term investments at December 31, 2007 were
comprised of investment grade variable rate debt obligations, which are
asset-backed and categorized as available-for-sale.  Accordingly, our
investments in these securities are recorded at cost, which approximates fair
value due to their variable interest rates, which typically reset every 28
days.  Despite the long-term nature of their contractual maturities,
we have the ability and intent to liquidate these securities within one
year.  As a result of the resetting variable rates, we had no
cumulative gross unrealized or realized holding gains or losses from these
investments.  All income generated from these investments was recorded
as interest income.  The Company had no such investments at December
31, 2008.
  Fair
value of financial instruments
 The
carrying value of cash and cash equivalents, convertible notes payable, accounts
payable and accrued expenses and deferred compensation approximates fair value
due to the relatively short maturity of these instruments.
  31
  NexMed,
Inc.
 Notes
to Consolidated Financial Statements
 Fixed
assets
 Property
and equipment are stated at cost less accumulated
depreciation.  Depreciation of equipment and furniture and fixtures is
provided on a straight-line basis over the estimated useful lives of the assets,
generally three to ten years.  Depreciation of buildings is provided
on a straight-line basis over the estimated useful life of 31
years.  Amortization of leasehold improvements is provided on a
straight-line basis over the shorter of their estimated useful life or the lease
term.  The costs of additions and betterments are capitalized, and
repairs and maintenance costs are charged to operations in the periods
incurred.
  Long-lived
assets
 The
Company reviews for the impairment of long-lived assets whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable.  An impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of the asset and
its eventual disposition is less than its carrying amount.  If such
assets are considered impaired, the amount of the impairment loss recognized is
measured as the amount by which the carrying value of the asset exceeds the fair
value of the asset, fair value being determined based upon discounted cash flows
or appraised values, depending on the nature of the asset.  The
Company recorded an impairment charge of $884,271 in 2008 to reduce the
carrying amount of its land and building to reflect the current commercial real
estate market as the Company has initiated efforts to sell its
facility.  This charge is recorded within general and administrative
expenses on the statement of operations.  No such impairment losses have
been recorded by the Company during 2007 or 2006.
  Revenue
recognition
 Revenues
from product sales are recognized upon delivery of products to customers, less
allowances for estimated returns and discounts.  Royalty revenue is
recognized upon the sale of the related products, provided the royalty amounts
are fixed or determinable and the amounts are considered
collectible.  Revenues from product sales and royalties are immaterial
in 2008, 2007 and 2006.
  Revenues
earned under licensing and research and development contracts are recognized in
accordance with the cost-to-cost method whereby the extent of progress toward
completion is measured on the cost-to-cost basis; however, revenue recognized at
any point will not exceed the cash received.  When the current
estimates of total contract revenue and contract cost indicate a loss, a
provision for the entire loss on the contract is made in the period which it
becomes probable.  All costs related to these agreements are expensed
as incurred and classified within “Research and development” expenses in the
Consolidated Statements of Operations.
  Also,
licensing agreements typically include several elements of revenue, such as
up-front payments, milestones, royalties upon sales of product, and the delivery
of product and/or research services to the licensor. We follow the accounting
guidance of SEC Staff Accounting Bulletin No. 104 (which superseded SEC
Staff Accounting Bulletin No. 101) and EITF No. 91-6 and EITF No.
00-21 (which became effective for contracts entered into after June 2003).
Non-refundable license fees received upon execution of license agreements where
we have continuing involvement are deferred and recognized as revenue over the
estimated performance period of the agreement. This requires management to
estimate the expected term of the agreement or, if applicable, the estimated
life of its licensed patents.
  32
  NexMed,
Inc.
 Notes
to Consolidated Financial Statements
 In
addition, EITF No. 00-21 requires a company to evaluate its arrangements under
which it will perform multiple revenue-generating activities. For example, a
license agreement with a pharmaceutical company may involve a license, research
and development activities and/or contract manufacturing. Management is required
to determine if the separate components of the agreement have value on a
standalone basis and qualify as separate units of accounting, whereby
consideration is allocated based upon their relative “fair values” or, if not,
the consideration should be allocated based upon the “residual method.”
Accordingly, up-front and development stage milestone payments will be deferred
and recognized as revenue over the performance period of such license
agreement.
  Research
and development
 Research
and development costs are expensed as incurred and include the cost of salaries,
building costs, utilities, allocation of indirect costs, and expenses to third
parties who conduct research and development, pursuant to development and
consulting agreements, on behalf of the Company.
  Income
taxes
 Income
taxes are accounted for under the asset and liability
method.  Deferred income taxes are recorded for temporary differences
between financial statement carrying amounts and the tax bases of assets and
liabilities.  Deferred tax assets and liabilities reflect the tax
rates expected to be in effect for the years in which the differences are
expected to reverse.  A valuation allowance is provided if it is more
likely than not that some or all of the deferred tax assets will not be
realized.
  Loss
per common share
 Basic
earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period.  Diluted earnings per share gives effect to all dilutive
potential common shares outstanding during the period.  The
computation of diluted earnings per share does not assume conversion, exercise
or contingent exercise of securities that would have an antidilutive effect on
per share amounts.
  At
December 31, 2008, 2007 and 2006, outstanding options to purchase 3,368,991,
3,469,841, and 3,663,421 shares of Common Stock, respectively, with exercise
prices ranging from $0.55 to $16.25 have been excluded from the computation of
diluted loss per share as they are antidilutive.  At December 31,
2008, 2007 and 2006, outstanding warrants to purchase 12,118,044, 12,439,954,
and 20,125,027 shares of Common Stock, respectively, with exercise prices
ranging from $0.55 to $4.04 have also been excluded from the computation of
diluted loss per share as they are antidilutive.  Promissory notes
convertible into 2,345,000 shares of Common Stock in 2008 and 600,000 shares of
Common Stock (see Note 6) in 2006 have also been excluded from the computation
of diluted loss per share, as they are antidilutive.
  Accounting
for stock based compensation
  Effective
January 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123R, “Share-Based Payment”, which
establishes the financial accounting and reporting standards for stock-based
compensation plans. SFAS 123R requires the measurement and recognition of
compensation expense for all stock-based awards made to employees and directors,
including employee stock options. Under the provisions of SFAS 123R,
stock-based compensation cost is measured at the grant date, based on the
calculated fair value of the award, and is recognized as an expense on a
straight-line basis overthe requisite service
period of the entire award (generally the vesting period of the
award).  The Company adopted the provisions of SFAS 123R as of January
1, 2006 using the modified prospective transition method.   Under
this transition method, stock-based compensation expense for the year ended
December 31, 2006 includes expense for all equity awards granted during the year
ended December 31, 2006 and prior, but not yet vested as of January 1, 2006,
based on the grant date fair value estimated in accordance with the original
provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”
as amended by SFAS 148, “Accounting for Stock-Based Compensation—Transition and
Disclosure.” Also in accordance with the modified prospective transition method,
prior interim and annual periods have not been restated and do not reflect the
recognition of stock-based compensation cost under SFAS 123R.  Since
the adoption of SFAS 123R, there have been no changes to the Company’s stock
compensation plans or modifications to outstanding stock-based awards which
would increase the value of any awards outstanding. Compensation expense for all
stock-based compensation awards granted subsequent to January 1, 2006 was based
on the grant-date fair value determined in accordance with the provisions of
SFAS 123R.
  33
 NexMed,
Inc.
 Notes
to Consolidated Financial Statements
 The
Company accounts for stock options granted to non-employees on a fair value
basis in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," and Emerging Issues Task Force Issue No. 96-18, "Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." Any options issued to
non-employees are recorded in the consolidated financial statements in deferred
expenses in stockholders' equity using the fair value method and then amortized
to expense over the applicable service periods (See Note 9). As a result, the
non-cash charge to operations for non-employee options with vesting or other
performance criteria is valued each reporting period based upon changes in the
fair value of the Company's Common Stock.
  As a
result of adopting SFAS 123R, the Company’s net loss and its non cash
compensation expense as shown in the Consolidated Statements of Operations for
the years ended December 31, 2008, 2007 and 2006 is $1,324,071, $1,095,834 and
$1,358,403 more, respectively, than if the Company had continued to account for
stock-based compensation under Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” and its related interpretations.
Basic and diluted net loss per share for the years ended December 31, 2008, 2007
and 2006 of $(0.05), $(0.11) and $(0.12), respectively, is $0.01, $0.01 and
$0.02 more than if the Company had not adopted SFAS 123R.
  The
following table indicates where the total stock-based compensation expense
resulting from stock options and awards appears in the Statements of
Operations:
  Year EndedDecember 31, 2008
                          
                          
                          December 31, 2007Research
      and development
                          
                          $
                          71,833
                          
                          
                          $
                          111,108General
      and administrative
                          
                          
                          1,252,239
                          
                          
                          
                          1,044,724Total
      stock-based compensation expense
                          
                          $
                          1,324,072
                          
                          
                          $
                          1,155,832
  The
stock-based compensation expense has not been tax-effected due to the recording
of a full valuation allowance against U.S. net deferred tax
assets.
  34
  NexMed,
Inc.
 Notes
to Consolidated Financial Statements
  The fair
value of each stock option grant is estimated on the grant date using the
Black-Scholes option-pricing model with the following assumptions used for the
years ended December 31, 2008, 2007 and 2006:
  Dividend
      yield
                          
                          
                          0.00
                          %Risk-free
      yields
                          
                          
                          1.35%
      - 5.02
                          %Expected
      volatility
                          
                          
                          54.38% - 103.51
                          %Expected
      option life
                          
                          1 -
      6 yearsForfeiture
      rate
                          
                          
                          6.41
                          %
  Expected Volatility. The
Company uses analysis of historical volatility to compute the expected
volatility of its stock options.
  Expected Term.The expected
term is based on several factors including historical observations of employee
exercise patterns during the Company’s history and expectations of employee
exercise behavior in the future giving consideration to the contractual terms of
the stock-based awards.
  Risk-Free Interest Rate. The
interest rate used in valuing awards is based on the yield at the time of grant
of a U.S. Treasury security with an equivalent remaining term.
  Dividend Yield. The Company
has never paid cash dividends, and does not currently intend to pay cash
dividends, and thus has assumed a 0% dividend yield.
  Pre-Vesting Forfeitures.
Estimates of pre-vesting option forfeitures are based on Company experience. The
Company will adjust its estimate of forfeitures over the requisite service
period based on the extent to which actual forfeitures differ, or are expected
to differ, from such estimates. Changes in estimated forfeitures will be
recognized through a cumulative catch-up adjustment in the period of change and
will also impact the amount of compensation expense to be recognized in future
periods. The cumulative effect resulting from initially applying the provisions
of SFAS 123R to nonvested equity awards was not significant.
  Additional
disclosures required under SFAS 123R are presented in Note 9.
  Concentration
of credit risk
 From time
to time, the Company maintains cash in bank accounts that exceed the FDIC
insured limits. The Company has not experienced any losses on its cash
accounts.
  Accounting
estimates
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
that affect the reported amounts of 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 most significant estimates relate
to the valuation of its long-lived assets, estimated cost to complete under its
research contracts, and valuation allowances for its deferred tax
benefit.  Actual results may differ from those
estimates.
  35
  NexMed,
Inc.
 Notes
to Consolidated Financial Statements
 
 Recent
accounting pronouncements
  In
February 2007, the Financial Accounting Standards Board (the “FASB”)issued
SFAS No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities”, including an
amendment of FASB No. 115 ("FAS 159"). The Statement permits companies to choose
to measure many financial instruments and certain other items at fair value in
order to mitigate volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply complex hedge
accounting provisions. FAS 159 is effective for the Company beginning January 1,
2008. The adoption of this standard has not had a significant impact on the
Company’s consolidated financial position, results of operations or cash
flows.
 
 In
December 2007, the FASB issued Statement of Financial Accounting Standard
No. 160,“Noncontrolling
Interests in Consolidated Financial Statements — an amendment of ARB
No. 51” (“FAS 160”).  FAS 160 establishes accounting and
reporting standards for the non-controlling interest in a subsidiary and for the
retained interest and gain or loss when a subsidiary is deconsolidated. This
statement is effective for financial statements issued for fiscal years
beginning on or after December 15, 2008 with earlier adoption prohibited.
The adoption of this standard is not expected to have a significant impact on
the Company’s consolidated financial position, results of operations or cash
flows.
 
 In
December 2007, the FASB issued SFAS No. 141R, "Business Combinations,"(“SFAS 141R”) which establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed and any non-controlling interest in the
acquiree. SFAS 141R also establishes disclosure requirements to enable the
evaluation of the nature and financial effects of the business combination. SFAS
141R applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008, and interim periods within those fiscal years.
The Company is currently evaluating the impact, if any, of SFAS 141R on its
operating results and financial position.
 
 In May
2008, the FASB issued Staff Position No. APB 14-1 “Accounting for Convertible
Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial
Cash Settlement)” (“FSP APB 14-1”), which clarifies the accounting for
convertible debt instruments that may be settled in cash (including partial cash
settlement) upon conversion.  FSP APB 14-1 requires issuers to account
separately for the liability and equity components of certain convertible debt
instruments in a manner that reflects the issuer’s non-convertible debt
borrowing rate when interest cost is recognized.  FSP APB 14-1
requires retrospective application to the terms of the instruments as they
existed for all periods presented.  FSB APB 14-1 is effective for the
Company as of January 1, 2009 and early adoption is prohibited.  The
Company is currently evaluating the impact of adopting FSP APB 14-1 on its
consolidated financial statements as a result of its convertible debt, as
discussed in Note 6 below.
 In
September 2006, the FASB issued SFAS 157, “Fair Value
Measurements”.  SFAS 157 defines fair value, establishes a
framework for measuring fair value in accordance with accounting principles
generally accepted in the United States of America and expands disclosures about
fair value measurements.  SFAS 157 applies under other accounting
pronouncements that require or permit fair value measurements.  The
Company was required to adopt SFAS 157 beginning January 1, 2008.  In
February 2008, the FASB released FASB Staff Position
(FSP FAS 157-2 — Effective Date of FASB Statement No. 157), which delayed the
effective date of SFAS No. 157 for all non-financial assets and liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually).  The adoption of
SFAS No. 157 for financial assets and liabilities did not have a material impact
on the Company’s consolidated financial statements.  The Company does
not expect that adoption of SFAS No. 157 for its non-financial assets and
liabilities, effective January 1, 2009, will have a material impact on its
financial statements.
  3.
                Licensing
      and Research and Development
Agreements
  On
November 1, 2007, the Company signed an exclusive licensing agreement with
Warner Chilcott Company, Inc., (“Warner”) for its topical alprostadil-based
cream treatment for erectile dysfunction (“Vitaros®”).  Under
the agreement, Warner acquired the exclusive rights in the United States to
Vitaros® and
would assume all further development, manufacturing, and commercialization
responsibilities as well as costs.  Warner agreed to pay the Company
an up front payment of $500,000 and up to $12.5 million in milestone payments on
the achievement of specific regulatory milestones.   In addition,
the Company was eligible to receive royalties in the future based upon the level
of sales achieved by Warner, assuming the product is approved by the U.S. Food
and Drug Administration (“FDA”).
  36
  NexMed,
Inc.
 Notes
to Consolidated Financial Statements
  The
Company has recognized the initial up-front payment as revenue on a straight
line basis over the 9 month period ended July 31, 2008 which was the remaining
review time by the FDA for the Company’s new drug application filed in September
2007 for Vitaros®.  Pursuant
to the agreement, NexMed was responsible for the regulatory approval of
Vitaros®.
Accordingly, for the years ended December 31, 2008 and 2007, the Company
recognized licensing revenue of $388,889 and $111,111, respectively, related to
the Warner agreement.
  On
February 3, 2009, the Company terminated the licensing agreement and sold the
U.S. rights for Vitaros®to
Warner.  Under the terms of the agreement, the Company received gross
proceeds of $2.5 million as an up-front payment and is eligible to
receive an additional payment of $2.5 million upon Warner’s receipt of a New
Drug Application (NDA) approval for Vitaros® from the
FDA.  As such, the Company is no longer responsible for the regulatory
approval of Vitaros®and
will no longer be eligible to receive royalties in the future based upon the
level of sales achieved by Warner.  In addition, Warner will pay a
total of $350,000 for the manufacturing equipment for Vitaros®. While
the Company believes that Warner is currently moving forward in pursuing NDA
approval for Vitaros®. Warner
is not obligated by the purchase agreement to continue with the development of
Vitaros® or
obtain approval of Vitaros® from the
FDA.
 
 On
September 15, 2005, the Company signed an exclusive global licensing agreement
with Novartis International Pharmaceutical Ltd. (“Novartis”) for its anti-fungal
product, NM100060.  Under the agreement, Novartis acquired the
exclusive worldwide rights to NM100060 and would assume all further development,
regulatory, manufacturing and commercialization responsibilities as well as
costs.  Novartis agreed to pay the Company up to $51 million in
upfront and milestone payments on the achievement of specific development and
regulatory milestones, including an initial cash payment of $4 million at
signing.  In addition, the Company is eligible to receive royalties
based upon the level of sales achieved and is entitled to receive reimbursements
of third party preclinical study costs up to $3.25 million.   The
Company began recognizing the initial up front and preclinical reimbursement
revenue from this agreement based on the cost-to-cost method over the 32-month
period estimated to complete the remaining preclinical studies for
NM100060.   On February 16, 2007, the Novartis agreement was
amended.  Pursuant to the amendment, the Company is no longer
obligated to complete the remaining preclinical studies for
NM100060.   Novartis has taken over all responsibilities related
to the remaining preclinical studies.  As such, the balance of
deferred revenue of $1,693,917 at December 31, 2006 was recognized as revenue on
a straight line basis over the 18 month period ended June 30, 2008 which was the
performance period for Novartis to complete the remaining preclinical studies.
Accordingly, for the years ended December 31, 2008 and 2007, the Company
recognized licensing revenue of $564,639 and $846,960, respectively, related to
the initial $4 million cash payment from the Novartis agreement.
  On March
4, 2008, the Company received a $1.5 million milestone payment from Novartis
pursuant to the terms of the licensing agreement whereby the payment was due
seven months after the completion of patient enrollment for the Phase 3 clinical
trials for NM100060, which occurred in July 2007.  Although the
completion of patient enrollment in the Phase 3 clinical trials for NM100060
triggered a $3 million milestone payment from Novartis, the agreement also
provided that clinical milestones paid to us by Novartis shall be reduced by 50%
until the Company receives an approved patent claim on the NM100060 patent
application filed with the U.S. patent office in November 2004.  The
$1.5 million milestone payment was being recognized on a straight-line basis
over the six month period to complete the Phase 3 clinical
trial.  Accordingly, for the year ended December 31, 2008, the Company
recognized licensing revenue of $1.5 million related to the $1.5 million
milestone payment.
  37
  NexMed,
Inc.
 Notes
to Consolidated Financial Statements
 
 In July
2008, Novartis completed testing for the Phase 3 clinical trials for NM100060
required for the filing of the NDA in the U.S.  On August 26, 2008,
the Company announced that Novartis had decided not to submit the NDA in the
U.S. based on First Interpretable Results of the Phase 3 trials. As a result of
this decision, the Company will not receive a $6 million payment for positive
Phase 3 results, and a $7 million milestone payment due upon filing of the NDA
has been postponed indefinitely.
 
 On
October 17, 2008, the Company received a Notice of Allowance for its U.S. patent
covering NM100060.  Pursuant to the license agreement, the payment of
the issuance fee for an approved patent claim on NM100060 triggered the $2
million patent milestone payment from Novartis.  Additionally, $1.5
million, which represents the remaining 50% of the patient enrollment
milestone  also became due and payable.  As such the Company
received a payment of $3.5 million from Novartis on October 30, 2008 and
recognized it as licensing revenue for the year ended December 31,
2008.
 
 Novartis
has confirmed that it intends to complete patient testing in the ongoing
comparator study which they had initiated in March 2007 in ten European
countries.  Over 900 patients with mild to moderate onychomycosis are
participating in this open-label study, which is designed to assess the safety
and tolerability of NM100060 (terbinafine 10% topical formulation) versus
Loceryl®
(amorolfine) 5% nail lacquer, a topical treatment for onychomycosis that is
approved in Europe. The comparator study is expected to be completed by early
2009 and the data will be available in mid-2009.  If the results of
the comparator study are positive and the total clinical database is deemed to
be sufficient for filing, the Company expects Novartis to begin filing for
marketing approval in selected European countries while they develop a new plan
of action for the U.S. market.  If the results are negative, the
Company expects Novartis to terminate the global licensing agreement, which it
can do at any time, and the rights to NM100060 would revert back to the Company
with no compensation for termination.
  38
  NexMed,
Inc.
 Notes
to Consolidated Financial Statements
 
 4.
                Fixed
      Assets
  Fixed
assets at December 31, 2008 and 2007 were comprised of the
following:
  2008
                        
                        
                        2007Land
                        
                        $
                        363,909
                        
                        
                        $
                        363,909Building,
      including impairment charge of $884,271 in 2008
                        
                        
                        6,378,587
                        
                        
                        
                        7,371,607Machinery
      and equipment
                        
                        
                        2,599,159
                        
                        
                        
                        2,630,155Computer
      software
                        
                        
                        600,167
                        
                        
                        
                        600,167Furniture
      and fixtures
                        
                        
                        188,935
                        
                        
                        
                        188,93510,130,757
                        
                        
                        
                        11,154,773Less:
      accumulated depreciation
                        
                        
                        (4,611,105
                        )
                        
                        
                        (4,197,787
                        )$
                        5,519,652
                        
                        
                        $
                        6,956,986
  Depreciation
and amortization expense was $486,420, $621,870, and $842,087 for 2008, 2007 and
2006 respectively, of which $188,825 related to capital leases for the year
ended December 31, 2006.
  5.
                Deferred
      Compensation
  On
February 27, 2002, the Company entered into an employment agreement with Y.
Joseph Mo, Ph.D., that had a constant term of five years, and pursuant to which
Dr. Mo served as the Company's Chief Executive Officer and
President.  Under the employment agreement, Dr. Mo is entitled to
deferred compensation in an annual amount equal to one sixth of the sum of his
base salary and bonus for the 36 calendar months preceding the date on which the
deferred compensation payments commence subject to certain limitations,
including a vesting requirement through the date of termination, as set forth in
the employment agreement.  The deferred compensation is payable
monthly for 180 months commencing on termination of employment.  Dr.
Mo’s employment was terminated as of December 15,
2005.    The monthly deferred compensation payment through
May 15, 2021 will be $9,158.  As of December 31, 2008 and 2007, the
Company has accrued  $1,009,762 and $1,060,274 respectively, which is
included in deferred compensation, based upon the estimated present value of the
vested portion of the obligation.
  6.
                Convertible
      Notes Payable
  June 2008 Convertible
Notes
  On June
30, 2008, the Company issued convertible notes (the “Convertible Notes”) in an
aggregate principal amount of $5.75 million.The Convertible Notes are
collateralized by the Company’s facility in East Windsor, New Jersey and $4.75
million of the Convertible Notes are due on December 31, 2011 (the “Due
Date”)and $1 million
of the Convertible Notes were due on December 31, 2008.  The
Convertible Notes are due and payable in cash or convertible into shares of
Common Stock with $4.75 million convertible at $2 pershare on or before the Due
Date and $1 million convertible at $1.75 per share on or before December 31,
2008 at the holders’ option.  The Convertible Notes have a coupon rate
of 7% per annum, which is payable at the Company’s option in cash or, if the
Company’s net cash balance is less than $3 million at the time of payment, in
shares of Common Stock.  If paid in shares of Common Stock, then the
price of the stock issued will be the lesser of $0.08 below or 95% of the
five-day weighted average of the market price of the Common Stock prior to the
time of payment.  Such additional interest consideration is considered
contingent and therefore would only be recognized upon
occurrence.
  39
  NexMed,
Inc.
 Notes
to Consolidated Financial Statements
 
 On
October 16, 2008, the Company sold certain building equipment and received
proceeds of $60,000 which was used to prepay a portion of the $4.75 million
payment due on December 31, 2011.  On December 31, 2008, the Company
paid the $1 million principal payment due in cash.  As such, the
balance of $4,690,000 is due on December 31, 2011 and is recorded as Convertible
notes payable on the consolidated balance sheets at December 31,
2008.  As discussed in Note 3 above, the Company sold $350,000 of
manufacturing equipment to Warner.  The note holders agreed to release
the lien on the equipment in exchange for a $50,000 repayment of principal to be
paid in 2009 when the equipment is transferred to Warner.
  December 2003 Convertible
Note
  On
December 12, 2003, the Company issued convertible notes in an aggregate
principal amount of $6 million.  The notes were payable in two
installments of $3 million on November 30, 2006 and May 31, 2007 and were
collateralized by the Company’s facility in East Windsor, New
Jersey.  The notes were convertible into shares of the Company’s
Common Stock at a conversion price initially equal to $6.50 per share (923,077
shares).  Pursuant to the terms of the Notes, the conversion price was
adjusted on June 14, 2004 to the greater of (i) the volume weighted average
price of the Company’s stock over the six-month period ending on such date and
(ii) $5.00.   Since the volume weighted average price of the
Company’s stock during this period was below $5.00, the conversion price was
adjusted to $5.00 (1,200,000 shares).  Interest accreted on the notes
on a semi-annual basis at a rate of 5% per annum, and the Company could pay such
amounts in cash or by effecting the automatic conversion of such amount into the
Company’s Common Stock at a 5% premium to the then average market
prices.
  In April
and October 2006, respectively, the Company issued 164,855 shares and 227,612
shares of its Common Stock as payment of an aggregate of $304,167 in interest on
the notes.
  On
November 30, 2006, the Company paid in cash the $3 million installment due plus
accrued interest of $25,417.  The remaining $3 million balance plus
accrued interest of $25,417 on the note was paid on May 31, 2007 such that no
amounts remained outstanding at December 31, 2008 and 2007.
  For the
year ended December 31, 2006, the Company recorded amortization of the debt
issuance costs of $11,345.
  40
  NexMed,
Inc.
 Notes
to Consolidated Financial Statements
  7.
                Notes
      Payable
  October 2007
Note
  On
October 26, 2007, the Company issued a note in a principal amount of $3
million.  The note was payable on June 30, 2009 and could be prepaid
by the Company at any time without penalty.  Interest accreted on the
note on a quarterly basis at a rate of 8.0% per annum.  The note was
collateralized by the Company’s facility in East Windsor, New
Jersey.
  The
Company also issued to the noteholder a 5-year detachable warrant to purchase
450,000 shares of Common Stock at an exercise price of $1.52.  Of the
total warrants issued, 350,000 warrants vest immediately and the remaining
100,000 warrants were to vest if the note had remained outstanding on October
26, 2008. The Company valued the warrants using the Black-Scholes pricing
model.   The Company allocated a relative fair value of $512,550
to the warrants.  The relative fair value of the warrants is allocated
to additional paid in capital and treated as a discount to the note that is
being amortized over the 20-month period ended June 30, 2009.
  This note
was paid on June 30, 2008 with the proceeds from the issuance of the Convertible
Notes referred to above in Note 6.  The Company paid in cash the $3
million balance on the note plus accrued interest of
$60,000.  Additionally, the remaining 100,000 warrants that were to
vest on October 26, 2008 were cancelled.
  For the
years ended December 31, 2008 and 2007, the Company recorded $461,291 and
51,255, respectively, of amortization related to the note discount, including
the acceleration of the amortization upon repayment.
  November 2006
Note
  On
November 30, 2006, the Company issued a note in the principal amount of $2
million.  The note was payable on the earlier of December 31, 2007 or
the closing by the Company on the sale of the Company’s facility in East
Windsor, New Jersey.  Interest accreted on the note on a quarterly
basis  at a rate of 7.5% per annum provided, however, if the Company
had not entered into a contract of sale of the East Windsor property on or prior
to May 31, 2007, and the note had not been repaid by such date, the interest
rate would increase to 8.5%.  As such, on May 31, 2007, the interest
rate increased to 8.5%.
  On
February 28, 2007, the Company issued 28,809 shares of its Common Stock as
payment of an aggregate of $25,000 in interest on the note.
  On May 1,
2007, the Company issued 30,711 shares of its Common Stock as payment of an
aggregate of $37,500 in interest on the note.
  On August
1, 2007 the Company issued 26,518 shares of its Common Stock as payment of an
aggregate of $40,833 in interest on the note.
  The
Company also issued the noteholder a 4-year detachable warrant to purchase
500,000 shares of Common Stock at an exercise price of $0.5535.  The
Company valued the warrants using the Black-Scholes pricing
model.   The Company allocated a relative fair value of $138,000
to the warrants.  The relative fair value of the warrants was
allocated to additional paid in capital and treated as a discount to the note
that was being amortized through the October 2007 repayment
date.
  41
  NexMed,
Inc.
 Notes
to Consolidated Financial Statements
  This note
was paid on October 29, 2007 with the proceeds from the issuance of the $3
million October 2007 note referred to above.  The Company paid in cash
the $2 million balance on the note plus accrued interest of
$42,028.
  For the
year ended December 31, 2007, the Company recorded $127,385 of amortization
related to the note discount.
  8.
                Line
      of Credit
  On May
12, 2008 the Company entered into a Binding Commitment for a Credit Line (the
“Commitment”), with one of its largest shareholders (the
“Lender”).  Pursuant to the Commitment, the Company established a $3
million credit line (the “Credit Line”) with the Lender, which was to expire on
December 31, 2008.  The Company could draw down (“Draw Down”) on the
Credit Line up to five times during the term of the Credit Line, and Draw Downs
could not exceed $600,000 in any 30 day period.  In addition, the
Company could only Draw Down when the Company’s cash and cash equivalents were
below $1 million, and the Company was required to give the Lender at least 5
days’ notice prior to any Draw Down.  The Commitment provided that if
the results from the Phase 3 trials on the Company’s anti-fungal product were
negative, further Draw Downs on the Credit Line would be
prohibited.
 
 The
Company could repay the Draw Downs in either shares of Common Stock or cash at
the Lender’s option on December 31, 2008.  If the Lender chose to be
repaid with Common Stock, the number of shares of Common Stock issued would have
been equal to the amount of the total Draw Down divided by $1.01, which was
92.5% of the 5 day volume weighted average price of the Company’s Common Stock
for the 5 day period ended May 9, 2008.
 
 In
consideration of making available the Credit Line, the Lender received a warrant
(the “Warrant”) to purchase 250,000 shares of the Company’s Common Stock, which
vested immediately upon the execution of the Commitment.  The Warrant
has a 3 year term at an exercise price of $1.15, which is 105% of the 5 day
volume weighted average price of the Company’s Common Stock for the 5 day period
ended May 9, 2008. The Company valued the Warrant using the Black-Scholes
pricing model.   The Company allocated a relative fair value of
$114,750 to the Warrant.  The relative fair value of the Warrant is
allocated to additional paid-in capital and treated as a debt issuance cost that
was amortized over the period ending December 31, 2008.
 
 For the
year ended December 31, 2008, the Company recorded $114,750 of amortization
related to the debt issuance cost of the Credit Line.  There were no
Draw Downs under the commitment during 2008.
  On August
26, 2008, the Company announced that Novartis had decided to not submit an NDA
in the U.S. based on First Interpretable Results of the Phase 3 trials on the
Company’s anti-fungal product. As such, the Credit Line was withdrawn by the
Lender.
  9.
                Stock
      Options and Restricted Stock
  During
December 1996, the Company adopted The NexMed, Inc. Stock Option and Long-Term
Incentive Compensation Plan (“the Incentive Plan”) and The NexMed, Inc.
Recognition and Retention Stock Incentive Plan (“the Recognition
Plan”).  A total of 2,000,000 shares were set aside for these two
plans.  In May 2000, the Stockholders’ approved an increase in the
number of shares reserved for the Incentive Plan and Recognition Plan to a total
of 7,500,000.  During June 2006, the Company adopted the NexMed, Inc.
2006 Stock Incentive Plan.  A total of 3,000,000 shares were set aside
for the plan and an additional 2,000,000 shares were added to the plan in June
2008.  Options granted under the Company’s plans generally vest over a
period of one to five years, with exercise prices of currently outstanding
options ranging between $0.55 to $16.25.  The maximum term under these
plans is 10 years.
  42
  NexMed,
Inc.
 Notes
to Consolidated Financial Statements
  The
following table summarizes information about options outstanding at December 31,
2008:
  Options Outstanding
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                Options ExercisableWeighted
                                                                
                                                                Weighted
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                WeightedRange of
                                                                
                                                                
                                                                
                                                                Average
                                                                
                                                                Average
                                                                
                                                                
                                                                Aggregate
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                Average
                                                                
                                                                
                                                                AggregateExercise
                                                                
                                                                Number
                                                                
                                                                Remaining
                                                                
                                                                Exercise
                                                                
                                                                
                                                                Intrinsic
                                                                
                                                                
                                                                Number
                                                                
                                                                
                                                                Exercise
                                                                
                                                                
                                                                IntrinsicPrices
                                                                
                                                                Outstanding
                                                                
                                                                Contractual Life
                                                                
                                                                Price
                                                                
                                                                
                                                                Value
                                                                
                                                                
                                                                Exercisable
                                                                
                                                                
                                                                Price
                                                                
                                                                
                                                                Value
      *$     .55
      - 1.85
                                                                
                                                                
                                                                2,858,090
                                                                
                                                                6.98
      years
                                                                
                                                                $
                                                                0.86
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                
                                                                2,666,686
                                                                
                                                                
                                                                $
                                                                0.83
                                                                
                                                                
                                                                $
                                                                -2.00
      - 3.99
                                                                
                                                                
                                                                119,250
                                                                
                                                                2.69
      years
                                                                
                                                                
                                                                2.88
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                119,250
                                                                
                                                                
                                                                
                                                                2.88
                                                                
                                                                
                                                                
                                                                -4.00
      - 5.50
                                                                
                                                                
                                                                373,651
                                                                
                                                                3.64
      years
                                                                
                                                                
                                                                4.65
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                373,651
                                                                
                                                                
                                                                
                                                                4.65
                                                                
                                                                
                                                                
                                                                -8.00
      - 16.25
                                                                
                                                                
                                                                18,000
                                                                
                                                                1.44
      years
                                                                
                                                                
                                                                8.67
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                18,000
                                                                
                                                                
                                                                
                                                                8.67
                                                                
                                                                
                                                                
                                                                -3,368,991
                                                                
                                                                
                                                                
                                                                $
                                                                1.40
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                
                                                                3,177,587
                                                                
                                                                
                                                                $
                                                                1.40
                                                                
                                                                
                                                                $
                                                                -
 *Intrinsic
values are determined by comparing the aggregate exercise prices of options to
the closing price of our Common Stock on December 31, 2008
  43
  NexMed,
Inc.
 Notes
to Consolidated Financial Statements
  A summary
of stock option activity is as follows:
  Weighted
                                                                    
                                                                    Weighted
                                                                    
                                                                    TotalAverage
                                                                    
                                                                    Average Remaining
                                                                    
                                                                    AggregateNumber of
                                                                    
                                                                    
                                                                    Exercise
                                                                    
                                                                    Contractual
                                                                    
                                                                    IntrinsicShares
                                                                    
                                                                    
                                                                    Price
                                                                    
                                                                    Life
                                                                    
                                                                    ValueOutstanding
      at January 1, 2006
                                                                    
                                                                    
                                                                    5,018,880
                                                                    
                                                                    
                                                                    $
                                                                    2.83Granted
                                                                    
                                                                    
                                                                    1,993,750
                                                                    
                                                                    
                                                                    
                                                                    0.78Exercised
                                                                    
                                                                    
                                                                    (354,666
                                                                    )
                                                                    
                                                                    
                                                                    0.71Cancelled
                                                                    
                                                                    
                                                                    (2,994,543
                                                                    )
                                                                    
                                                                    
                                                                    3.28Outstanding
      at December 31, 2006
                                                                    
                                                                    
                                                                    3,663,421
                                                                    
                                                                    
                                                                    $
                                                                    1.52Granted
                                                                    
                                                                    
                                                                    202,100
                                                                    
                                                                    
                                                                    
                                                                    1.41Exercised
                                                                    
                                                                    
                                                                    (78,480
                                                                    )
                                                                    
                                                                    
                                                                    1.07Cancelled
                                                                    
                                                                    
                                                                    (317,200
                                                                    )
                                                                    
                                                                    
                                                                    2.82Outstanding
      at December 31, 2007
                                                                    
                                                                    
                                                                    3,469,841
                                                                    
                                                                    
                                                                    $
                                                                    1.41Granted
                                                                    
                                                                    
                                                                    -Exercised
                                                                    
                                                                    
                                                                    (55,000
                                                                    )
                                                                    
                                                                    $
                                                                    0.73Cancelled
                                                                    
                                                                    
                                                                    (45,850
                                                                    )
                                                                    
                                                                    
                                                                    3.33Outstanding
      at December 31, 2008
                                                                    
                                                                    
                                                                    3,368,991
                                                                    
                                                                    
                                                                    $
                                                                    1.40
                                                                    
                                                                    5.25 years
                                                                    
                                                                    $
                                                                    0Vested
      or expected to vest atDecember 31, 2008
                                                                    
                                                                    
                                                                    3,356,722
                                                                    
                                                                    
                                                                    $
                                                                    1.40
                                                                    
                                                                    5.25 years
                                                                    
                                                                    $
                                                                    0Exercisable
      at December 31, 2008
                                                                    
                                                                    
                                                                    3,177,586
                                                                    
                                                                    
                                                                    $
                                                                    1.40
                                                                    
                                                                    5.05 years
                                                                    
                                                                    $
                                                                    0Exercisable
      at December 31, 2007
                                                                    
                                                                    
                                                                    3,122,740
                                                                    
                                                                    
                                                                    $
                                                                    1.43Exercisable
      at December 31, 2006
                                                                    
                                                                    
                                                                    2,395,897
                                                                    
                                                                    
                                                                    $
                                                                    1.83Options
      available for grant at December 31,  2008
                                                                    
                                                                    
                                                                    373,203
  There
were no options granted during 2008.  The weighted average grant date
fair value of options granted during 2007 and 2006 was $1.41, and $0.78,
respectively.  The intrinsic value of options exercised during the
year ended December 31, 2008 was $43,270.
  As of
December 31, 2008, there was $119,401 of total unrecognized compensation cost
related to non-vested stock options. That cost is expected to be recognized over
a weighted-average period of 1.40 years.
  Compensatory Share
Issuances
  The value
of restricted stock grants is calculated based upon the closing stock price of
the Company’s Common Stock on the date of the grant.  The value of the
grant is expensed over the vesting period of the grant in accordance with SFAS
123R as discussed in Note 2.  As of December 31, 2008, there was
$821,928 of total unrecognized compensation cost related to non-vested
restricted stock.  That cost is expected to be recognized over a
weighted-average period of 1.31 years.
  Principal
employee based compensation transactions for the year ended December 31, 2008
were as follows:
  44
  NexMed,
Inc.
 Notes
to Consolidated Financial Statements
 
 On
January 9, 2008 the Company issued awards of shares of Common Stock to each
non-employee Director as compensation for their services during the year ending
December 31, 2008.  In lieu of cash compensation, the non-employee
Directors have opted to receive, and the Board of Directors has approved, a full
grant of 24,324 shares of Common Stock to each non-employee Director for his
services to be rendered to the Board of Directors during the 2008 calendar
year.  The price per share (the "Price") is the average of the closing
price of Common Stock over five consecutive trading days, commencing on January
2, 2008.  The number of the full grant of shares was calculated based
on the amount of cash the Director would have received for annual service on the
Board, or $36,000, divided by the Price.
 
 On August
12, 2008, the Compensation Committee of the Company’s Board of Directors
approved a revised compensation package for the non-employee Directors for the
2008 calendar year.  Each non-employee member of the Board received an
additional grant of 18,508 shares of the Company’s Common Stock bringing the
total 2008 shares granted to each non-employee director to
42,832.  The number of the full grant of shares was calculated based
on the amount of cash the Director would have received for annual service on the
Board, or $62,962, divided by the Price.
  The
Compensation Committee also approved a revised compensation package for Richard
Berman for his annual service as Chairman of the Board.  Mr. Berman
received an additional grant of 57,835 shares of Common Stock bringing the total
2008 shares granted to him to 82,159.  The number of the full grant of
shares was calculated based on the amount of cash Mr. Berman would have received
for annual service as Chairman of the Board, or $120,773, divided by the
Price.  Also, as part of the revised compensation package, the Board
approved a one-time grant, vesting immediately, to the Chairmen and members of
the various committees of the Board for their annual service.  As
such, the following shares of Common Stock were issued to the non-employee
Directors on August 12, 2008:
  David
Tierney received 50,000 shares as Chairman of the Scientific Advisory Board, 906
shares as a member of the Governance/Nominating Committee, and 906 shares as a
member of the Compensation Committee. The number of the full grant of shares was
calculated based on the amount of cash Mr. Tierney would have received for
annual service as Chairman of the Scientific Advisory Board, member of the
Governance/Nominating Committee, and member of the Compensation Committee, or
$34,013, $1,333, and $1,333, respectively, divided by the Price.
 
 Leonard
Oppenheim received 6,197 shares as the Chairman of the Audit
Committee.  The number of the full grant of shares was calculated
based on the amount of cash Mr. Oppenheim would have received for annual service
as Chairman of the Audit Committee, or $9,111, divided by the
Price.
 
 Martin
Wade received 3,287 shares as the Chairman of the Compensation Committee, 1,209
shares as a member of the Audit Committee, and 906 shares as a member of the
Governance/Nominating Committee. The number of the full grant of shares was
calculated based on the amount of cash Mr. Wade would have received for annual
service as Chairman of the Compensation Committee, member of the Audit
Committee, and member of the Governance/Nominating Committee, or $4,833, $1,778,
and $1,333, respectively, divided by the Price.
 
 Arthur
Emil received 1,587 shares as Chairman of the Governance/Nominating Committee,
1,209 shares as a member of the Audit Committee, and 906 shares as a member of
the Compensation Committee. The number of the full grant of shares was
calculated based on the amount of cash Mr. Emil would have received for annual
service as Chairman of the Governance/Nominating Committee, member of the Audit
Committee, and member of the Compensation Committee, or $2,333, $1,778, and
$1,333, respectively, divided by the Price.
  45
  NexMed,
Inc.
 Notes
to Consolidated Financial Statements
 
 On
September 12, 2008, the Board of Directors approved new stock grants (“New Stock
Grants”) for Hemanshu Pandya, the Company’s Chief Operating Officer and Mark
Westgate, the Company’s Chief Financial Officer, with each grant comprised of
500,000 restricted shares of Common Stock.  The two New Stock Grants
will vest in two equal installments on June 30, 2009 and June 30, 2010,
respectively, provided that Mr. Pandya and Mr. Westgate remain in continuous and
uninterrupted service with the Company.
 
 For the
years ended December 31, 2007 and 2006, the Company granted 1,574,540 and
299,316 shares of restricted stock, respectively to officers and
Directors.
 
 10.
                Series
      C 6% Cumulative Convertible Preferred
Stock
  On May
17, 2005, the Company sold an aggregate of 445 shares of its Series C 6%
cumulative convertible preferred stock and raised gross proceeds of $4,450,000
($10,000 liquidation preference per share).  Each preferred share of
the Series C Stock was initially convertible at the holder’s option into
approximately 7,353 shares of Common Stock (total of 3,272,059
shares).  Each investor also received for each share of Series C Stock
purchased, 4-year detachable warrants to purchase 2,672 shares of Common Stock
(total of 1,188,931 warrants) at an exercise price of $1.43 per share. The
Series C Stock could be converted at any time, at the holder’s option, into
shares of the Company’s Common Stock at an initial conversion value of
$1.36.
  For the
year ended December 31, 2006 pursuant to the terms of the Series C Stock, the
Company recorded dividends in the amount of $15,264 as a dividend to preferred
shareholders in the Consolidated Statements of Operations.
  For the
year ended December 31, 2006 the Company recorded a deemed dividend of
$49,897.  This deemed dividend represents the sum of the beneficial
conversion feature, amortization of the contingent beneficial conversion
feature, and amortization of preferred stock issuance costs.
  During
2005, the Company converted 357.5 shares of the Series C Stock and accrued
dividends into 3,215,590 shares of its Common Stock with an aggregate value of
$3,482,974.  During the first half of 2006, the Company converted 72
shares of the Series C Stock and accrued dividends into 880,308 shares of its
Common Stock with a value of $715,388.
  On June
30, 2006, pursuant to the terms of the Series C Stock, the Company converted the
remaining 15.5 preferred shares and accrued dividends through June 30, 2006 of
$159,612 at a price of $0.65 per share.  Upon conversion, the Company
issued a total of 244,113 shares of Common Stock.  As of December 31,
2008 and 2007, no shares of the Series C Stock remained
outstanding.
  11.
                Common
      Stock
  Pursuant
to a Common Stock and Warrant Purchase Agreement dated December 20, 2006, the
Company closed a private placement of its securities and raised over $8.65
million in gross proceeds.  The Company sold 13,317,000 shares of its
Common Stock at $0.6501 per share.  The investors also received
four-year warrants to purchase 5,326,800 shares of Common Stock, exercisable
beginning six months after closing at a price of $0.79 per share.  The
warrants will be redeemable by the Company at $0.01 per share if the closing
sales price of its Common Stock is above $5 for ten consecutive trading days as
reported on the Nasdaq Capital Market or other principal
exchange.
  46
  NexMed,
Inc.
 Notes
to Consolidated Financial Statements
  On
January 23, 2006, the Company closed a private placement of its securities and
raised over $8.3 million in gross proceeds.  The Company sold
9,347,191 shares of its Common Stock at $0.89 per share.  The
investors also received four-year warrants to purchase 3,738,876 shares of
Common Stock, exercisable beginning six months after closing at a price of $1.11
per share.  The warrants will be redeemable by the Company at $0.01
per share if the closing sales price of its Common Stock is above $5 for ten
consecutive trading days as reported on the Nasdaq Capital Market or other
principal exchange.
  12.
                Stockholder
      Rights Plan
  On April
3, 2000, the Company declared a dividend distribution of one preferred share
purchase Right for each outstanding share of the Company's Common Stock to
shareholders of record at the close of business on April 21,
2000.  One Right will also be distributed for each share of Common
Stock issued after April 21, 2000, until the Distribution Date described in the
next paragraph.  Each Right entitles the registered holder to purchase
from the Company a unit consisting of one one-hundredths of a share (a Unit) of
Series A Junior Participating Preferred Stock, $.001 par value per share, at a
Purchase Price of $100.00 per Unit, subject to adjustment.  Under the
Rights Plan, 1,000,000 shares of the Company’s preferred stock have been
set-aside.
  Initially,
the Rights will be attached to all Common Stock certificates representing shares
then outstanding, and no separate Rights Certificates will be
distributed.  The Rights will separate from the Common Stock and a
Distribution Date will occur upon the earlier of (i) ten (10) business days
following a public announcement that a person or group of affiliated or
associated persons (an Acquiring Person) has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the outstanding shares of Common
Stock , or (ii) ten (10) business days following the public announcement of a
tender offer or exchange offer that would, if consummated, result in a person or
group beneficially owning 15% or more of such outstanding shares of Common
Stock, subject to certain limitations.
  Under the
terms of the Rights Agreement, Dr. Y. Joseph Mo, the Company’s former CEO, will
be permitted to increase his ownership to up to 25% of the outstanding shares of
Common Stock, without becoming an Acquiring Person and triggering a Distribution
Date.
  On
January 16, 2007 the Rights Agreement was amended to exempt Southpoint Master
Fund, LP and its affiliates from becoming an Acquiring Person within the meaning
of the Rights Agreement, provided that Southpoint’s aggregate beneficial
ownership of the Company’s Common Stock is less than 20% of the shares of Common
Stock then outstanding.
  47
  NexMed,
Inc.
 Notes
to Consolidated Financial Statements
  13.
                Warrants
  A summary
of warrant activity is as follows:
  Weighted
                        
                        WeightedCommon
      Shares
                        
                        
                        Average
                        
                        AverageIssuable
      upon
                        
                        
                        Exercise
                        
                        ContractualExercise
                        
                        
                        Price
                        
                        LifeOutstanding
      at January 1, 2006
                        
                        
                        11,030,550
                        
                        
                        
                        1.83Issued
      (Notes 10 and 11)
                        
                        
                        9,565,676
                        
                        
                        
                        0.90Exercised
                        
                        
                        -
                        
                        
                        
                        -Cancelled
                        
                        
                        (471,199
                        )
                        
                        
                        1.82Outstanding
      at December 31, 2006
                        
                        
                        20,125,027
                        
                        
                        $
                        1.33Issued
      (Note 7)
                        
                        
                        450,000
                        
                        
                        $
                        1.52Exercised
                        
                        
                        (2,790,495
                        )
                        
                        $
                        1.83Cancelled
                        
                        
                        (5,344,578
                        )
                        
                        $
                        1.40Outstanding
      at December 31, 2007
                        
                        
                        12,439,954
                        
                        
                        $
                        1.23Issued
      (Note 8)
                        
                        
                        250,000
                        
                        
                        $
                        1.15Exercised
                        
                        
                        (471,910
                        )
                        
                        $
                        0.89Cancelled
                        
                        
                        (100,000
                        )
                        
                        $
                        1.52Outstanding
      at December 31, 2008
                        
                        
                        12,118,044
                        
                        
                        $
                        1.23
                        
                        1.22
      yearsExercisable
      at December 31, 2008
                        
                        
                        12,118,044
                        
                        
                        $
                        1.23
                        
                        1.22
      years
  14.
                Income
      Taxes
  The
Company has incurred losses since inception, which have generated net operating
loss carryforwards of approximately $84 million for federal and state income tax
purposes.  These carryforwards are available to offset future taxable
income and expire beginning in 2014 through 2028 for federal income tax
purposes. In addition, the Company has general business and research and
development tax credit carryforwards of approximately $103.7
million.  Internal Revenue Code Section 382 places a limitation on the
utilization of federal net operating loss carryforwards when an ownership
change, as defined by tax law, occurs.  Generally, an ownership
change, as defined, occurs when a greater than 50 percent change in ownership
takes place during any three-year period.  The actual utilization of
net operating loss carryforwards generated prior to such changes in ownership
will be limited, in any one year, to a percentage of fair market value of the
Company at the time of the ownership change.  Such a change may have
already resulted from the additional equity financing obtained by the Company
since its formation.
  In 2006,
2007 and 2008, the Company was approved by the State of New Jersey to sell a
portion of its state tax credits pursuant to the Technology Tax Certificate
Transfer Program.  The Company has approximately $853,000 in NJ tax
credit benefits left available to sell at December 31, 2008, and was approved to
sell net operating loss tax benefits of $1,053,547 in 2008, $905,515 in 2007,
and $637,525 in 2006.  The Company received net proceeds of $937,657,
$805,909, and $567,397 in 2008, 2007, and 2006, respectively, as a result of the
sale of the tax credits, which has been recognized as received as an income tax
benefit in the Consolidated Statements of Operations.  There can be no
assurance that this program will continue in future years.
  48
  NexMed,
Inc.
 Notes
to Consolidated Financial Statements
 The net
operating loss carryforwards and tax credit carryforwards resulted in a
noncurrent deferred tax benefit at December 31, 2008, 2007 and 2006 of
approximately $42.8 million, $39.2 million and $35.6 million,
respectively.  In consideration of the Company’s accumulated losses
and the uncertainty of its ability to utilize this deferred tax benefit in the
future, the Company has recorded a valuation allowance of an equal amount on
such date to fully offset the deferred tax benefit amount.
  In June
2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109 ("FIN 48") which clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with FASB Statement No. 109, Accounting for
Income Taxes. FIN 48 prescribes a recognition threshold and measurement criteria
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. FIN No. 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition and defines the criteria that must be met
for the benefits of a tax position to be recognized. The cumulative effect of
the change in accounting principle must be recorded as an adjustment to opening
retained earnings. Effective January 1, 2007, the Company adopted FIN No. 48 and
determined that such adoption did not have a material impact on its financial
statements.
  The
reconciliation of income taxes computed using the statutory U.S. income tax rate
and the provision (benefit) for income taxes for the years ended December 31,
2008, 2007 and 2006 are as follows:
  For
      the years endedDecember 31,2008
                        
                        
                        2007
                        
                        
                        2006Federal
      statutory tax rate
                        
                        
                        (35
                        )%
                        
                        
                        (35
                        )%
                        
                        
                        (35
                        )%State
      taxes, net of federal benefit
                        
                        
                        (6
                        )%
                        
                        
                        (6
                        )%
                        
                        
                        (6
                        )%Valuation
      allowance
                        
                        
                        41
                        %
                        
                        
                        41
                        %
                        
                        
                        41
                        %Sale
      of state net operating losses
                        
                        
                        (15.35
                        )%
                        
                        
                        (8.40
                        )%
                        
                        
                        (6.59
                        )%Provision
      (benefit) for income taxes
                        
                        
                        (15.35
                        )%
                        
                        
                        (8.40
                        )%
                        
                        
                        (6.59
                        )%
  For the
years ended December 31, 2008, 2007 and 2006, the Company’s effective tax rate
differs from the federal statutory rate principally due to net operating losses
and other temporary differences for which no benefit was recorded, state taxes
and other permanent differences.
  15.
                Commitments
      and Contingencies
  The
Company was a party to clinical research agreements with a clinical research
organization (“CRO”) in connection with a one-year open-label study for
Vitaros® with
commitments by the Company that initially totaled approximately $12.8
million.  These agreements were amended in October 2005 such that the
total commitment was reduced to approximately $4.2 million.  These
agreements provided that if the Company canceled them prior to 50% completion,
the Company will owe the higher of 10% of the outstanding contract amount prior
to the amendment or 10% of the outstanding amount of the amended contract at the
time of cancellation.  On September 30, 2008, the clinical research
agreements were cancelled as it was determined that the one-year open-label
study would no longer be required by the FDA for regulatory approval of
Vitaros®.  As
such, a cancellation fee of approximately $892,000 was accrued at September 30,
2008.  Pursuant to the terms of the clinical research agreement, the
cancellation fee was not payable until December 15, 2008.  On December
31, 2008, the Company paid $300,000 toward the total cancellation
fee.  The balance of approximately $592,000 is included in accounts
payable and accrued expenses in the Consolidated balance sheets at December 31,
2008.
  49
  NexMed,
Inc.
 Notes
to Consolidated Financial Statements
  The
Company is a party to several short-term consulting and research agreements
that, generally, can be cancelled at will by either party.
  We are
subject to certain legal proceedings in the ordinary course of
business.  We do not expect any such items to have a significant
impact on our financial position.
  16.
                Segment
      and Geographic Information
  The
Company has only one active business segment: designing, developing,
manufacturing and marketing pharmaceutical products.  The Company
maintained development and business development operations in the United States
and Hong Kong in 2005, 2006.  In September 2007, the Company ceased
all operations in Hong Kong.
  Geographic
information as of December 31, 2008, 2007 and 2006 is as follows:
  For
      the years ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006Net
      revenuesUnited
      States
                            
                            $
                            5,957,491
                            
                            
                            $
                            775,894
                            
                            
                            $
                            758,207Hong
      Kong
                            
                            
                            -
                            
                            
                            
                            494,473
                            
                            
                            
                            1,108,720$
                            5,957,491
                            
                            
                            $
                            1,270,367
                            
                            
                            $
                            1,866,927
  All long-lived assets were located in
the United States at December 31, 2008, 2007 and 2006.
  50




ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.





None.





ITEM
      9A.
            CONTROLS
      AND PROCEDURES.





In
accordance with Exchange Act Rules 13a-15 and 15d-15, the Company’s management
carried out an evaluation with participation of the Company’s Chief Executive
Officer and Chief Financial Officer, its principal executive officer and
principal financial officer, respectively, of the effectiveness of the Company’s
disclosure controls and procedures as of the end of the period covered by this
report.  Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded as of the end of the period covered by this
report that the Company’s disclosure control and procedures are
effective.  There were no changes in the Company’s internal controls
over financial reporting identified in connection with the evaluation by the
Chief Executive Officer and Chief Financial Officer that occurred during the
Company’s fourth quarter that have materially affected or are reasonably likely
to materially affect the Company’s internal control over financial
reporting.





Management’s
Report on Internal Control over Financial Reporting





Our
Management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f).  Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.  Based on our evaluation under such framework,
our management concluded that our internal control over financial reporting was
effective as of December 31, 2008.




51




The
effectiveness of our internal control over financial reporting as of December
31, 2008 has been audited by Amper, Politziner & Mattia, LLP, an independent
registered public accounting firm, as stated in their report which is included
herein.





ITEM
      9B.
            OTHER
      INFORMATION.





None.





PART III.





ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.




ELECTION
OF DIRECTORS




Our
Amended and Restated Articles of Incorporation, as amended to date (the
“Articles of Incorporation”) divide our Board of Directors into three
classes.  The term of office for each class is arranged so that the
term of office of one class expires at each successive Annual Meeting of
Stockholders.  The Board of Directors currently consists of six
members as follows: Class I directors, Vivian H. Liu and Martin R. Wade, III,
whose terms expire in 2010; Class II directors, Richard J. Berman and Arthur D.
Emil, Esq., whose terms expire in 2009 and, if re-elected at the 2009 Annual
Meeting, in 2012 and Class III directors, Leonard A. Oppenheim and David S.
Tierney, MD, whose terms expire in 2011.





At the
2009 Annual Meeting, the Stockholders will elect two directors to serve as Class
II directors.  Each of the Class II directors who is elected at the
2009 Annual Meeting will serve until the Annual Meeting of Stockholders to be
held in 2012, and until such director’s successor is elected or appointed and
qualifies or until such director’s earlier resignation or
removal.  The Board of Directors believes that nominees, Richard J.
Berman and Arthur D. Emil, will stand for election and will, if elected, serve
as Class II directors.  However, with respect to each nominee, in the
event such nominee is unable or unwilling to serve as a Class II director at the
time of the 2009 Annual Meeting, the proxies may be voted for any substitute
nominee designated by the present Board of Directors to fill such vacancy or the
Board of Directors may be reduced to no less than three members in accordance
with the Articles of Incorporation.





Our
Corporate Governance/Nominating Committee has reviewed the qualifications of the
nominees for Class II director and has recommended such nominees for election to
the Board of Directors.




Nominees
for Director





The
following information was furnished to the Company by the nominees.





Richard J. Berman has served
on the Board of Directors since June 2002, as Chairman of the Board since June
2007, and on the Finance Committee since June 2002.  From January 2006
to June 2007, Mr. Berman served as our President and Chief Executive
Officer.  He also served as a member of the Audit Committee, Executive
Compensation Committee, and Corporate Governance/Nominating Committee of the
Board of Directors between June 2002 and January 2006.  Mr. Berman
currently serves as Chairman of National Investment Managers, a public company
in pension administration and investment management (OTC: NIVM.OB); Chairman of
Fortress Technology Systems (homeland security), and Chairman of Morlex, Inc.
(internet) (OTC: MORX.OB).  Mr. Berman is a director of eight public
companies: NexMed, Inc., Morlex, Inc., National Investment Managers,
Broadcaster, Inc. (OTC: BCSR.OB), Easylink Services International, Inc. (Nasdaq:
ESIC), (OTC: NIVM.OB), Advaxis, Inc. (OTC: ADXS.OB), NeoStem, Inc. (ASE: NBS),
and Fortress Technology Systems (listed on the Frankfurt
Exchange).  From 1998-2000, he was employed by Internet Commerce
Corporation (now Easylink Services International, Inc.) as Chairman and
CEO.  Previously, Mr. Berman worked at Goldman Sachs; was Senior Vice
President of Bankers Trust Company, where he started the M&A and Leveraged
Buyout Departments; created the largest battery company in the world by merging
Prestolite, General Battery and Exide to form Exide Technologies (NASDAQ: XIDE);
helped create what is now Soho (NYC) by developing five buildings; and advised
on over $4 billion of M&A transactions.  He is a past director of
the Stern School of Business of NYU where he obtained his BS and
MBA.  He also has U.S. and foreign law degrees from Boston College and
The Hague Academy of International Law, respectively.


52




Arthur D. Emil, Esq., is and
has been a director and a member of the Audit Committee, Executive Compensation
Committee and the Corporate Governance/Nominating Committee of the Board of
Directors since June 2003.  Mr. Emil has been a practicing attorney in
New York City for over forty years, including with Kramer Levin Naftalis &
Frankel from 1994 to 2002 and with Cohen Tauber Spievack & Wagner from 2003
to present. Mr. Emil is a principal owner and chairman of Night Sky Holdings
LLC, a company which owns several restaurants now operating in the New York
area, which included Windows on the World, and operated the Rainbow Room from
1986 until December 1998.  Mr. Emil is the founding principal and
shareholder of two real estate development firms with commercial, residential
and mixed-use properties in Connecticut, New York and Ohio.  Mr. Emil
has served as trustee for various non-profit organizations including The
American Federation of Arts and the Montefiore Medical Center.  Mr.
Emil received his LLB from Columbia University.   Mr. Emil serves
on the Board of Directors of National Investment Managers (OTC:
NIVM.OB).




DIRECTORS





Set forth below is certain information
as of March 10, 2009 regarding our directors.





Name
                    
                    Age
                    
                    TitleRichard
      J. Berman
                    
                    66
                    
                    Chairman
      of the Board of DirectorsArthur
      D. Emil, Esq.
                    
                    84
                    
                    DirectorVivian
      H. Liu
                    
                    47
                    
                    Director,
      President & Chief Executive OfficerLeonard
      A. Oppenheim
                    
                    62
                    
                    DirectorDavid
      S. Tierney, MD
                    
                    45
                    
                    DirectorMartin
      R. Wade, III
                    
                    59
                    
                    Director





Biographical information concerning
each of the director nominees is set forth above under the caption “Election of
Directors.”  Biographical information concerning the remaining
directors of the Company is set forth below.





Vivian H.
Liu, is and has been a
director and President and Chief Executive Officer of the Company since June
2007, and Secretary since 1995.  Ms. Liu served as our Vice President
of Corporate Affairs from September 1995 until December 2005, Acting Chief
Executive Officer from December 2005 until January 2006, Executive Vice
President and Chief Operating Officer from January 2006 to June 2007, Chief
Financial Officer from January 2004 until December 2005, Acting Chief Financial
Officer from 1999 to January 2004 and Treasurer from September 1995 through
December 2005.  In 1994, while we were in a transition period, Ms. Liu
served as Chief Executive Officer. From 1985 to 1994, Ms. Liu was a business and
investment adviser to the government of Quebec and numerous Canadian companies
with respect to product distribution, technology transfer and investment issues.
Ms. Liu received her MPA in International Finance from the University of
Southern California and her BA from the University of California,
Berkeley.





Leonard A. Oppenheim, is and
has been a director since 2004, and a member of the Audit Committee since
January 2006 and Finance Committee since June 2006.  Mr. Oppenheim
served as the Chairman of the Board from June 2006 through June 18, 2007. His
current term as a member of the Board of Directors expires in
2011..  Mr. Oppenheim retired from business in 2001 and has since been
active as a private investor.  From 1999 to 2001, Mr. Oppenheim was a
partner in Faxon Research, a company offering independent research to
professional investors.  From 1983 to 1999, Mr. Oppenheim was a
principal in the Investment Banking and Institutional Sales division of
Montgomery Securities.  Prior to that, he was a practicing
attorney.  Mr. Oppenheim graduated from New York University Law School
in 1976.


53


David S. Tierney, MD, is and
has been a director since January 2007, and a member of the Executive
Compensation Committee and Corporate Governance/Nominating Committee since June
2007.  His current term as a member of the Board of Directors expires
in 2011.  From August 2000 to April 2007, Dr. Tierney served as
President and Chief Executive Officer of Valera Pharmaceuticals, Inc.
(Nasdaq:VLRX).  Prior to joining Valera, Dr. Tierney was President of
Biovail Technologies, a division of Biovail Corporation.  While there,
Dr. Tierney had responsibility for all of Biovail’s research and development,
regulatory and clinical activities. Prior to Biovail, he spent three years at
Roberts Pharmaceutical Corporation as Senior Vice President of Drug Development
with responsibility for all research and development activities, and overall
responsibility for drug development, medical affairs, worldwide regulatory
affairs and chemical process development, as well as being part of the executive
management team. Prior to joining Roberts, Dr. Tierney spent eight years at Elan
Corporation in a variety of management positions. Dr. Tierney received his
medical degree from the Royal College of Surgeons in Dublin, Ireland and was
subsequently trained in internal medicine.  He currently serves on the
Board of Directors of Catalyst Pharmaceutical Partners, Inc. (Nasdaq: CPRX) and
Bioject Medical Technologies Inc. (Nasdaq: BJCT).





Martin R. Wade III is and has
been a director and a member of the Audit Committee, Executive Compensation
Committee, and Finance Committee of the Board of Directors since June 2003, and
a member of the Corporate Governance/Nominating Committee since January
2004.  His current term as a member of the Board of Directors expires in
2010.    Mr. Wade is the Chief Executive Officer of Broadcaster,
Inc. (BCSR.OB), an internet entertainment firm, and since 2000, has also served
as the Chief Executive Officer of Bengal Capital Partners, LLC, a merger and
acquisition firm.  From 2000 to 2001, Mr. Wade was director and Chief
Executive Officer of Digital Creative Development Corp.  From 1998 to 2000,
Mr. Wade was Managing Director of Prudential Securities Inc.  From 1975 to
1998, Mr. Wade served in various executive positions at Salomon Brothers Inc.,
Bankers Trust Company, Lehman Brothers and Price Waterhouse Company.  Mr.
Wade serves on the Boards of Directors of several companies, including Alliance
One International (NYSE: AOI) and BCSR.  Mr. Wade holds an MBA from the
University of Wyoming.





There are no family relationships among
the directors or executive officers of the Company.




THE
BOARD AND ITS COMMITTEES





Meetings
of the Board of Directors





During the year ended December 31,
2008, six meetings of the Board of Directors were held.  Each director
attended at least 75% of the aggregate number of meetings of the Board and the
Committees of the Board on which they served during the periods that they
served.  While we have no policy requiring attendance, in June 2008,
all of the four independent directors were present at our 2008 Annual Meeting of
Stockholders.





Committees
of the Board





The Board of Directors currently has
four committees: the Executive Compensation Committee, the Audit Committee, the
Finance Committee, and the Corporate Governance/Nominating Committee.





The Executive Compensation Committee
establishes remuneration levels for our executive officers and implements
incentive programs for officers, directors and consultants, including the 2006
Stock Incentive Plan (the 2006 Plan), the NexMed Inc. Stock Option and Long-Term
Incentive Compensation Plan (the Stock Plan) and the Recognition and Retention
Stock Incentive Plan (the Recognition Plan) (the Stock Plan and the Recognition
Plan both expired in 2006).  The Executive Compensation Committee was
formed on February 7, 2000 and met one time in 2008.  As of December
31, 2008, the Executive Compensation Committee consisted of Arthur D. Emil, Dr.
David S. Tierney and Martin R. Wade, III (Chairman), none of whom was an
employee and each of whom met the independence requirements of NASDAQ
Marketplace Rule 4200 (a)(15).  There is currently no charter for our
Executive Compensation Committee.   Our independent compensation
consultants as well as executive officers and management play an important role
in making recommendations and formulating compensation plans for our employees,
including named executives.  The Committee may delegate authority for
day-to-day administration and interpretation of the various compensation
programs in place, including selection of participants, determination of award
levels and approval of award documents to our officers.  However, the
Committee may not delegate any authority under those programs for matters
affecting the compensation and benefits of the executive
officers.  Our CEO, with input from our director of human resources,
gives the Committee a performance assessment and compensation recommendations
for the named executives.  Our director of human resources engaged and
works closely with our independent compensation consultants, ORC Worldwide
Compensation Consultants, who assist in evaluating our executive compensation
program and were instructed to provide additional assurance that our program is
reasonable and consistent with pharmaceutical industry standards for companies
in our peer group. ORC Worldwide Compensation Consultants is a compensation
consulting firm which provides consulting and data services to large and
mid-sized organizations, focusing on compensation programs.  We
participate in SIRS®, a Salary Information Retrieval System, which is a
comprehensive U.S. salary survey with analytical tools and reports, whereby we
select approximately fifty pharmaceutical companies with which we share salary
data information on an annual basis.  This process enables us to
benchmark our job functions and job levels within our specific industry sector,
obtain competitive salary data, and maintain a competitive salary
structure.  The recommendations of our CEO and director of human
resources are then considered by the Committee in determining the total
compensation packages for named executives.


54





The Audit Committee periodically meets
with our financial and accounting management and independent auditors and
selects our independent auditors, reviews with the independent auditors the
scope and results of the audit engagement, approves professional services
provided by the independent auditors, reviews the independence of the
independent auditors and reviews the adequacy of the internal accounting
controls.  The Audit Committee was formed on February 7, 2000 and acts
under a written charter first adopted and approved by the Board on the same
date, and subsequently amended and approved on May 7, 2001, October 29, 2002 and
May 24, 2004.  A copy of the Amended Audit Committee charter is posted
on the Company’s website at www.nexmed.com.  The Audit Committee met
three times in 2008, and as of December 31, 2008, consisted of Arthur D. Emil,
Leonard A. Oppenheim (Chairman) and Martin R. Wade, III, none of whom was an
employee and each of whom met the independence and experience requirements of
Nasdaq Capital Market listing requirements.  The Board of Directors
has determined that Mr. Wade, in addition to being “independent”, is an “audit
committee financial expert,” as defined in Item 407(d)(5) of the SEC’s
Regulation S-K.





The Finance Committee makes
recommendations to the Board of Directors concerning financing opportunities and
instruments.  The Finance Committee was formed on June 21,
2002.  The Finance Committee met one time in 2008, and consists of
Richard J. Berman, Leonard A. Oppenheim and Martin R. Wade, III.





The Corporate Governance/Nominating
Committee makes recommendations to the Board of Directors concerning candidates
for Board vacancies.  The Corporate Governance/Nominating Committee
was formed on February 7, 2000.  The Corporate Governance/Nominating
Committee met one time in 2008, and as of December 31, 2008, consisted of Arthur
D. Emil (Chairman), Dr. David S. Tierney and Martin R. Wade,
III.   The Corporate Governance/Nominating Committee acts under a
written charter, which is available on our website at
www.nexmed.com.  As of December 31, 2008, each of the members of the
Committee met the independence requirements of NASDAQ Capital Market listing
standards.  We have not paid any third party a fee to assist in the
process of identifying and evaluating candidates for director.  We
have not received any nominees for director from a Stockholder or Stockholder
group that owns more than 5% of our voting stock.





The Company’s Corporate
Governance/Nominating Committee may consider nominees for director submitted in
writing to the Chairman of the Committee, which are submitted by our executive
officers, current directors, search firms engaged by the Committee, and by
others in its discretion and, in the circumstances provided below, shall
consider nominees for director proposed by a Stockholder.  Information
with respect to the proposed nominee shall be provided in writing to the
Chairman of the Corporate Governance/Nominating Committee at NexMed, Inc., 89
Twin Rivers Drive, East Windsor, NJ 08520, at least 120 days prior to the
anniversary of the date of the prior year’s Annual Meeting proxy
statement.  A submitting Stockholder shall provide evidence that he,
she or it has beneficially owned at least 5% of our Common Stock for at least
one year and shall provide the name of the nominee, and such other information
with respect to the nominee as would be required under the rules and regulations
of the Securities and Exchange Commission to be included in our Proxy Statement
if such proposed nominee were to be included therein.  In addition,
the Stockholder shall include a statement to the effect that the proposed
nominee has no direct or indirect business conflict of interest with us, and
otherwise meets our standards set forth below.





Any other Stockholder communications
intended for our management or the Board of Directors shall be submitted in
writing to the Chairman of the Corporate Governance/Nominating Committee who
shall determine, in his discretion, considering the identity of the submitting
Stockholder and the materiality and appropriateness of the communication,
whether, and to whom within our Company, to forward the
communication.





The Corporate Governance/Nominating
Committee generally identifies potential candidates for director by seeking
referrals from our management and members of the Board of Directors and their
various business contacts.  There are currently no specific, minimum
or absolute criteria for Board membership.  Candidates are evaluated
based upon factors such as independence, knowledge, judgment, integrity,
character, leadership, skills, education, experience, financial literacy,
standing in the community and ability to foster a diversity of backgrounds and
views and to complement the Board’s existing strengths.  There are no
differences in the manner in which the Committee will evaluate nominees for
director based on whether the nominee is recommended by a
Stockholder.


55


The
Company has adopted a code of ethics that applies to its Chief Executive
Officer, Chief Financial Officer, and to all of its other officers, directors
and employees.  The code of ethics is available at the Corporate
Governance section of the Investors page on the Company’s website at http://www.nexmed.com.  The
Company intends to disclose future amendments to, or waivers from, certain
provisions of its code of ethics, if any, on the above website within four
business days following the date of such amendment or waiver.




SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE





Section
16(a) of the Securities Exchange Act of 1934, as amended, (the Exchange Act)
requires our executive officers, directors and persons who beneficially own
greater than 10% of a registered class of its equity securities to file certain
reports with the Securities and Exchange Commission with respect to ownership
and changes in ownership of the Common Stock and our other equity
securities.





Based
solely on our review of the copies of such reports furnished to us and written
representations that no other reports were required, our officers, directors and
greater than ten percent stockholders complied with these Section 16(a) filing
requirements with respect to the Common Stock during the fiscal year ended
December 31, 2008.





ITEM
      11.
            EXECUTIVE
      COMPENSATION.




DIRECTOR
COMPENSATION





In 2001, the Board of Directors adopted
a stock option and cash compensation package for its non-employee
directors.  Upon joining the Board, each new non-employee director
received a stock option and/or restricted stock package issued pursuant to the
Recognition Plan which expired in 2006, or the the 2006 Plan which generally
vests over a period of several years from the date of grant based on continuous
and uninterrupted service to NexMed.  Prior to 2007, the Company
granted each director a stock option grant equal to 20,000 options, vesting
immediately, upon commencement of his initial term.  Additionally,
upon commencement of each three year term, each director received an option to
purchase 60,000 shares of Common Stock which vest equally on the first, second
and third anniversaries of the date of the grant.  Each director also
received a cash payment of $500 per Board meeting.





Beginning
in 2007, the Board of Directors modified the stock and cash compensation package
for its non-employee directors such that each non-employee director received a
grant of restricted stock rather than stock options.  Each
non-employee director received a stock grant of 10,000 shares of Common Stock,
vesting immediately, upon commencement of his initial
term.  Additionally, upon commencement of his initial term, each
director received a restricted stock grant of 10,000 shares for each year of his
term with 10,000 shares vesting on the date of each annual stockholder’s meeting
during his term.  Dr. David Tierney, who was appointed in 2007, is the
only director who has received such grant of restricted stock.  All
other directors were compensated with stock option grants as discussed in the
previous paragraph.





In August
2008, the Board of Directors again modified the stock and cash compensation
package for its non-employee directors in order to achieve total compensation
packages that were consistent with competitive pharmaceutical company market
data.  As such, a Board compensation survey from Equilar, Inc., a
compensation survey specialist used by many NASDAQ companies, was requested and
reviewed by the Executive Compensation Committee.  The Executive
Compensation Committee determined that the Company’s compensation packages
differed significantly from the data in the survey in that the Company did not
pay any additional compensation to the Chairman of the Board or the various
Committee members and compensation to the Audit Committee Chairman was generally
below the other companies in the survey.  Additionally, it was found
that most companies in the survey compensated directors in both cash and stock
and each board member received a fee based on the number of meetings held and
attended.


56





As a
result of reviewing the Board compensation survey in August 2008, the Board
implemented a new stock and cash compensation package effective January 1, 2008
for the annual retainer.  Under the new compensation package, each
member of the Board and the various committees would receive an annual retainer
in shares of Common Stock calculated using the average of the closing price of
Common Stock over five consecutive trading days, commencing on January 2, 2008
(the “Price”).  The number of the full grant of shares was calculated
based on the amount of cash the director would have received for annual service
on the Board, as outlined in the table below, divided by the
Price.  Additionally, each director would receive cash payments for
individual Board meetings.  The new compensation package, which was
effective January 1, 2008 for the annual retainer and August 2008 for the
meeting fees, is as follows:




Title
                              
                              
                              Annual Retainer
                              
                              
                              In
      person Board
                                Meeting Fee
                              
                              
                              Telephone
      Board
                                Meeting FeeChairman
      of the Board
                              
                              $
                              120,773
      (82,159 shares
                              )
                              
                              $
                              1,750
                              
                              
                              $
                              1,000Board
      Member
                              
                              $
                              62,962
      (42,832 shares
                              )
                              
                              $
                              1,500
                              
                              
                              $
                              700Audit
      Committee Chair
                              
                              $
                              9,111
      (6,197 shares
                              )
                              
                              $
                              1,250
                              
                              
                              $
                              600Compensation
      Committee Chair
                              
                              $
                              4,833
      (3,287 shares
                              )
                              
                              $
                              1,150
                              
                              
                              $
                              600Governance/Nominating
      Committee Chair
                              
                              $
                              2,333
      (1,587 shares
                              )
                              
                              $
                              1,150
                              
                              
                              $
                              600Finance
      Committee Chair
                              
                              $
                              0
                              
                              
                              $
                              0
                              
                              
                              $
                              0Audit
      Committee Member
                              
                              $
                              1,778
      (1,209 shares
                              )
                              
                              $
                              1,250
                              
                              
                              $
                              600Compensation
      Committee Member
                              
                              $
                              1,333
      (906 shares
                              )
                              
                              $
                              1,250
                              
                              
                              $
                              600Governance/Nominating
      Committee Member
                              
                              $
                              1,333
      (906 shares
                              )
                              
                              $
                              1,150
                              
                              
                              $
                              600Finance
      Committee Member
                              
                              $
                              0
                              
                              
                              $
                              0
                              
                              
                              $
                              0





This
approach is consistent with the Company’s overall director compensation strategy
to align the interests of the directors with those of the Stockholders over the
long-term since the full benefits of the compensation package cannot be realized
unless stock price appreciation occurs over a number of years.





Additionally,
in 2007, the Board established a Scientific Advisory Board (SAB) and appointed
Dr. David S. Tierney to serve as the Chairman of the SAB.  The Board
approved a stock grant of 20,000 shares of the Company’s Common Stock to Dr.
David S. Tierney, pursuant to the 2006 Plan for services rendered in
2007.  The Board approved another stock grant in 2008 of 50,000 shares
for services rendered in 2008.





Total
non-employee director compensation for 2008 was as follows:




NON-EMPLOYEE
DIRECTOR COMPENSATION FOR 2008




Name
                            (9)
                          
                          Fees
      earned or
                            Paid
      in cash($)
                          
                          
                          Stock
      Awards ($)
                            (1)
                          
                          
                          Option
      Awards ($)
                            (1)
                          
                          
                          Total
                            ($)(a)
                          
                          (b)
                          
                          
                          (c)
                          
                          
                          (d)
                          
                          
                          (h)Richard
      J. Berman
                          
                          $
                          1,000
                          
                          
                          $
                          122,530
                          (2)
                          
                          $
                          —
                          (10)
                          
                          $
                          123,530Arthur
      D. Emil, Esq.
                          
                          $
                          1,300
                          
                          
                          $
                          69,905
                          (8)
                          
                          $
                          13,552
                          (3)
                          
                          $
                          84,757Leonard
      A. Oppenheim
                          
                          $
                          1,300
                          
                          
                          $
                          73,528
                          (4)
                          
                          $
                          7,917
                          (5)
                          
                          $
                          82,745David
      S. Tierney, MD
                          
                          $
                          700
                          
                          
                          $
                          140,627
                          (6)
                          
                          $
                          —
                          
                          
                          $
                          141,327Martin
      R. Wade, III
                          
                          $
                          600
                          
                          
                          $
                          70,904
                          (7)
                          
                          $
                          —
                          (10)
                          
                          $
                          71,504


57


(1)
            Market
      values for stock awards granted for the annual retainer fee were
      calculated based on the average of the closing price of our Common Stock
      over five consecutive trading days, commencing on January 2,
      2008.  Market values for other stock awards were determined by
      multiplying the number of shares granted by the closing market price of
      the Company’s stock on the grant date in accordance with SFAS
      123R.  The value of the option awards was calculated using the
      Black-Scholes method in accordance with SFAS 123R.  A discussion
      of the assumptions used in calculating the Black-Scholes values may be
      found in Note 2 and Note 9 of our Consolidated Financial Statements in
      Part II, Item 8.


(2)
            This
      amount represents our expense in 2008 for a grant of 82,159 shares as
      compensation for services as Chairman in 2008 and a grant of 13,258 shares
      in lieu of cash for a Board meeting fee in September
  2008.


(3)
            This
      amount represents our expense in 2008 for an option to purchase 60,000
      shares of Common Stock granted to Mr. Emil in August 2006 which vests in
      three equal installments in June 2007, 2008 and
  2009.


(4)
            This
      amount represents our expense in 2008 for a grant of 42,832 shares as
      compensation for services as a Board member, 6,197 shares as compensation
      for services as Chairman of the Audit Committee in 2008, and 11,364 shares
      in lieu of cash for a Board meeting fee in September
  2008.


(5)
            This
      amount represents our expense in 2008 for an option to purchase 60,000
      shares of Common Stock granted to Mr. Oppenheim in June 2005 which vested
      in three equal installments in June 2006, 2007 and
  2008.


(6)
            This
      amount represents our expense in 2008 for a grant of 42,832 shares as
      compensation for services as a Board member, 50,000 shares as compensation
      for services as Chairman of the SAB, 906 shares as compensation for
      services as a member of the Executive Compensation Committee, 906 shares
      as compensation for services as member of the Corporate
      Governance/Nominating Committee, and 11,364 shares in lieu of cash for a
      Board meeting fee in September
2008.


(7)
            This
      amount represents our expense in 2008 for a grant of 42,832 shares as
      compensation for services as a Board member, 3,287 shares as compensation
      for services as Chairman of the Executive Compensation Committee, 1,209
      shares as compensation for services as a member of the Audit Committee,
      and 906 shares as compensation for services as a member of the Corporate
      Governance/Nominating Committee.


(8)
            This
      amount represents our expense in 2008 for a grant of 42,832 shares as
      compensation for services as a Board member, 1,587 shares as compensation
      for services as Chairman of the Corporate Governance/Nominating Committee,
      1,209 shares as compensation for services as a member of the Audit
      Committee, 906 shares as compensation for services as a member of the
      Executive Compensation Committee, and 11,364 shares in lieu of cash for a
      Board meeting fee in September
2008.


(9)
            As
      of December 31, 2008: Mr. Berman had no shares of unvested restricted
      stock and options to purchase 1,150,000 shares of Common Stock
      outstanding; Mr. Emil had no shares of unvested restricted stock and
      options to purchase 140,000 shares of Common Stock outstanding; Mr.
      Oppenheim had no shares of unvested restricted stock and options to
      purchase 500,000 shares of Common Stock outstanding; Dr. Tierney had no
      options outstanding; and Mr. Wade had no shares of unvested restricted
      stock and options to purchase 100,000 shares of Common Stock
      outstanding.


(10)
            No
      expense was recorded in 2008 for options issued in previous
      years.





EXECUTIVE
COMPENSATION





Compensation
Discussion & Analysis





Introduction





The
objective of our executive compensation program is to link corporate performance
and the total return to Stockholders over the long-term.  More
specifically, the compensation program is designed to reward the achievement of
corporate goals which are set at the beginning of each fiscal year and are
communicated to all employees by the CEO, retain the executive employees over
long-term periods, and use performance-based equity awards tied to the corporate
goals in order to retain and reward the executive employees through the
achievement of such goals.   In 2008, as in 2007, the overarching
goals were to continue to maintain a low cash “burn rate”, to continue to
advance our NexACTâ-based products through our
own targeted development activities, and to secure additional strategic
collaborations and partnerships.   Tied to these broad goals were
the following specific corporate goals:manage our alliances
with Novartis and Warner, support three filings - the NDA in the U.S.,
the MAA  in Europe, and the NDS in Canada for Vitaros®, prepare our
East Windsor facility for the commercial manufacturing of Vitaros®, develop one
new program up through the IND (Investigational New Drug) stage (i.e., advance
our psoriasis program into clinical development), advance business development
efforts for products under development and for our technology, maintain
compliance with SEC requirements for a public company, develop new applications
and the next generation of NexACT® technology, and develop and implement a
process for project selection and project management.


58





The
elements of our executive compensation during the last fiscal year for our
executives under employment agreements consisted of base salary, an annual cash
bonus, and the granting of performance-based and incentive stock.





Base
Salaries





The
Executive Compensation Committee approves the salaries of our executives and
exercises oversight over the compensation of the executives.   In
establishing 2008 salary levels for our named executives (each of which was set
forth in the employment agreements as described below), the Executive
Compensation Committee placed the most emphasis on retaining the current
executive officers and on recruiting an external executive candidate in order to
advance our current products under development.  In addition,
competitive pharmaceutical company market data for these three positions was
obtained from ORC Worldwide Compensation Consultants and was used as a reference
point for the salaries.





Bonuses





Cash
bonuses are awarded to our named executives based upon a subjective evaluation
by the Executive Compensation Committee, with recommendations from the CEO,
based on an assessment of the performance of the executives during the
year.   In assessing the performance of the executives, the CEO
and the Executive Compensation Committee prioritize the importance of each of
the corporate goals, assess the individual contributions made by each of the
executives, and determine overall progress achieved.   As
outlined in the introduction to the “Compensation Discussion & Analysis”
section, the CEO and Board of Directors determine our corporate goals annually
at the onset of the year upon approval of the annual budget.  No
bonuses were paid to the named executives in 2008, as the annual corporate goals
were not achieved in their entirety.    The Executive
Compensation Committee determined that the substantial decline of the market
capitalization of the Company and the failure to receive significant cash
milestone payments, both of which were a direct result of the Novartis Phase 3
clinical trial results released in August 2008, significantly impacted executive
bonus entitlement for the year.  Thus, major importance was placed
upon Novartis’ decision not to file the NDA in the U.S. in 2008 due to
insufficient clinical data.





Stock
and Stock Options





Under the
Stock Plan, which was adopted by the Company in December 1996 and expired in
December 2006, and the 2006 Plan which was adopted on March 7, 2006, the
Company’s employees, including executives, are eligible to receive stock
options, stock appreciation rights, restricted stock, and other stock based
awards.  The Executive Compensation Committee, with input from
management, is responsible for approving stock and stock option grants to the
Company’s employees.  In determining the size and type of awards, the
nature of the position held as well as individual contributions of the employees
toward achieving our corporate goals for the year and the need to retain key
employees through the completion of critical projects over time are taken into
consideration.





Stock
options and restricted stock awarded under the Stock Plan and the 2006 Plan,
generally vest evenly over a period of three years from the date of
grant.  Our 10-year options, granted at the market price on the date
of the grant, help align the interests of the executive officers with those of
the Stockholders over the long term since the full benefits of the compensation
package cannot be realized unless stock price appreciation occurs over a number
of years.  In addition, the options and restricted stock awards help
to retain key employees because they typically cannot be fully exercised until
the end of the three year vesting period and, if not exercised, are forfeited if
the employee terminates employment with the
Company.   Performance-based stock and stock option awards vest
upon the achievement of specific corporate goals.  This approach helps
to focus employees on specific corporate goals and retain employees who are
integral in achieving such goals.





Compensation
of Chief Executive Officer





Effective on June 18, 2007, we entered
into a three-year employment agreement with Ms. Liu, pursuant to which she
serves as our President and Chief Executive Officer.  During her
employment, Ms. Liu will receive an annual base salary of at least $300,000, and
is eligible to earn an annual bonus up to 50% of her annual base salary based
upon the achievement by the Company of objective performance measures
established and determined at the beginning of each fiscal year by the Board of
Directors or the Executive Compensation Committee, in consultation with Ms.
Liu.


59


Ms. Liu’s
agreement provides for grants of stock under the 2006 Plan.   The
Executive Compensation Committee determined, based on their analysis of
competitive market data compiled by the director of human resources, that our
CEO should have a total equity compensation package such that she would achieve
an ownership of approximately 2% of our outstanding Common Stock taking into
account options and restricted stock already held by her at such
time.  Therefore upon Ms. Liu’s acceptance of the position as CEO, she
was awarded a restricted stock grant of a total of 850,000
shares.  100,000 shares vested immediately with the remaining 750,000
shares vesting in three equal installments of 250,000 shares on each June 18,
2008, 2009 and 2010.





Additionally, in2008the Board approved
performance-based stock grants to the three named executives, including Ms. Liu,
which vest in two equal installments upon the re-submission of the NDA for
Vitaros®and
upon the FDA’s approval of the NDA.  Ms. Liu’s award is 100,000 shares
of Common Stock.  As discussed in Note 3 of our Consolidated Financial
Statements in Part II, Item 8, the U.S. rights to Vitaros®were
sold to Warner and the FDA approval of Vitaros®is
now the responsibility of Warner. The number of shares awarded in this grant was
determined such that Ms. Liu would achieve an ownership percentage approaching
approximately 2% of our outstanding Common Stock as CEO.





Prior to
Ms. Liu’s appointment as CEO, she was awarded a restricted stock grant of
150,000 shares in January 2007.  The award vests in three equal
installments of 50,000 shares on each December 31, 2007, 2008 and
2009.  This award was intended to retain Ms. Liu in her position as
COO while the Board made a decision as to whether the Company would recruit an
external candidate for either the CEO or the COO position in
2007.  Additionally, this award was to recognize the progress made by
the Company in 2006, to acknowledge Ms. Liu’s contributions towards that
progress, and to remain competitive with industry compensation
standards.





Ms. Liu
also received an award of 200,000 shares of restricted Common Stock in April
2006.  The award vested on December 31, 2006.  This stock
grant was awarded as part of a corporate retention program implemented in April
and September of 2006 in order to offer all employees, including named
executives, a substantial monetary incentive to remain employed with us
following the substantial lay-off and restructuring which occurred at the end of
2005 and into 2006.





The
number of shares awarded in the 2006 and 2007 stock option and restricted Common
Stock grants was determined such that Ms. Liu would achieve an ownership
percentage approaching approximately 1% of our outstanding Common Stock as
COO.  The Executive Compensation Committee determined, based on their
analysis of competitive market data compiled by the director of human resources,
that our named executive officers, other than our CEO, should have a total
equity compensation package in order to achieve such ownership
percentage.





Ms. Liu’s
employment agreement provides that, in the event of termination of her
employment for “Cause” (as defined in the employment agreement), or death and
disability, Ms. Liu would be entitled to receive any earned but unpaid base
salary, bonus and benefits.  In the event of the termination of Ms.
Liu’s employment without Cause, by Ms. Liu with “Good Reason” (as defined in the
employment agreement) or upon a change in control (as defined in the employment
agreement), Ms. Liuwould be entitled to
receive any earned but unpaid base salary, bonus and benefits in an amount equal
to twelve months of her annual base salary at the time of such
termination.   In addition, Ms. Liu’s outstanding but unvested
restricted stock and stock options would vest immediately.





Compensation
of Chief Operating Officer





On
October 31, 2007, we entered into a one-year employment agreement with Hemanshu
Pandya, pursuant to which he serves as our Vice President.  The
employment agreement was automatically renewed on October 31, 2008 for another
one-year term.  During his employment, Mr. Pandya will receive an
annual base salary of at least $225,000, and is eligible to earn an annual bonus
of up to 50% of his annual base salary based upon the achievement by the Company
of objective performance measures established and determined at the beginning of
each fiscal year by the Board of Directors or its Executive Compensation
Committee, in consultation with Ms. Liu and Mr. Pandya.





Mr.
Pandya’s agreement provides for grants of options to purchase shares of our
Common Stock under the 2006 Plan.  These options are intended to be
incentive stock options to the fullest extent permitted under the Internal
Revenue Code.  In October 2007, Mr. Pandya received an option award to
purchase a total of 175,000 shares of our Common Stock at $1.43 per share, the
market price of our Common Stock at the time of the grant. The award vests in
three installments of 25,000 options on October 31, 2008, 50,000 options on
October 31, 2009 and 100,000 options on October 31, 2010.


60


Mr.
Pandya’s agreement also provides for grants of stock under the 2006
Plan.  On October 31, 2007, Mr. Pandya was awarded a restricted stock
grant of 125,000 shares.  75,000 shares will vest in three equal
installments of 25,000 shares each on October 31, 2008, 2009 and
2010.  The remaining 50,000 shares vest only upon the execution of a
licensing/development agreement brought to the Company by Mr. Pandya valued at
over $5 million on or before April 30, 2009.  In light of Mr. Pandya’s
efforts in connection with the sale of the U.S. rights to Vitaros®to
Warner as discussed in Note 3 of the Consolidated Financial Statements in Part
II, Item 8, on February 2, 2009 the Board approved the vesting of the remaining
50,000 shares.





Additionally, in2008the Board approved
performance-based stock grants to the three named executives, including Mr.
Pandya, which vest in two equal installments upon the re-submission of the NDA
for Vitaros®and
upon the FDA’s approval of the NDA.  Mr. Pandya’s award is 100,000
shares of Common Stock.   As discussed in Note 3 of the
Consolidated Financial Statements in Part II, Item 8, the U.S. rights to
Vitaros®
were sold to Warner and the FDA approval of Vitaros® is
now the responsibility of Warner.





Mr.
Pandya’s total compensation package (salary, bonus, stock options and restricted
stock) was reviewed and approved by the Executive Compensation Committee after a
discussion with our human resources director and a review of competitive
pharmaceutical company market data supplied by ORC Worldwide Compensation
Consultants for his position as COO.  It was determined that his total
compensation package is competitive with industrycompensation
standards.





The
number of shares awarded in the above mentioned stock option grants and
restricted Common Stock grants was determined such that Mr. Pandyawould eventually achieve
an ownership percentage approaching 1% of the Company as COO.  The
Executive Compensation Committee determined, based on their analysis of
competitive market data compiled by the director of human resources, that our
named executive officers, other than our CEO, should have a total equity
compensation package in order to achieve such ownership percentage.Accordingly, on October 3,
2008 the Executive Compensation Committee approved a grant of 500,000 shares
vesting in two equal installments on June 30, 2009 and 2010.  This new
grant in 2008 brought Mr. Pandya’s ownership percentage (vested and unvested) as
of December 31, 2008 to approximately 0.8%.





Mr.
Pandya’s employment agreement provides that, in the event of termination of his
employment for “Cause” (as defined in the employment agreement), or death and
disability, Mr. Pandya would be entitled to receive any earned but unpaid base
salary, bonus and benefits.  In the event of the termination of Mr.
Pandya’s employment without Cause, by Mr. Pandya with “Good Reason” (as defined
in the employment agreement) or upon a change in control (as defined in the
employment agreement), Mr. Pandyawould be entitled to
receive any earned but unpaid base salary, bonus and benefits in an amount equal
to six months of his annual base salary at the time of such termination plus one
week for every fully completed year of service, up to one year.  In
addition, Mr. Pandya’s outstanding but unvested restricted stock and stock
options would vest immediately.





Compensation
of Chief Financial Officer





On
December 15, 2005, we entered into a three-year employment agreement with Mark
Westgate, pursuant to which he serves as our Vice President.  During
his employment, Mr. Westgate was to receive an annual base salary of $160,000,
and was to be eligible to earn an annual bonus up to 50% of his annual base
salary based upon the achievement by the Company of objective performance
measures established and determined at the beginning of each fiscal year by the
Board of Directors or its Executive Compensation Committee in consultation with
Ms. Liu and Mr. Westgate.   On January 1, 2008, the base annual
salary of Mr. Westgate was adjusted to $235,000 for several reasons: the
progress that NexMed made during 2007, Mr. Westgate’s accomplishments during
2007, and the fact that Mr. Westgate’s salary was not deemed to be comparable to
industry standards according to data supplied by ORC Worldwide Compensation
Consultants.  On December 15, 2008, Mr. Westgate’s employment
agreement automatically renewed for a one-year period.





Mr.
Westgate’s employment agreement provides for grants of options to purchase
shares of our Common Stock under the Stock Plan.  These options are
intended to be incentive stock options to the fullest extent permitted under the
Internal Revenue Code.  In December 2005, Mr. Westgate received a
total of 75,000 stock options vesting in three equal installments on December
31, 2006, 2007 and 2008.


61


Mr.
Westgate’s employment agreement also provides for grants of Common Stock under
the 2006 Plan.  In January 2007, Mr. Westgate was awarded a restricted
stock grant of 75,000 shares.  The award vests in three equal
installments of 25,000 shares on each December 31, 2007, 2008 and
2009.  This award was intended to retain Mr. Westgate in his position
as CFO, to recognize the progress made by the Company in 2006, to acknowledge
Mr. Westgate’s contributions towards that progress, and to remain competitive
with industry compensation standards.





Additionally, in2008the Board approved
performance-based stock grants to the three named executives, including Mr.
Westgate, which vest in two equal installments upon the re-submission of the NDA
for Vitaros®and
upon the FDA’s approval of the NDA.  Mr. Westgate’s award is 100,000
shares of Common Stock.   As discussed in Note 3 of the
Consolidated Financial Statements in Part II, Item 8, the U.S. rights to
Vitaros®
were sold to Warner and the FDA approval of Vitaros®is
now the responsibility of Warner.





The
number of shares awarded in the above mentioned stock option grants and
restricted Common Stock grants was determined such that Mr. Westgate would
eventually achieve an ownership percentage approaching 1% of the Company as
CFO.  The Executive Compensation Committee determined, based on their
analysis of competitive market data compiled by the director of human resources,
that our named executive officers, other than our CEO, should have a total
equity compensation package in order to achieve such ownership
percentage.  Accordingly, on October 3, 2008 the Executive
Compensation Committee approved a grant of 500,000 shares vesting in two equal
installments on June 30, 2009 and 2010.  This new grant in 2008
brought Mr. Westgate’s ownership percentage (vested and unvested) as of December
31, 2008 to approximately 0.9%.





Mr.
Westgate’s employment agreement provided that, in the event of termination of
his employment for “Cause” (as defined in the employment agreement), or death
and disability, Mr. Westgate would be entitled to receive any earned but unpaid
base salary, bonus and benefits.  In the event of the termination of
Mr. Westgate’s employment without Cause, by him with “Good Reason” (as defined
in the employment agreement) or upon a change in control (as defined in the
employment agreement), Mr. Westgatewould be entitled to
receive any earned but unpaid base salary, bonus and benefits in an amount equal
to six months of his annual base salary at the time of such termination plus an
additional week of base salary for every fully-completed year of service, for a
total salary continuation period not to exceed one year.  In addition,
Mr. Westgate’s outstanding but unvested stock and stock options would vest
immediately.





Executive
Compensation Committee Report





The Executive Compensation Committee
evaluates and establishes compensation for executive officers and is responsible
for determining the recipients and the size of awards under the 2006
Plan.  The Executive Compensation Committee has reviewed and discussed
with management the Compensation Discussion and Analysis found in this Form
10-K.   The Executive Compensation Committee is satisfied that
the Compensation Discussion and Analysis fairly and completely represents the
philosophy, intent, and actions of the Committee with regard to executive
compensation.  We recommended to the Board of Directors that the
Compensation Discussion and Analysis be included in this Form 10-K for filing
with the Securities and Exchange Commission.





The
Executive Compensation Committee of the Board of Directors





Arthur D.
Emil, Esq.


David S.
Tierney, MD


Martin R.
Wade, III, Chairman





Summary
Compensation Table for 2008, 2007 and 2006





As discussed above in our Compensation
Discussion and Analysis, our executives under employment agreements received
base salary, bonuses, stock option awards and stock grants in 2008, 2007 and
2006.  The following table sets forth the compensation paid by NexMed
during the years ended December 31, 2008, 2007 and 2006 to
the   individuals listed who were serving as executive officers
at the end of our last fiscal year (collectively, the “Named Executive
Officers”):


62





Name and
                                                                          Principal
                                                                          Position
                                                                        
                                                                        Year
                                                                        
                                                                        Salary
                                                                          ($)
                                                                        
                                                                        
                                                                        Bonus
                                                                          ($)
                                                                          (2)
                                                                        
                                                                        
                                                                        Stock
                                                                          Awards
                                                                          ($)
                                                                          (1)
                                                                        
                                                                        
                                                                        Option
                                                                          Awards
                                                                          ($)
                                                                          (1)
                                                                        
                                                                        
                                                                        All Other
                                                                          Compen-
                                                                          sation ($)
                                                                        
                                                                        
                                                                        Total ($)(a)
                                                                        
                                                                        (b)
                                                                        
                                                                        (c)
                                                                        
                                                                        
                                                                        (d)
                                                                        
                                                                        
                                                                        (e)
                                                                        
                                                                        
                                                                        (f)
                                                                        
                                                                        
                                                                        (i)
                                                                        
                                                                        
                                                                        (j)Vivian
      H. Liu,
                                                                        
                                                                        2008
                                                                        
                                                                        $
                                                                        300,000
                                                                        
                                                                        
                                                                        $
                                                                        —
                                                                        
                                                                        
                                                                        $
                                                                        650,248
                                                                        (4)
                                                                        
                                                                        $
                                                                        36,512
                                                                        
                                                                        
                                                                        $
                                                                        4,835
                                                                        (9)
                                                                        
                                                                        $
                                                                        991,595CEO  (3)2007
                                                                        
                                                                        $
                                                                        273,207
                                                                        
                                                                        
                                                                        $
                                                                        150,000
                                                                        
                                                                        
                                                                        $
                                                                        210,000
                                                                        (4)
                                                                        
                                                                        $
                                                                        80,670
                                                                        
                                                                        
                                                                        $
                                                                        7,325
                                                                        (9)
                                                                        
                                                                        $
                                                                        713,8772006
                                                                        
                                                                        $
                                                                        200,000
                                                                        
                                                                        
                                                                        $
                                                                        125,000
                                                                        
                                                                        
                                                                        $
                                                                        124,000
                                                                        
                                                                        
                                                                        $
                                                                        71,162
                                                                        
                                                                        
                                                                        $
                                                                        7,099
                                                                        (9)
                                                                        
                                                                        $
                                                                        520,162Hemanshu
                                                                        
                                                                        2008
                                                                        
                                                                        $
                                                                        225,000
                                                                        
                                                                        
                                                                        $
                                                                        —
                                                                        
                                                                        
                                                                        $
                                                                        46,451
                                                                        (6)
                                                                        
                                                                        $
                                                                        63,232
                                                                        (7)
                                                                        
                                                                        $
                                                                        2,631
                                                                        (10)
                                                                        
                                                                        $
                                                                        337,314Pandya,
      COO2007
                                                                        
                                                                        $
                                                                        32,903
                                                                        (5)
                                                                        
                                                                        $
                                                                        18,500
                                                                        (5)
                                                                        
                                                                        $
                                                                        8,696
                                                                        (6)
                                                                        
                                                                        $
                                                                        15,808
                                                                        (7)
                                                                        
                                                                        $
                                                                        41
                                                                        (10)
                                                                        
                                                                        $
                                                                        75,9072006
                                                                        
                                                                        $
                                                                        —
                                                                        
                                                                        
                                                                        $
                                                                        —
                                                                        
                                                                        
                                                                        $
                                                                        —
                                                                        
                                                                        
                                                                        $
                                                                        —
                                                                        
                                                                        
                                                                        $
                                                                        —
                                                                        
                                                                        
                                                                        $
                                                                        —Mark
      Westgate,
                                                                        
                                                                        2008
                                                                        
                                                                        $
                                                                        235,000
                                                                        
                                                                        
                                                                        $
                                                                        —
                                                                        
                                                                        
                                                                        $
                                                                        36,419
                                                                        (8)
                                                                        
                                                                        $
                                                                        14,913
                                                                        
                                                                        
                                                                        $
                                                                        3,542
                                                                        (11)
                                                                        
                                                                        $
                                                                        289,874CFO2007
                                                                        
                                                                        $
                                                                        198,681
                                                                        
                                                                        
                                                                        $
                                                                        100,000
                                                                        
                                                                        
                                                                        $
                                                                        25,000
                                                                        (8)
                                                                        
                                                                        $
                                                                        49,446
                                                                        
                                                                        
                                                                        $
                                                                        6,425
                                                                        (11)
                                                                        
                                                                        $
                                                                        373,1272006
                                                                        
                                                                        $
                                                                        160,000
                                                                        
                                                                        
                                                                        $
                                                                        80,000
                                                                        
                                                                        
                                                                        $
                                                                        31,000
                                                                        
                                                                        
                                                                        $
                                                                        41,293
                                                                        
                                                                        
                                                                        $
                                                                        6,995
                                                                        (11)
                                                                        
                                                                        $
                                                                        312,923





1.
            Market
      values for stock awards were determined by multiplying the number of
      shares granted by the closing market price of the Company’s stock on the
      grant date in accordance with SFAS 123R.  Stock-based
      compensation under SFAS 123R is recognized as an expense on a
      straight-line basis over the required service period of the entire award
      (generally the vesting period of the award).  The value of stock
      option awards was calculated using the Black-Scholes method in accordance
      with SFAS 123R. A discussion of the assumptions used in calculating the
      Black-Scholes values may be found in Note 2 and Note 9 of the Consolidated
      Financial Statements in Part II, Item
8.


2.
            There
      were no 2008 bonuses accrued or paid.  2007 bonuses were accrued
      in 2007 and paid on March 14, 2008.  2006 bonuses were paid in
      December 2006.


3.
            Ms.
      Liu served as COO from January 2006 through June 18, 2007 at which time
      she was appointed CEO.


4.
            Ms.
      Liu was granted 100,000 shares of restricted stock in August
      2008.  The shares vest in two equal installments upon the
      re-submission of the NDA for Vitaros®and upon the FDA’s approval of the NDA.  There is no
      expense recorded for this grant in 2008 as the vesting is contingent upon
      an event that is uncertain.  Ms. Liu was granted 850,000 shares
      of restricted stock which were awarded when she was appointed CEO in June
      2007. The shares vest in four installments, the first installment of
      100,000 shares vested on October 3, 2007 upon the signing of her
      employment agreement with the remaining 750,000 shares vesting in three
      equal installments of 250,000 shares on June 18, 2008, 2009 and 2010,
      respectively.  Ms. Liu also received a grant of 150,000 shares
      of restricted stock in January 2007 as compensation for her services as
      COO.  The shares vest in three equal installments of 50,000
      shares on each December 31, 2007, 2008, and
  2009.


5.
            Mr.
      Pandya’s salary and bonus for 2007 were pro-rated for two months of
      employment in 2007.


6.
            On
      October 3, 2008 Mr. Pandya was granted 500,000 shares of restricted stock
      which vest in two equal installments on June 30, 2009 and
      2010.  Mr. Pandya was also granted 100,000 shares of restricted
      stock in August 2008.  The shares vest in two equal installments
      upon the re-submission of the NDA for Vitaros®and upon the FDA’s approval of the NDA.  There is no
      expense recorded for this grant in 2008 as the vesting is contingent upon
      an event that is uncertain.  On October 31, 2007 Mr. Pandya was
      granted 125,000 shares of restricted stock. 75,000 shares will vest in
      three equal installments of 25,000 shares each on October 31, 2008, 2009
      and 2010.  The remaining 50,000 shares vest upon the execution
      of a licensing/development agreement brought to the Company by Mr. Pandya
      valued at over $5 million on or before April 30, 2009.  In
      accordance with SFAS 123R, compensation expense for the 50,000 shares will
      be recorded for the quarter ended March 31, 2009 when these shares vested
      upon the completion of the business transaction as stated
      above.


63


7.
            On
      October 31, 2007, Mr. Pandya was granted an option to purchase a total of
      175,000 shares of our Common Stock at $1.43 per share, the market price of
      our Common Stock at the time of the grant. The award vests in three
      installments of 25,000 options on October 31, 2008, 50,000 options on
      October 31, 2009 and 100,000 options on October 31,
  2010.


8.
            On
      October 3, 2008 Mr. Westgate was granted 500,000 shares of restricted
      stock which vest in two equal installments on June 30, 2009 and
      2010.  Mr. Westgate was also granted 100,000 shares of
      restricted stock in August 2008.  The shares vest in two equal
      installments upon the re-submission of the NDA for Vitaros®and upon the FDA’s approval of the NDA.  There is no
      expense recorded for this grant in 2008 as the vesting is contingent upon
      an event that is uncertain.  Mr. Westgate received a grant of
      75,000 shares of restricted stock in January 2007. The shares vest in
      three equal installments of 25,000 shares on each of December 31, 2007,
      2008, and 2009.


9.
            This
      amount includes the Company’s matching and profit sharing contribution to
      the 401k plan of $4,385, $6,750 and $6,600 in 2008, 2007 and 2006,
      respectively and life insurance premiums paid on behalf of the Named
      Executive of $450, $575 and $499 in 2008, 2007 and 2006, respectively as
      part of the employee benefit plan for all employees, whereby each employee
      has a Company paid life insurance policy in the amount of each employee’s
      annual salary.


10.
            This
      amount includes the Company’s matching and profit sharing contribution to
      the 401k plan of $2,441 and $0 in 2008 and 2007, respectively and life
      insurance premiums paid on behalf of the Named Executive of $190 and $41
      in 2008 and 2007, respectively as part of the employee benefit plan for
      all employees, whereby each employee has a Company paid life insurance
      policy in the amount of each employee’s annual
  salary.


11.
            This
      amount includes the Company’s matching and profit sharing contribution to
      the 401k plan of $3,342, $5,977 and $6,600 in 2008, 2007 and 2006,
      respectively and life insurance premiums paid on behalf of the Named
      Executive of $200, $448 and $395 in 2008, 2007 and 2006, respectively as
      part of the employee benefit plan for all employees, whereby each employee
      has a Company paid life insurance policy in the amount of each employee’s
      annual salary.




GRANTS
OF PLAN BASED AWARDS FOR 2008





The
compensation plans under which the grants in the following table were made are
generally described in the Compensation Discussion and Analysis
above:





Name
                                      (a)
                                    
                                    Grant Date
                                      (b)
                                    
                                    Estimated
                                      Future Payouts
                                      Under Equity
                                      Incentive Plan
                                      Awards (Target
                                      shares)
                                      (g)
                                    
                                    
                                    All Other
                                      Stock
                                      Awards:
                                      Number of
                                      Shares of
                                      Stock or
                                      Units
                                      (i)
                                    
                                    
                                    Grant Date
                                      Fair Value of
                                      Equity Awards
                                      (l)
                                      (1)Vivian
      H. Liu, CEO
                                    
                                    8/12/2008
                                    
                                    
                                    100,000
                                    (2)
                                    
                                    
                                    
                                    
                                    $
                                    147,000Hemanshu
                                    
                                    8/12/2008
                                    
                                    
                                    100,000
                                    (2)
                                    
                                    
                                    
                                    
                                    $
                                    147,000Pandya,
      COO
                                    
                                    10/3/2008
                                    
                                    
                                    
                                    
                                    
                                    
                                    500,000
                                    
                                    
                                    $
                                    75,000Mark
      Westgate, CFO
                                    
                                    8/12/2008
                                    
                                    
                                    100,000
                                    (2)
                                    
                                    
                                    
                                    
                                    
                                    $
                                    147,00010/3/2008
                                    
                                    
                                    
                                    
                                    
                                    
                                    500,000
                                    
                                    
                                    $
                                    75,000





(1)
            Market
      values for stock awards were determined by multiplying the number of
      shares granted by the closing market price of our stock on the grant date
      in accordance with SFAS 123R.


(2)
            Represents
      shares of restricted stock which vest in two equal installments upon
      re-submission of the NDA for Vitaros®and upon FDA approval of the
NDA.


64


OUTSTANDING
EQUITY AWARDS AT DECEMBER 31, 2008





Options are granted at 100 percent of
fair market value on the date of the grant; they usually vest in three equal
installments over a three year period.  More discussion of our equity
compensation programs can be found in the Compensation Discussion and
Analysis.  There are no unexercised, unearned options under an equity
incentive plan.





Option Awards
                                                                
                                                                
                                                                
                                                                Stock AwardsName
                                                                
                                                                Number of
                                                                  Securities
                                                                  Underlying
                                                                  Unexercised
                                                                  Options
                                                                  (#)
                                                                  Exercisable
                                                                
                                                                
                                                                Number of
                                                                  Securities
                                                                  Underlying
                                                                  Unexercised
                                                                  Options
                                                                  (#)
                                                                  Unexercisable
                                                                
                                                                
                                                                Option Exercise
                                                                  Price
                                                                  ($)
                                                                
                                                                Option
                                                                  Expiration
                                                                  Date
                                                                
                                                                Number of
                                                                  Shares or
                                                                  Units of
                                                                  Stock That
                                                                  Have Not
                                                                  Vested (#)
                                                                
                                                                
                                                                Market
                                                                  Value of
                                                                  Shares or
                                                                  Units of
                                                                  Stock
                                                                  That
                                                                  Have Not
                                                                  Vested
                                                                  ($)
                                                                  (1)
                                                                
                                                                
                                                                Equity
                                                                  Incentive
                                                                  Plan
                                                                  Awards:
                                                                  Number of
                                                                  Unearned
                                                                  Shares,
                                                                  Units or
                                                                  Other
                                                                  Rights
                                                                  That Have
                                                                  Not Vested
                                                                  (#)
                                                                
                                                                
                                                                Equity
                                                                  Incentive
                                                                  Plan
                                                                  Awards:
                                                                  Market or
                                                                  Payout
                                                                  Value of
                                                                  Unearned
                                                                  Shares,
                                                                  Units or
                                                                  Other
                                                                  Rights
                                                                  That Have
                                                                  Not
                                                                  Vested
                                                                  ($)
                                                                  (1)(a)
                                                                
                                                                (b)
                                                                
                                                                
                                                                (c)
                                                                
                                                                
                                                                (e)
                                                                
                                                                (f)
                                                                
                                                                (g)
                                                                
                                                                
                                                                (h)
                                                                
                                                                
                                                                (i)
                                                                
                                                                
                                                                (j)Vivian
      H. Liu, CEO
                                                                
                                                                
                                                                180,000
                                                                (3)
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                $
                                                                0.92
                                                                
                                                                12/15/15105,000
                                                                (4)
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                $
                                                                0.70
                                                                
                                                                12/16/12114,284
                                                                (5)
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                $
                                                                0.55
                                                                
                                                                12/3/1290,000
                                                                (6)
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                $
                                                                4.00
                                                                
                                                                1/19/10100,000
                                                                (7)
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                $
                                                                0.81
                                                                
                                                                8/3/16100,000
                                                                (9)
                                                                
                                                                $
                                                                147,000550,000
                                                                (8)
                                                                
                                                                $
                                                                841,500Hemanshu
      Pandya, COO
                                                                
                                                                
                                                                25,000
                                                                
                                                                
                                                                
                                                                150,000
                                                                (10)
                                                                
                                                                $
                                                                1.43
                                                                
                                                                10/31/1750,000
                                                                (2)
                                                                
                                                                $
                                                                71,500100,000
                                                                (9)
                                                                
                                                                $
                                                                147,00050,000
                                                                (11)
                                                                
                                                                $
                                                                71,500500,000
                                                                (15)
                                                                
                                                                $
                                                                75,000Mark
      Westgate, CFO
                                                                
                                                                
                                                                75,000
                                                                (3)
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                $
                                                                0.92
                                                                
                                                                12/15/155,000
                                                                (12)
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                $
                                                                1.32
                                                                
                                                                1/18/1527,273
                                                                (5)
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                $
                                                                0.55
                                                                
                                                                12/3/1215,000
                                                                (13)
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                $
                                                                3.25
                                                                
                                                                3/11/1280,000
                                                                (8)
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                0.81
                                                                
                                                                8/3/16100,000
                                                                (9)
                                                                
                                                                $
                                                                147,000500,000
                                                                (15)
                                                                
                                                                $
                                                                50,00025,000
                                                                (14)
                                                                
                                                                $
                                                                25,000


65


(1)
            Market
      values were determined by multiplying the number of shares granted by the
      closing market price of our Common Stock on the grant
  date.


(2)
            Stock
      vests and restrictions lapse only upon the execution of a
      licensing/development agreement brought to the Company by Mr. Pandya
      valued at over $5 million on or before April 30, 2009.  These
      shares vested on February 3, 2009 when Warner purchased the U.S. rights to
      Vitaros®.


(3)
            Options
      vested in three equal installments on December 31, 2006, 2007 and
      2008.


(4)
            Options
      vested in three equal installments on December 31, 2003, 2004 and
      2005.


(5)
            Options
      vested on July 1, 2003.


(6)
            Options
      vested in three equal installments on January 19, 2001, 2002 and
      2003.


(7)
            Options
      vested in two equal installments on the filing of the NDA for our
      Vitaros® in
      September 2007 and the acceptance of the NDA for review by the FDA in
      November 2007.


(8)
            Shares vest in two equal
      installments of 250,000 shares on June 18, 2009 and
      2010.  50,000 shares vest in on December 31,
      2009.


(9)
            The stock vests in two equal
      installments upon the re-submission of the NDA for Vitaros®and upon the FDA’s approval of the
      NDA.


(10)
            The
      option award vests in two installments of 50,000 options on October 31,
      2009 and 100,000 options on October 31,
2010.


(11)
            The
      award vests in two equal installments of 25,000 shares each on October 31,
      2009 and 2010.


(12)
            Options
      vested on the grant date of January 18,
2005.


(13)
            Options
      vested in three equal installments on March 11, 2003, 2004 and
      2005.


(14)
            The
      award vests on December 31, 2009.


(15)
            The
      award vests in two equal installments on June 30, 2009 and
      2010.




OPTION
EXERCISES AND STOCK VESTED FOR 2008





No stock options were exercised by the
Named Executive Officers during 2008.





The following table indicates
restricted stock vested in 2008 for the Named Executives:





Name and
                                          Principal
                                          Position
                                        
                                        Date of
                                          Vesting
                                        
                                        Number
                                          of Shares
                                          Acquired
                                          on
                                          Vesting
                                          (#)
                                        
                                        
                                        Value
                                          Realized on
                                          Vesting
                                          ($)
                                          (1)Vivian
      H. Liu, CEO
                                        
                                        6/18/08
                                        
                                        
                                        250,000
                                        
                                        
                                        $
                                        370,00012/31/08
                                        
                                        
                                        50,000
                                        
                                        
                                        $
                                        7,000Hemanshu
      Pandya, COO
                                        
                                        10/31/08
                                        
                                        
                                        25,000
                                        
                                        
                                        $
                                        3,000Mark
      Westgate, CFO
                                        
                                        12/31/08
                                        
                                        
                                        25,000
                                        
                                        
                                        $
                                        3,500


(1)
            Market
      values were determined by multiplying the number of shares vesting by the
      closing market price of our Common Stock on the vesting
    date.


66




POTENTIAL
PAYMENTS UPON TERMINATION OR CHANGE-IN-CONTROL AT DECEMBER 31, 2008





The table below sets forth the
estimated current value of payments and benefits to each of the
Named  Executive Officers upon a change of control, a qualifying
termination, or resignation for good reason of the Named Executive Officer, in
each case as defined within the employment agreement for the Named Executive
attached as Exhibits  10.21, 10.22, 10.30 and 10.35.  All
payments are conditioned upon and subject to the named Executive's first
executing a Confidential Separation Agreement including a general waiver and
release (and the expiration of any associated revocation period), in such
reasonable and customary form as shall be prepared by the Company, of all claims
the Named Executive may have against the Company, and related entities and
individuals.





The
value of accelerated equity awards shown in the table below was calculated using
the closing price of our Common Stock on December 31, 2008
($0.14).  The value of the options is the aggregate spreads between
$0.14 and the exercise prices of the accelerated options; if less than $0 then
the value of the accelerated options is zero.





Name and
                          Principal
                          Position
                        
                        Lump
                          Sum
                          Cash
                          Payment
                          (1)
                        
                        
                        Value of
                          accelerated
                          stock
                          options
                        
                        
                        Value of
                          accelerated
                          restricted
                          stock
                        
                        
                        Total ($)Vivian
      H. Liu, CEO
                        
                        $
                        300,000
                        
                        
                        $
                        0
                        
                        
                        $
                        91,000
                        
                        
                        $
                        391,000Hemanshu
      Pandya, COO
                        
                        $
                        116,827
                        
                        
                        $
                        0
                        
                        
                        $
                        91,000
                        
                        
                        $
                        207,827Mark
      Westgate, CFO
                        
                        $
                        149,135
                        
                        
                        $
                        0
                        
                        
                        $
                        87,500
                        
                        
                        $
                        236,635


(1)
            Lump
      sum cash payments are based on the amount of salary payable at December
      31, 2008 per the Named Executives’ employment agreements based on service
      through such date.  In the case of Ms. Liu, the amount is
      equivalent to one year’s salary.  In the case of Mr. Pandya and
      Mr. Westgate, the amount is equivalent to six month’s salary plus an
      additional week of base salary for each fully-completed year of service
      (at December 31, 2008, seven weeks for Mr. Westgate and one week for Mr.
      Pandya).


67




COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION





Arthur D.
Emil, David S. Tierney and Martin R. Wade, III served on the Executive
Compensation Committee in 2008.   None of these three directors
has ever been an employee of NexMed or its subsidiaries.  No NexMed
executive officer served as a member of the Board of Directors or the Executive
Compensation Committee of any company whose executive officers included a member
of our Board of Directors or Executive Compensation Committee.





ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.





EQUITY
COMPENSATION PLAN INFORMATION





The
following table gives information as of December 31, 2008, about shares of our
Common Stock that may be issued upon the exercise of options, warrants and
rights under all of our existing equity compensation plans (together, the
"Equity Plans"):





(a)
                                                                                
                                                                                (b)
                                                                                
                                                                                (c)Plan
      category
                                                                                
                                                                                Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
                                                                                
                                                                                Weighted-average
      exercise price of outstanding options, warrants and rights
                                                                                
                                                                                Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))Equity
      compensation plans approved by security holders
                                                                                
                                                                                3,368,991
                                                                                (1)
                                                                                $
                                                                                1.40
                                                                                
                                                                                373,203
                                                                                (2)Equity
      compensation plans not approved by security holdersTotal
                                                                                
                                                                                3,368,991
                                                                                
                                                                                $
                                                                                1.40
                                                                                
                                                                                373,203





(1)
Consists of options outstanding at December 31, 2008 under The NexMed Inc. Stock
Option and Long Term Incentive Plan (the "Incentive Plan") and The NexMed, Inc.
2006 Stock Incentive Plan (the "2006 Plan").





(2)
Consists of zero and 373,203 shares of Common Stock that remain available for
future issuance, at December 31, 2008, under the Incentive Plan and 2006 Plan,
respectively.





The
following table sets forth information with respect to the beneficial ownership,
as of February 27, 2009, of Common Stock by (a) each person known by management
to be the beneficial owner of more than 5% of our outstanding voting securities,
(b) our directors and executive officers, individually, and (c) our directors
and executive officers as a group as of February 27, 2009.


68


SECURITY
OWNERSHIP TABLE





Name, Position and Address of Beneficial Owner (1)
                            
                            Number of Shares Beneficially Owned (2)
                            
                            Percent of Class
                              (%)Vivian
      H. Liu
                              President
      & Chief Executive Officer (3)
                            
                            1,280,284
                            
                            1.51
                            %Hemanshu
      Pandya (4)
                              Vice
      President & Chief Operating Officer
                            
                            100,000
                            
                            *Mark
      Westgate (5)
                              Vice
      President & Chief Financial Officer
                            
                            306,591
                            
                            *Richard
      J. Berman
                              Chairman
      of the Board (6)
                            
                            1,382,413
                            
                            1.62
                            %Arthur
      D. Emil, Esq.
                              Director
      (7)
                            
                            431,455
                            
                            *Leonard
      A. Oppenheim, Esq.
                              Director
      (8)
                            
                            855,727
                            
                            *David
      S. Tierney, MD
                              Director
      (9)
                            
                            225,824
                            
                            *Martin
      R. Wade, III
                              Director
      (10)
                            
                            269,166
                            
                            *Jacob
      May (11)
                              4525
      Harding Road
                              Nashville,
      TN 37205
                            
                            9,835,530
                            
                            11.65
                            %All
      Executive Officers and Directors as a Group (eight persons) (12)
      (13)
                            
                            4,851,460
                            
                            5.56
                            %




* less
than 1%





1)
            The
      address for each of the executive officers and directors of the Company is
      89 Twin Rivers Drive, East Windsor, New Jersey
  08520.


2)
            Except
      as otherwise indicated herein, all shares are solely and directly owned,
      with sole voting and dispositive
power.


3)     Includes
589,284 shares issuable upon exercise of stock options exercisable within 60
days of February 27, 2009.


4)     Includes
25,000 shares issuable upon exercise of stock options within 60 days of February
27, 2009.


5)     Includes
202,273 shares issuable upon exercise of stock options exercisable within 60
days of February 27, 2009.


6)     Includes
1,150,000 shares issuable upon exercise of stock options exercisable within 60
days of February 27, 2009 and 20,540 restricted shares that vest within 60 days
of February 27, 2009.


7)     Includes
140,000 shares issuable upon exercise of stock options exercisable within 60
days of February 27, 2009 and 10,708 restricted shares that vest within 60 days
of February 27, 2009.


8)     Includes
500,000 shares issuable upon exercise of stock options exercisable within 60
days of February 27, 2009 and 10,708 restricted shares that vest within 60 days
of February 27, 2009.


9)     Includes
10,708 restricted shares that vest within 60 days of February 27,
2009.


10)   Includes
100,000 shares issuable upon exercise of stock options exercisable within 60
days of February 27, 2009 and 10,708 restricted shares that vest within 60 days
of February 27, 2009.


11)   Except
for percentage information, this information is based upon a Form 4 filed with
the Securities and Exchange Commission on February 18, 2009.


12)   Includes
2,681,557 shares issuable upon exercise of stock options exercisable within 60
days of February 27, 2009 and 63,372 restricted shares that vest within 60 days
of February 27, 2009.


13)   No
shares owned by any of our officers and directors were pledged as
security.





ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.





Review
and Approval of Transactions with Related Persons





The Board has adopted a written policy
and procedures for review, approval and monitoring of transactions involving our
Company and “related persons” (directors and executive officers or their
immediate family members, or Stockholders owning 5% or greater of the Company’s
outstanding stock).  The policy covers any related person transaction
that meets the minimum threshold for disclosure in our proxy statement under the
relevant SEC rules (generally transactions involving amounts exceeding $120,000
in which a related person has a direct or indirect material
interest).  Related person transactions must be approved by the Board
or by the Audit Committee of the Board consisting solely of independent
directors, which will approve the transaction if they determine that it is in
our best interests.  The Board or Audit Committee will periodically
monitor the transaction to ensure that there are no changes that would render it
advisable for us to amend or terminate the transaction.





There were no related person
transactions entered into in 2008 and there are no related person arrangements
in place from previous years and no proposed related person
transaction.


69


Director
Independence





During the year ended December 31,
2008,the Board of
Directors has determined that each of Mr. Emil, Mr. Oppenheim, Dr. Tierney and
Mr. Wade met the definition of independence under the NASDAQ Capital Market
listing requirements.





ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES.





Audit
Fees




The
aggregate fees billed or to be billed by Amper, Politziner & Mattia, LLP for
2008 were $186,000 and $279,000 for 2007.




Audit-related
Fees




There were no fees
billed or to be billed by Amper, Politziner & Mattia,LLP for each of the
last two fiscal years for assurance and related services that were reasonably
related to the performance of the audit or review of our financial statements
and that are not reported under “Audit Fees” above.




Tax
Fees




We retain
the services of PricewaterhouseCoopers LLP as our tax advisor.  The
aggregate fees billed by PricewaterhouseCoopers LLP in each of the last two
fiscal years for professional services rendered for tax compliance, tax advice
and tax planning were $30,000 for 2008 and $28,000 for 2007.  The
nature of the services performed for these fees included the preparation of our
federal and state tax returns.




All
Other Fees




There
were no other fees billed to us by Amper, Politznier & Mattia, LLP or
PricewaterhouseCoopers LLP during 2008 and 2007.




Pre-Approval
Policies and Procedures




It is our
policy that all services provided by Amper, Politziner & Mattia, LLP shall
be pre-approved by the Audit Committee. Amper, Politziner & Mattia, LLP
provides the Audit Committee with an engagement letter during the first quarter
of each fiscal year outlining the scope of the audit services proposed to be
performed during the fiscal year and the estimated fees for such
services.  Pre-approval of audit and permitted non-audit services may
be given by the Audit Committee at any time up to one year before the
commencement of such services by Amper, Politziner & Mattia,
LLP.  Pre-approval must be detailed as to the particular services to
be provided. Pre-approval may be given for a category of services, provided that
(i) the category is narrow enough and detailed enough that management will not
be called upon to make a judgment as to whether a particular proposed service by
Amper, Politziner & Mattia, LLP fits within such pre-approved category of
services and (ii) the Audit Committee also establishes a limit on the fees for
such pre-approved category of services.   The Chairman of the
Audit Committee has, and the Audit Committee may delegate to any other member of
the Audit Committee, the authority to grant pre-approval of permitted non-audit
services to be provided by Amper, Politziner & Mattia, LLP between Audit
Committee meetings; provided, however, that any such pre-approval shall be
presented to the full Audit Committee at its next scheduled meeting. TheAuditCommittee pre-approved
all audit and permitted non-audit services that were provided in 2008 and
2007.




PART
IV.




ITEM
      15.
            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES.




(a)
            1.
            Financial
      Statements:





The
information required by this item is included in Item 8 of Part II of this Form
10-K.


70


2.
            Financial Statement
      Schedules




Report of
Independent Registered Public Accounting Firm on Financial Statement Schedule
for the years ended December 31, 2008, 2007 and 2006.




SCHEDULE
II





NEXMED,
INC.


SCHEDULE OF VALUATION AND
QUALIFYING ACCOUNTS





Description
                
                Balance
      at
                  Beginning
                  of Year
                
                
                Charged
      to
                  Costs
      and
                  Expenses
                
                
                Charged
                  to
                  Other
                  Accounts
                
                
                Deductions
                
                
                Balance
      at
                  End of YearYear
      ended December 31, 2008Valuation
      allowance - deferred tax asset
                
                $
                39,274,127
                
                
                $
                3,561,172
                
                
                
                —
                
                
                
                —
                
                
                $
                42,835,299Year
      ended December 31, 2007Valuation
      allowance – deferred tax asset
                
                $
                35,642,110
                
                
                $
                3,632,017
                
                
                
                —
                
                
                
                —
                
                
                $
                39,274,127Year
      ended December 31, 2006Valuation
      allowance - deferred tax asset
                
                $
                32,859,672
                
                
                $
                3,682,438
                
                
                
                —
                
                
                
                —
                
                
                $
                35,642,110





All other
schedules have been omitted because the information is not applicable or is
presented in the Financial Statements or Notes thereto.




3.           Exhibits





EXHIBITS
                      NO.
                    
                    DESCRIPTION3.1
                    
                    Amended
      and Restated Articles of Incorporation of the Company (incorporated herein
      by reference to Exhibit 2.1 filed with the Company's Form 10-SB filed with
      the Securities and Exchange Commission on March 14, 1997).3.2
                    
                    Amended
      and Restated By-laws of the Company (incorporated herein by reference to
      Exhibit 3.1 to the Company’s Form 10-Q filed with the Securities and
      Exchange Commission on May 14, 2003).3.3
                    
                    Certificate
      of Amendment to Articles of Incorporation of the Company, dated June 22,
      2000 (incorporated herein by reference to Exhibit 3.2 to the Company’s
      Form 10-K filed with the Securities and Exchange Commission on March 31,
      2003).3.4
                    
                    Certificate
      of Amendment to the Company’s Articles of Incorporation, dated June 14,
      2005. (incorporated herein by reference to Exhibit 3.4 to the Company’s
      Form 10-K filed with the Securities and Exchange Commission on March 16,
      2006).


71





3.5
                
                Second
      Amended and Restated By-Laws of the Company, effective as of April 18,
      2008 (incorporated herein by reference to Exhibit 3.1 to the Company’s
      Current Report on Form 8-K filed with the Securities and Exchange
      Commission on April 24, 2008).4.1
                
                Form
      of Common Stock Certificate (incorporated herein by reference to Exhibit
      3.1 filed with the Company's Form 10-SB filed with the Securities and
      Exchange Commission on March 14, 1997).4.2
                
                Rights
      Agreement and form of Rights Certificate (incorporated herein by reference
      to Exhibit 4 to the Company’s Current Report on Form 8-K filed with the
      Commission on April 10, 2000).4.3
                
                Certificate
      of Designation of Series A Junior Participating Preferred Stock
      (incorporated herein by reference to Exhibit 4 to the Company’s Current
      Report on Form 8-K filed with the Commission on April 10,
      2000).4.4
                
                Form
      of Warrant dated April 21, 2003 (incorporated herein by reference to
      Exhibit 4.2 to the Company’s Form 10-Q filed with the Securities and
      Exchange Commission on May 14, 2003).4.5
                
                Form
      of Common Stock Purchase Warrant dated July 2, 2003 (incorporated herein
      by reference to Exhibit 4.3 to the Company’s Registration Statement on
      Form S-3 filed with the Securities and Exchange Commission on July 17,
      2003).4.6
                
                Form
      of Warrant dated June 18, 2004 (incorporated herein by reference to
      Exhibit 4.1 to the Company’s Form 8-K filed with the Securities and
      Exchange Commission on June 25, 2004).4.7
                
                Form
      of Common Stock Purchase Warrant A, dated December 17, 2004 (incorporated
      herein by reference to Exhibit 4.1 to the Company’s Current Report on Form
      8-K filed with the Securities and Exchange Commission on December 23,
      2004).4.8
                
                Form
      of Warrant, dated May 17, 2005 (incorporated herein by reference to
      Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the
      Securities and Exchange Commission on May 19, 2005).4.9
                
                Form
      of Warrant, dated January 23, 2006 (incorporated herein by reference to
      Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the
      Securities and Exchange Commission on January 27, 2006).4.10
                
                Form
      of Warrant, dated November 30, 2006 (incorporated herein by reference to
      Exhibit 4.1 to the Company’s Form 8-K filed with the Securities and
      Exchange Commission on December 4, 2006).4.11
                
                Form
      of Warrant, dated December 20, 2006 (incorporated herein by reference to
      Exhibit 4.1 to the Company’s Form 8-K filed with the Securities and
      Exchange Commission on December 21, 2006).4.12
                
                Amendment
      No. 1 to Rights Agreement, dated as of January 16, 2007 (incorporated
      herein by reference to Exhibit 4.1 to the Company’s Form 8-K filed with
      the Securities and Exchange Commission on January 22, 2007).4.13
                
                Form
      of Warrant, dated October 26, 2007 (incorporated herein by reference to
      Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the
      Securities and Exchange Commission on October 31, 2007).4.14
                
                Form
      of Warrant (incorporated herein by reference to Exhibit 4.4 to the
      Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on July 29, 2008).10.1*
                
                Amended
      and Restated NexMed, Inc. Stock Option and Long-Term Incentive
      Compensation Plan (incorporated herein by reference to Exhibit 10.1 filed
      with the Company's Form 10-Q filed with the Securities and Exchange
      Commission on May 15,
2001).


72





10.2*
                
                The
      NexMed, Inc. Recognition and Retention Stock Incentive Plan (incorporated
      herein by reference to Exhibit 99.1 filed with the Company's Form 8-K
      filed with the Securities and Exchange Commission on May 28,
      2004).10.3
                
                License
      Agreement dated March 22, 1999 between NexMed International Limited and
      Vergemont International Limited  (incorporated herein by
      reference to Exhibit 10.7 of the Company’s Form 10-KSB filed with the
      Securities and Exchange Commission on March 16, 2000).10.4*
                
                The
      NexMed, Inc. Non-Qualified Stock Option Plan (incorporated herein by
      reference to Exhibit 6.6 filed with the Company's Form 10-SB/A filed with
      the Securities and Exchange Commission on June 5, 1997).10.5*
                
                Employment
      Agreement dated February 26, 2002 by and between NexMed, Inc. and Dr.
      Y.   Joseph Mo (incorporated herein by reference to Exhibit
      10.7 of the Company's Form 10-K filed with the Securities and Exchange
      Commission on March 29, 2002).10.6
                
                Registration
      Rights Agreement between the Company and The Tailwind Fund Ltd. and
      Solomon Strategic Holdings, Inc. dated June 11, 2002 (incorporated herein
      by reference to Exhibit 10.2 to the Company's Form 10-Q filed with the
      Securities and Exchange Commission on August 14, 2002).10.7
                
                Investor
      Rights Agreement, dated as of April 21, 2003, between the Company and the
      Purchasers identified on Schedule 1 to the Investor Rights Agreement
      (incorporated herein by reference to Exhibit 10.2 to the Company’s Form
      10-Q filed with the Securities and Exchange Commission on May 14,
      2003).10.8
                
                Investor
      Rights Agreement, dated as of July 2, 2003, between the Company and the
      Purchasers identified on Schedule 1 to the Investor Rights Agreement
      (incorporated herein by reference to Exhibit 10.2 to the Company’s
      Registration Statement on Form S-3 filed with the Securities and Exchange
      Commission on July 17, 2003).10.9*
                
                Amendment
      dated September 26, 2003 to Employment Agreement by and between Dr. Y.
      Joseph Mo and NexMed, Inc. dated February 26, 2002 (incorporated herein by
      reference to Exhibit 10.4 to the Company's Form 10-Q filed with the
      Securities and Exchange Commission on November 12, 2003).10.10
                
                Registration
      Rights Agreement, dated as of December 12, 2003, between the Company and
      the Purchasers named therein (incorporated herein by reference to Exhibit
      10.2 to the Company’s Registration Statement on Form S-3 filed with the
      Securities and Exchange Commission on January 13, 2004).10.11
                
                Form
      of 5% Convertible Note due May 31, 2007 (incorporated herein by reference
      to Exhibit 10.3 to the Company’s Registration Statement on Form S-3 filed
      with the Securities and Exchange Commission on January 13,
      2004).10.12
                
                Investor
      Rights Agreement, dated as of June 18, 2004, between the Company and the
      Purchasers identified on Schedule 1 thereto (incorporated herein by
      reference to Exhibit 10.2 to the Company’s Form 8-K filed with the
      Securities and Exchange Commission on June 25, 2004).10.13*
                
                Stock
      Option Grant Agreement between the Company and Leonard A. Oppenheim dated
      November 1, 2004 (incorporated herein by reference to Exhibit 10.2 to the
      Company’s Form 10-Q filed with the Securities and Exchange Commission on
      November 9, 2004).10.14*
                
                Form
      of Stock Option Grant Agreement between the Company and its Directors
      (incorporated herein by reference to Exhibit 10.29 to the Company’s Form
      10-K filed with the Securities and Exchange Commission on March 16,
      2006).


73





10.15
                
                Investor
      Rights Agreement, dated as of December 17, 2004, between the Company and
      the Purchasers named therein (incorporated herein by reference to Exhibit
      10.2 to the Company’s Current Report on Form 8-K filed with the Securities
      and Exchange Commission on December 23, 2004).10.16
                
                Preferred
      Stock and Warrant Purchase Agreement, dated as of May 16, 2005, between
      the Company and the Purchasers named therein (incorporated herein by
      reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
      filed with the Securities and Exchange Commission on May 19,
      2005).10.17
                
                Investor
      Rights Agreement, dated as of May 16, 2005, between the Company and the
      Purchasers named therein (incorporated herein by reference to Exhibit 10.2
      to the Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on December 23, 2004).10.18+
                
                License
      Agreement, dated September 13, 2005, between NexMed, Inc., NexMed
      International Limited and Novartis International Pharmaceutical Ltd.
      (incorporated herein by reference to Exhibit 99.1 to the Company’s Current
      Report on Form 8-K filed with the Securities and Exchange Commission on
      September 15, 2005).10.19
                
                Common
      Stock and Warrant Purchase Agreement, dated as of January 23, 2006,
      between the Company and the Purchasers named therein (incorporated herein
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
      filed with the Securities and Exchange Commission on January 27,
      2006).10.20
                
                Investor
      Rights Agreement, dated as of January 23, 2006, between the Company and
      the Purchasers named therein (incorporated herein by reference to Exhibit
      10.2 to the Company’s Current Report on Form 8-K filed with the Securities
      and Exchange Commission on January 27, 2006).10.21*
                
                Employment
      Agreement dated December 21, 2005 by and between NexMed, Inc. and Vivian
      H. Liu (incorporated herein by reference to Exhibit 10.30 to the Company’s
      Form 10-K filed with the Securities and Exchange Commission on March 16,
      2006).10.22*
                
                Employment
      Agreement dated December 21, 2005 by and between NexMed, Inc. and Mark
      Westgate (incorporated herein by reference to Exhibit 10.31 to the
      Company’s Form 10-K filed with the Securities and Exchange Commission on
      March 16, 2006).10.23
                
                Common
      Stock and Warrant Purchase Agreement, dated January 23, 2006 (incorporated
      herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed with
      the Securities and Exchange Commission on January 27, 2006).10.24*
                
                NexMed,
      Inc. 2006 Stock Incentive Plan (incorporated herein by reference to Annex
      A of the Company’s Definitive Proxy Statement filed with the Securities
      and Exchange Commission on April 6, 2006).10.25
                
                Securities
      Purchase Agreement, dated November 30, 2006, between NexMed, Inc., NexMed
      (U.S.A.), Inc. and Metronome LPC 1, Inc. (incorporated herein by reference
      to Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and
      Exchange Commission on December 4, 2006).10.26
                
                Senior
      Secured Note, dated November 30, 2006, in favor of Metronome LPC 1, Inc.
      (incorporated herein by reference to Exhibit 10.2 to the Company’s Form
      8-K filed with the Securities and Exchange Commission on December 4,
      2006).


74





10.27
                
                Common
      Stock and Warrant Purchase Agreement, dated December 20, 2006
      (incorporated herein by reference to Exhibit 10.1 to the Company’s Form
      8-K filed with the Securities and Exchange Commission on December 21,
      2006).10.28
                
                Registration
      Rights Agreement, dated December 20, 2006 (incorporated herein by
      reference to Exhibit 10.2 to the Company’s Form 8-K filed with the
      Securities and Exchange Commission on December 21, 2006).10.29
                
                Amendment,
      effective as of February 13, 2007, to License Agreement between Novartis
      International Pharmaceutical Ltd., NexMed, Inc. and NexMed International
      Limited, dated September 13, 2005 (incorporated herein by reference to
      Exhibit 99.1 to the Company’s Form 8-K filed with the Securities and
      Exchange Commission on February 23, 2007).10.30
      *
                
                Employment
      Agreement dated October 31, 2007 between NexMed, Inc. and Hemanshu Pandya
      (incorporated herein by reference to Exhibit 10.1 to the Company’s Form
      8-K filed with the Securities and Exchange Commission on November 5,
      2007).10.31
      +
                
                License
      Agreement dated November 1, 2007 between NexMed, Inc. and Warner Chilcott
      Company, Inc (incorporated herein by reference to Exhibit 10.31 to the
      Company’s Form 10-K filed with the Securities and Exchange Commission on
      March 12, 2008).10.32
                
                Securities
      Purchase Agreement, dated October 26, 2007, between NexMed, Inc. and Twin
      Rivers Associates, LLC. (incorporated herein by reference to Exhibit 10.1
      to the Company’s Current Report 8-K filed with the Securities and Exchange
      Commission on October 31, 2007).10.33
                
                Senior
      Secured Note dated October 26, 2007, between NexMed, Inc. and Twin Rivers
      Associates, LLC. (incorporated herein by reference to Exhibit 10.2 to the
      Company’s Current Report 8-K filed with the Securities and Exchange
      Commission on October 31, 2007).10.34
                
                Form
      of Binding Commitment for Credit Line, dated May 12, 2008 (incorporated
      herein by reference to Exhibit 10.1 to the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission on May 14,
      2008).10.35
      *
                
                Employment
      Agreement, dated October 3, 2007, by and between NexMed, Inc. and Vivian
      H.Liu (incorporated herein by reference to Exhibit 10.1 to the Company’s
      Current Report on Form 8-K filed with the Securities and Exchange
      Commission on May 30, 2008).10.36
                
                Side
      Letter, effective June 27, 2008, to License Agreement between Novartis
      International Pharmaceutical Ltd., NexMed, Inc. and NexMed International
      Limited, dated September 13, 2005 (incorporated herein by reference to
      Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the
      Securities and Exchange Commission on July 1, 2008).10.37
                
                Form
      of Purchase Agreement (incorporated herein by reference to Exhibit 10.1 to
      the Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on July 3, 2008).10.38
                
                Form
      of Note (incorporated herein by reference to Exhibit 10.2 to the Company’s
      Current Report on Form 8-K filed with the Securities and Exchange
      Commission on July 3, 2008).10.39
                
                Form
      of Registration Rights Agreement (incorporated herein by reference to
      Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the
      Securities and Exchange Commission on July 3, 2008).10.40
                
                Form
      of Mortgage, Security Agreement and Assignment of Leases and Rents
      (incorporated herein by reference to Exhibit 10.4 to the Company’s Current
      Report on Form 8-K filed with the Securities and Exchange Commission on
      July 3, 2008).


75




10.41
                
                Form
      of Subsidiary Guaranty (incorporated herein by reference to Exhibit 10.5
      to the Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on July 3, 2008).10.42
      *
                
                NexMed,
      Inc. Amendment to 2006 Stock Incentive Plan (incorporated by reference to
      Appendix A of the Company’s Definitive Proxy Statement filed with the
      Securities and Exchange Commission on April 18, 2008).10.43
                
                Asset
      Purchase Agreement, dated February 3, 2009, between Warner Chilcott
      Company, Inc. and NexMed, Inc. (incorporated herein by reference to
      Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the
      Securities and Exchange Commission on February 5, 2009).10.44
                
                License
      Agreement, dated February 3, 2009, between Warner Chilcott Company, Inc.
      and NexMed, Inc. (incorporated herein by reference to Exhibit 10.2 to the
      Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on February 5, 2009).21
                
                Subsidiaries.23.1
                
                Consent
      of Amper, Politziner & Mattia, LLP, independent registered public
      accounting firm.31.1
                
                Chief
      Executive Officer's Certificate, pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                
                Chief
      Financial Officer's Certificate, pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                
                Chief
      Executive Officer's Certificate, pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
                
                Chief
      Financial Officer's Certificate, pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.




*Management
compensatory plan or arrangement required to be filed as an exhibit pursuant to
Item 15(c) of Form 10-K.




+
Portions of this exhibit have been omitted pursuant to a request for
confidential treatment with the Securities and Exchange Commission. Such
portions have been filed separately with the Securities and Exchange
Commission.


76


SIGNATURES




Pursuant
to the requirements of the 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.




NEXMED,
INC.




Dated:  March
      12, 2009
                  By:
                  /s/
      Vivian LiuVivian
      LiuPresident
      and Chief Executive
Officer




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.




SIGNATURE
              
              TITLE
              
              DATE/s/ Vivian H. Liu
              
              Director,
      President and Chief Executive
              
              March
      12, 2009VIVIAN
      H. LIU
              
              Officer/s/ Mark Westgate
              
              Vice
      President, Chief Financial Officer and
              
              March
      12, 2009MARK
      WESTGATE
              
              principal
      accounting officer/s/ Richard J. Berman
              
              Chairman
      of the Board of Directors
              
              March
      12, 2009RICHARD
      J. BERMAN/s/ Arthur D. EmilARTHUR
      D. EMIL
              
              Director
              
              March
      12, 2009/s/ Leonard A. OppenheimLEONARD
      A. OPPENHEIM
              
              Director
              
              March
      12 2009/s/ David S. Tierney, M.D.DAVID
      S. TIERNEY
              
              Director
              
              March
      12, 2009/s/ Martin Wade IIIMARTIN
      WADE III
              
              Director
              
              March
      12, 2009


77