UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



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



For the quarterly period ended March 31, 2007



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 NO. 001-32177



NOVADEL PHARMA INC.



(Exact Name of registrant as specified in its charter)





Delaware
        22-2407152(State or other jurisdiction of incorporation or organization)
        (I.R.S. Employer Identification No.)






25 MINNEAKONING ROAD, FLEMINGTON, NEW JERSEY 08822

(Address of principal executive offices) (Zip Code)



(908) 782-3431

Registrants telephone number, including area code



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesxNoo



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



Large accelerated fileroAccelerated fileroNon-accelerated filerx



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



As of May 1, 2007, the issuer had 59,515,732 shares of common stock, $.001 par value, outstanding.



---





NOVADEL PHARMA INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007



TABLE OF CONTENTS





PART I  Financial Information
        PAGEItem 1.
        Financial Statements.
        4Item 2.
        Managements Discussion and Analysis of Financial Condition and Results of Operations.
        13Item 3.
        Quantitative and Qualitative Disclosure about Market Risk.
        21Item 4.
        Controls and Procedures.
        21PART II  Other InformationItem 1A.
        Risk Factors.
        22Item 6.
        Exhibits.
        43Signatures
        44






2



---





SAFE HARBOR STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995



This Quarterly Report on Form 10-Q includes forward-looking statements, including statements regarding NovaDel Pharma Inc.s (the Company, we, us or NovaDel) expectations, beliefs, intentions or strategies for the future and the Companys internal controls and procedures and outstanding financial reporting obligations and other accounting issues. The Company intends that all forward-looking statements be subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are only predictions and reflect the Companys views as of the date they are made with respect to future events and financial performance. In particular, the Managements Discussion and Analysis of Financial Condition and Results of Operations section in Part I, Item 2 of this Quarterly
Report includes forward-looking statements that reflect the Companys current views with respect to future events and financial performance. The Company uses words such as expect, anticipate, believe, intend and similar expressions to identify forward-looking statements. You can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. A number of important risks and uncertainties could, individually or in the aggregate, cause actual results to differ materially from those expressed or implied in any forward-looking statements.

Examples of the risks and uncertainties include, but are not limited to: the inherent risks and uncertainties in developing products of the type the Company is developing (independently and through collaborative arrangements); the inherent risks and uncertainties in completing the pilot pharmacokinetic feasibility studies being conducted by the Company; possible changes in the Companys financial condition; the progress of the Companys research and development; clinical trials require adequate supplies of drug substance and drug product, which may be difficult or uneconomical to procure or manufacture; timely obtaining sufficient patient enrollment in the Companys clinical trials; the impact of development of competing therapies and/or technologies by other companies; the Companys ability to obtain additional required financing to fund its research programs; the Companys ability
to enter into agreements with collaborators and the failure of collaborators to perform under their agreements with the Company; the progress of the U.S. Food and Drug Administration, or FDA, approvals in connection with the conduct of the Companys clinical trials and the marketing of the Companys products; the additional costs and delays which may result from requirements imposed by the FDA in connection with obtaining the required approvals; acceptance for filing by the FDA does not mean that the New Drug Application, or NDA, has been or will be approved, nor does it represent an evaluation of the adequacy of the data submitted; the risks related to the Companys internal controls and procedures; and the risks identified under the section entitled Risk Factors included as Item 1A in Part II of this Quarterly Report on Form 10-Q and other reports, including this report and other filings filed with the Securities and Exchange Commission from time to time.





3



---



PART I  FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS

NOVADEL PHARMA INC.

CONDENSED BALANCE SHEETS

AS OF MARCH 31, 2007 (UNAUDITED) AND DECEMBER 31, 2006



ASSETS
        
        March 31, 2007 (unaudited)
        
        
        
        December31, 2006Current Assets:Cash and cash equivalents
        
        $
        9,997,000
        
        
        
        $
        16,586,000Short-term investments
        
        
        8,673,000
        
        
        
        
        3,690,000Inventories
        
        
        32,000
        
        
        
        
        32,000Investment in marketable equity security available for sale
        
        
        140,000
        
        
        
        
        466,000Prepaid expenses and other current assets
        
        
        545,000
        
        
        
        
        572,000Total Current Assets
        
        
        19,387,000
        
        
        
        
        21,346,000Property and equipment, net
        
        
        2,391,000
        
        
        
        
        2,611,000Other assets
        
        
        359,000
        
        
        
        
        359,000TOTAL ASSETS
        
        $
        22,137,000
        
        
        
        $
        24,316,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
        
        $
        1,560,000
        
        
        
        $
        798,000Accrued expenses and other current liabilities
        
        
        2,550,000
        
        
        
        
        2,061,000Current portion of deferred revenue
        
        
        162,000
        
        
        
        
        162,000Current portion of capitalized lease obligations
        
        
        128,000
        
        
        
        
        125,000Total Current Liabilities
        
        
        4,400,000
        
        
        
        
        3,146,000Non-current portion of deferred revenue
        
        
        2,487,000
        
        
        
        
        2,444,000Non-current portion of capitalized lease obligations
        
        
        95,000
        
        
        
        
        128,000Total Liabilities
        
        
        6,982,000
        
        
        
        
        5,718,000COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITYPreferred stock, $.001 par value:Authorized 1,000,000 shares, none issued
        
        
        
        
        
        
        
        Common stock, $.001 par value:Authorized 200,000,000 and 100,000,000 shares as of March 31, 2007 and December 31, 2006, respectively. Issued 59,445,732 and 58,358,818 shares at March 31, 2007 and December 31, 2006, respectively
        
        
        59,000
        
        
        
        
        58,000Additional paid-in capital
        
        
        68,806,000
        
        
        
        
        66,860,000Accumulated deficit
        
        
        (53,704,000
        )
        
        
        
        (48,280,000
        )Accumulated other comprehensive loss
        
        
        
        
        
        
        
        (34,000
        )Less:  Treasury stock, at cost, 3,012 shares
        
        
        (6,000
        )
        
        
        
        (6,000
        )Total Stockholders Equity
        
        
        15,155,000
        
        
        
        
        18,598,000TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
        
        $
        22,137,000
        
        
        
        $
        24,316,000




See accompanying notes to condensed financial statements.



4



---



NOVADEL PHARMA INC.

CONDENSED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND APRIL 30, 2006

(UNAUDITED)





Three Months EndedMarch 31, 2007
        
        
        April 30, 2006License Fees and Milestone Payments Earned from Related Parties
        
        $
        40,000
        
        
        $
        1,041,000Consulting Revenues from Related Parties
        
        
        
        
        
        
        118,000Total Revenues
        
        
        40,000
        
        
        
        1,159,000Research and Development Expenses
        
        
        3,097,000
        
        
        
        1,571,000General and Administrative Expenses
        
        
        2,237,000
        
        
        
        1,736,000Total Operating Expenses
        
        
        5,334,000
        
        
        
        3,307,000Loss From Operations
        
        
        (5,294,000
        )
        
        
        (2,148,000
        )Other Loss
        
        
        (360,000
        )
        
        
        Interest Income, net
        
        
        230,000
        
        
        
        19,000Net Loss
        
        $
        (5,424,000
        )
        
        $
        (2,129,000
        )Basic and Diluted Loss Per Common Share
        
        $
        (0.09
        )
        
        $
        (0.05
        )Weighted Average Number of Common Shares Used in Computation of Basic and Diluted Loss Per Share
        
        
        59,264,000
        
        
        
        41,715,000




See accompanying notes to condensed financial statements.



5



---



NOVADEL PHARMA INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2007

(UNAUDITED)





Common StockShares
        
        
        
        Amount
        
        
        Additional Paid-In Capital
        
        
        Accumulated Deficit
        
        
        Accumulated Other Comprehensive Income (Loss)
        
        
        
        Treasury Stock
        
        
        TotalStockholders EquityBALANCE, December 31, 2006
        
        58,358,818
        
        
        
        $
        58,000
        
        
        $
        66,860,000
        
        
        $
        (48,280,000
        )
        
        $
        (34,000
        )
        
        
        $
        (6,000
        )
        
        $
        18,598,000Share-based compensation expense
        
        
        
        
        
        
        
        
        
        
        458,000
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        458,000Stock issued for options exercised
        
        125,000
        
        
        
        
        
        
        
        
        94,000
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        94,000Stock issued in connection with private placement
        
        961,914
        
        
        
        
        1,000
        
        
        
        1,394,000
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        1,395,000Comprehensive income (loss):Reclassification of unrealized loss on investment in marketable equity security to realized loss
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        34,000
        
        
        
        
        
        
        
        
        34,000Net loss
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (5,424,000
        )
        
        
        
        
        
        
        
        
        
        
        
        (5,424,000
        )Total comprehensive loss
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (5,390,000
        )BALANCE, March 31, 2007
        
        59,445,732
        
        
        
        $
        59,000
        
        
        $
        68,806,000
        
        
        $
        (53,704,000
        )
        
        $
        
        
        
        
        $
        (6,000
        )
        
        $
        15,155,000






See accompanying notes to condensed financial statements.




6



---



NOVADEL PHARMA INC.

CONDENSED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND APRIL 30, 2006

(UNAUDITED)



Three Months EndedMarch 31, 2007
        
        
        April 30, 2006CASH FLOWS FROM OPERATING ACTIVITIESNet loss
        $
        (5,424,000
        )
        $
        (2,129,000
        )Adjustments to reconcile net loss to net cash used in operating activities:Share-based compensation expense
        
        458,000
        
        
        259,000Amortization of discount on short-term investments
        
        (40,000
        )
        
        Depreciation and amortization
        
        176,000
        
        
        161,000Other than temporary impairment of investment in marketable equity security available for sale
        
        360,000
        
        
        Changes in operating assets and liabilities:Accounts receivable from related parties
        
        
        
        
        (42,000
        )Inventories
        
        
        
        
        (82,000
        )Prepaid expenses and other current assets
        
        27,000
        
        
        186,000Other assets
        
        
        
        
        Accounts payable
        
        762,000
        
        
        (25,000
        )Accrued expenses and other current liabilities
        
        489,000
        
        
        130,000Deferred revenue
        
        43,000
        
        
        (40,000
        )Net cash used in operating activities
        
        (3,149,000
        )
        
        (1,582,000
        )CASH FLOWS FROM INVESTING ACTIVITIES:Return of property and equipment
        
        44,000
        
        
        Purchases of short-term investments
        
        (8,537,000
        )
        
        Maturities of short-term investments
        
        3,594,000
        
        
        398,000Net cash provided by (used in) investing activities
        
        (4,899,000
        )
        
        398,000CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of common stock through private placements
        
        1,395,000
        
        
        10,634,000Proceeds from options exercised
        
        94,000
        
        
        80,000Payments of capitalized lease obligations
        
        (30,000
        )
        
        Net cash provided by financing activities
        
        1,459,000
        
        
        10,714,000NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
        
        (6,589,000
        )
        
        9,530,000CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
        
        16,586,000
        
        
        2,383,000CASH AND CASH EQUIVALENTS, END OF PERIOD
        $
        9,997,000
        
        $
        11,913,000




See accompanying notes to condensed financial statements.



7



---



NOVADEL PHARMA INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS



NOTE 1 - NATURE OF THE BUSINESS



NovaDel Pharma Inc. (the Company) is a specialty pharmaceutical company developing oral spray formulations for a broad range of marketed drugs.  The Companys proprietary technology offers, in comparison to conventional oral dosage forms, the potential for faster absorption of drugs into the bloodstream leading to quicker onset of therapeutic effects and possibly reduced first pass liver metabolism, which may result in lower doses.  Oral sprays eliminate the requirement for water or the need to swallow, potentially improving patient convenience and adherence.



Through March 31, 2007, the Company has entered into strategic license agreements with (i) Hana Biosciences Inc. (Hana Biosciences), for the marketing rights in the U.S. and Canada for the Companys ondansetron oral spray, (ii) Par Pharmaceutical, Inc. (Par), for the marketing rights in the U.S. and Canada for the Companys nitroglycerin oral spray, (iii) Manhattan Pharmaceuticals, Inc. (Manhattan Pharmaceuticals), in connection with propofol, and (iv) Velcera , Inc. (Velcera), in connection with veterinary applications for currently marketed veterinary drugs.



On November 18, 2004, the Company entered into a manufacturing and supply agreement with INyX USA, Ltd. (INyX), whereby INyX manufactures and supplies the Companys nitroglycerin lingual spray. For a five-year period that began November 18, 2004, INyX is the exclusive provider substantially worldwide of the nitroglycerin lingual spray to the Company.



NOTE 2  BASIS OF PRESENTATION AND LIQUIDITY

On June 28, 2006, our Board of Directors approved a change of our fiscal year end from July 31 to December 31. Accordingly, the new fiscal year began on January 1 and ends on December 31. We filed a Transition Report on Form 10-K for the five months ended December 31, 2006.  As such, the end of the quarters in the new fiscal year does not coincide with the end of the quarters in the previous fiscal years.  Due to significant costs, the Company is not recasting the quarterly data from the previous fiscal year as such costs would exceed any potential benefits.  Instead, the Company is presenting financial statements and other financial information, including Managements Discussion and Analysis of Financial Condition and Results of Operations, for the three months ended March 31, 2007 and the three months ended April 30, 2006, the most nearly comparable quarter from the previous fiscal year.  There are
no seasonal or other significant factors which affect comparability.



The balance sheet at December 31, 2006 has been derived from the audited balance sheet contained in the Companys Transition Report on Form 10-K for the five months ended December 31, 2006, and is presented for comparative purposes. All other financial statements are unaudited. The condensed financial statements are presented on the basis of accounting principles generally accepted in the United States of America for interim financial statements.  However, certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with the published rules and regulations of the Securities and Exchange Commission. The condensed financial statements in this report should be read in conjunction with the financial statements and notes thereto included in the Companys
Transition Report on Form 10-K for the five months ended December 31, 2006.



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect reported loss, financial position and various disclosures. Actual results could differ from those estimates. In the opinion of management, all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows for all periods presented, have been made in the interim financial statements. Results of operations for interim periods are not necessarily indicative of the operating results to be expected for a full fiscal year.



8



---



The Company has reported a net loss of $5,424,000 and $2,129,000, and negative cash flows from operating activities of $3,149,000, and $1,582,000 for the three months ended March 31, 2007 and the three months ended April 30, 2006, respectively.  As of March 31, 2007, the Company had working capital of $14,987,000, cash and cash equivalents of $9,997,000 and short-term investments of $8,673,000. Until and unless the Companys operations generate significant revenues and cash flow, we will attempt to continue to fund operations from cash on hand and through the sources of capital described below. The Companys long-term liquidity is contingent upon achieving sales and positive cash flows from operating activities, and/or obtaining additional financing. The most likely sources of financing include private placements of the Companys equity or debt securities or bridge loans to the Company from
third-party lenders, license payments from existing and future partners, and royalty payments from sales of approved drugs by partners. The Company can give no assurances that any additional capital that it is able to obtain will be sufficient to meet its needs.  On December 27, 2006, the Company completed an equity financing in which it received proceeds, net of offering costs, of $13,144,000 of which $11,749,000 was received in December 2006 and $1,395,000 was received in January 2007.  Given the current and desired pace of development of its product candidates, the Company estimates that it will have sufficient cash on hand to fund development of its product candidates through December 31, 2007. The Company may, however, choose to raise additional capital before December 31, 2007 to fund future development activities or to take advantage of other strategic opportunities.  This could include the securing of funds through new strategic partnerships and/or the sale of common stock or
other securities.  There can be no assurance that such capital will be available to the Company on favorable terms, or at all.  There are a number of risks and uncertainties related to the Companys attempt to complete a financing or strategic partnering arrangement that are outside its control.  The Company may not be able to obtain additional financing on terms acceptable to it, or at all.  If the Company is unsuccessful at obtaining additional financing as needed, it may be required to significantly curtail or cease operations. The Company will need additional financing thereafter until it achieves profitability, if ever.



NOTE 3  INVENTORIES



Inventories, consisting of raw materials, are carried at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method.



NOTE 4  CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS



Cash equivalents include certificates of deposit and money market instruments with original maturities of three months or less when purchased. Investments include short-term investments and an investment in marketable common stock received from a licensee (see Notes 7 and 8). Short-term investments are carried at amortized cost, which approximates fair market value, and consist of certificates of deposit and U.S. treasury securities with original maturities greater than three months and less than one year.



NOTE 5  LOSS PER SHARE



LOSS PER SHARE  Loss per common share is computed pursuant to SFAS No. 128, Earnings Per Share.  Basic loss per share is computed as net loss divided by the weighted average number of common shares outstanding for the period. Diluted loss per common share is the same as basic loss per common share, since potentially dilutive securities from the assumed exercise of all outstanding options and warrants would have an antidilutive effect because the Company incurred a net loss during each period presented. As of March 31, 2007 and April 30, 2006, there were 37.3 million and 30.7 million common shares, respectively, issuable upon exercise of options and warrants which were excluded from the diluted loss per share computation.



9



---



NOTE 6  STOCK-BASED COMPENSATION



At March 31, 2007, the Company had two plans which allow for the issuance of stock options and other awards: the 1998 Stock Option Plan, as amended, and the 2006 Equity Incentive Plan, as amended, (the Plans). On January 17, 2006, the stockholders of the Company, upon the recommendation of the Board of Directors of the Company, approved the NovaDel Pharma Inc. 2006 Equity Incentive Plan (the 2006 Plan).  The 2006 Plan authorizes the grant of several types of stock-based awards, including stock options, stock appreciation rights and stock (including restricted stock).  The number of shares of common stock originally reserved for issuance under the 2006 Plan was 6 million shares.  These Plans are administered by the Compensation Committee of the Board of Directors. Incentive Stock Options (ISOs) may be granted to employees and officers of the Company and non-qualified
options may be granted to consultants, directors, employees and officers of the Company. Options to purchase the Companys common stock may not be granted at a price less than the fair market value of the common stock at the date of grant and will expire not more than 10 years from the date of grant, and vesting is determined by the Compensation Committee of the Board of Directors. ISOs granted to a 10% or more stockholder may not be for less than 110% of fair market value or for a term of more than five years. As of March 31, 2007, there were approximately 2.1 million shares available for issuance under the Plans.



The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R) effective August 1, 2005 and selected the Black-Scholes method of valuation for share-based compensation. SFAS 123R requires that compensation costs be recorded as earned for all unvested stock options outstanding at the beginning of the first quarter of adoption of SFAS 123R and for all options granted after the date of adoption. The charge is being recognized in research and development and consulting, selling, general and administrative expenses over the remaining service period after the adoption date based on the original estimate of fair value of the options as of the grant date.



Information with respect to stock option activity for the three months ended March 31, 2007 is as follows:





Options
        
        Shares (000)
        
        
        Weighted-Average Exercise Price
        
        Weighted-Average Remaining Contractual Terms (Years)
        
        
        Aggregate Intrinsic Value ($000)Outstanding at December  31, 2006
        
        8,775
        
        $
        1.68
        
        
        
        $
        Grants
        
        3,194
        
        
        1.68
        
        
        
        
        Exercises
        
        (125
        )
        
        .75
        
        
        
        
        Cancellations
        
        (1,248
        )
        
        1.87
        
        
        
        
        Outstanding at March 31, 2007
        
        10,596
        
        $
        1.67
        
        6.1
        
        $
        398Exercisable at March 31, 2007
        
        4,347
        
        $
        1.68
        
        3.5
        
        $
        395




The Company recorded share-based compensation using the fair value method required by SFAS 123R of approximately $458,000 or $0.01 per share, and $259,000 or $0.01 per share for the three months ended March 31, 2007 and April 30, 2006, respectively, which amounts are included in the Companys net loss for each period.



As of March 31, 2007, unamortized stock-based compensation expense of $5.2 million remains to be recognized, which is comprised of $4.1 million related to non-performance based stock options to be recognized over a weighted average period of 2.3 years, $0.2 million related to restricted stock to be recognized over a weighted average period of 2.7 years, and $0.9 million related to performance-based stock options which vest upon reaching certain milestones. Expenses related to the performance-based stock options will be recognized if and when the Company determines that it is probable that the milestone will be reached.



10



---



The Company used the following weighted average assumptions in determining fair value under the Black-Scholes model for grants in the respective periods:



Three Months EndedMarch 31, 2007
        
        
        April 30, 2006Expected volatility
        
        
        62%
        
        
        
        66%Dividend yield
        
        
        0%
        
        
        
        0%Expected term until exercise (years)
        
        
        4.9
        
        
        
        6.5Risk-free interest rate
        
        
        4.8%
        
        
        
        4.9%




The above table represents the weighted-average assumptions for all options granted during the three months ended March 31, 2007 and April 30, 2006.  During the three months ended March 31, 2007, the Company granted 667,000 performance-based stock options.  The Company used the following weighed average assumptions in determining the fair value for such performance-based options: expected volatility of 57%; dividend yield of 0%; expected term  of 2.7 years; and risk-free interest rate of 4.6%.



Expected volatility is based on historical volatility of the Companys common stock. The expected term of options is estimated based on the average of the vesting period and contractual term of the option. The risk-free rate is based on U.S. Treasury yields for securities in effect at the time of grant with terms approximating the expected term until exercise of the option.  In addition, under SFAS 123R, the fair value of stock options granted is recognized as expense over the service period, net of estimated forfeitures. The Company is utilizing a 5% forfeiture rate, which it believes is a reasonable assumption to estimate forfeitures. However, the estimation of forfeitures requires significant judgment, and to the extent actual results or updated estimates differ from our current estimates, the effects of such resulting adjustment will be recorded in the period estimates are revised.   The
weighted average grant date fair value of options granted was $0.94 and $1.09 during the three months ended March 31, 2007 and April 30, 2006, respectively.  The total intrinsic value of options exercised was $95,000 and $67,000 during the three months ended March 31, 2007 and April 30, 2006, respectively.



NOTE 7 - RELATED PARTY TRANSACTIONS AND LICENSE AND DEVELOPMENT AGREEMENTS



License and Development Agreements with Related Parties



In October 2004, the Company entered into a license and development agreement pursuant to which the Company granted to Hana Biosciences an exclusive license to develop and market the Companys oral spray version of ondansetron in the U.S. and Canada. Pursuant to the terms of the agreement, in exchange for $1,000,000, Hana Biosciences purchased 400,000 shares of the Companys common stock at a per share price equal to $2.50, a premium of $0.91 per share or $364,000 over the then market value of the Companys common stock. The Company accounted for this premium as deferred revenue related to the license. In connection with the agreement, Hana Biosciences issued to the Company $500,000 worth of common stock of Hana Biosciences (73,121 shares based on a market value of $6.84 per share). The proceeds received from Hana Biosciences attributable to the premium are included in deferred revenue and
are being recognized over the 20-year term of the agreement. The Company may receive additional license fees and royalties over the 20-year term of the agreement.  In the three months ended March 31, 2007 and April 30, 2006, the Company received $0 and $1,000,000, respectively, in milestone payments from Hana Biosciences.



In June 2004, the Company entered into a 20-year worldwide exclusive license agreement with Velcera, a veterinary company. The license agreement is for the exclusive rights to the Companys propriety oral spray technology in animals. In September 2004, the Company received $1,500,000 from Velcera as an upfront payment in connection with the commercialization agreement. The upfront payment has been included in deferred revenue and will be recognized in income over the 20-year term of the agreement. In addition, the Company received an equity stake of 529,500 shares of common stock in Velcera which did not have a material value. Such investment continues to be carried at its cost basis of $0 as of March 31, 2007.  In February 2007, Velcera merged with Denali Sciences, Inc., a publicly reporting Delaware corporation.  The common stock of Denali Sciences, Inc. is not traded on any stock exchange.  The
Company may receive additional milestone payments and royalty payments over the 20-year term of the agreement. During the three months ended March 31, 2007 and April 30, 2006, the Company invoiced Velcera $0 and $118,000, respectively, for reimbursable expenses.



11



---



In April 2003, the Company entered into a license and development agreement with Manhattan Pharmaceuticals for the worldwide, exclusive rights to the Companys proprietary oral spray technology to deliver propofol for pre-procedural sedation. The terms of the agreement call for certain license, milestone  and other payments, the first $125,000 of which was received in June 2003. In November 2003, the Company received $375,000 from Manhattan Pharmaceuticals for license fees. The Company has included these license fees in deferred revenue and is recognizing these license fees over the 20-year term of the license.



Lindsay A. Rosenwald, M.D., a significant stockholder of the Company, may be deemed to be an affiliate of the Company, Manhattan Pharmaceuticals, Velcera, and Hana Biosciences. Companies affiliated with Dr. Rosenwald have provided financial and other services unrelated to the Companys agreements with the parties to such agreements from time to time.



Other Related Party Transactions



In November 2005, the Company entered into a Confidential Separation Agreement and General Release (the Separation Agreement) and a Consulting Agreement (the Consulting Agreement) with Gary Shangold, M.D. Dr. Shangold is the former President and Chief Executive Officer of the Company. For the three months ended March 31, 2007 and April 30, 2006, pursuant to the Consulting Agreement, the Company paid Dr. Shangold $0 and $75,000, respectively.



In September 2006, the Companys Board of Directors appointed Steven B. Ratoff as Chairman of the Board. In connection with Mr. Ratoffs appointment as Chairman of the Board, the Board entered into a consulting arrangement to compensate Mr. Ratoff for his efforts. This arrangement is on a month-to-month basis and compensates Mr. Ratoff at a rate of $17,500 per month. In March 2007, Mr. Ratoffs monthly compensation was reduced to $10,000 to reflect his decreased day-to-day time involvement at the Company.  Pursuant to this consulting arrangement, the Company paid Mr. Ratoff approximately $49,000 for the three months ended March 31, 2007.



Other License and Development Agreements



In July 2004, the Company entered into a licensing agreement with Par for the exclusive right to market, sell and distribute nitroglycerin lingual spray in the U.S. and Canada. The Company has received upfront and milestone payments and may receive additional fees and royalty payments over the 10-year term of the license. The upfront payment has been included in deferred revenue and is being recognized in income over the 10-year term of the agreement.



On November 18, 2004, the Company entered into a manufacturing and supply agreement with INyX whereby INyX manufactures and supplies the Companys nitroglycerin lingual spray. For a five-year period that began November 18, 2004, INyX is the exclusive provider of the nitroglycerin lingual spray to the Company substantially worldwide. Pursuant to the terms and conditions of the agreement, it will be INyXs responsibility to manufacture, package and supply the nitroglycerin lingual spray in such territories. Thereafter, INyX will have a non-exclusive right to manufacture such spray for an additional five years.



NOTE 8  INVESTMENT IN EQUITY SECURITY

As explained in Note 7, in October 2004, as part of the license agreement with Hana Biosciences, the Company received $500,000 of common stock of Hana Biosciences (73,121 shares based on a market value of $6.84 per share at the date of the agreement).  As of March 31, 2007, such shares were classified as available for sale and had a market value of $140,000, as compared to their cost basis of $500,000. The Company has determined that the decline in value of this investment is other than temporary and has recorded a $360,000 impairment charge to the statement of operations, the only component of other loss, for the three months ended March 31, 2007 to establish a new cost basis for the investment as of March 31, 2007.



12



---





ITEM 2.  MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following discussion of our financial condition and result of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this Quarterly Report. The discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth in Part II, Item 1A. Risk Factors of this Quarterly Report, our actual results may differ materially from those anticipated in these forward looking statements.



GENERAL



NovaDel Pharma Inc. is a specialty pharmaceutical company developing oral spray formulations for a broad range of marketed drugs.  Our proprietary technology offers, in comparison to conventional oral dosage forms, the potential for faster absorption of drugs into the bloodstream leading to quicker onset of therapeutic effects and possibly reduced first pass liver metabolism, which may result in lower doses.  Oral sprays eliminate the requirement for water or the need to swallow, potentially improving patient convenience and adherence.  Our oral spray technology is focused on addressing unmet medical needs for a broad array of existing and future pharmaceutical products.  Our most advanced oral spray candidates target angina, nausea, insomnia, migraine headaches and disorders of the central nervous system.  We plan to develop these and other products independently and through collaborative arrangements with
pharmaceutical and biotechnology companies.  Currently, we have eight patents which have been issued in the U.S. and 54 patents which have been issued outside of the U.S. Additionally, we have over 80 patents pending around the world. We look for drug compounds that are off patent or are coming off patent in the near future, and we reformulate these compounds in conjunction with our proprietary drug delivery method.  Once reformulated, we file for new patent applications on these reformulated compounds that comprise our product candidates.  Our patent portfolio includes patents and patent applications with claims directed to the pharmaceutical formulations, methods of use and methods of manufacturing of a number of our product candidates.



Since inception, substantially all of our revenues have been derived from consulting activities, primarily in connection with product development for various pharmaceutical companies. More recently, we have begun to derive revenues from license fees and milestone payments stemming from our partnership agreements.  Our future growth and profitability will be principally dependent upon our ability to successfully develop our products and to market and distribute the final products either internally or with the assistance of a strategic partner.

On June 28, 2006, our Board of Directors approved a change of our fiscal year end from July 31 to December 31. Accordingly, our new fiscal year begins on January 1 and ends on December 31. We filed a Transition Report on Form 10-K for the five months ended December 31, 2006.  As such, the end of the quarters in the new fiscal year does not coincide with the end of the quarters in the previous fiscal years.  Due to the significant costs, the Company is not recasting the quarterly data from the previous fiscal year as such costs would exceed any potential benefits.  Instead, we are presenting financial statements and other financial information, including Managements Discussion and Analysis of Financial Condition and Results of Operations, for the three months ended March 31, 2007 and the three months ended April 30, 2006, the most nearly comparable quarter from the previous fiscal year.  There are no
seasonal or other significant factors which affect comparability.

Highlights for the three months ended March 31, 2007, and additionally through the date of filing of this Quarterly Report on Form 10-Q, include the following product development and business achievements:




        Announced that Hana Biosciences has notified us that ongoing scale-up and stability experiments indicate that there is a need to make adjustments to the formulation and/or manufacturing process, and that there will be a delay in the FDA approval and commercial launch of Zensana .




13



---






        Issued an additional patent in Canada which further strengthens our intellectual property position in the oral delivery of pharmaceuticals.  The issued patents cover the use of multiple classes of drugs in oral sprays, including those for the treatment of pain, and for central nervous system disorders under our oral spray delivery system.





        Appointed Deni M. Zodda, Ph.D. as Senior Vice President and Chief Business Officer.





        Appointed Mr. Mark J. Baric as a member of the Board of Directors.





        Announced that Mr. Barry C. Cohen will no longer serve as Vice President, Business and New Product Development, and the execution of a related settlement/release agreement.




Drug development in the U.S. and most countries throughout the world is a process that includes several steps defined by the U.S. Food and Drug Administration, or FDA, or comparable regulatory authorities in foreign countries. The FDA approval processes relating to new drugs differ, depending on the nature of the particular drug for which approval is sought. With respect to any drug product with active ingredients not previously approved by the FDA, a prospective drug manufacturer is required to submit a New Drug Application, or NDA, which includes complete reports of pre-clinical, clinical and laboratory studies to prove such products safety and efficacy. Prior to submission of the NDA, it is necessary to submit an Investigational New Drug, or IND, to obtain permission to begin clinical testing of the new drug. Given that our current product candidates are based on a new technology for formulation
and delivery of active pharmaceutical ingredients that have been previously approved and that have been shown to be safe and effective in previous clinical trials, we believe that we will be eligible to submit what is known as a 505(b)(2) NDA. We estimate that the development of new formulations of our pharmaceutical product candidates, including formulation, testing and submission of an NDA, will take two to three years for the 505(b)(2) NDA process and will require significantly lower investments in direct research and development expenditures than is the case for the discovery and development of new chemical entities. However, our estimates may prove to be inaccurate; or pre-marketing approval relating to our proposed products may not be obtained on a timely basis, if at all, and research and development expenditures may significantly exceed managements expectations.



It is not anticipated that we will generate any revenues from royalties or sales of our product candidates until regulatory approvals are obtained and marketing activities begin. Any one or more of our product candidates may not prove to be commercially viable, or if viable, may not reach the marketplace on a basis consistent with our desired timetables, if at all. The failure or the delay of any one or more of our proposed products to achieve commercial viability would have a material adverse effect on us.

The successful development of our product candidates is highly uncertain. Estimates of the nature, timing and estimated expenses of the efforts necessary to complete the development of, and the period in which material net cash inflows are expected to commence from, any of our product candidates are subject to numerous risks and uncertainties, including:




        the scope, rate of progress and expense of our clinical trials and other research and development activities;





        results of future clinical trials;





        the expense of clinical trials for additional indications;





        the terms and timing of any collaborative, licensing and other arrangements that we may establish;





        the expense and timing of regulatory approvals;





        the expense of establishing clinical and commercial supplies of our product candidates and any products that we may develop;





        the effect of competing technologies and market developments; and





        the expense of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.




14



---



We expect to continue to spend significant amounts on the development of our product candidates and we expect our costs to increase as we continue to develop and ultimately commercialize our product candidates. Over the next fiscal year, we expect to devote the majority of our research and development resources to the following product candidates:




        NitroMist (nitroglycerin lingual aerosol). This product candidate is indicated for acute relief of an attack or acute prophylaxis of angina pectoris due to coronary artery disease. We have partnered with Par Pharmaceutical, Inc., or Par, who has exclusive rights to market, sell and distribute NitroMist in the U.S. and Canada. On June 1, 2005, we received an approvable letter from the FDA regarding our NDA for NitroMist. The FDA is not requiring any additional clinical studies for approval, but has requested that we complete certain manufacturing process validation commitments.  On April 30, 2006, we submitted the additional documentation to the FDA for the manufacturing process validation commitments.  On May 26, 2006, we announced that the FDA had accepted our submission regarding our NDA as a complete response and, further, that the FDA
indicated a target date of November 3, 2006 for action on the submission. On November 3, 2006, we announced that we received an approval letter from the FDA regarding our NDA for NitroMist for which we received a milestone payment from Par.  We are currently working with Par to finalize the commercialization strategy for this product. We will receive royalty payments based upon a percentage of net sales.





        Zolpidem oral spray. Zolpidem is the active ingredient in Ambien®, the leading hypnotic marketed by Sanofi-Aventis. Previously, we were targeting an NDA submission for our zolpidem product candidate in the first half of calendar 2007; however, we have revised our target date for the NDA submission to be as soon as possible in the second half of 2007. If this timeline is met, we may obtain final approval from the FDA in calendar 2008.





        Sumatriptan oral spray. Sumatriptan is the active ingredient in Imitrex® which is the largest selling migraine remedy marketed by GlaxoSmithKline, or GSK. We are currently targeting a NDA submission for our sumatriptan product candidate in the second half of calendar 2007. If this timeline is met, we may obtain final approval from the FDA in calendar 2008; however, we will not be able to launch this product candidate until after the expiration of the relevant Imitrex® patents and extensions thereof in February 2009.





        Tizanidine oral spray.  Tizanidine is indicated for the treatment of spasticity, a symptom of several neurological disorders, including multiple sclerosis, spinal cord injury, stroke and cerebral palsy, which leads to involuntary tensing, stiffening and contracting of muscles. Tizanidine treats spasticity by blocking nerve impulses through pre-synaptic inhibition of motor neurons. This method of action results in decreased spasticity without a corresponding reduction in muscle strength. Because patients experiencing spasticity may have difficulty swallowing the tablet formulation of the drug, our tizanidine oral spray may provide patients suffering from spasticity with a very convenient solution to this serious treatment problem. We are currently targeting an NDA submission for our tizanidine product candidate in calendar 2008. If this timeline is met, we may
obtain final approval from the FDA in calendar 2009.





        Ropinirole oral spray.  Ropinirole is indicated for the treatment of the signs and symptoms of idiopathic Parkinson's disease. Ropinirole oral spray is ideal for the geriatric population who may be suffering from dysphagia (difficulty swallowing); 85% of sufferers of Parkinson's are 65 years of age or older and it is estimated that 45% of elderly people have some difficulty in swallowing. Our formulation of ropinirole oral spray may represent a more convenient way for the patient or healthcare provider to deliver ropinirole to patients suffering stiffness and/or tremors. We are currently targeting a NDA submission for our ropinirole product candidate in calendar 2008. If this timeline is met, we may obtain final approval from the FDA in calendar 2009.




15



---



We will also support our partners, as necessary, with the following product candidates and opportunities:




        Zensana (ondansetron oral spray). Ondansetron is the active ingredient in Zofran®, the leading anti-emetic marketed by GSK. Our partner for Zensana, Hana Biosciences, is overseeing all clinical development and regulatory approval activities for this product in the U.S. and Canada.  In January 2006, Hana Biosciences announced positive study results of a pivotal clinical trial for Zensana. Hana Biosciences submitted its NDA on June 30, 2006 and such NDA was accepted for review by the FDA in August 2006.  Previously, Hana Biosciences targeted final approval from the FDA and commercial launch in calendar 2007.  However, on February 20, 2007, we announced that Hana Biosciences notified us that ongoing scale-up and stability experiments indicate that there is a need to make adjustments to the formulation and/or manufacturing process, and
that there is likely to be a delay in the FDA approval and commercial launch of Zensana as a result thereof.  On March 23, 2007, Hana Biosciences announced its plan to withdraw, without prejudice, its pending NDA for Zensana with the FDA, and that it plans to re-direct the development plan for Zensana using our patent-protected European formulation of the product.  Subject to the successful scale-up and manufacturing tests of our European formulation of ondansetron, Hana Biosciences expects to conduct the appropriate clinical trials and re-file the NDA for Zensana in 2008.  Because we rely upon Hana Biosciences to develop and file the NDA for Zensana we can give no assurances as to the amount of delay resulting from Hana Biosciences re-directing the development plan relating to Zensana or that Hana Biosciences will be able to re-file the NDA for Zensana in 2008, if at all, and ultimately receive final FDA approval.We will receive a milestone payment from Hana Biosciences upon final approval from the FDA. In addition, we will receive royalty payments based upon a percentage of net sales.  We retain the rights to our ondansetron oral spray outside of the U.S. and Canada.  In light of Hanas recent announcement regarding the status of this product candidate, we devoted resources to this project during the three months ended March 31, 2007, including approximately $204,000 in third-party costs. Currently, we cannot estimate the amount of resources, if any, that we will devote to this product candidate in future periods.





        Propofol oral spray. Propofol is the active ingredient in Diprivan®, a leading intravenous anesthetic marketed by AstraZeneca. We continue to support our partner, Manhattan Pharmaceuticals, Inc., or Manhattan Pharmaceuticals, who will oversee all clinical development and regulatory approval for this product candidate. Our partner has not provided guidance regarding the clinical and regulatory development plan for this product candidate.  We do not expect to devote a significant amount of corporate resources to this product candidate.





        Our veterinary initiatives are being carried out largely by our partner, Velcera, Inc., or Velcera. Our partner has not provided guidance regarding the clinical and regulatory development plan for the potential veterinary product candidates.  We do not expect to devote a significant amount of corporate resources to this product candidate.




As discussed above, certain of our product candidates are in early stages of clinical development and some are in preclinical testing. These product candidates are continuously evaluated and assessed and are often subject to changes in formulation and technology. As a result, these product candidates are subject to a more difficult, time-consuming and expensive regulatory path in order to commence and complete the preclinical and clinical testing of these product candidates as compared to other product candidates in later stages of development.



CRITICAL ACCOUNTING POLICIES



USE OF ESTIMATES - The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the U.S. This requires our management to make estimates about the future resolution of existing uncertainties that affect the reported amounts of assets, liabilities, revenues and expenses which in the normal course of business are subsequently adjusted to actual results. Actual results could differ from such estimates. In preparing these financial statements, management has made its best estimates and judgments of the amounts and disclosures included in the financial statements giving due regard to materiality.



REVENUE RECOGNITION  We receive revenue from consulting services and license agreements. Consulting revenues from contract clinical research are recognized in the period in which the services are rendered, provided that collection is reasonably assured. Upfront license agreement payments are initially deferred and subsequently amortized into revenue over the contractual period.  Milestone payments related to license agreements are recognized as revenue when earned.



16



---



STOCK-BASED COMPENSATION  In December 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, SFAS 123R, which revises Accounting for Stock-Based Compensation, SFAS 123 and superseded Accounting Principles Board APB Opinion No. 25, Accounting for Stock Issued to Employees, APB 25, which provided for the use of the intrinsic value method of accounting for employees stock options. SFAS 123R required all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first quarter of the first annual reporting period that began after June 15, 2005. Under SFAS 123R, the use of the intrinsic value method and pro forma disclosures previously permitted under SFAS 123 are
no longer an alternative to financial statement recognition.



We have adopted the provisions of Statement of Financial Accounting Standards, or SFAS, No. 123 (revised 2004), Share-Based Payment, or SFAS 123R, effective August 1, 2005 and have selected the Black-Scholes method of valuation for share-based compensation. SFAS 123R requires that compensation cost be recorded as earned for all unvested stock options outstanding at the beginning of the first quarter of adoption of SFAS 123R and for all options granted after the date of adoption. The charge is being recognized in research and development and consulting, selling, general and administrative expenses over the remaining service period after the adoption date based on the original estimate of fair value of the options as of the grant date.  For the three months ended March 31, 2007 and April 30, 2006, we recorded share-based compensation of approximately $458,000 or $0.01 per share and $259,000 or
$0.01 per share, respectively.  We will continue to incur share-based compensation charges in future periods. As of March 31, 2007, unamortized stock-based compensation expense of $5.2 million remains to be recognized, which is comprised of $4.1 million related to non-performance based stock options to be recognized over a weighted average period of 2.3 years, $0.2 million related to restricted stock to be recognized over a weighted average period of 2.7 years, and $0.9 million related to performance-based stock options which vest upon reaching certain milestones. Expenses related to the performance-based stock options will be recognized if and when the Company determines that it is probable that the milestone will be reached.



RESEARCH AND DEVELOPMENT EXPENSES - Research and development expenses are expensed as incurred.



RESULTS OF OPERATIONS



THREE MONTHS ENDED MARCH 31, 2007 AND APRIL 30, 2006



License fees and milestone fees earned from related parties for the three months ended March 31, 2007 were $40,000, as compared to $1,041,000 for the three months ended April 30, 2006.  The decrease is primarily due to a non-recurring milestone payment received in connection with our license and development agreement with Hana Biosciences in the three months ended April 30, 2006.



Consulting revenues from related parties for the three months ended March 31, 2007 were $0, as compared to $118,000 for the three months ended April 30, 2006.  The decrease is due to lower revenue from Velcera for veterinary products.



Research and development expenses for the three months ended March 31, 2007 were $3,097,000, as compared to $1,571,000 for the three months ended April 30, 2006.  Research and development costs consist primarily of salaries and benefits, contractor and consulting fees, clinical drug supplies of preclinical and clinical development programs, consumable research supplies and allocated facility and administrative costs. Below is a summary of our research and development expenses for the three months ended March 31, 2007 and April 30, 2006.



Three Months EndedMarch 31, 2007
        
        April 30,     2006NitroMist
        
        $
        170,000
        
        $
        481,000Zolpidem
        
        
        1,665,000
        
        
        174,000Sumatriptan
        
        
        116,000
        
        
        221,000Zensana
        
        
        204,000
        
        
        Propofol
        
        
        
        
        
        Tizanidine
        
        
        48,000
        
        
        Ropinirole
        
        
        3,000
        
        
        Other research and development costs
        
        
        182,000
        
        
        284,000Internal costs
        
        
        709,000
        
        
        411,000Total research and development expenses
        
        $
        3,097,000
        
        $
        1,571,000






17



---





In the preceding table, research and development expenses are set forth in the following categories:




        NitroMist, Zolpidem, Sumatriptan, Tizanidine and Ropinirole - third-party direct project expenses relating to the development of the respective product candidates.  We expect to devote the majority of our research and development resources to our zolpidem and sumatriptan product candidates and expect that costs associated with these product candidates should increase in future periods;





        Zensana and Propofol - third-party direct project expenses relating to the development of Zensana and our Propofol product candidate. As our partner for the Propofol product candidate, Manhattan Pharmaceuticals is overseeing all clinical development and regulatory approval activities, we do not expect to devote a significant amount of resources to this product candidate. Our partner for Zensana, Hana Biosciences, is responsible and is overseeing all product development, clinical development and regulatory approval activities for this product candidate. In light of Hanas recent announcement regarding the status of this product candidate, as described above, we devoted resources to this project during the three months ended March 31, 2007, including approximately $204,000 in third-party costs. Currently, we cannot estimate the amount of
resources, if any, that we will devote to this product candidate in future periods.





        Other research and development costs  direct expenses not attributable to a specific product candidate; and





        Internal costs  costs related primarily to personnel and overhead. We do not allocate these expenses to specific product candidates as these costs relate to all research and development activities.




Research and development expenses in the three months ended March 31, 2007 increased primarily as a result of the following items:




        $1,491,000 increase primarily related to product development costs for our Zolpidem product candidate, including costs for clinical trials and manufacturing preparedness;





        $298,000 increase in internal costs primarily due to an increase in payroll and other compensation costs as of result of higher headcount; and





        $311,000 decrease in costs associated with our NitroMist product candidate primarily due to process validation and method transfer activities in the three months ended April 30, 2006, which did not recur in the three months ended March 31, 2007.




General and administrative expenses for the three months ended March 31, 2007 were $2,237,000, as compared to $1,736,000 for the three months ended April 30, 2006.  General and administrative expenses consist primarily of salaries and related expenses for executive, finance, legal and other administrative personnel, recruitment expenses, professional fees and other corporate expenses. The increase in general and administrative expenses is primarily attributable to the following partially offsetting items:




        $200,000 increase in the non-cash charge for stock compensation expenses in the three months ended March 31, 2007 primarily due to a higher number of outstanding options; and





        The remaining net increase, as a result of items of lesser significance, is primarily attributable to higher payroll and other compensation costs.




Primarily as a result of the factors described above, total operating expenses for the three months ended March 31, 2007 were $5,334,000, as compared to $3,307,000 for the three months ended April 30, 2006.



Other loss for the three months ended March 31, 2007 relates to a $360,000 non-cash charge to write-down an investment in a marketable equity security as we determined that the decline in market value was other than temporary.



Interest income for the three months ended March 31, 2007 was $230,000, as compared to $19,000 for the three months ended April 30, 2006 due to higher average cash and short-term investment balances.



The resulting net loss for the three months ended March 31, 2007 was $5,424,000, as compared to $2,129,000 for the three months ended April 30, 2006.



18



---



LIQUIDITY AND CAPITAL RESOURCES



From our inception, our principal sources of capital have been consulting revenues, private placements and public offerings of our securities, as well as loans and capital contributions from our principal stockholders. We have had a history of recurring losses, giving rise to an accumulated deficit as of March 31, 2007 of $53,704,000, as compared to $48,280,000 as of December 31, 2006.  We have had negative cash flow from operating activities of $3,149,000 for the three months ended March 31, 2007, as compared to $1,582,000 for the three months ended April 30, 2006.  As of March 31, 2007, we had working capital of approximately $14,987,000, as compared to $18,200,000 as of December 31, 2006, representing a net decrease in working capital of approximately $3,213,000. As explained further below, such decrease is primarily attributable to a net decrease in cash and short-term investments and an increase in
accounts payable and accrued expenses and other current liabilities.  In December 2006, we closed a private placement of our common stock and warrants to purchase shares of our common stock involving the sale of 9,823,983 shares of common stock and warrants to purchase 3,929,593 shares of common stock.  We received proceeds, net of offering costs, of $13,144,000 of which $11,749,000 was received in December 2006 and $1,395,000 in January 2007.



Net cash used in operating activities was approximately $3,149,000 for the three months ended March 31, 2007, as compared to $1,582,000 for the three months ended April 30, 2006.  The $1,567,000 increase in net cash used in operating activities in the three months ended March 31, 2007, as compared to the three months ended April 30, 2006 is primarily due to the following:




        $3,295,000 increase in net loss in the three months ended March 31, 2007 compared with the three months ended April 30, 2006. As more fully described above, the decrease in the net loss is primarily due to a decrease in revenues and an increase in total expenses;





        Aggregate $1,251,000 increase in accounts payable, and accrued expenses and other current liabilities in the three months ended March 31, 2007, primarily due to various product development activities completed for our zolpidem product candidate in the three months ended March 31, 2007;





        $360,000 non-cash charge in the three months ended March 31, 2007 to write-down an investment in a marketable equity security; and





        $199,000 increase in the non-cash charge for stock-based compensation expense for the three months ended March 31, 2007, as compared to the three months ended April 30, 2006.




Net cash used in investing activities was approximately $4,899,000 for the three months ended March 31, 2007, as compared to $398,000 provided by investing activities for the three months ended April 30, 2006.  The $5,297,000 increase in cash used in investing activities is primarily a result of $4,943,000 in net purchases of short-term investments in the three months ended March 31, 2007.



Cash provided by financing activities was approximately $1,459,000 for the three months ended March 31, 2007, as compared to $10,714,000 for the three months ended April 30, 2006.  The $9,255,000 decrease is primarily attributable to the three months ended April 30, 2006 including $10,634,000 of net proceeds from the private placement we completed in April 2006, as compared to the three months ended March 31, 2007 including the remaining $1,395,000 of net proceeds from the private placement we completed in December 2006.



19



---



Until and unless our operations generate significant revenues and cash flow, we will attempt to continue to fund operations from cash on hand and through the sources of capital described below. Our long-term liquidity is contingent upon achieving sales and positive cash flows from operating activities, and/or obtaining additional financing. The most likely sources of financing include private placements of our equity or debt securities or bridge loans to us from third-party lenders, license payments from current and future partners, and royalty payments from sales of approved drugs by partners. We can give no assurances that any additional capital that we are able to obtain will be sufficient to meet our needs.  On December 27, 2006, we completed a private placement of our common stock and warrants to purchase shares of common stock in which we received gross proceeds of $14.2 million and approximate net
proceeds of $13.1 million, of which $11.7 million was received in December 2006 and $1.4 million was received in January 2007. Given the current and desired pace of development of our product candidates, we estimate that we will have sufficient cash on hand to fund development of our product candidates through December 31, 2007. We may, however, choose to raise additional capital before December 31, 2007 to fund future development activities or to take advantage of other strategic opportunities.  This could include the securing of funds through new strategic partnerships and/or the sale of our common stock or other securities.  There can be no assurance that such capital will be available to us on favorable terms, or at all.  There are a number of risks and uncertainties related to our attempt to complete a financing or strategic partnering arrangement that are outside our control.  We may not be able to obtain additional financing on terms acceptable to us, or at all.  If we are
unsuccessful at obtaining additional financing as needed, we may be required to significantly curtail or cease operations. We will need additional financing thereafter until we achieve profitability, if ever.



OFF-BALANCE SHEET ARRANGEMENTS



We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity or capital resources.



CONTRACTUAL OBLIGATIONS



Our major outstanding contractual obligations relate to our operating leases, employment agreements, consulting agreements, and license agreements with our strategic partners. Since December 31, 2006, there have been no material changes with respect to our contractual obligations as disclosed in our Transition Report on Form 10-K for the five months ended December 31, 2006, other than the employment agreement that we entered into with Dr. Deni Zodda on February 22, 2007, pursuant to which Dr. Zodda was appointed our Chief Business Officer.  Such employment agreement is summarized below.



On February 26, 2007, our Board of Directors, or the Board announced the appointment of Dr. Deni M. Zodda as our Chief Business Officer. There was no arrangement or understanding between Dr. Zodda and any other persons pursuant to which Dr. Zodda was appointed Chief Business Officer.



NovaDel and Dr. Zodda entered into an Employment Agreement, dated as of February 22, 2007 (the Employment Agreement). The term of the Employment Agreement commenced on February 22, 2007 and expires on February 21, 2010. The material terms of the Employment Agreement are set forth below. In addition, NovaDel and Dr. Zodda entered into an Incentive Stock Option Agreement and a Nonqualified Stock Option Agreement, both dated as of February 22, 2007 (the Option Agreements), pursuant to which we granted to Dr. Zodda incentive stock options to purchase 68,027 shares of our common stock and non-qualified stock options to purchase 598,973 shares of our common stock.  The material terms of the Option Agreements are also set forth below.




        Base salary: Pursuant to the Employment Agreement, we will pay Dr. Zodda a base salary of $275,000 per annum, payable in equal semi-monthly installments (the Base Salary).





        Bonuses: We shall pay Dr. Zodda a cash bonus of up to 30% of his Base Salary, provided, however, that such bonus shall be payable only upon the successful achievement of certain performance milestones related to Dr. Zoddas role at NovaDel, which milestones shall be defined and enumerated by mutual agreement between Dr. Zodda and our President and Chief Executive Officer within the first month of Dr. Zoddas employment, and again at the same time in each succeeding year during the term of the Employment Agreement. The amount of bonus paid to Dr. Zodda shall be increased or decreased from time to time at the discretion of the Compensation Committee of the Board.




20



---






        Stock Options: Pursuant to the Employment Agreement, we granted Dr. Zodda incentive stock options to purchase 68,027 shares of our common stock and non-qualified stock options to purchase 598,973 shares of our common stock. Such option grants have a term of ten (10) years. The stock options shall vest upon achievement of performance milestones; so that 22,676 incentive stock options and 200,324 non-qualified stock options will vest on the signing of a Board approved third party agreement for U.S. or worldwide rights of sumatriptan; 22,676 incentive stock options and 199,324 non-qualified stock options will vest on the signing of a Board approved third party agreement for U.S. or worldwide rights of zolpidem; and 22,675 incentive stock options and 199,325 non-qualified stock options will vest upon approval by the Board of any third party agreement whereby we
obtain the right to develop a product incorporating an active pharmaceutical ingredient that is the subject of a then valid U.S. Patent (or in-process U.S. Patent Application) and already approved for sale by the U.S. Food and Drug Administration with sales in the U.S. of at least $100 million. Such options will expire on February 21, 2017. The exercise price of each option is $1.47 (the closing price of our common stock on February 22, 2007, as listed on the American Stock Exchange).





        Severance: If Dr. Zoddas employment is terminated by us prior to the expiration of the term of the Employment Agreement or if terminated by Dr. Zodda for Good Reason (as defined in the Employment Agreement), Dr. Zodda will receive certain severance payments and benefits, which vary depending upon the reason for the termination of the Employment Agreement, and which are fully described in the Employment Agreement as filed with the SEC on Form 8-K. In addition, upon termination, certain options will vest and certain options will be terminated either at the date of termination of the Employment Agreement or at a later date, varying in both cases, depending upon the reason for the termination, all as fully described in the Employment Agreement and the Option Agreements. If Dr. Zoddas Employment Agreement were to not be renewed at the expiration of the
term thereof, Dr. Zodda will receive certain severance payments and benefits, as fully described in the Employment Agreement, and all of his outstanding options will be deemed to be vested and will expire 90 days after the date of nonrenewal.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Our holdings of financial instruments consist of certificates of deposit and U.S. Treasury securities. Our market risk exposure consists principally of exposure to changes in interest rates.



ITEM 4. CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures



Disclosure controls and procedures are controls and other procedures that are designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934, or the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the Rules and Forms of the Securities and Exchange Commission, or the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that a company files or submits under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.



We carried out an evaluation, under the supervision and with the participation of our Chief Executive and Chief Financial Officers, of the effectiveness of the design and operation of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of March 31, 2007. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of March 31, 2007, our disclosure controls and procedures wereeffective in that they were designed to ensure that material information relating to us is made known to our Chief Executive Officer and Chief Financial Officer by others within the Company, as appropriate to allow timely decisions regarding required disclosures, and effective in that they ensure that information required to be disclosed by us in our reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.



Changes in Internal Controls



During the three months ended March 31, 2007, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



21



---



ITEM 1A. RISK FACTORS



This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in this report. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below, elsewhere in this Quarterly Report on Form 10-Q, in our Transition Report on Form 10-K for the five months ended December 31, 2006, and in any documents incorporated in this report by reference.

RISKS RELATED TO OUR BUSINESS

WE ARE A PRE-COMMERCIALIZATION COMPANY, HAVE A LIMITED OPERATING HISTORY AND HAVE NOT GENERATED ANY REVENUES FROM THE SALE OF PRODUCTS TO DATE.

We are a pre-commercialization specialty pharmaceutical company developing oral spray formulations of a broad range of marketed treatments. There are many uncertainties and complexities with respect to such companies. We have not generated any revenue from the commercial sale of our proposed products and do not expect to receive such revenue in the near future. We have no material licensing or royalty revenue or products ready for sale or licensing in the marketplace. This limited history may not be adequate to enable one to fully assess our ability to develop our technologies and proposed products, obtain U.S. Food and Drug Administration, or FDA, approval and achieve market acceptance of our proposed products and respond to competition. The filing of a New Drug Application, or NDA, with the FDA is an important step in the approval process in the U.S. Acceptance for filing by the FDA does not mean that the
NDA has been or will be approved, nor does it represent an evaluation of the adequacy of the data submitted. On November 3, 2006, we announced that we received an approval letter from the FDA regarding our NDA for NitroMist.  We are currently in the process of working with Par Pharmaceutical, Inc., or Par, to finalize the commercialization strategy for this product. We cannot be certain as to when to anticipate commercializing and marketing any of our product candidates in development, if at all, and do not expect to generate sufficient revenues from proposed product sales to cover our expenses or achieve profitability in the near future.

We had an accumulated deficit as of March 31, 2007 of approximately $53.7 million. We incurred losses in each of our last ten fiscal years, including net losses of approximately $5.4 million for the three months ended March 31, 2007, $3.8 million for the five months ended December 31, 2006, $10.1 million for the fiscal year ended July 31, 2006, $9.5 million for the fiscal year ended July 31, 2005 and $6.3 million for the fiscal year ended July 31, 2004. Additionally, we have reported negative cash flows from operations of approximately $3.1 million for the three months ended March 31, 2007, $1.8 million for the five months ended December 31, 2006, $8.9 million for the fiscal year ended July 31, 2006, $6.3 million for the fiscal year ended July 31, 2005, and $6.1 million for the fiscal year ended July 31, 2004. We anticipate that we will incur substantial operating expenses in connection with continued
research and development, clinical trials, testing and approval of our proposed products, and expect these expenses will result in continuing and, perhaps, significant operating losses until such time, if ever, that we are able to achieve adequate product sales levels. Our ability to generate revenue and achieve profitability depends upon our ability, alone or with others, to complete the development of our product candidates, obtain the required regulatory approvals and manufacture, market and sell our product candidates.



22



---



WE WILL REQUIRE SIGNIFICANT CAPITAL FOR PRODUCT DEVELOPMENT AND COMMERCIALIZATION.



The research, development, testing and approval of our product candidates involve significant expenditures, and, accordingly, we require significant capital to fund such expenditures.  Due to our small revenue base, low level of working capital and, until recently, our relative inability to increase the number of development agreements with pharmaceutical companies, we have been unable to pursue aggressively our product development strategy.  Until and unless our operations generate significant revenues and cash flow, we will attempt to continue to fund operations from cash on hand and through the sources of capital described below. Our long-term liquidity is contingent upon achieving sales and positive cash flows from operating activities, and/or obtaining additional financing. The most likely sources of financing include private placements of our equity or debt securities or bridge loans to us from
third-party lenders, license payments from current and future partners, and royalty payments from sales of approved drugs by partners. We can give no assurances that any additional capital that we are able to obtain will be sufficient to meet our needs.  On December 27, 2006, we completed an equity financing in which we received gross proceeds of $14.2 million and approximate net proceeds of $13.1 million of which approximately $11.7 million was received in December 2006 and $1.4 million was received in January 2007. Given the current and desired pace of development of our product candidates, we estimate that we will have sufficient cash on hand to fund development of our product candidates through December 31, 2007. We may, however, choose to raise additional capital before December 31, 2007 to fund future development activities or to take advantage of other strategic opportunities.   This could include the securing of funds through new strategic partnerships and/or the sale of our
common stock or other securities. There can be no assurance that such capital will be available to us on favorable terms, or at all.  There are a number of risks and uncertainties related to our attempt to complete a financing or strategic partnering arrangement that are outside our control.  We may not be able to obtain additional financing on terms acceptable to us, or at all.  If we are unsuccessful at obtaining additional financing as needed, we may be required to significantly curtail or cease operations. We will need additional financing thereafter until we achieve profitability, if ever.



OUR ADDITIONAL FINANCING REQUIREMENTS COULD RESULT IN DILUTION TO EXISTING STOCKHOLDERS.



The additional financings we require may be obtained through one or more transactions which effectively dilute the ownership interests of our existing stockholders.  Further, we may not be able to secure such additional financing on terms acceptable to us, if at all.  We have the authority to issue additional shares of our common stock, as well as additional classes or series of ownership interests or debt obligations which may be convertible into any one or more classes or series of ownership interests.  We are authorized to issue a total of 200,000,000 shares of common stock and 1,000,000 shares of preferred stock.  Such securities may be issued without the approval or other consent of our stockholders.

OUR TECHNOLOGY PLATFORM IS BASED SOLELY ON OUR PROPRIETARY DRUG DELIVERY TECHNOLOGY. OUR ONGOING CLINICAL TRIALS FOR CERTAIN OF OUR PRODUCT CANDIDATES MAY BE DELAYED, OR FAIL, WHICH WILL HARM OUR BUSINESS.

Our strategy is to concentrate our product development activities primarily on pharmaceutical products for which there already are significant prescription sales, where the use of our proprietary, novel drug delivery technology could potentially enhance speed of onset of therapeutic effect, could potentially reduce side effects through a reduction of the amount of active drug substance required to produce a given therapeutic effect and improve patient convenience or compliance. Our most recent new product candidates, tizanidine and ropinirole, are focused on the neurology segment, where we believe that the benefits of our proprietary drug delivery technology may apply to a number of different pharmaceutical products.

On November 3, 2006, we announced that the FDA has approved our NitroMist (nitroglycerin lingual aerosol) for acute relief of an attack or acute prophylaxis of angina pectoris due to coronary artery disease.  NitroMist is our first approval that utilizes our proprietary oral spray technology.



23



---



Our partner in North America, Hana Biosciences, Inc., or Hana Biosciences, for our ondansetron oral spray product candidate is overseeing all clinical development and regulatory approval activities.  In January 2006, Hana Biosciences announced positive study results of a pivotal clinical trial for Zensana. Hana Biosciences submitted its NDA on June 30, 2006. Such NDA was accepted for filing by the FDA in August 2006. Previously, Hana Biosciences targeted final approval from the FDA and commercial launch in calendar 2007.  However, on February 20, 2007, we announced that Hana Biosciences notified us that ongoing scale-up and stability experiments indicate that there is a need to make adjustments to the formulation and/or manufacturing process, and that there is likely to be a delay in the FDA approval and commercial launch of Zensana as a result thereof.  On March 23, 2007, Hana
Biosciences announced its plan to withdraw, without prejudice, its pending NDA for Zensana with the FDA, and that it plans to re-direct the development plan for Zensana using our patent-protected European formulation of the product.  Subject to the successful scale-up and manufacturing tests of our European formulation of ondansetron, Hana Biosciences expects to conduct the appropriate clinical trials and re-file the NDA for Zensana in 2008.  Because we rely upon Hana Biosciences to develop and file the NDA for Zensana we can give no assurances as to the amount of delay resulting from Hana Biosciences re-directing the development plan relating to Zensana or that Hana Biosciences will be able to re-file the NDA for Zensana in 2008, if at all, and ultimately receive final FDA approval.

We completed pilot pharmacokinetic studies of certain of our product candidates during late calendar year 2004 and early calendar year 2005.  These products are oral spray formulations of ondansetron, sumatriptan, propofol and zolpidem. In addition, in September and October 2006, we completed a pharmacokinetic study of our improved oral spray formulation of sumatriptan and zolpidem, respectively.  The goal of these pilot pharmacokinetic studies is to determine whether or not a specific oral spray can achieve therapeutic blood levels of an active ingredient via administration through the oral mucosa.  If desired therapeutic blood levels are not achieved, it could result in the need to reformulate the oral spray and/or to terminate work on a specific compound which would have a material adverse effect on our operations.

We have also completed pilot pharmacokinetic studies for two antihistamine oral sprays (loratadine and clemastine), an estradiol oral spray, an alprazolam oral spray and a progesterone oral spray.  In addition, we completed phase 2 clinical trials for the clemastine oral spray.  However, additional development work on these product candidates has been put on hold.

We have also commenced formulation work on two new product candidates, tizanidine oral spray and ropinirole oral spray.

Companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials.  Data obtained from tests are susceptible to varying interpretations which may delay, limit or prevent regulatory approval.  In addition, companies may be unable to enroll patients quickly enough to meet expectations for completing clinical trials.  The timing and completion of current and planned clinical trials of our product candidates depend on, among other factors, the rate at which patients are enrolled, which is a function of many factors, including:


        the number of clinical sites;



        the size of the patient population;



        the proximity of patients to the clinical sites;



        the eligibility criteria for the study;



        the existence of competing clinical trials; and



        the existence of alternative available products.


Delays in patient enrollment in clinical trials may occur, which would likely result in increased costs, program delays or both.



24



---



THERE ARE CERTAIN INTERLOCKING RELATIONSHIPS AND POTENTIAL CONFLICTS OF INTEREST.

Lindsay A. Rosenwald, M.D., a significant stockholder, directly and indirectly, of us, is the Chairman and sole shareholder of Paramount.  In the regular course of its business and the business of its affiliates, and outside of its arrangement with us, Paramount and/or its affiliates identify, evaluate and pursue investment opportunities in biomedical and pharmaceutical products, technologies and companies. As of May 1, 2007, Dr. Rosenwald beneficially owns approximately 14% of our outstanding common stock (assuming exercise of certain warrants beneficially owned by Dr. Rosenwald). As such, Dr. Rosenwald and Paramount may be deemed to be our affiliates.  Dr. Rosenwald has the ability to designate an individual to serve on our Board of Directors, or the Board, and has exercised such ability by designating Mr. J. Jay Lobell to serve on the Board.  Although Mr. Lobell is a designee of Dr. Rosenwalds, he
does not have any voting or dispositive control over the shares held directly or indirectly by Dr. Rosenwald. On December 14, 2005 based upon the recommendation of the Corporate Governance and Nominating Committee, the Board elected Mr. Lobell as a member of the Board.  Pursuant to the listing standards of the American Stock Exchange, or AMEX, Mr. Lobell has been deemed to be an independent director by our Board as of September 15, 2006. Dr. Rosenwald and Paramount may also be deemed to be affiliates of Manhattan Pharmaceuticals, Velcera and Hana Biosciences.  In addition, Paramount has assisted us in the placement of shares in connection with various private placements. Refer to Note 7 License and Development Agreements and Related Party Transactions of the Financial Statements included in this Quarterly Report on Form 10-Q for the three months ended March 31, 2007 for additional information. Generally, Delaware corporate law requires that any transactions between us and
any of our affiliates be on terms that, when taken as a whole, are substantially as favorable to us as those then reasonably obtainable in an arms length transaction from a person who is not an affiliate. Nevertheless, neither Dr. Rosenwald nor Paramount, nor their affiliates, are obligated pursuant to any agreement or understanding with us to make any additional products or technologies available to us, nor can there be any assurance, and we do not expect and our stockholders should not expect, that any biomedical or pharmaceutical product or technology identified by Dr. Rosenwald or Paramount, or their affiliates, in the future will be made available to us. In addition, certain of our current officers and directors or any officers or directors hereafter appointed by us may from time to time serve as officers or directors of other biopharmaceutical or biotechnology companies. Such other companies may have interests in conflict with our interests.

OUR BUSINESS AND REVENUE IS DEPENDENT ON THE SUCCESSFUL DEVELOPMENT OF OUR PRODUCTS.



Revenue received from our product development efforts consists of payments by pharmaceutical companies for research and bioavailability studies, pilot clinical trials and similar milestone-related payments.  Our future growth and profitability will be dependent upon our ability to successfully raise additional funds to complete the development of, obtain regulatory approvals for and license out or market our product candidates.  Accordingly, our prospects must be considered in light of the risks, expenses and difficulties frequently encountered in connection with the establishment of a new business in a highly competitive industry, characterized by frequent new product introductions.  We anticipate that we will incur substantial operating expenses in connection with the development, testing and approval of our product candidates and expect these expenses to result in continuing and significant operating
losses until such time, if ever, that we are able to achieve adequate levels of sales or license revenues.  We may not be able to raise additional financing, increase revenues significantly, or achieve profitable operations.  See Risk Factors - We Will Require Significant Capital For Product Development And Commercialization and Our Strategy Includes Entering Into Collaboration Agreements With Third Parties For Certain of our Product Candidates And We May Require Additional Collaboration Agreements. If We Fail To Enter Into These Agreements Or If We Or The Third Parties Do Not Perform Under Such Agreements, It Could Impair Our Ability To Commercialize Our Proposed Products.

SOME OF OUR PRODUCT CANDIDATES ARE IN EARLY STAGES OF CLINICAL DEVELOPMENT AND SOME ARE IN PRECLINICAL TESTING, WHICH MAY AFFECT OUR ABILITY OR THE TIME WE REQUIRE TO OBTAIN NECESSARY REGULATORY APPROVALS.



Some of our product candidates are in early stages of clinical development and some are in preclinical testing.  These product candidates are continuously evaluated and assessed and are often subject to changes in formulation and technology.  The regulatory requirements governing these types of products may be less well defined or more rigorous than for conventional products. As a result, we may experience delays with our preclinical and clinical testing, and a longer and more expensive regulatory process in connection with obtaining regulatory approvals of these types of product candidates as compared to others in our pipeline at later stages of development.  These delays may negatively affect our business and operations.



25



---



WE DO NOT HAVE COMMERCIALLY AVAILABLE PRODUCTS.

Our principal efforts are the development of, and obtaining regulatory approvals for, our product candidates.  We anticipate that marketing activities for our product candidates, whether by us or one or more of our licensees, if any, will not begin until the second half of calendar 2007 at the earliest.  On November 3, 2006, we announced that we received an approval letter from the FDA regarding our NDA for NitroMist.  We are currently in the process of working with Par to finalize the commercialization strategy for this product.Accordingly, it is not anticipated that we will generate any revenues from royalties or sales of our product candidates until regulatory approvals are obtained, if ever, and marketing activities begin.  Any one or more of our product candidates may not prove to be commercially viable, or if viable, may not reach the marketplace
on a basis consistent with our desired timetables.  The failure or the delay of any one or more of our proposed product candidates to achieve commercial viability would have a material adverse effect on us.

WE HAVE NOT COMPLETED PRODUCT DEVELOPMENT.

We have not completed the development of our product candidates and we will be required to devote considerable effort and expenditures to complete such development.  In addition to obtaining adequate financing, satisfactory completion of development, testing, government approval and sufficient production levels of such product candidates must be obtained before the product candidates will become available for commercial sale.  We do not anticipate generating material revenue from product sales until perhaps the second half of calendar 2007 at the earliest.  On November 3, 2006, we announced that we received an approval letter from the FDA regarding our NDA for NitroMist.  We are currently working with Par to finalize the commercialization strategy for this product.Other potential products remain in the conceptual or very early development stage and
remain subject to all the risks inherent in the development of pharmaceutical products, including unanticipated development problems and possible lack of funds to undertake or continue development.  These factors could result in abandonment or substantial change in the development of a specific formulated product.  We may not be able to successfully develop any one or more of our product candidates or develop such product candidates on a timely basis.  Further, such product candidates may not be commercially accepted if developed. The inability to successfully complete development, or a determination by us, for financial or other reasons, not to undertake to complete development of any product candidates, particularly in instances in which we have made significant capital expenditures, could have a material adverse effect on our business and operations.

WE DO NOT HAVE DIRECT CONSUMER MARKETING EXPERIENCE.

We have no experience in marketing or distribution at the consumer level of our product candidates.  Moreover, we do not have the financial or other resources to undertake extensive marketing and advertising activities.  Accordingly, we intend generally to rely on marketing arrangements, including possible joint ventures or license or distribution arrangements with third-parties.  Except for our agreements with Par, Manhattan Pharmaceuticals, Velcera and Hana Biosciences, we have not entered into any significant agreements or arrangements with respect to the marketing of our product candidates. We may not be able to enter into any such agreements or similar arrangements in the future and we may not be able to successfully market our products.  If we fail to enter into these agreements or if we or the third parties do not perform under such agreements, it could impair our ability to commercialize our products.

We have stated our intention to possibly market our own products in the future, although we have no such experience to date.  Substantial investment will be required in order to build infrastructure and provide resources in support of marketing our own products, particularly the establishment of a marketing force.  If we do not develop a marketing force of our own, then we will depend on arrangements with corporate partners or other entities for the marketing and sale of our remaining products.  The establishment of our own marketing force, or a strategy to rely on third party marketing arrangements, could adversely affect our profit margins.

WE MUST COMPLY WITH GOOD MANUFACTURING PRACTICES.

The manufacture of our pharmaceutical products under development will be subject to current Good Manufacturing Practices, or cGMP, prescribed by the FDA, pre-approval inspections by the FDA or comparable foreign authorities, or both, before commercial manufacture of any such products and periodic cGMP compliance inspections thereafter by the FDA.  We, or any of our third party manufacturers, may not be able to comply with cGMP or satisfy pre- or post-approval inspections by the FDA or comparable foreign authorities in connection with the manufacture of our product candidates.  Failure or delay by us or any such manufacturer to comply with cGMP or satisfy pre- or post-approval inspections would have a material adverse effect on our business and operations.



26



---



WE ARE DEPENDENT ON OUR SUPPLIERS.

We believe that the active ingredients used in the manufacture of our product candidates are presently available from numerous suppliers located in the U.S., Europe, India and Japan.  We believe that certain raw materials, including inactive ingredients, are available from a limited number of suppliers and that certain packaging materials intended for use in connection with our spray products currently are available only from sole source suppliers.  Although we do not believe we will encounter difficulties in obtaining the inactive ingredients or packaging materials necessary for the manufacture of our product candidates, we may not be able to enter into satisfactory agreements or arrangements for the purchase of commercial quantities of such materials.  We have a written supply agreement with Dynamit Nobel for certain raw materials for our nitroglycerin lingual spray and a written supply agreement in place
with INyX USA, Ltd., which intends to manufacture our nitroglycerin lingual spray in its Manatee, Puerto Rico facility.  With respect to other suppliers, we operate primarily on a purchase order basis beyond which there is no contract memorializing our purchasing arrangements.  The inability to enter into agreements or otherwise arrange for adequate or timely supplies of principal raw materials and the possible inability to secure alternative sources of raw material supplies, or the failure of Dynamit Nobel or INyX USA, Ltd. to comply with their supply obligations to us, could have a material adverse effect on our ability to arrange for the manufacture of formulated products.  In addition, development and regulatory approval of our products are dependent upon our ability to procure active ingredients and certain packaging materials from FDA-approved sources.  Since the FDA approval process requires manufacturers to specify their proposed suppliers of active ingredients and certain
packaging materials in their applications, FDA approval of a supplemental application to use a new supplier would be required if active ingredients or such packaging materials were no longer available from the originally specified supplier, which may result in manufacturing delays.  If we do not maintain important manufacturing relationships, we may fail to find a replacement manufacturer or to develop our own manufacturing capabilities.  If we cannot do so, it could delay or impair our ability to obtain regulatory approval for our products and substantially increase our costs or deplete any profit margins.  If we do find replacement manufacturers, we may not be able to enter into agreements with them on terms and conditions favorable to us and, there could be a substantial delay before a new facility could be qualified and registered with the FDA and foreign regulatory authorities.

FAILURE TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND OPERATING RESULTS.  IN ADDITION, CURRENT AND POTENTIAL STOCKHOLDERS COULD LOSE CONFIDENCE IN OUR FINANCIAL REPORTING, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR STOCK PRICE.

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

We will be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and reports by our independent registered public accounting firm addressing these assessments and our internal controls.  During the course of our testing we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act of 2002 for compliance with the requirements of Section 404.  In addition, if we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act of 2002.  Failure to achieve and maintain an effective internal control environment could also cause investors to lose confidence in our reported financial information, which could have a material adverse effect on the price of our common stock. As of the date of the filing of this Quarterly Report, we will have to comply with Section 404 of the Sarbanes-Oxley Act of 2002 as of December 31, 2007.



27



---



COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new regulations promulgated by the Securities and Exchange Commission, or SEC, and American Stock Exchange, or AMEX rules, are creating uncertainty for companies such as ours.  These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.  We are committed to maintaining high standards of corporate governance and public disclosure.  As a result, our efforts to comply with evolving laws, regulations and
standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.  In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our independent registered public accounting firms audit of that assessment will require the commitment of significant financial and managerial resources.  In addition, it has become more difficult and more expensive for us to obtain director and officer liability insurance.  We expect these efforts to require the continued commitment of significant resources.  Further, our Board members, Chief Executive Officer and Chief Financial Officer could face an increased risk of personal liability in connection with the performance of their duties.  As a result, we
may have difficulty attracting and retaining qualified board members and executive officers, which could harm our business.  If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed.

WE FACE INTENSE COMPETITION.

The markets which we intend to enter are characterized by intense competition.  We, or our licensees, may be competing against established, larger and/or better capitalized pharmaceutical companies with currently marketed products which are equivalent or functionally similar to those we intend to market.  Prices of drug products are significantly affected by competitive factors and tend to decline as competition increases.  In addition, numerous companies are developing or may, in the future, engage in the development of products competitive with our product candidates.  We expect that technological developments will occur at a rapid rate and that competition is likely to intensify as enhanced dosage from technologies gain greater acceptance.  Additionally, the markets for formulated products which we have targeted for development are intensely competitive, involving numerous competitors and products.  Most
of our prospective competitors possess substantially greater financial, technical and other resources than we do.  Moreover, many of these companies possess greater marketing capabilities than we do, including the resources necessary to enable them to implement extensive advertising campaigns.  We may not be able to compete successfully with such competitors.

Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA or comparable foreign approval or commercializing products before us.  If we commence commercial product sales, we will compete against companies with greater marketing and manufacturing capabilities who may successfully develop and commercialize products that are more effective or less expensive than ours.  Our competitors may be more successful in receiving third party reimbursements from government agencies and others for their commercialized products which are similar to our products.  If we cannot receive third party reimbursement for our products, we may not be able to commercialize our products.  These are areas in which, as yet, we have limited or no experience.  In addition, developments by our competitors may render our product candidates obsolete or noncompetitive.

We are aware of several companies that are selling or developing oral spray products.  Sciele Pharma Inc. (formerly First Horizon Pharmaceutical Corporation), headquartered in Alpharetta, Georgia, currently markets Nitrolingual® Pumpspray, a nitroglycerin oral spray which is an air propelled dispensing system (our nitroglycerin lingual spray is a propellant based dispensing system).  Generex Biotechnology Corporation, based in Toronto, Canada, is developing an insulin formulation that is delivered directly into the mouth via its RapidMist device.  They also state that they have begun research on four specific target molecules for their RapidMist delivery system: morphine, fentanyl, heparin and flu vaccine.  Generex Biotechnology Corporation is listed as the assignee on 15 U.S. patents.  RapidMist is a pending trademark of Generex Biotechnology
Corporation. There are several other companies that we are aware of that market oral spray products containing vitamins and homeopathic ingredients. GW Pharmaceuticals plc, based in the UK, has developed a cannabinoid lingual spray called Sativex®.  Sativex® was approved by Health Canada in April 2005 for the relief of neuropathic pain in Multiple Sclerosis, or MS, and was launched in Canada in June 2005 by Bayer HealthCare, who will exclusively market Sativex® in Canada.  Sosei Co. Ltd. is developing an analgesic to be delivered suborally via a non-pressurized metered dose spray formulation.



28



---



We also face, and will continue to face, competition from colleges, universities, governmental agencies and other public and private research organizations.  These competitors are becoming more active in seeking patent protection and licensing arrangements to collect royalties for use of technology that they have developed.  Some of these technologies may compete directly with the technologies that we are developing.  These institutions will also compete with us in recruiting highly qualified scientific personnel.  We expect that developments in the areas in which we are active may occur at a rapid rate and that competition will intensify as advances in this field are made.  As a result, we need to continue to devote substantial resources and efforts to research and development activities.

LIMITED PRODUCT LIABILITY INSURANCE COVERAGE MAY AFFECT OUR BUSINESS.

We may be exposed to potential product liability claims by end-users of our products.  Although we obtain product liability insurance per contractual obligations, before the commercialization of any of our product candidates, we cannot guarantee such insurance will be sufficient to cover all possible liabilities to which we may be exposed.  Any product liability claim, even one that was not in excess of our insurance coverage or one that is meritless and/or unsuccessful, could adversely affect our cash available for other purposes, such as research and development.  In addition, the existence of a product liability claim could affect the market price of our common stock.  In addition, certain food and drug retailers require minimum product liability insurance coverage as a condition precedent to purchasing or accepting products for retail distribution.  Product liability insurance coverage includes various
deductibles, limitations and exclusions from coverage, and in any event might not fully cover any potential claims.  Failure to satisfy such insurance requirements could impede the ability of us or our distributors to achieve broad retail distribution of our product candidates, which could have a material adverse effect on us.

EXTENSIVE GOVERNMENT REGULATION MAY AFFECT OUR BUSINESS.

The development, manufacture and commercialization of pharmaceutical products is generally subject to extensive regulation by various federal and state governmental entities.  The FDA, which is the principal U.S. regulatory authority over pharmaceutical products, has the power to seize adulterated or misbranded products and unapproved new drugs, to request their recall from the market, to enjoin further manufacture or sale, to publicize certain facts concerning a product and to initiate criminal proceedings.  As a result of federal statutes and FDA regulations pursuant to which new pharmaceuticals are required to undergo extensive and rigorous testing, obtaining pre-market regulatory approval requires extensive time and expenditures.  Under the Federal Food, Drug, and Cosmetic Act, or FFDCA, as amended (21 U.S.C. 301 et. seq.), a new drug may not be commercialized or otherwise distributed in the U.S.
without the prior approval of the FDA or pursuant to an applicable exemption from the FFDCA.  The FDA approval processes relating to new drugs differ, depending on the nature of the particular drug for which approval is sought.  With respect to any drug product with active ingredients not previously approved by the FDA, a prospective drug manufacturer is required to submit an NDA, which includes complete reports of pre-clinical, clinical and laboratory studies to prove such products safety and efficacy.  Prior to submission of the NDA, it is necessary to submit an Investigational New Drug, or IND, to obtain permission to begin clinical testing of the new drug.  Such clinical trials are required to meet good clinical practices under the FFDCA. Given that our current product candidates are based on a new technology for formulation and delivery of active pharmaceutical ingredients that have been previously approved and that have been shown to be safe and effective in previous
clinical trials, we believe that we will be eligible to submit what is known as a 505(b)(2).  We estimate that the development of new formulations of pharmaceutical products, including formulation, testing and NDA submission, generally takes two to three years under the 505(b)(2) NDA process.  Our determinations may prove to be inaccurate or pre-marketing approval relating to our proposed products may not be obtained on a timely basis, if at all.  The failure by us to obtain necessary regulatory approvals, whether on a timely basis or at all, would have a material adverse effect on our business. The filing of an NDA with the FDA is an important step in the approval process in the U.S. Acceptance for filing by the FDA does not mean that the NDA has been or will be approved, nor does it represent an evaluation of the adequacy of the data submitted.

THE CLINICAL TRIAL AND REGULATORY APPROVAL PROCESS FOR OUR PRODUCTS IS EXPENSIVE AND TIME CONSUMING, AND THE OUTCOME IS UNCERTAIN.

In order to sell our proposed products, we must receive separate regulatory approvals for each product. The FDA and comparable agencies in foreign countries extensively and rigorously regulate the testing, manufacture, distribution, advertising, pricing and marketing of drug products like our products. This approval process for an NDA includes preclinical studies and clinical trials of each pharmaceutical compound to establish its safety and effectiveness and confirmation by the FDA and comparable agencies in foreign countries that the manufacturer maintains good laboratory and manufacturing practices during testing and manufacturing. Clinical trials generally take two to five years or more to complete. Even if favorable testing data is generated by clinical trials of drug products, the FDA may not accept an NDA submitted by a pharmaceutical or biotechnology company for such drug product for filing, or if
accepted for filing, may not approve such NDA.



29



---



We expect to continue to spend significant amounts on the development of our product candidates and we expect our costs to increase as we continue to develop and ultimately commercialize our product candidates. We are devoting the majority of our internal research and development resources to the following product candidates:




        NitroMist (nitroglycerin lingual aerosol). This product candidate is for acute relief of an attack or acute prophylaxis of angina pectoris due to coronary artery disease. We have partnered with Par, who has exclusive rights to market, sell and distribute NitroMist in the U.S. and Canada. On November 3, 2006, we announced that we received an approval letter from the FDA regarding our NDA for NitroMist.  We are currently working with Par to finalize the commercialization strategy for this product.  We received a milestone payment from Par for FDA approval.  We are currently in the process of working with Par to finalize the commercialization strategy for this product.  In addition, we will receive royalty payments based upon a percentage of net sales.





        Zolpidem oral spray. Zolpidem is the active ingredient in Ambien®, the leading hypnotic marketed by Sanofi-Aventis. In October 2006, we announced positive study results of a pharmacokinetic study of our improved oral spray formulation of zolpidem, a study which demonstrated that zolpidem oral spray achieves a statistically significant faster rate of absorption than Ambien® tablets. Previously, we were targeting a NDA submission for our zolpidem product candidate in the first half of calendar 2007; however, we have revised our target date for the NDA submission to be as soon as possible in the second half of 2007. If this timeline is met, we may obtain final approval from the FDA in calendar 2008.





        Sumatriptan oral spray. Sumatriptan is the active ingredient in Imitrex® which is the largest selling migraine remedy marketed by GlaxoSmithKline, GSK. In September 2006, we announced positive study results of a pharmacokinetic study of our improved oral spray formulation of sumatriptan, a study which demonstrated that sumatriptan oral spray achieves a statistically significant faster rate of absorption than Imitrex® tablets. We are currently targeting a NDA submission for our sumatriptan product candidate in the second half of calendar 2007. If this timeline is met, we may obtain final approval from the FDA in calendar 2008; however, we will not be able to launch this product candidate until after the expiration of the relevant Imitrex® patents and extensions thereof in February 2009.





        Tizanidine oral spray.  Tizanidine is indicated for the treatment of spasticity, a symptom of several neurological disorders, including Multiple Sclerosis, spinal cord injury, stroke and cerebral palsy, and leads to involuntary tensing, stiffening and contracting of muscles. Tizanidine treats spasticity by blocking nerve impulses through pre-synaptic inhibition of motor neurons. This method of action results in decreased spasticity without a corresponding reduction in muscle strength. Because patients experiencing spasticity may have difficulty swallowing the tablet formulation of the drug, our tizanidine oral spray may provide patients suffering from spasticity with a very convenient solution to this serious treatment problem. We are currently targeting a NDA submission for our tizanidine product candidate in calendar 2008. If this timeline is met, we may
obtain final approval from the FDA in calendar 2009.





        Ropinirole oral spray.  Ropinirole is indicated for the treatment of the signs and symptoms of idiopathic Parkinson's disease. Ropinirole oral spray is ideal for the geriatric population who may be suffering from dysphagia (difficulty swallowing); 85% of sufferers of Parkinson's are 65 years of age or older and it is estimated that approximately 45% of elderly people have some difficulty in swallowing. Our formulation of ropinirole oral spray may represent a more convenient way for the patient or healthcare provider to deliver ropinirole to patients suffering stiffness and/or tremors. We are currently targeting a NDA submission for our ropinirole product candidate in calendar 2008. If this timeline is met, we may obtain final approval from the FDA in calendar 2009.




30



---



We will also support our partners, as necessary, with the following product candidates and opportunities although we do not expect to devote a significant amount of resources to such activities:




        Zensana (ondansetron oral spray). Ondansetron is the active ingredient in Zofran®, the leading anti-emetic marketed by GSK. Our partner for Zensana, Hana Biosciences, is overseeing all clinical development and regulatory approval activities for this product in the U.S. and Canada. In January 2006, Hana Biosciences announced positive study results of a pivotal clinical trial for Zensana. Hana Biosciences submitted its NDA on June 30, 2006. Such NDA was accepted for review by the FDA in August 2006.  Previously, Hana Biosciences targeted final approval from the FDA and commercial launch in calendar 2007.  However, on February 20, 2007, we announced that Hana Biosciences notified us that ongoing scale-up and stability experiments indicate that there is a need to make adjustments to the formulation and/or manufacturing process, and that
there is likely to be a delay in the FDA approval and commercial launch of Zensana as a result thereof.  On March 23, 2007, Hana Biosciences announced its plan to withdraw, without prejudice, its pending NDA for Zensana with the FDA, and that it plans to re-direct the development plan for Zensana using our patent-protected European formulation of the product. Subject to the successful scale-up and manufacturing tests of our European formulation of ondansetron, Hana Biosciences expects to conduct the appropriate clinical trials and re-file the NDA for Zensana in 2008.  Because we rely upon Hana Biosciences to develop and file the NDA for Zensana we can give no assurances as to the amount of delay resulting from Hana Biosciences re-directing the development plan relating to Zensana or that Hana Biosciences will be able to re-file the NDA for Zensana in 2008, if at all, and ultimately receive final FDA approval. We will receive a
milestone payment from Hana Biosciences upon final approval from the FDA. In addition, we will receive royalty payments based upon a percentage of net sales.  In light of Hanas recent announcement regarding the status of this product candidate, as described above, we devoted resources to this project during the three months ended March 31, 2007, including approximately $204,000 in third-party costs. Currently, we cannot estimate the amount of resources, if any, that we will devote to this product candidate in future periods.





        Propofol oral spray. Propofol is the active ingredient in Diprivan®, an anesthetic marketed by AstraZeneca. We continue to support our partner, Manhattan Pharmaceuticals, who will oversee all clinical development and regulatory approval for this product. Our partner has not provided guidance regarding the clinical and regulatory development plan for this product candidate.





        Our veterinary initiatives are being carried out largely by our partner, Velcera. Our partner has not provided guidance regarding the clinical and regulatory development plan for the potential veterinary product candidates.


The approval process is lengthy, expensive and uncertain. It is also possible that the FDA or comparable foreign regulatory authorities could interrupt, delay or halt any one or more of our clinical trials. If we, or any regulatory authorities, believe that trial participants face unacceptable health risks, any one or more of our trials could be suspended or terminated. We also may fail to reach agreement with the FDA and/or comparable foreign agencies on the design of any one or more of the clinical studies necessary for approval. Conditions imposed by the FDA and comparable agencies in foreign countries on our clinical trials could significantly increase the time required for completion of such clinical trials and the costs of conducting the clinical trials. Data obtained from clinical trials are susceptible to varying interpretations which may delay, limit or prevent regulatory approval.

Delays and terminations of the clinical trials we conduct could result from insufficient patient enrollment. Patient enrollment is a function of several factors, including the size of the patient population, stringent enrollment criteria, the proximity of the patients to the trial sites, having to compete with other clinical trials for eligible patients, geographical and geopolitical considerations and others. Delays in patient enrollment can result in greater costs and longer trial timeframes. Patients may also suffer adverse medical events or side effects.

The FDA and comparable foreign agencies may withdraw any approvals we obtain. Further, if there is a later discovery of unknown problems or if we fail to comply with other applicable regulatory requirements at any stage in the regulatory process, the FDA may restrict or delay our marketing of a product or force us to make product recalls. In addition, the FDA could impose other sanctions such as fines, injunctions, civil penalties or criminal prosecutions. To market our products outside the U.S., we also need to comply with foreign regulatory requirements governing human clinical trials and marketing approval for pharmaceutical products. Other than the approval of NitroMist, the FDA and foreign regulators have not yet approved any of our products under development for marketing in the U.S. or elsewhere. If the FDA and other regulators do not approve any one or more of our products under development,
we will not be able to market such products.



31



---



WE EXPECT TO FACE UNCERTAINTY OVER REIMBURSEMENT AND HEALTHCARE REFORM.

In both the U.S. and other countries, sales of our products will depend in part upon the availability of reimbursement from third-party payers, which include government health administration authorities, managed care providers and private health insurers.  Third-party payers are increasingly challenging the price and examining the cost effectiveness of medical products and services.

OUR STRATEGY INCLUDES ENTERING INTO COLLABORATION AGREEMENTS WITH THIRD PARTIES FOR CERTAIN OF OUR PRODUCT CANDIDATES AND WE MAY REQUIRE ADDITIONAL COLLABORATION AGREEMENTS.  IF WE FAIL TO ENTER INTO THESE AGREEMENTS OR IF WE OR THE THIRD PARTIES DO NOT PERFORM UNDER SUCH AGREEMENTS, IT COULD IMPAIR OUR ABILITY TO COMMERCIALIZE OUR PROPOSED PRODUCTS.

Our strategy for the completion of the required development and clinical testing of certain of our product candidates and for the manufacturing, marketing and commercialization of such product candidates includes entering into collaboration arrangements with pharmaceutical companies to market, commercialize and distribute the products.  We have entered into a license agreement with Manhattan Pharmaceuticals for the worldwide, exclusive rights to our oral spray technology to deliver propofol for pre-procedural sedation; an exclusive worldwide license for our proprietary oral spray technology with Velcera for the development of innovative veterinary medicines pursuant to which we are entitled to milestone payments for each product developed by Velcera and royalties on product sales and Velcera will fund all development and regulatory expenses; a license and supply agreement with Par pursuant to which Par has
the exclusive rights to market, sell and distribute our nitroglycerin lingual spray in the U.S. and Canada; and a license agreement with Hana Biosciences for the marketing rights in the U.S. and Canada for our ondansetron oral spray.  Our success depends upon obtaining additional collaboration partners and maintaining our relationships with our current partners.  In addition, we may depend on our partners expertise and dedication of sufficient resources to develop and commercialize proposed products.  We may, in the future, grant to collaboration partners, rights to license and commercialize pharmaceutical products developed under collaboration agreements.  Under these arrangements, our collaboration partners may control key decisions relating to the development of the products.  The rights of our collaboration partners could limit our flexibility in considering alternatives for the commercialization of such product candidates.  If we fail to successfully develop these
relationships or if our collaboration partners fail to successfully develop or commercialize such product candidates, it may delay or prevent us from developing or commercializing our proposed products in a competitive and timely manner and would have a material adverse effect on our business.



Pursuant to the license and development agreement, as amended, that we entered into with Hana Biosciences, Hana Biosciences submitted an NDA under Section 505(b)(2) for Zensana in June 2006.  Previously, Hana Biosciences targeted final approval from the FDA and commercial launch in calendar 2007.  However, on February 20, 2007, we announced that Hana Biosciences notified us that ongoing scale-up and stability experiments indicate that there is a need to make adjustments to the formulation and/or manufacturing process, and that there is likely to be a delay in the FDA approval and commercial launch of Zensana  as a result thereof.  On March 23, 2007, Hana Biosciences announced its plan to withdraw, without prejudice, its pending NDA for Zensana with the FDA, and that it plans to re-direct the development plan for Zensana using our patent-protected European formulation
of the product.  Subject to the successful scale-up and manufacturing tests of our European formulation of ondansetron, Hana Biosciences expects to conduct the appropriate clinical trials and re-file the NDA for Zensana in 2008.  Because we rely upon Hana Biosciences to develop and file the NDA for Zensana we can give no assurances as to the amount of delay resulting from Hana Biosciences re-directing the development plan relating to Zensana or that Hana Biosciences will be able to re-file the NDA for Zensana in 2008, if at all, and ultimately receive final FDA approval.



32



---



IF WE CANNOT PROTECT OUR INTELLECTUAL PROPERTY, OTHER COMPANIES COULD USE OUR TECHNOLOGY IN COMPETITIVE PRODUCTS.  IF WE INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, OTHER COMPANIES COULD PREVENT US FROM DEVELOPING OR MARKETING OUR PRODUCTS.

We seek patent protection for our technology so as to prevent others from commercializing equivalent products in substantially less time and at substantially lower expense.  The pharmaceutical industry places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes.  Our success will depend in part on our ability and that of parties from whom we license technology to:


        defend our patents and otherwise prevent others from infringing on our proprietary rights;



        protect our trade secrets; and



        operate without infringing upon the proprietary rights of others, both in the U.S. and in other countries.


The patent position of firms relying upon biotechnology is highly uncertain and involves complex legal and factual questions for which important legal principles are unresolved.  To date, the U.S. Patent and Trademark Office, or USPTO, has not adopted a consistent policy regarding the breadth of claims that the USPTO allows in biotechnology patents or the degree of protection that these types of patents afford.  As a result, there are risks that we may not develop or obtain rights to products or processes that are or may seem to be patentable.



Section 505(b)(2) of the FFDCA was enacted as part of the Drug Price Competition and Patent Term Restoration Act of 1984, otherwise known as the Hatch-Waxman Act. Section 505(b)(2) permits the submission of an NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. For example, the Hatch-Waxman Act permits an applicant to rely upon the FDAs findings of safety and effectiveness for an approved product. The FDA may also require companies to perform one or more additional studies or measurements to support the change from the approved product. The FDA may then approve the new formulation for all or some of the label indications for which the referenced product has been approved, or a new indication sought by the Section 505(b)(2) applicant.



To the extent that the Section 505(b)(2) applicant is relying on the FDAs findings for an already-approved product, the applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDAs Orange Book publication. Specifically, the applicant must certify that: (1) the required patent information has not been filed (paragraph I certification); (2) the listed patent has expired (paragraph II certification); (3) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration (paragraph III certification); or (4) the listed patent is invalid or will not be infringed by the manufacture, use or sale of the new product (paragraph IV certification). If the applicant does not challenge the listed patents, the Section 505(b)(2) application will not be approved until all the listed
patents claiming the referenced product have expired, and once any pediatric exclusivity expires. The Section 505(b)(2) application may also not be approved until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for the referenced product has expired.



If the applicant has provided a paragraph IV certification to the FDA, the applicant must also send notice of the paragraph IV certification to the NDA holder and patent owner once the NDA has been accepted for filing by the FDA. The NDA holder and patent owner may then initiate a legal challenge to the paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of their receipt of a paragraph IV certification automatically prevents the FDA from approving the Section 505(b)(2) NDA until the earliest of 30 months, expiration of the patent, settlement of the lawsuit or a decision in an infringement case that is favorable to the Section 505(b)(2) applicant. Thus, a Section 505(b)(2) applicant may invest a significant amount of time and expense in the development of its products only to be subject to significant delay and patent litigation
before its products may be commercialized. Alternatively, if the NDA holder or patent owner does not file a patent infringement lawsuit within the required 45-day period, the applicants NDA will not be subject to the 30-month stay.

Notwithstanding the approval of many products by the FDA pursuant to Section 505(b)(2), over the last few years, certain brand-name pharmaceutical companies and others have objected to the FDAs interpretation of Section 505(b)(2). If the FDA changes its interpretation of Section 505(b)(2), this could delay or even prevent the FDA from approving any Section 505(b)(2) NDA that we submit.





33



---



Our partner, Hana Biosciences, submitted an NDA under Section 505(b)(2) for Zensana in June 2006. The safety and efficacy of the drug will be based on a demonstration of the bioequivalence of Zensana to oral ondansetron, marketed under the tradename Zofran®. This Zofran® formulation is protected by one unexpired patent, which is scheduled to expire in September 2011, and is subject to a period of pediatric exclusivity expiring in March 2012. Additionally, this Zofran® formulation was covered by another patent which, after pediatric exclusivity, expired in December 2006. Hana Biosciences Section 505(b)(2) NDA contained a paragraph III certification acknowledging that the now expired patent would expire in December 2006, and a paragraph IV certification to the patent which is due to expire in March 2012. Based on the paragraph IV certification, it is possible that the NDA holder
or the patent owner will sue us and/or Hana Biosciences for patent infringement, and that the FDA will be prevented from approving our application until the earliest of 30 months, settlement of the lawsuit, or a decision in an infringement case that is favorable to us. Hana Biosciences has announced that it has not received any objections related to these patent certifications.

We have received a request for information from a third party in response to the information we have set forth in the paragraph IV certification of the NDA we have filed for NitroMist.  Such request no longer has any effect on PDUFA dates for such NDA.  However, the request may be a precursor for a patent infringement claim by such third party.  We do not believe that we have infringed on any intellectual property rights of such party and if such a claim is filed, we intend to vigorously defend our rights in response to such claim.

EVEN IF WE OBTAIN PATENTS TO PROTECT OUR PRODUCTS, THOSE PATENTS MAY NOT BE SUFFICIENTLY BROAD AND OTHERS COULD COMPETE WITH US.

We, and the parties licensing technologies to us, have filed various U.S. and foreign patent applications with respect to the products and technologies under our development, and the USPTO and foreign patent offices have issued patents with respect to our products and technologies.  These patent applications include international applications filed under the Patent Cooperation Treaty.  Currently, we have eight patents which have been issued in the U.S. and 54 patents which have been issued outside of the U.S. Additionally, we have over 80 patents pending around the world.  Our pending patent applications, those we may file in the future and those we may license from third parties, may not result in the USPTO or any foreign patent office issuing patents.  Also, if patent rights covering our products are not sufficiently broad, they may not provide us with sufficient proprietary protection or competitive
advantages against competitors with similar products and technologies.  Furthermore, if the USPTO or foreign patent offices issue patents to us or our licensors, others may challenge the patents or circumvent the patents, or the patent office or the courts may invalidate the patents.  Thus, any patents we own or license from or to third parties may not provide any protection against competitors.

Furthermore, the life of our patents is limited.  Such patents, which include relevant foreign patents, expire on various dates.  We have filed, and when possible and appropriate, will file, other patent applications with respect to our product candidates and processes in the U.S. and in foreign countries.  We may not be able to develop additional products or processes that will be patentable or additional patents may not be issued to us.  See also Risk Factors - If We Cannot Meet Requirements Under our License Agreements, We Could Lose the Rights to our Products.

INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES COULD LIMIT OUR ABILITY TO MARKET OUR PRODUCTS.

Our commercial success also significantly depends on our ability to operate without infringing the patents or violating the proprietary rights of others.  The USPTO keeps U.S. patent applications confidential while the applications are pending.  As a result, we cannot determine which inventions third parties claim in pending patent applications that they have filed.  We may need to engage in litigation to defend or enforce our patent and license rights or to determine the scope and validity of the proprietary rights of others.  It will be expensive and time consuming to defend and enforce patent claims.  Thus, even in those instances in which the outcome is favorable to us, the proceedings can result in the diversion of substantial resources from our other activities.  An adverse determination may subject us to significant liabilities or require us to seek licenses that third parties may not grant to us or
may only grant at rates that diminish or deplete the profitability of the products to us.  An adverse determination could also require us to alter our products or processes or cease altogether any related research and development activities or product sales.

IF WE CANNOT MEET REQUIREMENTS UNDER OUR LICENSE AGREEMENTS, WE COULD LOSE THE RIGHTS TO OUR PRODUCTS.

We depend, in part, on licensing arrangements with third parties to maintain the intellectual property rights to our products under development.  These agreements may require us to make payments and/or satisfy performance obligations in order to maintain our rights under these licensing arrangements.  All of these agreements last either throughout the life of the patents, or with respect to other licensed technology, for a number of years after the first commercial sale of the relevant product.



34



---



In addition, we are responsible for the cost of filing and prosecuting certain patent applications and maintaining certain issued patents licensed to us.  If we do not meet our obligations under our license agreements in a timely manner, we could lose the rights to our proprietary technology.

In addition, we may be required to obtain licenses to patents or other proprietary rights of third parties in connection with the development and use of our products and technologies.  Licenses required under any such patents or proprietary rights might not be made available on terms acceptable to us, if at all.

WE RELY ON CONFIDENTIALITY AGREEMENTS THAT COULD BE BREACHED AND MAY BE DIFFICULT TO ENFORCE.

Although we believe that we take reasonable steps to protect our intellectual property, including the use of agreements relating to the non-disclosure of confidential information to third parties, as well as agreements that purport to require the disclosure and assignment to us of the rights to the ideas, developments, discoveries and inventions of our employees and consultants while we employ them, the agreements can be difficult and costly to enforce.  Although we seek to obtain these types of agreements from our consultants, advisors and research collaborators, to the extent that they apply or independently develop intellectual property in connection with any of our projects, disputes may arise as to the proprietary rights to this type of information.  If a dispute arises, a court may determine that the right belongs to a third party, and enforcement of our rights can be costly and unpredictable.  In
addition, we will rely on trade secrets and proprietary know-how that we will seek to protect in part by confidentiality agreements with our employees, consultants, advisors or others.  Despite the protective measures we employ, we still face the risk that:


        they will breach these agreements;



        any agreements we obtain will not provide adequate remedies for this type of breach or that our trade secrets or proprietary know-how will otherwise become known or competitors will independently develop similar technology; and



        our competitors will independently discover our proprietary information and trade secrets.


WE ARE DEPENDENT ON EXISTING MANAGEMENT AND BOARD MEMBERS.

Our success is substantially dependent on the efforts and abilities of the principal members of our management team and our directors. Decisions concerning our business and our management are and will continue to be made or significantly influenced by these individuals. The loss or interruption of their continued services could have a materially adverse effect on our business operations and prospects. Although our employment agreements with members of management generally provide for severance payments that are contingent upon the applicable officers refraining from competition with us, the loss of any of these persons services could adversely affect our ability to develop and market our products and obtain necessary regulatory approvals, and the applicable noncompetition provisions can be difficult and costly to monitor and enforce. Further, we do not maintain key-man life insurance.

On September 6, 2005, our Board of Directors, or Board, announced that they would not be renewing the employment contract of Dr. Gary A. Shangold. Accordingly, Dr. Shangold ceased to be the President and Chief Executive Officer of the Company on December 22, 2005.

On September 28, 2005, the Board announced its appointment of Dr. Jan H. Egberts as our Chief Operating Officer, effective September 26, 2005, reporting to the Chairman of the Board. Dr. Egberts assumed the positions of President and Chief Executive Officer on December 23, 2005, was elected as a member of our Board and was named Chairman of the Board on January 17, 2006.

On October 19, 2005, our Board appointed Dr. William F. Hamilton as Chairman of the Corporate Governance and Nominating Committee.  On January 17, 2006, we announced that Dr. Hamilton had been named to the newly-created position of Lead Independent Director.

On October 20, 2005, we announced that Dr. Henry Kwan would no longer serve as Head of Pharmaceutical Sciences.

On November 22, 2005, we announced that Board member, and non-executive Chairman of the Board, Mr. Robert G. Savage announced his intention not to stand for re-election to our Board at our 2006 annual meeting of stockholders. Mr. Savage served as a director since 2004 and as our non-executive Chairman of the Board since September 2, 2005.

On December 15, 2005, we announced that Board member, Dr. Mark Rachesky, announced his resignation from our Board.  Dr. Rachesky served as a director since 2003.



35



---



On December 15, 2005, we announced the election of Mr. J. Jay Lobell as a member of our Board effective December 14, 2005.  Mr. Lobell was appointed as a result of Dr. Rosenwalds right to designate a director nominee for our Board. Although Mr. Lobell is a designee of Dr. Rosenwalds, he does not have any voting or dispositive control over the shares held directly or indirectly by Dr. Rosenwald. As of September 15, 2006, Mr. Lobell has been deemed independent by our Board of Directors in accordance with the rules of AMEX.

In our annual proxy statement, we announced that Dr. Lawrence J. Kessel was not being nominated to stand for re-election to our Board at our 2006 annual stockholders meeting. Dr. Kessel served as a director since March 2003.

On January 17, 2006, we announced the election of Mr. Steven B. Ratoff as a member of our Board.

On April 24, 2006, Ms. Jean Frydman ceased to serve as Vice President, General Counsel and Corporate Secretary.

On September 15, 2006, our Board appointed Steven B. Ratoff as Chairman of the Board, with Dr. Egberts remaining a member of our Board.

On December 4, 2006, our Board appointed David H. Bergstrom, Ph.D. as Senior Vice President and Chief Operating Officer.

On January 4, 2007, Mr. Barry Cohen ceased to serve as Vice President, Business and New Product Development.

On February 2, 2007, we announced the election of Mr. Mark J. Baric as a member of our Board, effective February 1, 2007.

On February 22, 2007, our Board appointed Deni M. Zodda, Ph.D. as Senior Vice President and Chief Business Officer.

Our future success also will depend in part on the continued service of our key scientific and management personnel and our ability to identify, hire and retain additional personnel, including scientific, development and manufacturing staff.

RISKS RELATED TO OUR COMMON STOCK

WE ARE INFLUENCED BY CURRENT STOCKHOLDERS, OFFICERS AND DIRECTORS.

Our directors, executive officers and principal stockholders and certain of our affiliates have the ability to influence the election of our directors and most other stockholder actions. As of May 1, 2007, management and our affiliates currently beneficially own, including shares they have the right to acquire, approximately 16% of the common stock on a fully-diluted basis. This determination of affiliate status is not necessarily a conclusive determination for other purposes. Specifically, Dr. Rosenwald has the ability to exert significant influence over the election of the Board and other matters submitted to our stockholders for approval. Dr. Rosenwald has the ability to designate an individual to serve on our Board and has exercised such ability by designating Mr. J. Jay Lobell to serve on the Board.  Although Mr. Lobell is a designee of Dr. Rosenwalds, he does not have any voting or dispositive
control over the shares held directly or indirectly by Dr. Rosenwald. On December 14, 2005 based upon the recommendation of the Corporate Governance and Nominating Committee, the Board elected Mr. Lobell as a member of the Board.  Pursuant to the listing standards of the AMEX, Mr. Lobell has been deemed to be an independent director by our Board on September 15, 2006.

Such positions may discourage or prevent any proposed takeover of us, including transactions in which our stockholders might otherwise receive a premium for their shares over the then current market prices.  Our directors, executive officers and principal stockholders may influence corporate actions, including influencing elections of directors and significant corporate events.



36



---



THE MARKET PRICE OF OUR STOCK AND OUR EARNINGS MAY BE ADVERSELY AFFECTED BY MARKET VOLATILITY.

The market price of our common stock, like that of many other development stage pharmaceutical or biotechnology companies, has been and is likely to continue to be volatile.  In addition to general economic, political and market conditions, the price and trading volume of our common stock could fluctuate widely in response to many factors, including:


        announcements of the results of clinical trials by us or our competitors;



        adverse reactions to products;



        governmental approvals, delays in expected governmental approvals or withdrawals of any prior governmental approvals or public or regulatory agency concerns regarding the safety or effectiveness of our products;



        changes in the U.S. or foreign regulatory policy during the period of product development;



        developments in patent or other proprietary rights, including any third party challenges of our intellectual property rights;



        announcements of technological innovations by us or our competitors;



        announcements of new products or new contracts by us or our competitors;



        actual or anticipated variations in our operating results due to the level of development expenses and other factors;



        changes in financial estimates by securities analysts and whether our earnings meet or exceed the estimates;



        conditions and trends in the pharmaceutical and other industries;



        new accounting standards; and



        the occurrence of any of the risks set forth in these Risk Factors and other reports, including this Quarterly Report and other filings filed with the Securities and Exchange Commission from time to time.


Our common stock has been listed for quotation on the AMEX since May 11, 2004 under the symbol NVD.  Prior to May 11, 2004, our common stock was traded on the OTC Bulletin Board® of the National Association of Securities Dealers, Inc.  During the 12-month period ended March 31, 2007, the closing price of our common stock has ranged from $1.11 to $1.90.  We expect the price of our common stock to remain volatile.  The average daily trading volume in our common stock varies significantly.  For the 12-month period ended March 31, 2007, the average daily trading volume in our common stock was approximately 139,000 shares.  Our relatively low average volume and low average number of transactions per day may affect the ability of our stockholders to sell their shares in the public market at prevailing prices and a more active market may never develop.

In addition, we may not be able to continue to adhere to the strict listing criteria of the AMEX.  If our common stock were no longer listed on the AMEX, investors might only be able to trade on the OTC Bulletin Board® or in the Pink Sheets® (a quotation medium operated by Pink Sheets LLC).  This would impair the liquidity of our securities not only in the number of shares that could be bought and sold at a given price, which might be depressed by the relative illiquidity, but also through delays in the timing of transactions and reduction in media coverage.

In the past, following periods of volatility in the market price of the securities of companies in our industry, securities class action litigation has often been instituted against companies in our industry.  If we face securities litigation in the future, even if without merit or unsuccessful, it would result in substantial costs and a diversion of management attention and resources, which would negatively impact our business.

BECAUSE THE AVERAGE DAILY TRADING VOLUME OF OUR COMMON STOCK IS LOW, THE ABILITY TO SELL OUR SHARES IN THE SECONDARY TRADING MARKET MAY BE LIMITED.

Because the average daily trading volume of our common stock on the AMEX is low, the liquidity of our common stock may be impaired. As a result, prices for shares of our common stock may be lower than might otherwise prevail if the average daily trading volume of our common stock was higher. The average daily trading volume of our common stock may be low relative to the stocks of exchange-listed companies, which could limit investors ability to sell shares in the secondary trading market.



37



---





WE LIKELY WILL ISSUE ADDITIONAL EQUITY SECURITIES, WHICH WILL DILUTE CURRENT STOCKHOLDERS SHARE OWNERSHIP.

We likely will issue additional equity securities to raise capital and through the exercise of options and warrants that are outstanding or may be outstanding. These additional issuances will dilute current stockholders share ownership.

PENNY STOCK REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF OUR SECURITIES.

The SEC has adopted regulations which generally define a penny stock to be any equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions.  As a result, our common stock is subject to rules that impose additional sales practice requirements on broker dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse).  For transactions covered by such rules, the broker dealer must make a special suitability determination for the purchase of such securities and have received the purchasers written consent to the transaction prior to the purchase.  Additionally, for any transaction involving a penny stock, unless exempt, the rules require
the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market.  The broker dealer must also disclose the commission payable to both the broker dealer and the registered representative, current quotations for the securities and, if the broker dealer is the sole market maker, the broker dealer must disclose this fact and the broker dealers presumed control over the market.  Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Broker-dealers must wait two business days after providing buyers with disclosure materials regarding a security before effecting a transaction in such security.  Consequently, the penny stock rules restrict the ability of broker dealers to sell our securities and affect the ability of investors to sell our securities in the secondary market and the price at which such
purchasers can sell any such securities, thereby affecting the liquidity of the market for our common stock.

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


        control of the market for the security by one or more broker-dealers that are often related to the promoter or issuer;



        manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;



        boiler room practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;



        excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and



        the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.


Our management is aware of the abuses that have occurred historically in the penny stock market.

ADDITIONAL AUTHORIZED SHARES OF OUR COMMON STOCK AND PREFERRED STOCK AVAILABLE FOR ISSUANCE MAY ADVERSELY AFFECT THE MARKET.

We are authorized to issue a total of 200,000,000 shares of common stock and 1,000,000 shares of preferred stock. Such securities may be issued without the approval or other consent of our stockholders. As of May 1, 2007, there were 59,515,732 shares of common stock issued and outstanding. However, the total number of shares of our common stock issued and outstanding does not include shares reserved in anticipation of the exercise of options or warrants. As of May 1, 2007, we had outstanding stock options and warrants to purchase approximately 37.3 million shares of common stock, the exercise prices of which range between $0.46 per share and $3.18 per share, and we have reserved shares of our common stock for issuance in connection with the potential exercise thereof.



38



---



The following table provides an overview of our stock options and corresponding plans:





Plan
        
        Shares Authorized
        
        Options Outstanding at May 1,  2007
        
        Remaining Shares Available for Issuance
        
        Comments1992 Stock Option Plan
        
        500,000
        
        60,000
        
        
        
        Plan Closed1997 Stock Option Plan
        
        500,000
        
        100,000
        
        
        
        Plan Closed1998 Stock Option Plan
        
        3,400,000
        
        2,776,000
        
        329,000
        
        2006 Equity Incentive Plan
        
        6,000,000
        
        4,144,000
        
        1,756,000
        
        Non-Plan
        
        n/a
        
        3,426,000
        
        n/a
        
        




To the extent such options or warrants are exercised, the holders of our common stock will experience further dilution.

In addition, in the event that any future financing should be in the form of, be convertible into or exchangeable for, equity securities, and upon the exercise of options and warrants, investors may experience additional dilution.

See Risk Factors - Our Additional Financing Requirements Could Result In Dilution To Existing Stockholders included herein. The exercise of the outstanding derivative securities will reduce the percentage of common stock held by our stockholders in relation to our aggregate outstanding capital stock. Further, the terms on which we could obtain additional capital during the life of the derivative securities may be adversely affected, and it should be expected that the holders of the derivative securities would exercise them at a time when we would be able to obtain equity capital on terms more favorable than those provided for by such derivative securities. As a result, any issuance of additional shares of our common stock may cause our current stockholders to suffer significant dilution which may adversely affect the market.



In addition to the above referenced shares of our common stock which may be issued without stockholder approval, we have 1,000,000 shares of authorized preferred stock, the terms of which may be fixed by our Board. We presently have no issued and outstanding shares of preferred stock and while we have no present plans to issue any shares of preferred stock, our Board has the authority, without stockholder approval, to create and issue one or more series of such preferred stock and to determine the voting, dividend and other rights of holders of such preferred stock. The issuance of any of such series of preferred stock may have an adverse effect on the holders of our common stock.

SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET.

From time to time, certain of our stockholders may be eligible to sell all or some of their shares of our common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act of 1933, as amended, subject to certain limitations.  In general, pursuant to Rule 144, a stockholder (or stockholders whose shares are aggregated) who has satisfied a one year holding period may, under certain circumstances, sell within any three month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale.  Rule 144 also permits, under certain circumstances, the sale of securities, without any limitation, by our stockholders that are non-affiliates that have satisfied a two year holding period.  Any
substantial sale of our common stock pursuant to Rule 144 or pursuant to any resale prospectus may have a material adverse effect on the market price of our common stock.

LIMITATION ON DIRECTOR/OFFICER LIABILITY.

As permitted by Delaware law, our certificate of incorporation limits the liability of our directors for monetary damages for breach of a directors fiduciary duty except for liability in certain instances.  As a result of our charter provision and Delaware law, stockholders may have limited rights to recover against directors for breach of fiduciary duty.  In addition, our certificate of incorporation provides that we shall indemnify our directors and officers to the fullest extent permitted by law.

WE HAVE NO HISTORY OF PAYING DIVIDENDS ON OUR COMMON STOCK.

We have never paid any cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future.  We plan to retain any future earnings to finance growth.  If we decide to pay dividends to the holders of our common stock, such dividends may not be paid on a timely basis.



39



---



PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW COULD DETER A CHANGE OF OUR MANAGEMENT WHICH COULD DISCOURAGE OR DELAY OFFERS TO ACQUIRE US.

Provisions of our certificate of incorporation and Delaware law may make it more difficult for someone to acquire control of us or for our stockholders to remove existing management, and might discourage a third party from offering to acquire us, even if a change in control or in management would be beneficial to our stockholders.  For example, our certificate of incorporation allows us to issue shares of preferred stock without any vote or further action by our stockholders.  Our Board has the authority to fix and determine the relative rights and preferences of preferred stock.  Our Board also has the authority to issue preferred stock without further stockholder approval, including large blocks of preferred stock. As a result, our Board could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend
payments before dividends are distributed to the holders of our common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock.

SALES OF LARGE QUANTITIES OF OUR COMMON STOCK, INCLUDING THOSE SHARES ISSUABLE IN CONNECTION WITH PRIVATE PLACEMENT TRANSACTIONS, COULD REDUCE THE PRICE OF OUR COMMON STOCK.

On July 20, 2006, we filed a shelf registration statement on Form S-3 registering for sale by us of up to 14,000,000 shares of our common stock. Such shelf registration statement was declared effective by the SEC on August 2, 2006. We may offer and sell such shares from time to time, in one or more offerings in amounts and at prices, and on terms determined at the time of the offering. Such offerings of our common stock may be made through agents we select or through underwriters and dealers we select. If we use agents, underwriters or dealers, we will name them and describe their compensation at the time of the offering. As of the filing date of this Quarterly Report, such shelf registration statement is no longer effective.

In December 2006, we sold securities in a private placement transaction resulting in the issuance of 9,823,983 shares of our common stock, and warrants to purchase 4,383,952 shares of our common stock.  The sale of the shares of common stock and warrants resulted in gross proceeds to us of approximately $14.2 million, prior to offering expenses.

In April 2006, we sold securities in a private placement transaction resulting in the issuance of 8,092,796 shares of our common stock, and warrants to purchase 2,896,168 shares of our common stock.  The sale of the shares of common stock and warrants resulted in gross proceeds to us of approximately $11.8 million, prior to offering expenses.

In May 2005, we sold securities in a private placement transaction resulting in the issuance of 6,733,024 shares of our common stock, and certain warrants to purchase 2,693,210 shares of our common stock.  The sales of the shares of common stock and warrants resulted in gross proceeds to us of $7.1 million, prior to offering expenses.

The offering of, and/or resale of our common stock and the exercise of the warrants described immediately above in this risk factor are subject to currently effective registration statements filed by us on Forms S-3. There can be no assurance as to the prices at which our common stock will trade in the future, although they may continue to fluctuate significantly. Prices for our common stock will be determined in the marketplace and may be influenced by many factors, including the following:


        The depth and liquidity of the markets for our common stock;



        Investor perception of us and the industry in which we participate; and



        General economic and market conditions.


Any sales of large quantities of our common stock could reduce the price of our common stock. The holders of the shares may sell such shares at any price and at any time, as determined by such holders in their sole discretion without limitation. If any such holders sell such shares in large quantities, our common stock price may decrease and the public market for our common stock may otherwise be adversely affected because of the additional shares available in the market.

As of May 1, 2007, we have 59,515,732 shares of common stock issued and outstanding and approximately 37.3 million shares of common stock issuable upon the exercise of outstanding stock options and warrants. In the event we wish to offer and sell shares of our common stock in excess of the 200,000,000 shares of common stock currently authorized by our certificate of incorporation, we will first need to receive stockholder approval. Such stockholder approval has the potential to adversely affect the timing of any potential transactions.



40



---



THE SECURITIES ISSUED IN OUR DECEMBER 2006 PRIVATE PLACEMENT ARE RESTRICTED SECURITIES.



At the time of the offer and sale of the common stock (and the shares of common stock underlying the warrants) in our December 2006 private placement, the common stock was not registered under the Securities Act or the securities laws of any state.  Accordingly, these securities may not be sold or otherwise transferred unless such sale or transfer is subsequently registered under the Securities Act and applicable state securities laws or unless exemptions from such registration are available.  The registration statement covering these securities was declared effective by the SEC on January 26, 2007.  Notwithstanding our registration obligations regarding these securities, investors may be required to hold these securities for an indefinite period of time.  All investors who purchase these securities are required to make representations that it will not sell, transfer, pledge or otherwise dispose of any of
the securities in the absence of an effective registration statement covering such transaction under the Securities Act and applicable state securities laws, or the receipt by us of an opinion of counsel to the effect that registration is not required.



WE WILL HAVE BROAD DISCRETION AS TO THE USE OF THE PROCEEDS FROM THE DECEMBER 2006 PRIVATE PLACEMENT AND MAY USE THE PROCEEDS IN A MANNER WITH WHICH YOU DISAGREE.



Our Board and management will have broad discretion over the use of the net proceeds of the December 2006 private placement.  Stockholders may disagree with the judgment of the Board and management regarding the application of the proceeds of the December 2006 private placement.  We cannot predict that investments of the proceeds will yield a favorable, or any, return.



WE MAY INCUR SIGNIFICANT COSTS FROM CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK VOLATILITY.



In the past, following periods of large price declines in the public market price of a companys stock, holders of that stock occasionally have instituted securities class action litigation against the company that issued the stock.  If any of our stockholders were to bring this type of lawsuit against us, even if the lawsuit is without merit, we could incur substantial costs defending the lawsuit.  The lawsuit also could divert the time and attention of our management, which would hurt our business.  Any adverse determination in litigation could also subject us to significant liabilities.

THE UNCERTAINTY CREATED BY CURRENT ECONOMIC CONDITIONS AND POSSIBLE TERRORIST ATTACKS AND MILITARY RESPONSES THERETO COULD MATERIALLY ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS, AND PROCURE NEEDED FINANCING.

Current conditions in the domestic and global economies continue to present challenges. We expect that the future direction of the overall domestic and global economies will have a significant impact on our overall performance. Fiscal, monetary and regulatory policies worldwide will continue to influence the business climate in which we operate. If these actions are not successful in spurring continued economic growth, we expect that our business will be negatively impacted, as customers will be less likely to buy our products, if and when we commercialize our products. The potential for future terrorist attacks or war as a result thereof has created worldwide uncertainties that make it very difficult to estimate how the world economy will perform going forward.



41



---



OUR INABILITY TO MANAGE THE FUTURE GROWTH THAT WE ARE ATTEMPTING TO ACHIEVE COULD SEVERELY HARM OUR BUSINESS.

We believe that, given the right business opportunities, we may expand our operations rapidly and significantly. If rapid growth were to occur, it could place a significant strain on our management, operational and financial resources. To manage any significant growth of our operations, we will be required to undertake the following successfully:


        We will need to improve our operational and financial systems, procedures and controls to support our expected growth and any inability to do so will adversely impact our ability to grow our business. Our current and planned systems, procedures and controls may not be adequate to support our future operations and expected growth. Delays or problems associated with any improvement or expansion of our operational systems and controls could adversely impact our relationships with customers and harm our reputation and brand.



        We will need to attract and retain qualified personnel, and any failure to do so may impair our ability to offer new products or grow our business. Our success will depend on our ability to attract, retain and motivate managerial, technical, marketing, and administrative personnel. Competition for such employees is intense, and we may be unable to successfully attract, integrate or retain sufficiently qualified personnel.


If we are unable to hire, train, retain or manage the necessary personnel, we may be unable to successfully introduce new products or otherwise implement our business strategy. If we are unable to manage growth effectively, our business, results of operations and financial condition could be materially adversely affected.

WE MAY BE OBLIGATED, UNDER CERTAIN CIRCUMSTANCES, TO PAY LIQUIDATED DAMAGES TO HOLDERS OF OUR COMMON STOCK.



We have entered into agreements with the holders of our common stock that requires us to continuously maintain as effective, a registration statement covering the underlying shares of common stock. Such registration statements were declared effective on January 26, 2007, May 30, 2006 and July 28, 2005 and must continuously remain effective for a specified term. If we fail to continuously maintain such a registration statement as effective throughout the specified term, we may be subject to liability to pay liquidated damages.



42



---







ITEM 6.  EXHIBITS



INDEX TO EXHIBITS



The following exhibits are included with this Quarterly Report. All management contracts or compensatory plans or arrangements are marked with an asterisk.



EXHIBIT NO.
        
        DESCRIPTION
        
        METHOD OF FILING31.1
        
        Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
        
        Filed herewith31.2
        
        Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
        
        Filed herewith32.1
        
        Certifications of the Chief Executive Officer and Chief Financial Officer under 18 USC 1350, Section 1330 as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
        
        Furnished






43



---



SIGNATURES



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



NovaDel Pharma Inc.





Date:  May 15, 2007
        By:
        /S/JAN H. EGBERTSJan H. Egberts, M.D.President and Chief Executive Officer(principal executive officer)






Date:  May 15, 2007
        By:
        /S/MICHAEL E. SPICERMichael E. SpicerChief Financial Officer(principal financial and accounting officer)








44