UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON,D.C. 20549

FORM 10-QSB

XQUARTERLY REPORT UNDER SECTION 13 or 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedJanuary 31, 2005

____
  TRANSITION REPORT UNDER SECTION 13 or 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____to_____

Commission file number 001-32177

NOVADEL PHARMA INC.

(Exact name of small business issuer as specified in its charter)



| | Delaware(State or other jurisdiction ofincorporation or organization) |  | 22-2407152(I.R.S. EmployerIdentification No.) | 
| | --------------------------------------------------------------------- |  | --------------------------------------------- | 

| |  |  |  | 
| |  |  |  | 

| | 25 Minneakoning RoadFlemington, New Jersey(Address of Principal Executive Offices) |  | 08822(Zip Code) | 
| | ---------------------------------------------------------------------------------- |  | --------------- | 

(908) 782-3431

(Issuers telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. YesXNo ___

APPLICABLE ONLY TO CORPORATE ISSUERS:

State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date: 33,834,294 shares of common stock outstanding as of March 12, 2005.





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Index



|           |    |                                                                     | Page
|---------- | -- | ------------------------------------------------------------------- | ----
|PART I     |    | FINANCIAL
        INFORMATION                                       |     
|           |    |                                                                     |     
|Item 1.    |    | Financial
        Statements                                        | 1   
|           |    |                                                                     |     
|Item 2.    |    | Managements Discussion and Analysis or Plan of Operation           | 13  
|           |    |                                                                     |     
|Item 3.    |    | Controls and Procedures                                             | 20  
|           |    |                                                                     |     
|PART II    |    | OTHER
        INFORMATION                                           |     
|           |    |                                                                     |     
|Item 1.    |    | Legal
        Proceedings                                           | 22  
|           |    |                                                                     |     
|Item 2.    |    | Unregistered
        Sales of Equity Securities and Use of Proceeds | 22  
|           |    |                                                                     |     
|Item 3.    |    | Defaults
        Upon Senior Securities                             | 23  
|           |    |                                                                     |     
|Item 4.    |    | Submission
        of Matters to a Vote of Security Holders         | 23  
|           |    |                                                                     |     
|Item 5.    |    | Other
        Information                                           | 23  
|           |    |                                                                     |     
|Item 6.    |    | Exhibits                                                            | 23  
|           |    |                                                                     |     
|Signatures | 24



ii

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Safe harbor statements under the private securities litigation reform act of 1995

This Current Report on Form 10-QSB includes forward-looking statements, including statements regarding NovaDel Pharma Inc.s (the Company 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 or Plan of Operation 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 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; the risks related to the Companys internal controls and procedures; and the risks identified under the section entitled Risk Factors following Item 5 in Part II of the Companys Annual Report on Form 10-KSB for the fiscal year ended July 31, 2004, and other reports, including this report and other filings filed with the Securities and Exchange Commission from time to time.





iii

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PART
  I

FINANCIAL INFORMATION

|Item 1. | Financial Statements.
|------- | ---------------------

NOVADEL PHARMA INC.

CONDENSED BALANCE SHEETS

AS OF JANUARY 31, 2005 (Unaudited) AND JULY 31, 2004



|                                                                                                                    |  | January
        31,2005(Unaudited) |             | July
        31,2004(Note 1) |  
|------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ----------- | ---------------------------- | -
|                                                                                                                    |  |                                    |             |                              |  
|ASSETS                                                                                                              |  |                                    |             |                              |  
|Current
        Assets:                                                                                             |  |                                    |             |                              |  
|Cash
        and cash equivalents                                                                                   |  | $                                  | 1,380,000   |                              | $
|Short-term
        investments                                                                                      |  |                                    | 5,307,000   |                              |  
|Accounts
        receivable  trade                                                                                 |  |                                    | 148,000     |                              |  
|Inventories                                                                                                         |  |                                    | 160,000     |                              |  
|Prepaid
        expenses and other current assets                                                                   |  |                                    | 265,000     |                              |  
|                                                                                                                    |  |                                    |             |                              |  
|Total
        Current Assets                                                                                        |  |                                    | 7,260,000   |                              |  
|                                                                                                                    |  |                                    |             |                              |  
|Property
        and equipment, net                                                                                 |  |                                    | 2,251,000   |                              |  
|Long-term
        investments                                                                                       |  |                                    | 397,000     |                              |  
|Other
        assets                                                                                                |  |                                    | 351,000     |                              |  
|Other
        investment, at cost                                                                                   |  |                                    | 500,000     |                              |  
|                                                                                                                    |  |                                    |             |                              |  
|TOTAL
        ASSETS                                                                                                |  | $                                  | 10,759,000  |                              | $
|                                                                                                                    |  |                                    |             |                              |  
|LIABILITIES
        AND STOCKHOLDERS EQUITY                                                                        |  |                                    |             |                              |  
|Current
        Liabilities:                                                                                        |  |                                    |             |                              |  
|Accounts
        payable-trade                                                                                      |  | $                                  | 462,000     |                              | $
|Accrued
        expenses and other current liabilities                                                              |  |                                    | 1,014,000   |                              |  
|Current
        portion of deferred revenue                                                                         |  |                                    | 162,000     |                              |  
|Current
        portion of capitalized lease obligation                                                             |  |                                    |            |                              |  
|                                                                                                                    |  |                                    |             |                              |  
|Total
        Current Liabilities                                                                                   |  |                                    | 1,638,000   |                              |  
|                                                                                                                    |  |                                    |             |                              |  
|Non
        current portion of deferred revenue                                                                     |  |                                    | 2,755,000   |                              |  
|Non
        current portion of capitalized lease obligation                                                         |  |                                    |            |                              |  
|                                                                                                                    |  |                                    |             |                              |  
|Total
        Liabilities                                                                                           |  |                                    | 4,393,000   |                              |  
|                                                                                                                    |  |                                    |             |                              |  
|COMMITMENTS
        AND CONTINGENCIES                                                                               |  |                                    |             |                              |  
|                                                                                                                    |  |                                    |             |                              |  
|STOCKHOLDERS
        EQUITY:                                                                                       |  |                                    |             |                              |  
|Preferred
        stock, $.01 par value:                                                                            |  |                                    |             |                              |  
|Authorized
        1,000,000 shares, none issued                                                                    |  |                                    |             |                              |  
|Common
        stock, $.001 par value:                                                                              |  |                                    |             |                              |  
|Authorized
         100,000,000 shares                                                                             |  |                                    |             |                              |  
|Issued
        and outstanding 33,834,294 shares at January 31, 2005 and 33,091,437 shares
        at July 31, 2004 |  |                                    | 34,000      |                              |  
|Additional
        paid-in capital                                                                                  |  |                                    | 36,085,000  |                              |  
|Accumulated
        deficit                                                                                         |  |                                    | (29,747,000 | )                            |  
|Less:
        Treasury stock, at cost, 3,012 shares                                                                 |  |                                    | (6,000      | )                            |  
|                                                                                                                    |  |                                    |             |                              |  
|Total
        Stockholders Equity                                                                                  |  |                                    | 6,366,000   |                              |  
|                                                                                                                    |  |                                    |             |                              |  
|TOTAL
        LIABILITIES AND STOCKHOLDERS EQUITY                                                                  |  | $                                  | 10,759,000  |                              | $
|                                                                                                                    |  |                                    |             |                              |  

See accompanying notes to condensed financial statements.



1

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NOVADEL PHARMA INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                       |  | Three
        Months EndedJanuary 31, |            |   | Six
        Months EndedJanuary 31, |  
|---------------------------------------------------------------------- |  | ------------------------------------- | ---------- | - | ----------------------------------- | -
|                                                                       |  |                                       |            |   |                                     |  
|                                                                       |  | 2005                                  |            |   | 2004                                |  
|                                                                       |  |                                       |            |   |                                     |  
|                                                                       |  |                                       |            |   | As
        restated(Note 3)         |  
|                                                                       |  |                                       |            |   |                                     |  
|                                                                       |  |                                       |            |   |                                     |  
|License
        Fees                                                   |  | $                                     | 41,000     |   |                                     | $
|                                                                       |  |                                       |            |   |                                     |  
|Consulting
        Revenues                                            |  |                                       | 83,000     |   |                                     |  
|                                                                       |  |                                       |            |   |                                     |  
|Total
        Revenues                                                 |  |                                       | 124,000    |   |                                     |  
|                                                                       |  |                                       |            |   |                                     |  
|Research
        And Development Expenses                              |  |                                       | 759,000    |   |                                     |  
|Consulting,
        Selling, General And Administrative Expenses       |  |                                       | 2,169,000  |   |                                     |  
|                                                                       |  |                                       |            |   |                                     |  
|Total
        Expenses                                                 |  |                                       | 2,928,000  |   |                                     |  
|                                                                       |  |                                       |            |   |                                     |  
|Loss
        From Operations                                           |  |                                       | (2,804,000 | ) |                                     |  
|                                                                       |  |                                       |            |   |                                     |  
|Interest
        Income                                                |  |                                       | 13,000     |   |                                     |  
|                                                                       |  |                                       |            |   |                                     |  
|                                                                       |  |                                       |            |   |                                     |  
|Loss
        Before Income Tax Benefit                                 |  |                                       | (2,791,000 | ) |                                     |  
|                                                                       |  |                                       |            |   |                                     |  
|Income
        Tax Benefit                                             |  |                                       | 241,000    |   |                                     |  
|                                                                       |  |                                       |            |   |                                     |  
|                                                                       |  |                                       |            |   |                                     |  
|Net
        Loss                                                       |  | $                                     | (2,550,000 | ) |                                     | $
|                                                                       |  |                                       |            |   |                                     |  
|Basic
        And Diluted Loss Per Share                               |  | $                                     | (.08       | ) |                                     | $
|                                                                       |  |                                       |            |   |                                     |  
|                                                                       |  |                                       |            |   |                                     |  
|Shares
        Used In Computation Of Basic And Diluted Loss Per Share |  |                                       | 33,596,406 |   |                                     |  
|                                                                       |  |                                       |            |   |                                     |  

See accompanying notes to condensed financial statements.





2



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NOVADEL PHARMA INC.

CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY

(Unaudited)

(Note 3)



|                                                            |  | Common Stock |  |        |        |                          |   |                    |   |               |            
|----------------------------------------------------------- |  | ------------ |  | ------ | ------ | ------------------------ | - | ------------------ | - | ------------- | -----------
|                                                            |  |              |  |        |        |                          |   |                    |   |               |            
|                                                            |  | Shares       |  | Amount |        | AdditionalPaid-inCapital |   | AccumulatedDeficit |   | TreasuryStock |            
|                                                            |  |              |  |        |        |                          |   |                    |   |               |            
|BALANCE, August 1, 2004                                     |  | 33,091,437   |  | $      | 33,000 |                          | $ | 34,937,000         |   | $             | (24,941,000
|Impact of variable plan accounting                          |  |             |  |        |       |                          |   | (5,000             | ) |               |           
|Stock issued to Hana Biosciences Inc. per license agreement |  | 400,000      |  |        |       |                          |   | 636,000            |   |               |           
|Stock issued for warrants exercised                         |  | 142,857      |  |        |       |                          |   | 200,000            |   |               |           
|Warrants issued for services                                |  |             |  |        |       |                          |   | 11,000             |   |               |           
|Stock issued to consultants for services                    |  | 200,000      |  |        | 1,000  |                          |   | 306,000            |   |               |           
|                                                            |  |              |  |        |        |                          |   |                    |   |               |            
|Net Loss                                                    |  |             |  |        |       |                          |   |                   |   |               | (4,806,000 
|                                                            |  |              |  |        |        |                          |   |                    |   |               |            
|BALANCE, January 31, 2005                                   |  | 33,834,294   |  | $      | 34,000 |                          | $ | 36,085,000         |   | $             | (29,747,000
|                                                            |  |              |  |        |        |                          |   |                    |   |               |            

See accompanying notes to condensed financial statements.





3



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NOVADEL PHARMA INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

|                                                                                                  |  | Six
        Months EndedJanuary 31, |           
|------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ----------
|                                                                                                  |  |                                     |           
|                                                                                                  |  | 2005                                |           
|                                                                                                  |  |                                     |           
|CASH
        FLOWS FROM OPERATING ACTIVITIES:                                                     |  |                                     |           
|Net
        loss                                                                                  |  | $                                   | (4,806,000
|Adjustments
        to reconcile net loss to net cash used in operating activities:               |  |                                     |           
|Stock
        issued for services                                                                 |  |                                     | 307,000   
|Warrants
        issued for services                                                              |  |                                     | 11,000    
|Impact
        of variable plan accounting                                                        |  |                                     | (5,000    
|Depreciation
        and amortization                                                             |  |                                     | 186,000   
|Changes
        in operating assets and liabilities:                                              |  |                                     |           
|Accounts
        receivable  trade                                                               |  |                                     | (18,000   
|Inventories                                                                                       |  |                                     | (160,000  
|Prepaid
        expenses and other current assets                                                 |  |                                     | (10,000   
|Other
        assets                                                                              |  |                                     |          
|Accounts
        payable  trade                                                                  |  |                                     | 221,000   
|Accrued
        expenses and other current liabilities                                            |  |                                     | 216,000   
|Deferred
        revenue                                                                          |  |                                     | 2,055,000 
|                                                                                                  |  |                                     |           
|Net
        cash used in operating activities                                                     |  |                                     | (2,003,000
|                                                                                                  |  |                                     |           
|CASH
        FLOWS FROM INVESTING ACTIVITIES:                                                     |  |                                     |           
|Purchases
        of investments                                                                  |  |                                     | (4,280,000
|Maturities
        of investments                                                                 |  |                                     | 6,094,000 
|Purchases
        of property and equipment                                                       |  |                                     | (1,371,000
|                                                                                                  |  |                                     |           
|Net
        cash provided by (used in) investing activities                                       |  |                                     | 443,000   
|                                                                                                  |  |                                     |           
|CASH
        FLOWS FROM FINANCING ACTIVITIES:                                                     |  |                                     |           
|Proceeds
        received from issuance of common stock through a private placement offering      |  |                                     |          
|Proceeds
        from shares of common stock issued to Hana Biosciences                           |  |                                     | 636,000   
|Proceeds
        from warrants exercised                                                          |  |                                     | 200,000   
|Payments
        on capitalized lease obligation                                                  |  |                                     | (62,000   
|                                                                                                  |  |                                     |           
|Net
        cash provided by financing activities                                                 |  |                                     | 774,000   
|                                                                                                  |  |                                     |           
|NET
        INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                      |  |                                     | (786,000  
|CASH
        AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                            |  |                                     | 2,166,000 
|                                                                                                  |  |                                     |           
|CASH
        AND CASH EQUIVALENTS, END OF PERIOD                                                  |  | $                                   | 1,380,000 
|                                                                                                  |  |                                     |           
|SUPPLEMENTAL
        DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:                    |  |                                     |           
|Equipment
        acquired under capitalized lease obligation                                     |  | $                                   |          
|                                                                                                  |  |                                     |           
|Investment
        in Hana Biosciences common stock received in connection with license agreement |  | $                                   | 500,000   
|                                                                                                  |  |                                     |           

See
  accompanying notes to condensed financial statements.

4

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NOTESTOFINANCIALSTATEMENTS(UNAUDITED)

|Note 1 - | The Company and Basis of Presentation
|-------- | -------------------------------------

The Company -NovaDel Pharma Inc. (the Company), is engaged in the development of novel application drug delivery systems for presently marketed prescription, over-the-counter (OTC) and veterinary drugs. The Companys patented and patent-pending delivery system is a lingual spray potentially enabling drug absorption through the oral mucosa and more rapid absorption into the bloodstream than presently available oral delivery systems. The Companys proprietary delivery system potentially enhances and greatly accelerates the onset of the therapeutic benefits within minutes of administration. The Companys development efforts for its novel drug delivery system are concentrated on making such system available for drugs that are already available and proven in the marketplace. In addition to increasing the bioavailability of a drug
by avoiding metabolism by the liver before entry into the bloodstream, the Company believes that its proprietary drug delivery system offers the following significant advantages: (i) more rapid delivery of drugs to the bloodstream allowing for quicker onset of therapeutic effects compared to conventional oral dosage forms; (ii) improved drug safety profile by reducing the required dosage, including possible reduction of side-effects; (iii) improved dosage reliability; (iv) allowing medication to be taken without water; and (v) improved patient convenience and compliance.

The Companys strategy is to concentrate its product development activities primarily on pharmaceutical products for which there already are significant prescription sales, where the use of the Companys proprietary, novel drug delivery technology will greatly enhance speed of onset of therapeutic effect, 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.

The Company has identified six tier-one priority products for development, namely nitroglycerin, sumatriptan, alprazolam, zolpidem, ondansetron and propofol. The Company also has identified a number of other development initiatives which are currently less of a priority than the Companys six tier-one priority programs.

To date, the Company has entered into strategic license agreements with (i) Manhattan Pharmaceuticals, Inc. (Manhattan), in connection with propofol, (ii) Velcera Pharmaceuticals, Inc. (Velcera), in connection with veterinary applications for currently marketed veterinary drugs, (iii) Par Pharmaceutical, Inc. (Par), for the marketing rights in the United States and Canada for the Companys nitroglycerin lingual spray, and (iv) Hana Biosciences Inc. (Hana), for the marketing rights in the United States and Canada for the Companys ondansetron lingual spray.





5



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On November 18, 2004, the Company entered into a manufacturing and supply agreement with INyX USA, Ltd. (INyX), whereby INyX will manufacture and supply the Companys nitroglycerin lingual spray. For a five-year period beginning November 18, 2004, INyX will be the exclusive provider of the nitroglycerin lingual spray to the Company worldwide, excluding Poland, Byelorussia, the former Russian Republics of Ukraine, Latvia, Lithuania, Estonia and the United Arab Emirates. 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. The targeted date for INyX to commence production is presently mid-2005. During the quarter ended January 31, 2005, the
Company made payments to INyX of $282,000 which INyX used to acquire certain fixed assets to be used in the manufacturing process. In addition, the Company purchased fixed assets during the quarter in the amount of $87,000 and supplies in the amount of $99,000, which assets and supplies were shipped to the facilities of INyX, to be used expressly for the business of the Company in connection with the manufacturing and supply agreement. The Company had total fixed assets of $428,000 and inventories of $160,000 at the facilities of INyX as of January 31, 2005. Such assets are the property of the Company and cannot be used by INyX for any other business. In the event that the Companys contract with INyX is terminated for any reason, such assets are to be returned to the Company.

The Company has not entered into any other material development arrangements with any pharmaceutical companies. The Company believes that it will require additional financing and/or additional alliances with development partners to undertake and maintain its business plan.

Basis of Presentation -The balance sheet at July 31, 2004, the end of the preceding fiscal year, has been derived from the audited balance sheet contained in the Companys Annual Report on Form 10-KSB for the fiscal year ended July 31, 2004, 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. The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.

Certain
  footnote disclosures normally included in financial statements prepared in accordance
  with accounting principles generally accepted in the United States 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 Annual Report on Form 10-KSB for the fiscal year ended
  July 31, 2004.





6



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The Company has reported a net loss of $4,806,000 for the
  six months ended January 31, 2005 and a net loss of $2,369,000 for the six months
  ended January 31, 2004, as restated (see Note 3). Management believes that the
  Company will continue to incur net losses through at least January 31, 2006.
  Management believes that the Companys capital resources will be adequate
  to fund operations through at least October 31, 2005. As of January 31, 2005,
  the Company had working capital of $5,622,000, cash and cash equivalents of
  $1,380,000 and short-term investments of $5,307,000. Until and unless the Companys
  operations generate significant revenues, the Company will attempt to continue
  to fund operations from cash on hand and short-term investments. The Companys
  long-term liquidity is contingent upon achieving sales 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.

Management of the Company believes that no later than the fiscal quarter ending October 31, 2005, it will be necessary for the Company to obtain additional financing and/or consummate a strategic alliance with a business partner. 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 the control of the Company. The Company may not be able to successfully obtain additional financing on terms acceptable to the Company, or at all. If the Company is unsuccessful at obtaining additional financing as needed, it may be required to significantly curtail or cease operations.

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.

Reclassification Certain prior year amounts have been reclassified to conform to the current years presentation.

|Note 2 - | Loss Per Common 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 net loss per common
  share is the same as basic net 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 January 31, 2005 and 2004, there were 23,723,385
  and 20,110,429 common shares, respectively, issuable upon exercise of options
  and warrants which were excluded from the diluted loss per share computation.
  In January 2005, the Company determined that certain warrants previously issued
  by the Company contain anti-dilution provisions which require an
  adjustment to the number of warrants previously issued in the event of certain
  events. As a result of the financings consummated by the Company during 2003,
  the Company is required to adjust such warrants to be exerciseable for an
  additional approximate 3,000,000 common shares, which is included in the 23,723,385
  of common
  shares issuable
  upon exercise of options and warrants as of January 31, 2005.





7



---





|Note 3 - | Restatement of Financial Statements
|-------- | -----------------------------------

In connection with the preparation of the Companys Annual Report on Form 10-KSB for the fiscal year ended July 31, 2004, the Companys independent registered public accounting firm brought to the attention of the Company that certain of the Companys issued and outstanding stock options should have been subject to variable plan accounting treatment under applicable accounting standards and, accordingly, previously unrecognized compensation expenses should have been recognized in the Companys previously issued financial statements under the Financial Accounting Standards Boards Interpretation 44, Accounting for Certain Transactions involving Stock Compensation-an interpretation of APB Opinion No. 25 (Issue Date 3/00). After reviewing the matter with its current and former independent registered public accounting firms, the Company identified certain
adjustments that necessitated the restatement of its financial statements for the first three quarters of fiscal 2004, the interim periods of fiscal 2003 and 2002, and for the fiscal years 2003 and 2002.

These adjustments reflect variable plan accounting treatment of the affected stock options for the relevant periods, resulting from cashless exercise provisions applicable to options held by employees and directors. Under variable plan option accounting, compensation expense is increased or decreased as a result of changes in the market price of the Companys common stock. The restatement adjustment for the three and six months ended January 31, 2004 resulted in credits to Research & Development of $3,000 and $27,000, respectively. In addition, the restatement adjustment for the three and six months ended January 31, 2004 resulted in credits to Consulting, Selling, General and Administrative Expenses of $72,000 and $743,000, respectively. For the three and six months ended January 31, 2004, net loss decreased by $75,000 and $772,000, respectively, as a result of the variable plan
accounting treatment adjustment.

On October 20, 2004, the Board of Directors of the Company rescinded the Companys cashless exercise provision for all of the Companys outstanding option grants. As a result, variable accounting will no longer be required to be applied to all option grants. However, variable accounting may still be required for certain option grants (see Note 5).



8



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|Note 4 - | Investments
|-------- | -----------

Investments include short-term investments, long-term investments and an investment in common stock received from a licensee (See Note 6). Short-term investments are carried at amortized cost, which approximates fair market value, and consist of certificates of deposit and US treasury securities with original maturities greater than three months and less than one year. Long-term investments are carried at amortized cost, which approximates fair market value, and consist of certificates of deposit, and US treasury securities with maturities greater than one year. Unregistered, nonmarketable common stock received from the licensee is carried at cost.

|Note 5 - | Stock Options and Warrants
|-------- | --------------------------

The Company uses the intrinsic value method of accounting for stock options pursuant to the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for its employee stock options. Because the exercise price of the Companys stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is initially recognized under APB 25. Compensation expense and credits were recorded as a result of variable plan accounting for options with cashless exercise provisions. Had compensation costs been determined using the Black-Scholes option pricing model in accordance with the fair value method prescribed by SFAS No. 123 Accounting for Stock-Based Compensation for all options issued to employees and amortized over the vesting period, the Companys net
loss applicable to common shares and net loss per common share (basic and diluted) would have been increased to the pro forma amounts indicated below.

As noted above, compensation expense and credits were recorded through October 31, 2004 as a result of variable plan accounting due to cashless exercise provisions, which provisions were rescinded on October 20, 2004. Variable plan accounting is still required for approximately 340,000 outstanding options of the Company, for which option exercise prices were modified from the original agreements. These option agreements will continue to be accounted for under variable plan accounting until such time as they lapse or are exercised. The use of variable plan accounting reduced net loss by $34,000 and $75,000 for the three months ended January 31, 2005 and 2004, respectively, and reduced net loss by $5,000 and $772,000 for the six months ended January 31, 2005 and 2004, respectively.





9



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|                                                                                                 |  | Three Months EndedJanuary 31, |           
|------------------------------------------------------------------------------------------------ |  | ----------------------------- | ----------
|                                                                                                 |  |                               |           
|                                                                                                 |  | 2005                          |           
|                                                                                                 |  |                               |           
|Net loss, as reported                                                                            |  | $                             | (2,550,000
|Compensation expense (credit) resulting from variable plan accounting                            |  |                               | (34,000   
|                                                                                                 |  |                               |           
|Total Stock-based employee compensation expense using the fair-value based method for all awards |  |                               | (197,000  
|                                                                                                 |  |                               |           
|Pro forma net loss                                                                               |  | $                             | (2,781,000
|                                                                                                 |  |                               |           
|                                                                                                 |  |                               |           
|Loss per share:                                                                                  |  |                               |           
|Basic and diluted, as reported                                                                   |  | $                             | (.08      
|                                                                                                 |  |                               |           
|Basic and diluted, pro forma                                                                     |  | $                             | (.08      
|                                                                                                 |  |                               |           



|                                                                                                 |  | Six Months EndedJanuary 31, |           
|------------------------------------------------------------------------------------------------ |  | --------------------------- | ----------
|                                                                                                 |  |                             |           
|                                                                                                 |  | 2005                        |           
|                                                                                                 |  |                             |           
|Net loss, as reported                                                                            |  | $                           | (4,806,000
|Compensation expense (credit) resulting from variable plan accounting                            |  |                             | (5,000    
|                                                                                                 |  |                             |           
|Total Stock-based employee compensation expense using the fair-value based method for all awards |  |                             | (368,000  
|                                                                                                 |  |                             |           
|Pro forma net loss                                                                               |  | $                           | (5,179,000
|                                                                                                 |  |                             |           
|                                                                                                 |  |                             |           
|Loss per share:                                                                                  |  |                             |           
|Basic and diluted, as reported                                                                   |  | $                           | (.14      
|                                                                                                 |  |                             |           
|Basic and diluted, pro forma                                                                     |  | $                           | (.16      
|                                                                                                 |  |                             |           

The
  fair market value of options granted during the three and six month periods
  ended January 31, 2005 and 2004 was estimated at the date of grant using a Black-Scholes
  option pricing model with the following weighted-average assumptions, respectively:
  risk-free interest rates of 4.0%; dividend yield of 0.0%; volatility factors
  of 68% and 67% for the three and six months ended January 31, 2005, respectively,
  and 54% and 57% for the three and six months ended January 31, 2004, respectively;
  and a weighted-average expected life of the options of five to 10 years for
  the three and six months ended January 31, 2005 and 2004.





10



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As a result of the revision of SFAS No. 123, the Company
  will expense the fair value of employee stock options beginning with the first
  quarter of fiscal 2006.

During the fiscal quarter ended January 31, 2005, the Company granted 750,000 options to employees under the 1998 Stock Option Plan. These options vest equally over three years and expire in 10 years. The exercise price of the options granted during this fiscal quarter is $1.53 per share. During the quarter, the Company recorded a charge to operations of $11,000 for 15,000 warrants issued to outside consultants, which expire in three years and which have an exercise price equal to $1.57 per share. In addition, the Company granted 200,000 fully vested restricted common shares to another consultant, which were valued at $306,000 using the market price on the date of grant. Such amount was recorded as a charge to operations.

During the fiscal quarter ended October 31, 2004, the Company granted 60,000 options to an employee under the 1998 Stock Option Plan. These options vest equally over three years and expire in 10 years. The exercise price of the options granted during this fiscal quarter was $1.82 per share. During such quarter, the Company also issued 10,000 options to a former board member. These options have an exercise price of $1.72 per share and vested immediately.

|Note 6 - | Related Party Transactions - License and Development Agreements
|-------- | ---------------------------------------------------------------

In April 2003, the Company entered into a license and development agreement with Manhattan for the worldwide, exclusive rights to the Companys proprietary lingual spray technology to deliver propofol for pre-procedural sedation. The terms of the agreement call for certain milestone and other payments, the first $125,000 of which was partially received during June 2003. During the fiscal year ended July 31, 2004, the Company invoiced Manhattan approximately $400,000for reimbursable expenses. In November 2003, the Company received $375,000 from Manhattan 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. During the three and six months ended January 31, 2005, the Company invoiced Manhattan approximately $20,000
and $119,000, respectively, for reimbursable expenses.

In
  June 2004, the Company entered into a 20-year worldwide exclusive license agreement
  with Velcera, a veterinary company. The agreement is for the exclusive rights
  to the Companys propriety lingual spray technology for animals. In September
  2004, the Company received $1,500,000 from Velcera in connection with the agreement.
  The upfront payment has been included in deferred revenue and is being recognized
  in income over the 20-year term of the agreement. The Company may receive additional
  milestone payments and royalty payments over the 20-year term of the agreement.
  During the three months ended January 31, 2005, the Company invoiced Velcera
  approximately $63,000 for reimbursable expenses.





11



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In
  October 2004, the Company entered into a license and development agreement pursuant
  to which the Company granted to Hana an exclusive license to develop and market
  the Companys lingual spray version of ondansetron in the United States
  and Canada. Pursuant to the terms of the agreement, in exchange for $1,000,000,
  Hana purchased 400,000 shares of the Companys common stock at a per share
  price equal to $2.50, a premium of $.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 issued to the Company $500,000 worth of common stock of Hana (73,121 shares
  based on a market value of $6.84 per share). The proceeds received from Hana
  attributable to the premium are included in deferred revenue and are being recognized
  over the period of the agreement. The Company may receive additional license
  fees and royalties over the 20-year term of the agreement.

Lindsay A. Rosenwald, M.D., a significant stockholder of the Company, may be deemed to be an affiliate of the Company, Manhattan, Velcera and Hana. 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.

|Note 7 - | Sale of Net Operating Loss Carryforwards
|-------- | ----------------------------------------

The State of New Jersey has enacted legislation permitting certain corporations located in New Jersey to sell state tax loss carryforwards and state research and development credits, or net operating loss carryforwards, in order to obtain tax benefits. The Company recorded an income tax benefit of $241,000 and $214,000 for the three and six months ended January 31, 2005 and 2004, respectively, from the sale of the its New Jersey net operating losses. If still available under New Jersey law, the Company may attempt to sell its remaining net operating loss carryforwards. The Company cannot estimate, however, what percentage of its saleable net operating loss carryforwards New Jersey will permit it to sell, how much money will be received in connection with the sale, if the Company will be able to find a buyer for its net operating loss carryforwards or if such funds will be available in a timely manner.



12



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|Note
        8 - | Subsequent
        Events
|---------------- | -------------------------

At the Annual Meeting of Stockholders held on February 28, 2005, all of the directors of the Company were re-elected to the Board for another term of one year. As a result, all five outside directors were each granted 50,000 non-plan options to purchase common stock of the Company, for a total of 250,000 options. Such options vest equally over three years, expire in five years and have an exercise price equal to $1.41 per share.

On March 10, 2005 the Company appointed Thomas Bonney to its board of directors. Mr. Bonney also has been appointed chairman of the Audit Committee. Commensurate with his appointment, Mr. Bonney was granted 100,000 non-plan options to purchase common stock of the Company. Such options vest equally over three years, expire in five years and have an exercise price equal to $1.38 per share.

|Item 2. | Managements
        Discussion and Analysis or Plan of Operation.
|------- | ------------------------------------------------------------------

Since the Companys inception, substantially all of its revenues have been derived from consulting activities and license fees, primarily in connection with product development for various pharmaceutical companies. The Company has had a history of recurring losses from operations, giving rise to an accumulated deficit at January 31, 2005, of approximately $29,747,000. Although substantially all of the Companys revenues to date have been derived from its consulting business, the future growth and profitability of the Company will be principally dependent upon its ability to successfully develop its products and to enter into additional license agreements with drug companies who will market and distribute the final products.

Over the next fiscal year, the Company intends to continue to stay focused on its six tier-one priority products: nitroglycerin, sumatriptan, ondansetron, zolpidem, alprazolam and propofol. The Company currently has cash and marketable investment balances of approximately $7,084,000, which the Company believes are sufficient to maintain operating costs until at least October 31, 2005. The Company continues to seek collaborative arrangements with pharmaceutical companies for joint development of delivery systems and the successful marketing of these delivery systems. In view of the Companys limited resources, its anticipated expenses (resulting in significant operating losses) and the competitive environment in which the Company operates, the Company anticipates that it will need to pursue additional financing by the end of the fiscal quarter ending October 31, 2005. See Liquidity and Capital
Resources below.

NEW ACCOUNTING PRONOUNCEMENT

In
  December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
  Payment (SFAS 123R), which replaces SFAS No. 123, Accounting
  for Stock-Based Compensation, (SFAS 123) and supercedes APB
  Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R
  requires all share-based payments to employees, including grants of employee
  stock options, to be recognized in the financial statements based on their fair
  values. The Company intends to adopt the provisions of SFAS 123R on August 1,
  2005. The pro forma disclosures previously permitted under SFAS 123 no longer
  will be an alternative to financial statement recognition. Under SFAS 123R,
  the Company must determine the appropriate fair value model to be used for valuing
  share-based payments, the amortization method for compensation cost and the
  transition method to be used at date of adoption. The transition methods include
  prospective and retroactive adoption options. Under the retroactive option,
  prior periods may be restated either as of the beginning of the year of adoption
  or for all periods presented. The prospective method requires that compensation
  expense be recorded for all unvested stock options and restricted stock at the
  beginning of the first quarter of adoption of SFAS 123R, while the retroactive
  methods would record compensation expense for all unvested stock options and
  restricted stock beginning with the first period restated. The Company is evaluating
  the requirements of SFAS 123R and expects that the adoption of SFAS 123R will
  have a material impact on the Companys historical consolidated results
  of operations and earnings per share. The Company has not yet determined the
  method of adoption or the effect of adopting SFAS 123R, and has not determined
  whether the adoption will result in amounts that are similar to the current
  pro forma disclosures under SFAS 123.



13



---



RESULTS OF OPERATIONS

THE SIX MONTHS ENDED JANUARY 31, 2005 (THE 2005 PERIOD) COMPARED TO  THE SIX MONTHS ENDED JANUARY 31, 2004 (THE 2004  PERIOD)

Consulting and license fee revenues for the 2005 Period increased approximately $219,000 to $242,000 from $23,000 for the 2004 Period. This revenue increase for the 2005 Period was primarily attributable to revenues from the Companys arrangements with Manhattan and Velcera, in addition to amortization of deferred revenue from license fees received.

Research and development expenses increased approximately $768,000 to $1,419,000 from $651,000 for the 2005 Period. The increase in research and development expenses is primarily related to outsourced manufacturing fees, purchases of additional laboratory and manufacturing supplies and increased pharmacokinetic study activities for the Companys tier-one products.

Consulting,
  selling, general and administrative expenses increased approximately $1,939,000
  to $3,905,000 from $1,966,000 for the 2005 Period. The increase in consulting,
  selling, general and administrative expenses is related to increased payroll,
  recruiting and relocation expenses as a result of hiring additional employees,
  higher accounting and legal fees, increased travel and trade show attendance,
  increased rent expense due to the leasing and occupying of additional space
  for the Companys operations and a $772,000 decrease in compensation expense
  related to variable accounting adjustments to certain of the Companys
  outstanding stock options in the 2004 Period. In addition, consulting fees during
  the 2005 Period included a non-cash charge of $306,000 for restricted shares
  awarded to a consultant (see Note 5). Primarily as a result of the factors described
  above, total costs and expenses for the 2005 Period increased approximately
  $2,707,000 to approximately $5,324,000 compared to the 2004 Period.



14



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Interest income increased approximately $24,000 to $35,000 for the 2005 Period from $11,000 for the 2004 Period as a result of the $12.8 million received from the January 2004 private placement of the Companys common stock, the remaining portion of which is invested in liquid securities.

Income tax benefit for the 2005 Period was approximately $241,000, as compared to $214,000 for the 2004 Period. These benefits resulted from the sale of the Companys New Jersey net operating losses.

The resulting net loss for the 2005 Period was $4,806,000 compared to a net loss of $2,369,000 for the 2004 Period.

THE THREE MONTHS ENDED JANUARY 31, 2005 (THE 2005 PERIOD) COMPARED TO THE THREE MONTHS ENDED JANUARY 31, 2004 (THE 2004 PERIOD)

Consulting and license fee revenues for the 2005 Period increased approximately $103,000 to $124,000 from $21,000 for the 2004 Period. This revenue increase for the 2005 Period was primarily attributable to the Companys arrangements with Manhattan and Velcera, in addition to amortization of deferred revenue from license fees received.

Research and development expenses increased approximately $373,000 to $759,000 from $386,000 for the 2004 Period. The increase in research and development expenses is primarily related to outsourced manufacturing fees, purchases of additional laboratory and manufacturing supplies and increased pharmacokinetic study activities for the Companys tier-one products.

Consulting, selling, general and administrative expenses for the 2005 Period increased approximately $976,000 to $2,169,000 from $1,193,000 for the 2004 Period. The increase in consulting, selling, general and administrative expenses is related to increased payroll, recruiting and relocation expenses as a result of hiring additional employees, higher accounting and legal fees, increased travel and trade show attendance, and a $75,000 decrease in compensation expense related to variable accounting adjustments to certain of the Companys outstanding stock options in the 2004 Period. In addition, consulting fees during the 2005 Period included a non-cash charge for restricted shares awarded to a consultant (see Note 5). Primarily as a result of the factors described above, total costs and expenses for the 2005 Period increased approximately $1,349,000 to approximately $2,928,000 as compared to the 2004 Period.

Interest income increased approximately $8,000 to $13,000 for the 2005 Period from $5,000 for the 2004 Period as a result of the $12.8 million received from the January 2004 private placement of the Companys common stock, the remaining portion of which is invested in liquid securities.

Income tax benefit for the 2005 Period was approximately $241,000, as compared to $214,000 for the 2004 Period. These benefits resulted from the sale of the Companys New Jersey net operating losses.



15



---



The resulting net loss for the 2005 Period was $2,550,000 compared to a net loss of $1,339,000 for the 2004 Period.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities approximated $2,003,000 for the 2005 Period compared to net cash used in operating activities of approximately $2,690,000 for the 2004 Period. Net cash used in operating activities for both the 2005 and 2004 periods was primarily attributable to the net loss of $4,806,000 and $2,369,000, respectively, partially offset by an increase in deferred revenue for the 2005 Period of $2,055,000 and increased by an adjustment to eliminate a noncash benefit from variable plan accounting in the 2004 Period of $772,000. The increase in deferred revenue is attributable to payments received by the Company from its licensees (see Note 6), which payments are being amortized over the remaining terms of the agreements with the licensees. For the 2005 Period, $443,000 was provided from investing activities, principally from maturities of investments, net of purchases of liquid investments,
which amounts exceeded capital expenditures, as compared to cash used in investing activities of $329,000 for the 2004 Period. For the 2005 Period, financing activities provided approximately $774,000, which consisted of cash received for shares issued to Hana and cash received for warrants exercised, offset by payments on a capital lease.

The Company has reported a net loss of $4,806,000 for the six months ended January 31, 2005 and a net loss of $2,369,000 for the six months ended January 31, 2004, as restated (see Note 3). Management believes that the Company will continue to incur net losses through at least January 31, 2006. Management believes that the Companys capital resources will be adequate to fund operations through at least October 31, 2005. As of January 31, 2005, the Company had working capital of $5,622,000, cash and cash equivalents of $1,380,000 and short-term investments of $5,307,000. Until and unless the Companys operations generate significant revenues, the Company will attempt to continue to fund operations from cash on hand and short-term investments. The Companys long-term liquidity is contingent upon achieving sales and/or obtaining additional financing. The most likely sources of financing include
private placements of its equity or debt securities or bridge loans to the Company from third party lenders.

Management of the Company believes that by the end of the fiscal quarter ending October 31, 2005, it will be necessary for the Company to obtain additional financing and/or consummate a strategic alliance with a business partner. 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 the control of the Company. The Company may not be able to successfully obtain additional financing on terms acceptable to the Company, if at all. If the Company is unsuccessful at obtaining additional financing as needed, it may be required to significantly curtail or cease operations.

RESEARCH AND DEVELOPMENT EXPENSES

Research
  and development expenses for the six months ended January 31, 2005 and 2004
  were $1,419,000 and $651,000, respectively. For the second quarter 2005 Period
  and the 2004 Period, research and development expenses were $759,000 and $386,000,
  respectively. The Companys research and
  development costs are expensed as incurred. These include all internal costs,
  external costs related to services contracted by the Company and research services
  conducted for others. Research and development costs consist primarily of salaries
  and benefits, contractor fees, clinical drug supplies of preclinical and clinical
  development programs, consumable research supplies and allocated facility and
  administrative costs. These cost categories typically include the expenses discussed
  below. The increase in research and development expenses is primarily related
  to outsourced manufacturing fees, purchases of additional laboratory and manufacturing
  supplies and increased pharmacokinetic study activities for the Companys
  tier-one products.



16



---



RESEARCH AND PRE-CLINICAL OPERATIONS

Research and pre-clinical operations reflect activities associated with research prior to the initiation of any potential human clinical trials. These activities predominantly represent projects associated with the formulation development of lingual sprays which may include animal safety studies and validation testing.

DIRECT EXPENSES - CLINICAL TRIALS

Direct expenses of clinical trials include patient enrollment costs, external site costs, expense of clinical drug supply and external costs such as contract research consultant fees and expenses.

MANUFACTURING DEVELOPMENT

Manufacturing Development primarily reflects costs incurred to prepare current good manufacturing procedures (cGMP) manufacturing capabilities in order to provide clinical scale drug supply. These costs primarily reflect activities with external contract manufacturing resources. Included in manufacturing development are personnel costs, depreciation, expenses associated with technology transfer, process development and validation, quality control and assurance activities and analytical services.

UNALLOCATED DEVELOPMENT - CLINICAL AND REGULATORY OPERATIONS

Clinical and regulatory operations reflect the preparation, implementation and management of the Companys clinical trial activities in accordance with current good clinical practice (cGCP). Included in unallocated clinical development and regulatory operations are costs associated with personnel, supplies, facilities, fees to consultants, other related costs for clinical trial implementation and management, clinical quality control, regulatory compliance activities, data management and biostatistics.



17

---



The following summarizes the Companys research and development expenses by the foregoing categories for the three and six months ended January 31, 2005 and 2004:



|                                             |  | THREE
        MONTHS ENDEDJanuary 31, |        
|-------------------------------------------- |  | ------------------------------------- | -------
|                                             |  |                                       |        
|                                             |  | 2005                                  |        
|                                             |  |                                       |        
|RESEARCH
        AND DEVELOPMENT EXPENSES:   |  |                                       |        
|Research
        and pre-clinical operations |  | $                                     | 34,000 
|Direct
        clinical trial expenses       |  |                                       | 180,000
|Manufacturing
        development            |  |                                       | 1,000  
|Unallocated
        development              |  |                                       | 544,000
|                                             |  |                                       |        
|RESEARCH
        AND DEVELOPMENT EXPENSES    |  | $                                     | 759,000
|                                             |  |                                       |        



|                                             |  | SIX
        MONTHS ENDEDJanuary 31, |          
|-------------------------------------------- |  | ----------------------------------- | ---------
|                                             |  |                                     |          
|                                             |  | 2005                                |          
|                                             |  |                                     |          
|RESEARCH
        AND DEVELOPMENT EXPENSES:   |  |                                     |          
|Research
        and pre-clinical operations |  | $                                   | 49,000   
|Direct
        clinical trial expenses       |  |                                     | 312,000  
|Manufacturing
        development            |  |                                     | 31,000   
|Unallocated
        development              |  |                                     | 1,027,000
|                                             |  |                                     |          
|RESEARCH
        AND DEVELOPMENT EXPENSES    |  | $                                   | 1,419,000
|                                             |  |                                     |          

Off Balance Sheet Arrangements

The Company has no off balance sheet arrangements within the meaning of SEC rules.

Inflation

The Company does not believe that inflation has had a material effect on its results of operations during the past three fiscal years. There can be no assurance that the Companys business will not be affected by inflation in the future.

Risk Factors That May Affect Future Results

Due
  to the significant risks and uncertainties inherent in the clinical development
  and regulatory approval processes, the nature, timing and costs of the efforts
  necessary to complete projects in development are not reasonably estimated.
  Results from clinical trials may not be favorable. Data from clinical
  trials are subject to varying interpretations and may be deemed insufficient
  by the regulatory bodies reviewing applications for marketing approvals. As
  such, clinical development and regulatory programs are subject to risks and
  changes that may significantly impact cost projections and timelines.



18



---



Currently, none of the Companys drug product candidates are available for commercial sale. All of the Companys potential products are in regulatory review, clinical development or pre-clinical development. The status of each of the Companys six tier-one priority products is discussed in General, above. Successful completion of development of the Companys six tier-one priority programs are contingent on numerous risks, uncertainties and other factors, which are described in the section entitled Risk Factors in Item 5 of Part II of the Companys Annual Report on Form 10-KSB for the fiscal year ended July 31, 2004. These factors include:

| | Completion
        of pre-clinical and clinical trials of the product candidate with the
        scientific results that support further development and/or regulatory
        approval       
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Receipt
        of necessary regulatory approvals                                                                                                                                             
| | Obtaining
        adequate supplies of sufficient raw materials on commercially reasonable
        terms                                                                                      
| | Obtaining
        capital necessary to fund the Companys operations, including the
        Companys research and development efforts, manufacturing requirements
        and clinical trials
| | Performance
        of third-party collaborators on whom the Company relies heavily for the
        commercialization and manufacture of drug product                                         
| | Obtaining
        manufacturing, sales and marketing capabilities for which the Company
        presently has limited resources                                                               

As a result of the amount and nature of these factors, many of which are outside the Companys control, the success, timing of completion and ultimate cost of development of any of the Companys product candidates is highly uncertain and cannot be estimated with any degree of certainty. The timing and cost to complete drug trials alone may be impacted by, among other things:

| | Slow
        patient enrollment                                    
|- | -------------------------------------------------------------------
| | Long
        treatment time required to demonstrate effectiveness  
| | Lack
        of sufficient clinical supplies and material          
| | Adverse
        medical events or side effects in treated patients 
| | Lack
        of effectiveness of the product candidate being tested
| | Lack
        of sufficient funds                                   



19



---



If the Company does not successfully complete clinical trials, the Company will not receive regulatory approval to market its six tier-one priority products. If the Company does not obtain and maintain regulatory approval for its products, the Company will not generate any revenues from the sale of its products and the Companys value and its financial condition and results of operations will be substantially harmed.

The Company is engaged in research and development activities which often provide services and transfer rights under complex licensing agreements. The arrangements may include payment terms that include receipt of up-front fees and milestone payments. The Company has entered into such arrangements which contain multiple elements including up-front fees, milestone payments, royalty fees and equity issuances, among others. Different methods of accounting for revenue and expense recognition may be appropriate under each of these arrangements. It is currently expected that upfront and milestone payments will be recognized over the life of the relevant agreements.

The Company presently has four major agreements with each of Manhattan, Par, Velcera and Hana. The Company is entitled to certain milestone payments and double-digit royalties, generally on either net sales or gross revenues. It is speculative as to when any such payments or royalties will be earned or paid, if at all. On November 18, 2004, the Company entered into a Manufacturing and Supply Agreement with INyX, whereby INyX will be the exclusive provider of the nitroglycerin lingual spray to the Company worldwide, excluding Poland, Byelorussia, the former Russian Republics of Ukraine, Latvia, Lithuania, Estonia and the United Arab Emirates.

|Item 3. | 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 (Exchange Act) is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. 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 the companys management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

The Companys Chief Executive Officer and its Chief Financial Officer have evaluated 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 January 31, 2005, the end of the period covered by this Quarterly Report on Form 10-QSB. Based on this evaluation, the Companys Chief Executive Officer and its Chief Financial Officer concluded that as of the end of the period covered by this report, except as set forth below, the Companys disclosure controls and procedures wereeffective in their design to ensure that information required to be disclosed by us in the reports that the Companyfiles or submits under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms.



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In connection with its audit of the Companys financial statements for the fiscal year ended July 31, 2004, J.H. Cohn LLP, the Companys independent registered public accounting firm (J.H. Cohn), brought to the attention of the Company that certain issued and outstanding options that permitted cashless exercise should be subject to variable plan accounting treatment under applicable accounting standards, and, accordingly, previously unrecognized compensation expense needed to be recognized as compensation expense in the Companys previously issued financial statements under the Financial Accounting Standards Boards Interpretation 44, Accounting for Certain Transactions Involving Stock Compensation--an interpretation of APB Opinion No. 25 (Issue Date 3/00). See Note 3 to Notes to Condensed Financial Statements.

J.H. Cohn also advised the Audit Committee and management of certain material weaknesses, including the failure to record and retain comprehensive option grants issued by the Company, inability to prepare financial statements and footnotes in accordance with U.S. generally accepted accounting principles and SEC rules, a lack of an appropriate system of policies and procedures for the internal review of financial reports, including inadequate staffing, training and expertise and improper accounting procedures for grants with cashless exercise provisions per Financial Accounting Standards Boards Interpretation 44, Accounting for Certain Transactions Involving Stock Compensation  an interpretation of APB Opinion No. 25. J.H. Cohn indicated that they considered these deficiencies to be material weaknesses as that term is defined under standards established by the Public Company
Accounting Oversight Board (United States). These material weaknesses also included the following: a lack of effective documentation for stock options and other compensatory equity grants; the absence of a procedure to obtain from officers and directors information required to be disclosed about such persons; the absence or ineffectiveness of a rule compliance checking procedure for SEC filings; and lack of effective record keeping and compliance assistance for reports required under Section 16(a) of the Exchange Act.

In light of the need for a restatement and the material weaknesses in the Companys internal controls, commencing in the first quarter of the Companys 2005 fiscal year, the Company began to undertake a review of the Companys disclosure, financial information and internal controls and procedures. This review includes increased diligence by the Companys management and directors, as well as the use of additional outside resources. The Company is committed to addressing its control environment and reporting procedures.

In December 2004, the Company hired a new Chief Financial Officer and in March 2005, the Company hired a Corporate Controller. The Company believes that these hirings will improve the Companys internal controls, particularly with respect to its need to comply with Section 404 of the Sarbanes-Oxley Act of 2002.

To
  address the weaknesses identified in the Companys internal controls and
  disclosure practices, the Company has established written disclosure controls
  and procedures applicable to periodic reports and certain public communications.
  The Company has a Disclosure Committee, which is chaired by the Companys
  Vice President and General Counsel and comprised of other executives. The Disclosure
  Committee establishes, maintains, monitors and evaluates the Companys
  written disclosure controls and procedures and coordinates the preparation of
  the Companys periodic reports and certain other of its public communications
  pursuant to formal written disclosure controls and procedures.



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On October 20, 2004, the Board of Directors of the Company rescinded the cashless exercise provision for all of the Companys outstanding option grants. Thus, variable accounting relating to the cashless exercise feature is no longer required after the Companys fiscal quarter ended October 31, 2004. To address the weaknesses in recordkeeping related to option grants, the Company is planning to evaluate, test and install software to assist in the reconciliation of options and warrants issued by the Company.

The Companys management, including its Chief Executive Officer and its Chief Financial Officer, does not expect that disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud, even as the same are improved to address any deficiencies. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will be met. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.

The Company has recently commenced a comprehensive effort to ensure compliance with Section 404 of the Sarbanes-Oxley Act of 2002. As a non-accelerated filer with a fiscal year end of July 31, the Company must first begin to comply with the requirements of Section 404 for the fiscal year ending July 31, 2006. During the periods through July 31, 2006, we will review, and where necessary, enhance our internal control design and documentation, management review, and ongoing risk assessment as part of our internal control program.

PART II. OTHER INFORMATION

|Item 1. | Legal
        Proceedings.
|------- | --------------------------

Not applicable.

|Item 2. | Unregistered
        Sales of Equity Securities and Use of Proceeds.
|------- | --------------------------------------------------------------------

In
  the quarter ended January 31, 2005, the Company granted 200,000 shares of restricted
  common stock to its investor relations service provider and its designees as
  a payment for services provided by the investor relations group. The Company
  claimed the exemption from registration provided by Section 4(2) of the Securities
  Act for such transaction. No broker/dealers were involved in the sale and no commissions were paid in connection with such transaction.



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In the quarter ended January 31, 2005, the Company granted 15,000 warrants to outside consultants and its designees as a payment for services provided by the outside consultants. The Company claimed the exemption from registration provided by Section 4(2) of the Securities Act for such transaction. No broker/dealers were involved in the sale and no commissions were paid in connection with such transaction.

|Item 3. | Defaults
        Upon Senior Securities.
|------- | ----------------------------------------

Not applicable.

|Item 4. | Submission
        of Matters to a Vote of Security Holders.
|------- | ------------------------------------------------------------

Not applicable.

|Item 5. | Other
        Information.
|------- | --------------------------

Not applicable.

|Item 6. | Exhibits.
|------- | ---------



|Exhibit
        No. | Description                                            
|------------------- | -------------------------------------------------------
|                    |                                                        
|31.1                | Rule 13a-14(a) Certification of Chief Executive Officer
|                    |                                                        
|31.2                | Rule 13a-14(a) Certification of Chief Financial Officer
|                    |                                                        
|32.1                | Certification under 18 U.S.C. 1350                     
|                    |                                                        
|32.2                | Certification under 18 U.S.C. 1350                     
|                    |                                                        
|                    |                                                        



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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



NOVADEL PHARMA INC.Dated:
        
        March
            16, 2005
        
        By:
        /s/ Gary A. Shangold, M.D.Gary A. Shangold, M.D.President & Chief Executive Officer




Dated:
        
        March
            16, 2005
        
        By:
        /s/ Michael E. SpicerMichael E. SpicerChief Financial Officer




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