UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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

      For the fiscal year ended July 31, 2004

                                       OR

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

     For the transition period from                    to                    .
                                    ------------------    ------------------

                          COMMISSION FILE NO. 000-23399


                               NOVADEL PHARMA INC.
           (Name of small business issuer as specified in its charter)


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


               25 MINNEAKONING ROAD, FLEMINGTON, NEW JERSEY 08822
               (Address of principal executive offices) (Zip Code)


                                 (908) 782-3431
                 Issuer's telephone number, including area code


    Securities registered pursuant to Section 12(b) of the Exchange Act: None


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

                     COMMON STOCK, PAR VALUE $.001 PER SHARE

      Check whether the issuer (1) has 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. Yes X No ___

      Check if there is no disclosure of delinquent filings pursuant to Item 405
of Regulation S-B contained herein, and no disclosure will be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [ ].

      State the issuer's revenues for its most recent fiscal year: $466,000

      The aggregate  market value of the voting and non-voting  common equity of
the registrant held by  non-affiliates of the registrant at November 9, 2004 was
approximately  $  46,081,507  based upon the closing sale price of $1.60 for the
Registrant's  Common Stock,  $.001 par value,  as reported by the American Stock
Exchange on November 9, 2004.

      As of November 9, 2004, the  Registrant  had  33,491,437  shares of Common
Stock, $.001 par value, outstanding.


<PAGE>


                               NOVADEL PHARMA INC.

                          ANNUAL REPORT ON FORM 10-KSB
                     FOR THE FISCAL YEAR ENDED JULY 31, 2004

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                           PAGE
                                                                                                           ----

                                              PART I

<S>              <C>                                                                                       <C>
Item 1.          Description of Business.                                                                     1

Item 2.          Description of Property.                                                                    18

Item 3.          Legal Proceedings.                                                                          18

Item 4.          Submission of Matters to a Vote of Security Holders.                                        18

                                              PART II

Item 5.          Market for Common Equity, Related Stockholder Matters and Small Business Issuer
                 Purchases of Equity Securities.                                                             19

Item 6.          Management's Discussion and Analysis or Plan of Operation.                                  20

Item 7.          Financial Statements.                                                                       46

Item 8.          Changes In and Disagreements With Accountants on Accounting
                 and Financial Disclosure.                                                                   46

Item 8A.         Controls and Procedures.                                                                    46

Item 8B.         Other Information.                                                                          48

                                             PART III

Item 9.          Directors, Executive Officers, Promoters and Control Persons;
                 Compliance With Section 16(a) of the Exchange Act.                                          49

Item 10.         Executive Compensation.                                                                     53

Item 11.         Security Ownership of Certain Beneficial Owners and Management and Related
                 Stockholder Matters.                                                                        58

Item 12.         Certain Relationships and Related Transactions.                                             61

Item 13.         Exhibits.                                                                                   62

Item 14.         Principal Accountant Fees and Services.                                                     62


                 SIGNATURES                                                                                  63
</TABLE>

                                       ii

<PAGE>


NOTE:  RESTATED FINANCIAL STATEMENTS

The  Registrant,  its Audit  Committee  and its current  and former  independent
registered  public  accounting  firms have agreed that certain of the  Company's
issued  and  outstanding  stock  options  should be  subject  to  variable  plan
accounting treatment under applicable  accounting  standards,  and, accordingly,
previously  unrecognized  compensation  expense  should  be  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).  Accordingly,  management  has  restated  the  Company's  financial
statements for the first three  quarters of fiscal 2004, the interim  periods of
fiscal  2002 and 2003,  and for the  fiscal  years  2002 and 2003.  This  report
contains restated financial information for all of the above fiscal periods. The
reasons for, and financial impact of, the adjustments are described in Note 3 of
the Notes to Financial  Statements set forth herein and in Item 6  "Management's
Discussion  and Analysis or Plan of  Operation".  Previously  issued  financial
statements for such periods should not be relied upon.

Unless the context otherwise requires,  all references to "we," "us," "our," and
the "Company" include NovaDel Pharma Inc. ("NovaDel").

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

This Annual Report includes "forward-looking  statements",  including statements
regarding the expectations, beliefs, intentions or strategies for the future and
our  internal  controls  and  procedures  and  outstanding  financial  reporting
obligations  and other  accounting  issues.  We intend 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 our views as of the date they are made with  respect to
future events and financial performance.  Forward-looking statements are subject
to many risks and  uncertainties  which could cause our actual results to differ
materially from any future results  expressed or implied by the  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 we are
developing;  possible  changes in our financial  condition;  the progress of our
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 our clinical
trials; the impact of development of competing  therapies and/or technologies by
other companies; our ability to obtain additional required financing to fund our
research  programs;  our ability to enter into agreements with collaborators and
the failure of  collaborators  to perform  under their  agreements  with us; the
progress of the FDA  approvals  in  connection  with the conduct of our clinical
trials and the marketing of our products;  the additional costs and delays which
may result from requirements imposed by the FDA in connection with obtaining the
required  approvals;  and  the  risks  related  to  our  internal  controls  and
procedures.

                                      iii

<PAGE>

Except to the extent  required by applicable  laws or rules, we do not undertake
any  obligation  or  duty to  publicly  update  or  revise  any  forward-looking
statements, whether as a result of new information, future events or otherwise.


                                       iv

<PAGE>


                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

GENERAL

NovaDel  Pharma Inc., is engaged in the  development of novel  application  drug
delivery systems for presently marketed prescription,  over-the-counter  ("OTC")
and  veterinary  drugs.  Our 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.  Our  proprietary  delivery system  potentially  enhances and
greatly  accelerates  the onset of the  therapeutic  benefits  within minutes of
administration.  Our development  efforts for our novel drug delivery system are
concentrated  on making it 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,  we
believe  that  our  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.

In light of the  material  expense  and  delays  associated  with  independently
developing and obtaining  approval of  pharmaceutical  products,  we continue to
develop a number of such products through collaborative  arrangements with major
pharmaceutical and veterinary companies, such pharmaceutical companies providing
the funding for the development of specified drug products.  To date, other than
license agreements with (i) Manhattan Pharmaceuticals,  Inc., in connection with
propofol,  (ii) Velcera  Pharmaceuticals,  Inc., in connection  with  veterinary
applications for currently marketed  veterinary drugs, (iii) Par Pharmaceutical,
Inc.,  for  the  marketing  rights  in the  United  States  and  Canada  for our
nitroglycerin  lingual spray, and (iv) Hana Biosciences  Inc., for the marketing
rights in the United States and Canada for our  ondansetron  lingual  spray,  we
have  not  entered  into  any  material   development   arrangements   with  any
pharmaceutical  companies.  The lack of any such  further  arrangements  and our
limited  revenues and low level of working capital has restricted our ability to
pursue  aggressively our product development  strategy.  We believe that we will
require  additional  financing  and/or  additional  alliances  with  well-funded
development partners to undertake and maintain our business plan.

At our inception in 1982, NovaDel, then known as Pharmaconsult, consulted to the
pharmaceutical  industry,  focusing on product development activities of various
European  pharmaceutical  companies.  Since  1992,  we have used our  consulting
revenues to fund our own product development activities. Our focus on developing
our own products  evolved  naturally out of our consulting  experience for other
pharmaceutical  companies.  Substantially  all of our revenues  previously  were
derived from our consulting  activities.  Consulting  activities are no longer a
material  part of our  business.  In 1991,  we  changed  our name to  Flemington
Pharmaceutical  Corporation.  Effective  October 1, 2002, we changed our name to
NovaDel  Pharma Inc. Our principal  business  address is 25  Minneakoning  Road,
Flemington, New Jersey, 08822, and our telephone number is (908) 782-3431.


                                       1
<PAGE>

On May 11, 2004,  our common stock was listed for trading on the American  Stock
Exchange (AMEX) under the symbol "NVD".

PRODUCT DEVELOPMENT

The Company has identified six (6) tier-one  priority  products for development,
namely  nitroglycerin,   sumatriptan,   alprazolam,  zolpidem,  ondansetron  and
propofol.

CARDIOVASCULAR (NITROGLYCERIN)

We have formulated our nitroglycerin  product and completed stability testing of
such product.  A United  States patent was issued in 1999 and a European  patent
was  issued  in 2003.  We filed  an IND  with  the FDA in early  2002 and  began
clinical trials in July 2002, which were completed in December 2002. We filed an
NDA,  under the  guidelines of Section  505(b)(2) of the Federal Food,  Drug and
Cosmetic (FFDC) Act, as amended (21 U.S.C.  301 et. Seq.),  with the FDA on June
16, 2004. The FDA had some outstanding  administrative  issues to clarify before
registering the filing,  namely, the status of our User Fee Exemption.  The date
that the issue was  brought to closure  is the date that our  Prescription  Drug
User Fee Act (PDUFA) clock began (August 4, 2004). Ultimately, it was determined
that a PDUFA  User  Fee was not  required  for  this  submission.  The  expected
timeframe  for review has been  determined  as 10 months,  making the PDUFA date
June 4, 2005. On September 27, 2004, the FDA accepted our NDA for filing.

MIGRAINE (SUMATRIPTAN) LINGUAL SPRAY

We  have  formulated  our  sumatriptan  lingual  spray  and  performed  a  pilot
pharmacokinetic  study thereof  during the second quarter of calendar year 2004.
On  October  13,  2004,   we  announced  the   preliminary   results  from  such
pharmacokinetic  study.  The study indicated that the sumatriptan  lingual spray
achieved serum concentrations of sumatriptan in the therapeutic range. The pilot
pharmacokinetic  study  involved  nine  healthy,   fasting  volunteers  and  was
conducted  in Europe.  The study was  designed to evaluate  the  pharmacokinetic
profile of various doses of a sumatriptan lingual spray (dose range: 2.5 mg - 30
mg) in comparison to the 50 mg oral tablet and 6 mg subcutaneous injection.  For
a majority of doses, we successfully delivered sumatriptan via the lingual spray
into  the  expected  therapeutic  range  of  serum  concentrations.   The  study
demonstrated a clear  dose-concentration  relationship for major pharmacokinetic
parameters  over the  evaluated  range of  lingual  spray  doses  from 2.5 to 30
milligrams.    Dose-normalized    peak   serum    concentrations    (Cmax)   and
areas-under-the-curve (AUC) reached with some of the doses were at least similar
to the 50 mg  sumatriptan  (Imitrex(R))  tablet in this study,  and appear to be
greater  than  those  published  for the  approved  20 mg Imitrex  nasal  spray.
Absorption of the lingual spray through the oral mucosa was  demonstrated by the
observation that for some doses, overall bioavailability of sumatriptan appeared
to be greater  than  previously  reported for that of either the tablet or nasal
spray  formulations.  Additionally,  double  concentration  peaks  detected in a
number of subjects with the lingual spray provided  further  evidence of initial
drug absorption through the oral mucosa.  Drug levels in what is regarded as the
therapeutic  range were  achieved in as little as 9 to 15 minutes in a number of
subjects  with the lingual  spray.  Furthermore,  the mean time to reach maximal
serum concentrations (Tmax) at the 15 mg lingual spray dose was approximately 20
minutes  shorter than that  achieved  with the 50 mg  Imitrex(R)  tablet in this
study. The total amount of drug delivered over the first 30 minutes  post-dosing
(as measured by AUC normalized for dose) was approximately 40% higher for the 15
mg  lingual  spray dose when  compared  to the 50 mg  Imitrex  tablet.  The mean
concentration  levels reached at 3, 6 and 9 minutes post-dosing were appreciably
higher  (162%,  122% and 45%  increase,  respectively)  for the 30 mg spray dose
administered  sublingually  when compared to the 50 mg Imitrex tablet.  The Tmax
seen with the spray (< 1 hr) was faster than that reported for the tablet at 25,
50, or 100 mg in migraine  sufferers (~1.5 hrs). The  sumatriptan  lingual spray
had a favorable safety profile and was well-tolerated. None of the nine subjects
dropped out of the study.  Based on these results,  we are proceeding toward the
submission of an IND with the FDA and plan to move the product forward into full
development,  with the  expectation  of  eventually  filing an NDA under Section
505(b)(2)  of the FFDC Act. We plan to optimize  the current  formulation  going
forward with  appropriate  modifications,  including  enhancements  to the taste
characteristics.


                                       2
<PAGE>

ANXIOLYTIC (ALPRAZOLAM) LINGUAL SPRAY

We have  formulated  an  alprazolam  lingual spray and on September 23, 2004, we
announced the initiation of a pilot pharmacokinetic feasibility study in humans.
Results are expected late in the fourth quarter of calendar year 2004. The study
involves the administration of test drug in a range of doses into human subjects
to document the profile of blood levels achieved using our  proprietary  lingual
spray formulation of alprazolam.

HYPNOTIC (ZOLPIDEM) LINGUAL SPRAY

We have  formulated a zolpidem  lingual  spray and we are  currently  conducting
stability testing of the zolpidem lingual spray. A pilot  pharmacokinetic  study
is planned for initiation late in the fourth quarter of calendar year 2004.

ANTI-EMETIC (ONDANSETRON) LINGUAL SPRAY

We have formulated an ondansetron lingual spray and we are currently  conducting
stability  testing of the  ondansetron  lingual spray.  A pilot  pharmacokinetic
study of the  ondansetron  lingual  spray is  planned  for the first  quarter of
calendar year 2005.

ANESTHETIC (PROPOFOL) LINGUAL SPRAY

We  have  formulated  a  propofol  lingual  spray  and we  completed  a  Phase I
randomized, double-blind, placebo-controlled dose-escalating study in the second
quarter of  calendar  year 2004.  Accordingly,  Manhattan  Pharmaceuticals,  our
licensee and  co-developer  of the propofol  lingual  spray,  has directed us to
proceed with dose  optimization and other  formulation  modifications to support
full human clinical testing, targeted to start in the United States during early
calendar year 2005. Manhattan  Pharmaceuticals said it plans to file an IND with
the FDA by the end of  calendar  year 2004 for an  expanded-use  version  of the
popular anesthetic agent. The experimental  product would become the first known
needle-less formulation of propofol, the world's leading intravenous anesthetic,
marketed  as  Diprivan(R).  We  believe  that the  propofol  lingual  spray will
potentially make propofol, with its established record of safety,  available for
dosing in office-based and other ambulatory settings where use of an intravenous
catheter is not  appropriate  or desirable.  We believe that a propofol  lingual
spray, in an appropriate  sedative dose, has the potential to enable  clinicians
to  better  control  the  onset,  duration  and  depth  of  sedation  with  high
reliability and accuracy.  The intended benefits of such properly timed sedation
should  facilitate  achievement of the best  procedural  outcomes while avoiding
unnecessary costs and anxiety.


                                       3
<PAGE>

The Company also has identified a number of other development  initiatives,  but
which  are  currently  less of a  priority  than our six (6)  tier-one  priority
programs.   These  initiatives  include,   among  other  products,   clemastine,
loratadine, and estradiol and progesterone lingual sprays.

ANTIHISTAMINE (CLEMASTINE) LINGUAL SPRAY

We have revised the  formulation  of our  clemastine  lingual spray and filed an
IND. We initiated a pilot nasal  challenge  efficacy study in the second quarter
of calendar  year 2000 which was completed in the fourth  quarter of 2000.  This
study tested the relative response of subjects challenged with allergy producing
substances  to an OTC tablet (1.34 mg) and a lingual  spray dose of 0.68 mg. The
antihistamine  was  administered 15 minutes prior to the challenge.  The results
showed  that the spray had the same  antihistaminic  effect as the  tablet  when
compared  to placebo at 45 minutes  after  dosing  even though the dose was only
half that of the tablet.  Eight of the parameters measured in the study showed a
clear  trend that the spray was better than the tablet and the tablet was better
than  placebo.  Even though the study was only a pilot  study,  we feel that the
results  support the concept  that a  clemastine  lingual  spray could be an OTC
non-sedating  antihistamine  product in that there were two cases of  drowsiness
when the tablet  was given and one with the  placebo  but none when the  lingual
spray was  administered.  A larger  confirmatory  study,  as well as other pilot
studies, is needed.

Our  antihistamine  projects have been put on hold as the  perceived  commercial
opportunity  has been  greatly  diminished  by the entry of generic  versions of
loratadine and clemastine  into the marketplace and the switch of loratadine and
clemastine from prescription to over-the-counter status.

ANTIHISTAMINE (LORATADINE) LINGUAL SPRAY

We have  developed a formulation  for our loratadine  lingual spray  formulation
which  has  successfully  undergone  stability  testing.  We filed an IND in the
fourth quarter of calendar year 2000 and a  pharmacokinetic  study was completed
in the  second  quarter of  calendar  year 2001.  We have  completed  a phase II
clinical trial.


                                       4
<PAGE>


ESTRADIOL AND PROGESTERONE LINGUAL SPRAYS

We have  formulated a lingual spray version of estradiol and have filed two INDs
with the FDA in connection  therewith.  We have also  formulated a lingual spray
version of progesterone. We have performed pharmacokinetic studies in connection
with both of these therapies, the results of which have confirmed our ability to
deliver  each  of  these  hormones  with  enhanced   bioavailability   and  with
versatility in kinetic  profile than with  comparative  solid oral dosage forms.
This  project  has been put on hold due to  questions  that  recently  have been
raised within medical  literature about the proper therapeutic level of estrogen
therapy.

BUSINESS DEVELOPMENT

AGREEMENT WITH MANHATTAN PHARMACEUTICALS

In April 2003, we entered into a 10-year license and development  agreement with
Manhattan  Pharmaceuticals  for the worldwide,  exclusive  rights to our lingual
spray  technology to deliver  propofol for  pre-procedural  sedation.  Manhattan
Pharmaceuticals  is a development stage company and has no revenues to date. The
terms of the agreement  require  Manhattan  Pharmaceuticals  to achieve  certain
milestones  and to make certain  up-front  license fee payments to us, the first
$500,000 of which we received from June 2003 through November 2003.

LICENSE AND SUPPLY AGREEMENT WITH PAR PHARMACEUTICAL

In July 2004, we entered into a ten-year  license and supply  agreement with Par
Pharmaceutical,  Inc., a wholly owned  subsidiary of  Pharmaceutical  Resources,
Inc., whereby Par  Pharmaceutical  has the exclusive rights to market,  sell and
distribute our nitroglycerin  lingual spray in the United States and Canada. The
terms of the agreement  call for an upfront  license fee which was paid to us in
July 2004, a milestone  payment made to us upon the FDA's  acceptance  of an NDA
for our  nitroglycerin  lingual  spray  for  review  in  September  2004,  other
potential  milestone  payments if and when the NDA is approved for  marketing in
the  United  States;  and  royalties  on net sales of the  product in the United
States and Canada in double-digit percentages.  We are responsible for obtaining
regulatory  approval  for the  product  and for  supplying  the  product  to Par
Pharmaceutical.

AMENDED AGREEMENT WITH VELCERA PHARMACEUTICALS, INC. (FORMERLY VETCO)

On September  14,  2004,  we  announced  the granting of an exclusive  worldwide
20-year  license  for  our  proprietary  lingual  spray  technology  to  Velcera
Pharmaceuticals,  Inc. of Langhorne,  PA (formerly  Vetco  Pharmaceuticals)  for
development of innovative veterinary medicines.  Velcera is a development-stage,
privately-held  animal health company headed by former senior  executives at the
animal units of Merial, Merck and  Schering-Plough.  We received an equity stake
of  592,500  shares of common  stock in  Velcera  Pharmaceuticals,  representing
approximately 15% of its outstanding  common stock as of October 23, 2003, along
with an upfront cash  technology fee of $1,500,000  (which will be recognized as
income by the Company over the 20-year term of the agreement) in September 2004.
The  agreement,  which  amends  an  earlier  agreement,  provides  that  Velcera
Pharmaceuticals  shall make certain milestone payments upon regulatory  approval
on the first NDA filing and European  filing.  Velcera will be obligated to make
additional  similar  payments  to us for  each  product  developed  by  it,  and
double-digit  royalty payments on product sales will be due to us. Products will
be  formulated  in our labs, at Velcera  Pharmaceutical's  expense,  and Velcera
Pharmaceuticals  will fund all  development  and  regulatory  expenses.  We will
manufacture and supply Velcera Pharmaceuticals with the resulting pharmaceutical
products.  We expect our technology will help pet owners overcome the well known
problem of compliance  with the  administration  of pills to their pets. A trial
conducted at an independent facility sponsored by Velcera Pharmaceuticals showed
that our  delivery  technology  was well  accepted by cats and dogs.  The animal
health  market  is  estimated  to be  valued at about  $14  billion  per  annual
worldwide.  The companion pet category is the fasted growing segment,  currently
valued at about $5 billion per annual  worldwide.  Drug  development  by Velcera
Pharmaceuticals will focus on formulating  veterinary medicines that are already
being marketed.


                                       5
<PAGE>


AMENDED AGREEMENT WITH HANA BIOSCIENCES, INC.

In October 2004,  we entered into a 20-year  license and  development  agreement
with Hana  Biosciences,  Inc. Hana will develop and market the Company's lingual
spray  version  of  ondansetron,  the most  widely  prescribed  anti-emetic  for
preventing  chemotherapy-induced  nausea and vomiting. Under the agreement, Hana
has exclusive  rights to market,  sell and distribute the Company's  ondansetron
lingual  spray in the  United  States and  Canada.  We are  entitled  to receive
milestone  development  payments at several junctures of development,  including
completion of a pharmacokinetic  study,  filing of an IND, FDA acceptance of the
NDA and NDA  approval.  Double-digit  royalties may be due to us on sales of the
lingual  spray  version of  ondansetron.  In October  2004,  in exchange  for $1
million,  Hana purchased  400,000 newly issued shares of our common stock,  at a
price of $2.50 per share, and has issued to us, for no additional consideration,
73,121  shares of its common  stock,  valued at $500,000  based upon the average
price of Hana's  common stock during the 10 business days prior to the effective
date of the agreement ($6.84 per share).

BUSINESS STRATEGY

Our strategy is to concentrate our product development  activities  primarily on
pharmaceutical  products for which there  already are  significant  prescription
sales,  where the use of our  proprietary,  novel drug delivery  technology 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.  We have
completed pilot  pharmacokinetic  studies for two  antihistamine  lingual sprays
(loratadine and clemastine),  an estradiol lingual spray, a progesterone lingual
spray, a nitroglycerin lingual spray, a propofol lingual spray and a sumatriptan
lingual  spray.  In addition,  a phase 2 clinical  trial was  completed  for the
nitroglycerin  and clemastine  lingual sprays.  Additional  development  work on
loratadine,  clemastine,  estradiol and progesterone has been put on hold due to
changes in the marketplace which have significantly reduced the market potential
for these  compounds.  We filed a Section  505(b)(2)  NDA for our  nitroglycerin
lingual spray in June 2004 which was accepted for filing by the FDA in September
2004. We plan to conduct pilot  pharmacokinetic  studies on our remaining Tier I
priority products during the second half of calendar year 2004 and first quarter
of calendar year 2005. The Tier I products, other than the nitroglycerin lingual
spray,   are  lingual  spray   formulations   of   sumatriptan   for  which  the
pharmacokinetic  study is  complete,  alprazolam  for which the  pharmacokinetic
study  has been  initiated,  propofol  for which  the  pharmacokinetic  study is
complete. The pharmacokinetic  studies for ondansetron and zolpidem are expected
to  be  commenced   during   calendar  year  2005.   The  goal  of  these  pilot
pharmacokinetic  studies is to determine whether or not a specific lingual spray
can achieve  therapeutic blood levels of an active ingredient via administration
through the oral mucosa.  If blood levels are not  achieved,  it could result in
the need to reformulate the lingual spray and/or to terminate work on a specific
compound which could have a material adverse effect on our operations.


                                       6
<PAGE>

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

--the number of clinical sites;

--the size of the patient population;

--the proximity of patients to the clinical sites;

--the eligibility criteria for the study;

--the existence of competing clinical trials; and

--the existence of alternative available products.

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

In light of the  material  expense  and  delays  associated  with  independently
developing  and  obtaining  approval of  pharmaceutical  products,  we intend to
develop  some  such  products  through  collaborative  arrangements  with  major
pharmaceutical companies, which will fund that development.  Our lack of working
capital  has  impaired  our  ability  to  pursue  such  strategy.   See  Item  6
"Management's Discussion and Analysis or Plan of Operation."


                                       7
<PAGE>


PATENTED AND PATENT PENDING DELIVERY SYSTEMS

(LINGUAL (ORAL) SPRAY).

We have certain  patents and pending patent  applications  for our lingual spray
delivery system.  FDA approval is not a prerequisite  for patent  approval.  The
expected year of  marketability  of a given product will vary depending upon the
specific  drug  product with which the  delivery  system will be utilized.  Each
individual  use of the  delivery  system will require  registration  with and/or
approval by the FDA or other relevant health  authority prior to  marketability,
and the amount of regulatory  oversight  required by the FDA or other regulatory
agencies  will also depend on the  specific  type of drug  product for which the
delivery system is implemented.  Our aerosol and pump spray formulations release
drugs in the form of a fine mist into the  mouth for rapid  absorption  into the
bloodstream  via the mucosal  membranes.  We believe that this  delivery  system
offers  certain  advantages,  including  more  rapid  delivery  of  drugs to the
bloodstream,  improving  the safety  profile of certain  drugs by  lowering  the
required  dosage  to  be  administered,  improving  dose  reliability,  allowing
medication  to be taken  without  water and  improved  patient  convenience  and
compliance.  Drug absorption through the mucosal membranes of the mouth is rapid
and  minimizes  the  first-pass   metabolism  effect  (i.e.,  total  or  partial
inactivation  of a drug as it  passes  through  the  gastrointestinal  tract and
liver).

PROPOSED PRODUCTS

Our proposed products are subjected to laboratory  testing and stability studies
and tested for therapeutic  comparison to the originators' products by qualified
laboratories  and clinics.  To the extent that two drug  products  with the same
active ingredients are substantially identical in terms of their rate and extent
of  absorption  in  the  human  body  (bioavailability),   they  are  considered
bioequivalent.  If the accumulated data demonstrates bioequivalency,  submission
is then made to the FDA  (through  the  filing of an ANDA)  for its  review  and
approval to manufacture and market.  If the accumulated data  demonstrates  that
there are  differences in the two drugs' rate and extent of absorption  into the
human  body,  or if it is  intended  to  make  additional  or  different  claims
regarding therapeutic effect for the newly developed product, submission is made
to the FDA via an NDA for its review and  approval  under  Section  505(b)(1) or
Section  505(b)(2) of the FFDC Act. An NDA submitted under Section  505(b)(2) of
the FFDC Act, is generally less complex than an ordinary Section  505(b)(1) NDA.
We expect that the  majority of our  products in  development  will  require the
filing of these  Section  505(b)(2)  NDA's  because,  although such products are
known  chemical  entities,  we or our licensees  will be making new claims as to
therapeutic effects or lessened side effects, or both.

We estimate that  development of new  formulations of  pharmaceutical  products,
including formulation, testing and obtaining FDA approval, generally takes three
to five years for the Section  505(b)(2)  NDA or ANDA  Section  505(j)  process.
Development of products requiring  additional clinical studies under full NDA's,
may take four to seven years.  Our  determination  regarding the availability of
ANDA's or Section  505(b)(2) NDA's for our products under development may not be
accurate  and  pre-marketing  approval for our  proposed  products  might not be
obtained on a timely  basis,  if at all. See Item 1  "Description  of Business -
Government Regulation."

MARKETING AND DISTRIBUTION

We intend, generally, to license products developed with our technology to other
drug  companies or to market our products to  pharmaceutical  wholesalers,  drug
distributors,  drugstore chains, hospitals, United States governmental agencies,
health  maintenance  organizations and other drug companies.  We anticipate that
promotion of our proposed products will be characterized by an emphasis on their
distinguishing  characteristics,  such as dosage form and packaging,  as well as
possible  therapeutic  advantages  of such  products.  We intend to position our
proposed products as alternatives or as line extensions to brand-name  products.
We believe that to the extent our formulated products are patent-protected, such
formulations may offer brand-name  manufacturers the opportunity to expand their
product lines. Alternatively,  products which are not patented may be offered to
brand-name manufacturers as improved substitute products after patent protection
on existing products expire.


                                       8
<PAGE>

Inasmuch  as we do not  have  the  financial  or other  resources  to  undertake
extensive  marketing  activities,  we  generally  intend  to seek to enter  into
marketing  arrangements,   including  possible  joint  ventures  or  license  or
distribution arrangements, with third parties.

We believe  that such  third-party  arrangements  will permit us to maximize the
promotion and  distribution  of  pharmaceutical  products  while  minimizing our
direct  marketing  and  distribution  costs.  Except  for  our  agreements  with
Manhattan Pharmaceuticals, Par Pharmaceutical,  Velcera Pharmaceuticals and Hana
Biosciences,  Inc., we have not entered into any agreements or arrangements with
respect to the  marketing  of our  proposed  products  and we may not be able to
enter into  additional  agreements  in the future.  See Item 1  "Description  of
Business -  Business  Development".  If we are  unable to enter into  additional
agreements, we may not be able to market successfully our proposed products.

We have  not yet  determined  strategies  relating  to  marketing  of our  other
proposed formulated products; these will be formulated in advance of anticipated
completion  of  development  activities  relating to the  particular  formulated
product. As a company, we have no experience in marketing or distribution of our
proposed proprietary products, and our ability to fund such marketing activities
will require us to raise additional funds and/or consummate a strategic alliance
or combination with a well-funded business partner.

MANUFACTURING

We intend to both internalize and contract out the manufacturing of our proposed
products.  Presently,  we have established a pilot manufacturing facility at one
of our present locations which we believe is adequate for our needs with respect
to our requirements for formulation development,  stability testing and clinical
supplies.  We have also leased a new, larger facility,  which will have adequate
space for our future foreseeable requirements for production,  manufacturing and
warehouse  space.  We began to occupy this new space during the third quarter of
calendar year 2003. The manufacture of our pharmaceutical products is subject to
current  Good   Manufacturing   Practices  (cGMP)  prescribed  by  the  FDA  and
pre-approval  inspections  by the  FDA  and  foreign  authorities  prior  to the
commercial manufacture of any such products. See Item 1 "Description of Business
- Government  Regulation" and "- Raw Materials and  Suppliers."  Since we cannot
construct such a manufacturing and warehousing  facility in compliance with cGMP
in time to support the potential launch of our nitroglycerin  lingual spray, for
which an NDA has been submitted, we will use a third party contract manufacturer
to satisfy our requirements.  We may not be able to enter into arrangements with
third party manufacturers, or be able to do so on terms favorable to us. Failure
by  us  to  complete  successfully  the  internalization  of  our  manufacturing
requirements or to conclude an alternative  contract  manufacturing  arrangement
could have an adverse effect our efforts to obtain regulatory approval for or to
commercialize our products.


                                       9
<PAGE>


RAW MATERIALS AND SUPPLIERS

We believe that the active  ingredients  used in the manufacture of our proposed
pharmaceutical  products are presently available from numerous suppliers located
in the  United  States,  Europe  and Japan and  delivered  to our  manufacturing
facility  by such  suppliers.  We intend to enter  into  arrangements  with such
third-party  suppliers  for  supplies  of  active  and  inactive  pharmaceutical
ingredients  and packaging  materials  used in the  manufacture  of our proposed
products.  Accordingly, we may be subject to various import duties applicable to
both  finished  products and raw  materials and may be affected by various other
import and export  restrictions  as well as other  developments  impacting  upon
international  trade.  These  international  trade factors  will,  under certain
circumstances,  have an impact on the  manufacturing  cost (which will, in turn,
have an  impact  on the  cost of our  proposed  products).  To the  extent  that
transactions  relating to the purchase of raw materials involve currencies other
than United States dollars (e.g., Swiss francs and Euros), our operating results
will be affected by fluctuations in foreign currency exchange rates.

Generally, certain raw materials,  including inactive ingredients, are available
from a limited number of suppliers and certain packaging  materials intended for
use in  connection  with our lingual spray  products may be available  only from
sole  source  suppliers.   Although  we  believe  that  we  will  not  encounter
difficulties  in obtaining  the  inactive  ingredients  or  packaging  materials
necessary for the manufacture of our products,  we may not be able to enter into
satisfactory   agreements  or  arrangements   for  the  purchase  of  commercial
quantities of such  materials.  A failure to enter into  agreements or otherwise
arrange for  adequate or timely  supplies of  principal  raw  materials  and the
possible inability to secure alternative  sources of raw material supplies could
have  a  material  adverse  effect  on our  ability  to  manufacture  formulated
products.

Development and regulatory approval of our pharmaceutical products are dependent
upon our ability to procure active  ingredients and certain packaging  materials
from FDA-approved sources. Since the FDA approval process requires manufacturers
to specify their proposed  suppliers of active ingredients and certain packaging
materials in their applications,  FDA approval of a supplemental  application to
use a new supplier  would be required if active  ingredients  or such  packaging
materials  were no longer  available  from the specified  supplier,  which could
result in manufacturing delays. Accordingly, we intend to locate alternative FDA
approved suppliers.

GOVERNMENT REGULATION

The development,  manufacture and  commercialization of pharmaceutical  products
are  generally  subject to  extensive  regulation  by various  federal and state
governmental  entities. The FDA, which is the principal United States regulatory
authority,  has the  power to  seize  adulterated  or  misbranded  products  and
unapproved new drugs, to request their recall from the market, to enjoin further
manufacture  or sale,  to publicize  certain  facts  concerning a product and to
initiate  criminal  proceedings.  As  a  result  of  federal  statutes  and  FDA
regulations,  pursuant  to which new  pharmaceuticals  are  required  to undergo
extensive  and  rigorous  testing,   obtaining  pre-market  regulatory  approval
requires extensive time and expenditures.


                                       10
<PAGE>


Under FFDC Act, a new drug may not be commercialized or otherwise distributed in
the United  States  without  the prior  approval  of the FDA or  pursuant  to an
applicable exemption from the FFDC Act.

The FDA approval process relating to a new drug differs, depending on the nature
of the particular  drug for which  approval is sought.  With respect to any drug
product  with  active  ingredients  not  previously   approved  by  the  FDA,  a
prospective drug manufacturer is required to submit an NDA,  including  complete
reports of pre-clinical, clinical and laboratory studies to prove such product's
safety,  quality and efficacy.  The NDA process generally  requires,  before the
submission  of the NDA,  submission  of an IND pursuant to which  permission  is
sought to begin  preliminary  clinical  testing of the new drug. An NDA based on
published safety and efficacy  studies  conducted by others may also be required
to be submitted for a drug product with a previously approved active ingredient,
if the method of delivery, strength or dosage is changed.  Alternatively, a drug
having the same active ingredients as a drug previously  approved by the FDA may
be eligible to be submitted under an ANDA, which is significantly less stringent
than the NDA approval process.

While the ANDA process  requires a manufacturer to establish  bioequivalence  to
the previously  approved drug, it permits the manufacturer to rely on the safety
and efficacy studies contained in the NDA for the previously approved drug.

The NDA approval  process  generally  requires  between 10 to 24 months from NDA
submission to pre-marketing  approval,  although in the case of an NDA submitted
pursuant  to  Section  505(b)(2)  of  the  FFDC  Act  this  time  frame  may  be
significantly  shorter. We believe that most products developed in lingual spray
delivery systems (dosage forms) usually will require  submission of an NDA under
Section 505(b)(2).  This is because the safety and efficacy of the drug compound
used in the lingual spray  formulation  generally can be established in previous
trials in NDA submissions and publications.

We estimate that the development of new formulations of pharmaceutical products,
including formulation,  testing and obtaining FDA approval, generally takes four
to seven years for the NDA  process,  although  NDA's  submitted  under  Section
505(b)(2) are generally  less complex than an ordinary NDA and may be acted upon
by the FDA in a  shorter  period  of  time.  Our  determinations  regarding  the
availability  of  ANDA's  for our  proposed  products  may not be  accurate  and
pre-marketing  approval  for our  proposed  products  might not be obtained on a
timely basis, if at all. The FDA application  procedure has become more rigorous
and costly and the FDA currently performs  pre-approval and periodic inspections
of each finished dosage form and each active ingredient.


                                       11
<PAGE>

The  manufacture  of  our  pharmaceutical  products  will  be  subject  to  cGMP
prescribed  by the FDA,  pre-approval  inspection  by the FDA  before  beginning
commercial manufacture of such products and periodic cGMP compliance inspections
by the FDA thereafter.

COMPETITION

The markets which we intend to enter are  characterized by intense  competition.
We  will  be  competing  against  established   pharmaceutical  companies  which
currently market products which are equivalent or functionally  similar to those
we intend to market.  Prices of drug  products  are  significantly  affected  by
competitive factors and tend to decline as competition  increases.  In addition,
numerous  companies  are  developing  or  may,  in  the  future,  engage  in the
development of products  competitive with our proposed products.  We expect that
technological  developments  will occur at a rapid rate and that  competition is
likely to  intensify  as enhanced  delivery  system  technologies  gain  greater
acceptance.  Additionally,  the markets for  formulated  products  which we have
targeted  for  development  are  intensely   competitive,   involving   numerous
competitors  and  products.  We intend to enhance  our  competitive  position by
focusing our efforts on our novel dosage forms.

We are aware of several  companies that are selling or developing  lingual spray
products. First Horizon Pharmaceutical Corporation, headquartered in Alpharetta,
Georgia,  currently markets  Nitrolingual(R)  Pumpspray, a nitroglycerin lingual
spray  which is in an  "air"  propelled  dispensing  system  (our  nitroglycerin
lingual  spray  is  in  a  "propellant"   based  dispensing   system).   Generex
Biotechnology  Corporation,  based in Toronto,  Canada, is developing an insulin
formulation  that is delivered  directly into the mouth via their  RapidMist(TM)
device.  They also state that they have begun  research on four specific  target
molecules for their RapidMist delivery system: morphine,  fentanyl,  heparin and
flu vaccine.  Sirus  Pharmaceuticals  Ltd.,  based in the United  Kingdom,  also
claims to be developing drugs to be delivered sublingually via an aerosol spray.
Sirus is  working  in the  areas of pain and  emesis.  There are  several  other
companies  that we are aware of that market  lingual spray  products  containing
vitamins and homeopathic ingredients.

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


                                       12
<PAGE>


PATENTS AND PROTECTION OF PROPRIETARY INFORMATION

We have applied for United States and foreign  patent  protection for our buccal
spray delivery systems which are the primary focus of our development activities
as well as for our delayed  contact allergy  topical  formulations.  Five United
States patents and four European patents have been issued and other applications
are pending.  Additional patent applications may not be granted, or, if granted,
may not provide  adequate  protection  to us. We also intend to rely on whatever
protection  the law affords to trade  secrets,  including  unpatented  know-how.
Other  companies,  however,  may  independently  develop  equivalent or superior
technologies  or processes and may obtain patents or similar rights with respect
thereto.

Although we believe that we have developed our technology independently and have
not infringed,  and do not infringe, on the patents of others, third parties may
make claims,  however,  that our  technology  does  infringe on their patents or
other intellectual property. In the event of infringement, we may, under certain
circumstances, be required to modify our infringing product or process or obtain
a license. We may not be able to do either of those things in a timely manner if
at all,  and  failure  to do so could  have a  material  adverse  effect  on our
business.  In  addition,  we may not  have  the  financial  or  other  resources
necessary  to enforce a patent  infringement  or  proprietary  rights  violation
action or to defend ourselves  against such actions brought by others. If any of
the  products  we  develop  infringe  upon the patent or  proprietary  rights of
others, we could, under certain circumstances,  be enjoined or become liable for
damages, which would have a material adverse effect on our business.

We also rely on confidentiality and nondisclosure  agreements with our licensees
and potential  development  candidates to protect our  technology,  intellectual
property and other proprietary property. Pursuant to the foregoing and for other
reasons,  we face the risk that our competitors may acquire information which we
consider to be proprietary, that such parties may breach such agreements or that
such agreements will be inadequate or unenforceable.

BUCCAL  NONPOLAR  SPRAYS.  On April 12, 1996, we filed an  application  with the
United States Patent and Trademark  Office ("USPTO") with claims directed to our
buccal spray composition  containing certain amounts of propellant,  a non-polar
solvent,  and certain  classes of drugs,  as well as specific drugs within those
classes.  The application  also included  claims  directed to soft-bite  gelatin
capsules  containing  these drugs.  On September 1, 1998,  the USPTO allowed the
claims directed to buccal spray propellant compositions, but rejected the claims
directed to the capsules.  In November  1998, we deleted the capsule claims from
this  application  to pursue  issuance of a patent  with claims  directed to the
buccal non-polar spray  compositions  and methods of administering  the class of
drugs using the buccal spray  compositions.  On September 21, 1999,  U.S. Patent
No.  5,955,098  was issued to us with  claims  directed  to the  above-described
buccal non-polar spray propellant  compositions and methods. This patent expires
in September 2019.

On February  21,  1997,  we filed an  application  under the Patent  Cooperation
Treaty (the "PCT") for the above-subject  matter. The International  Preliminary
Examination  Authority issued an International  Preliminary  Examination  Report
alleging that the subject  matter of the invention  lacked novelty and/or lacked
an inventive step. This opinion, with which we disagree, is not dispositive. The
opinion,  however,  may be persuasive to individual  national  patent offices in
countries where we enter the national phase.


                                       13
<PAGE>

With  respect to the above PCT  application,  in October and November  1998,  we
entered  the  national  phase in Canada and  Europe,  respectively,  with claims
directed to the above subject matter. On April 16, 2003,  European patent no. EP
0 904 055 was granted to us with claims directed to propellant containing buccal
non-polar  spray   compositions   containing  similar  drugs  to  those  in  the
corresponding issued U.S. patent. This European patent has been validated in the
United Kingdom,  Germany,  France,  Italy,  Belgium,  Switzerland/Liechtenstein,
Austria, Sweden, Denmark, Finland,  Luxembourg, the Netherlands,  Spain, Greece,
Monaco,  Portugal  and  Ireland  so that  there is  patent  protection  in these
countries.  We have filed a divisional application based on this European patent
with claims directed to a buccal spray  composition  containing a propellant,  a
non-polar solvent and an active compound selected from alkaloids and analgesics.
With respect to the  Canadian  application,  we filed a request for  examination
with the  Canadian  Patent  Office on  February  7, 2002.  We received an Office
Action from the Canadian  Patent Office dated April 13, 2004,  pursuant to which
we were  requested to elect for  prosecution  either  claims  directed to buccal
spray  compositions or claims to the soft-bite gelatin  capsules.  We elected to
prosecute the claims directed to buccal spray compositions.

BUCCAL POLAR SPRAYS.  On April 12, 1996, we filed an application  with the USPTO
with  claims  directed  to  propellant  free  buccal  polar  spray  compositions
containing  certain  amounts of a polar solvent and certain classes of drugs, as
well as specific  drugs within those  classes.  The  application  also contained
claims   to   soft-bite    gelatin    capsules    containing   such   drugs.   A
continuation-in-part  ("CIP")  application  was filed  directed to this  subject
matter before the original  application  was allowed to go abandoned.  The USPTO
initially rejected the claims in the CIP application. We deleted the claims from
this application (including the soft-bite capsule claims) and replaced them with
claims directed to methods of using the  above-described  propellant free buccal
polar spray  compositions  to  administer  the drugs.  On August 29, 2000,  U.S.
Patent  No.   6,110,486   was  issued  to  us  with   claims   directed  to  the
above-described  methods of administering  the drugs. This patent expires August
2020.

On  February  21,  1997,  we  filed  an  application   under  the  PCT  for  the
above-described  subject  matter.  The  International   Preliminary  Examination
Authority issued an International  Preliminary  Examination Report alleging that
the subject  matter of the invention  lacked  novelty and/or lacked an inventive
step. This opinion,  with which we disagree,  is not  dispositive.  The opinion,
however,  may be persuasive to individual  national  patent offices in countries
where we enter the national phase.

With  respect to the above PCT  application,  in October and November  1998,  we
entered  the  national  phase in Canada and  Europe,  respectively,  with claims
directed to the above subject matter. On April 16, 2003,  European patent no. EP
0 904 055 was granted to us with claims directed to propellant containing buccal
non-polar  spray   compositions   containing  similar  drugs  to  those  in  the
corresponding issued U.S. patent. This European patent has been validated in the
United Kingdom,  Germany,  France,  Italy,  Belgium,  Switzerland/Liechtenstein,
Austria, Sweden, Denmark, Finland,  Luxembourg, the Netherlands,  Spain, Greece,
Monaco,  Portugal  and  Ireland  so that  there is  patent  protection  in these
countries.  We have filed a divisional application based on this European patent
with claims directed to a buccal spray  composition  containing a propellant,  a
non-polar solvent and an active compound selected from alkaloids and analgesics.
With respect to the  Canadian  application,  we filed a request for  examination
with the  Canadian  Patent  Office on  February  7, 2002.  We received an Office
Action from the Canadian  Patent Office dated April 13, 2004,  pursuant to which
we were  requested to elect for  prosecution  either  claims  directed to buccal
spray  compositions or claims to the soft-bite gelatin  capsules.  We elected to
prosecute the claims directed to buccal spray compositions.


                                       14
<PAGE>


BUCCAL  NONPOLAR  SPRAY  FOR  NITROGLYCERIN.  On  April  12,  1996,  we filed an
application  with the USPTO with claims  directed to a buccal  spray  containing
certain amounts of nitroglycerin,  a non-polar  solvent,  and a propellant.  The
claims were allowed and on February 9, 1999,  the USPTO  issued U.S.  Patent No.
5,869,082 to us for said  nitroglycerin  buccal  spray.  This patent  expires in
February 2019.

On February 21, 1997, we filed a PCT application directed to the above-described
subject matter. The International  Preliminary  Examination  Authority issued an
International Preliminary Examination Report alleging that the subject matter of
the invention lacks an inventive step. This opinion,  with which we disagree, is
not dispositive.  The opinion, however, may be persuasive to individual national
patent  offices in countries  where we enter the national  phase.  Nevertheless,
Greek  Patent,  GRO904055  was issued on March 18, 2004,  for our  nitroglycerin
buccal, non-polar spray or capsule.

In October 1998, we entered the national phase in Canada. We filed a request for
examination  on February 7, 2002.  The Canadian  Patent  Office issued an Office
Action to us dated July 21, 2004.  We are in the process of  responding  to such
Office Action.

In November 1998, we entered the national phase in Europe. A European patent was
granted  to us on April  16,  2003,  with  claims  directed  to a  buccal  spray
containing  certain  amounts  of  nitroglycerin,   a  non-polar  solvent  and  a
propellant.  This  European  patent has been  validated  in the United  Kingdom,
Germany,  France, Italy, Belgium,  Switzerland/Liechtenstein,  Austria,  Sweden,
Denmark, Finland,  Luxembourg, the Netherlands,  Spain, Greece, Monaco, Portugal
and Ireland so that there is patent protection in these countries.

BUCCAL  POLAR/NONPOLAR  SPRAYS OR CAPSULES.  On October 1, 1997,  we filed a PCT
application designating a large number of countries including the United States,
directed to the buccal sprays and soft-bite capsules.  The application  included
claims directed to: (A) a buccal spray composition containing either (1) a polar
solvent  with  certain  classes  of drugs,  as well as  specific  drugs in those
classes with or without a propellant or (2) a non-polar  solvent with or without
a propellant  with certain  classes of drugs, as well as specific drugs in those
classes;  (B)  buccal  spray  composition  containing  a  non-polar  solvent,  a
flavoring agent and certain classes of drugs;  and (C) methods of  administering
these drugs using the buccal spray compositions.  The application also contained
claims to soft-bite  gelatin  capsules  containing such drugs.  This application
differs from the first three applications,  discussed above, in that the claimed
compositions  include  different  classes of drugs from those  described  in the
first three applications.  The International  Preliminary  Examination Authority
issued an International Preliminary Examination Report alleging that the subject
matter of the invention  lacked  novelty and/or lacked an inventive  step.  This
opinion, with which we disagree, is not dispositive.  The opinion,  however, may
be persuasive to individual  national patent offices in countries where we enter
the national phase.


                                       15
<PAGE>

On March 29, 2000, we entered the national  phase in the United States by filing
a  CIP  of  the  above-identified  PCT  application  with  the  USPTO.  The  CIP
application   included   claims   directed  to  propellant   free  buccal  spray
compositions  containing  certain  amounts of polar or non-polar  solvents,  and
certain  classes of drugs,  as well as specific drugs in those  classes;  buccal
spray  compositions  containing  certain  amounts  of a  propellant,  a polar or
non-polar  solvent and certain  classes of drugs,  as well as specific  drugs in
those  classes;  and  methods of  administering  said drugs using these types of
buccal spray  compositions.  The application is currently being  prosecuted with
claims directed to the propellant free buccal spray  compositions and methods of
administering  said  drugs  using  these  types of  buccal  spray  compositions.
Subsequently, we filed two divisional applications claiming priority to the CIP.
The first  divisional  application  is currently  being  prosecuted  with claims
directed  to the  buccal  spray  compositions  containing  certain  amounts of a
propellant,  a polar or non-polar  solvent and certain classes of drugs, as well
as specific drugs in those classes and methods of administering said drugs using
these types of buccal spray compositions.  The second divisional application was
issued to us as U.S. Patent No. 6,676,931.  This patent expires in January 2024.
The  claims  of this  patent  are  directed  to a  propellant  free  pump  spray
composition containing certain amounts of a polar solvent,  certain amounts of a
flavoring agent and certain amounts of cyclosporin or ondansetron hydrochloride.
Another  application has been filed directed to the additional  classes of drugs
and  specific  drugs that were not  included  in the  claims of U.S.  Patent No.
6,676,931.

Based on the above-identified PCT application,  we entered the national phase in
Canada on March 29, 2000. We filed a request for examination in Canada on August
29,  2002.  An office  action has not been  received  from the  Canadian  Patent
Office.  Based on the  above-identified  PCT  application,  we also  entered the
national  phase  in  Japan  on  April  3,  2000.  We have  filed a  request  for
examination of this Japanese application on September 30, 2004.

Based on the  above-identified  PCT  application,  we also  entered the national
phase in Europe in April 2000. The European application includes claims directed
to propellant  free buccal spray  compositions  containing  certain amounts of a
polar solvent and certain  classes of drugs,  as well as specific drugs in those
classes and the use thereof to prepare a  medicament  for use as a buccal  spray
for transmucosal  administration.  We have filed three  applications  related to
this application in Europe.  The first  application  included claims directed to
buccal spray  compositions  containing certain amounts of a non-polar solvent, a
propellant  and  certain  classes  of drugs as well as  specific  drugs in those
classes and the use thereof to prepare a  medicament  for use as a buccal  spray
for transmucosal administration. The second application included claims directed
to propellant  free buccal spray  compositions  containing  certain amounts of a
non-polar  solvent and certain  classes of drugs,  as well as specific  drugs in
those classes.  The third application included claims directed to a buccal spray
composition  containing  certain  amounts of a polar  solvent,  a propellant and
certain  classes of drugs,  as well as specific drugs in those classes.  Each of
the above-identified European applications is currently being prosecuted.

Furthermore,  in  August  2002,  we filed a number of U.S.  patent  applications
directed to buccal spray  compositions  containing  certain  classes of drugs as
well as specific  drugs for treating  particular  types of disorders.  In August
2003,  we filed PCT  applications  related  to these U.S.  applications.  We are
currently prosecuting these applications.


                                       16
<PAGE>

ANTIHISTAMINE SYRUP AND OINTMENT.  On November 10, 1997, we filed an application
with  the  USPTO  with  claims  directed  to a  spray  composition  for  topical
administration   containing  an   antihistamine   and  a  polar  solvent  or  an
antihistamine,  a non-polar  solvent and a propellant.  In October 1998, the PTO
rejected the claims.  The claims were deleted and replaced with a claim directed
to a method of  controlling  the  occurrence  of delayed  contact  dermatitis by
applying   a  lotion   composition   containing   certain   amounts  of  certain
antihistamines  in certain amounts of a polar or non-polar  solvent.  On May 21,
2002, U.S. Patent No. 6,391,282 was issued to us for the above-described method.
This patent expires in May 2022.

On November 9, 1998, we filed the above-identified application with the Canadian
Patent Office and on October 29, 2002, a request for  examination  was filed. We
have not yet received an office action from the Canadian Patent Office.

GENERAL  COMMENT WITH  RESPECT TO ENTERING  THE  NATIONAL  PHASE FOR EACH OF THE
FOREGOING PCT APPLICATIONS.  In addition to our patents and patent  applications
in the United  States,  we are  interested  in entering the  national  phase and
obtaining patent protection in Europe and Canada. At the present time, it is not
possible to accurately  predict the expenses  involved in pursuing the foregoing
applications in Canada and Europe. For example,  we anticipate that, in the case
of the European  applications,  it may become necessary to file appeals with the
Board of Appeals in Munich.  Expenses  may exceed  $100,000  (in the  aggregate)
before a final  disposition  is  obtained.  We expect that this process may take
between two and four years.

EMPLOYEES

As of November 1, 2004, we had 28 full-time employees,  two part-time employees,
four of whom  serve as our  executive  officers,  21 of whom are  laboratory  or
support personnel and three of whom are engaged in administrative functions. Our
success is dependent,  in part,  upon our ability to hire and retain  additional
manufacturing  and research and development  personnel;  however,  we may not be
able to hire or retain such necessary personnel.

AVAILABLE INFORMATION

We file  annual,  quarterly  and current  reports,  proxy  statements  and other
information with the Securities and Exchange  Commission.  You may read and copy
any document we file with the Commission at the  Commission's  public  reference
rooms at 450 Fifth Street, N.W., Washington, D.C. 20549, 233 Broadway, New York,
New York 10279,  and  Citicorp  Center,  500 West  Madison  Street,  Suite 1400,
Chicago,  Illinois 60661- 2511. Please call the Commission at 1-800-SEC-0330 for
further  information on the public reference  rooms. Our Commission  filings are
also   available   to   the   public   from   the   Commission's    Website   at
"http://www.sec.gov." We make available free of charge our annual, quarterly and
current reports, proxy statements and other information upon request. To request
such  materials,  please send an e-mail to  bcohen@NovaDel.com  or contact Barry
Cohen,  our Vice  President of Business & Product  Development at our address as
set forth above or at 908-782-3431 ext. 2160


                                       17
<PAGE>


We maintain a Website at "http://www.NovaDel.com"  (this is not a hyperlink, you
must visit this  website  through an  Internet  browser).  Our  Website  and the
information  contained  therein or connected  thereto are not incorporated  into
this Annual Report on Form 10-KSB.

ITEM 2. DESCRIPTION OF PROPERTY.

Our  executive  offices are located at 25  Minneakoning  Road,  Flemington,  New
Jersey. The facility, constituting approximately 31,800 square feet, is occupied
under a 10-year lease.  Presently, we are only occupying a portion of the office
space in the  building;  the remaining  office,  laboratory,  manufacturing  and
warehousing  space is still being fitted out. We also have  approximately  4,500
square feet of laboratory and office space at 31 Route 12 West, Flemington,  New
Jersey,  which also formerly housed our executive offices.  We occupy that space
under a five-year lease expiring in September 2005.  During fiscal 2004, we paid
rent for both facilities of approximately $477,000 including real estate taxes.

ITEM 3. LEGAL PROCEEDINGS.

There are no legal  proceedings  to which we are a party and we are not aware of
any possible pending proceedings.

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

During the fourth  quarter of fiscal year 2004,  no matters were  submitted to a
vote of security holders, through the solicitation of proxies or otherwise.


                                       18
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
        ISSUER PURCHASES OF EQUITY SECURITIES.

      (A) MARKET  INFORMATION.  Since May 11,  2004,  our common  stock has been
traded on the AMEX under the ticket  symbol  "NVD".  Prior  thereto,  our common
stock was traded in the over-the-counter  market on the OTC Bulletin Board under
the ticker symbol "NVDL".  The following  table sets forth the range of high and
low closing sales prices of our common stock as reported by the AMEX and the OTC
Bulletin Board for each fiscal quarter for the past two fiscal years.

<TABLE>
<CAPTION>
                                                                       CLOSING SALES PRICES
                                                                       --------------------
                                                                                ($)
                                                                                ---
                                                                        HIGH          LOW
                                                                        ----          ---
<S>                                                                     <C>           <C>
    FISCAL 2004
    First Quarter (August 1, 2003 through October 31, 2003)             2.45          1.54
    Second Quarter (November 1, 2003 through January 31, 2004)          1.99          1.29
    Third Quarter (February 1, 2004 through April 30, 2004)             2.23          1.43
    Fourth Quarter (May 1, 2004 through July 31, 2004)                  2.45          1.35

    FISCAL 2003
    First Quarter (August 1, 2002 through October 31, 2002)             1.90          1.13
    Second Quarter  (November 1, 2002 through January 31, 2003)         2.80          1.44
    Third Quarter (February 1, 2003 through April 30, 2003)             2.43          1.50
    Fourth Quarter (May 1, 2003 through July 31, 2003)                  2.20          1.50
</TABLE>

The closing sales price of our common stock as reported by the AMEX was $1.71 on
July 31, 2004.

      (B)  HOLDERS.  As of July 31,  2004  there were  approximately  156 record
holders of our common stock.

      (C)  DIVIDENDS.  We have never  declared  or paid a dividend on our common
stock and  management  expects that all or a  substantial  portion of our future
earnings will be retained for  expansion or  development  of our  business.  The
decision to pay dividends, if any, in the future is within the discretion of our
Board of  Directors  and will depend upon our  earnings,  capital  requirements,
financial condition and other relevant factors such as contractual  obligations.
Management does not anticipate that we will pay dividends on our common stock in
the foreseeable future. Moreover, we may never issue dividends in the future.


                                       19
<PAGE>

      (D) RECENT SALES OF UNREGISTERED SECURITIES.  During the fourth quarter of
fiscal  2004,  a total of  26,677  shares of our  common  stock  were  issued in
connection  with the  cashless  exercise of 29,689  options.  We relied upon the
exemption  from  registration  of Section 4(2) of the Securities Act of 1933 for
each of such transactions.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

The  Management's  Discussion  and Analysis or Plan of  Operation  for the years
ended July 31, 2004 and 2003 presented  below reflects  certain  restatements to
the Company's  previously reported results of operations for these periods.  See
Note  3 of  the  Notes  to  Financial  Statements  for  a  discussion  of  these
restatements.

GENERAL

Since its  inception,  substantially  all of the  Company's  revenues  have been
derived  from  consulting  activities,  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
July 31, 2004 of approximately  $24,941,000.  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 license
agreements  with  drug  companies  who will  market  and  distribute  the  final
products.

The  Company  currently  has  cash  and  investment  balances  of  approximately
$9,400,000, which the Company believes is sufficient to maintain operating costs
until  the  end of the  calendar  year  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 may,  depending upon market
conditions,  pursue a  financing  by the end of the second  calendar  quarter of
2005. See "Liquidity and Capital Resources" below.

Over the next fiscal year,  the Company will continue to stay focused on its six
tier-one priority products: nitroglycerin,  sumatriptan,  ondansetron, zolpidem,
alprazolam and propofol.

Nitroglycerin.  The Company will  continue to work with the FDA  concerning  its
review of the nitroglycerin NDA by providing any further  information or support
to the FDA in order  to meet  the  PDUFA  date of June 4,  2005 for  anticipated
approval.


                                       20
<PAGE>

Sumatriptan. The Company plans to request a pre-IND meeting with the FDA with an
anticipated  goal for filing the IND during  first half of  calendar  year 2005.
Subsequent  to the IND  submission,  the Company  plans to develop the  clinical
protocol  and  administer  clinical  trials for the  sumatriptan  lingual  spray
product.

Zolpidem and  Ondansetron.  The Company plans to initiate pilot  pharmacokinetic
studies on both of these  lingual  sprays with  anticipated  results  from those
studies in first  calendar  quarter of 2005.  Depending  on the results of these
studies,  the Company intends to develop the appropriate  clinical  protocol and
administer the relevant trials.

Alprazolam.  The Company is awaiting results of its pilot  pharmacokinetic study
initiated  in the third  quarter  calendar of 2004.  Depending on the results of
this study,  we expect to consider taking steps to file an IND and initiate full
clinical development.

Propofol.  We continue to support our  partner,  Manhattan  Pharmaceuticals,  in
preparation  of  filing  an IND  with the FDA.  Manhattan  Pharmaceuticals  will
oversee all clinical development for this product.

Our  veterinary  initiatives  are being  undertaken  with our  partner,  Velcera
Pharmaceuticals,  to determine a designated  compound  for  formulations.  It is
believed that one compound will be identified by the first  calendar  quarter of
2005 and formulation by NovaDel is expected to be initiated subsequently.

The Company is building laboratory space in its existing  headquarters (See Item
2 -  "Description  of  Property")  to handle its  research and  development  and
formulation endeavors.

The  Company  plans to hire a new Head of  Pharmaceutical  Sciences  and a Chief
Financial  Officer  as  soon as  practical.  There  also  will be a need to hire
additional  employees in the laboratory to support our research and  development
efforts going forward,  however,  we do not believe that a significant number of
overall new employees will be required in the next 12 months.

RESULTS OF OPERATIONS

FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003

Consulting revenues for fiscal 2004 increased approximately $451,000 to $453,000
from $2,000 for fiscal 2003. This revenue increase for fiscal 2004 was primarily
attributable to an increase in consulting  assignments and revenue  attributable
to our arrangements with Manhattan Pharmaceuticals.

Research  and  development  expenses  increased   approximately   $1,405,000  to
$2,492,000 from  $1,087,000 for fiscal 2003.  Consulting,  selling,  general and
administrative expenses decreased approximately  $1,377,000 or 23% to $4,627,000
from $6,004,000 for fiscal 2003.


                                       21
<PAGE>

Total costs and  expenses  for fiscal 2004  increased  approximately  $28,000 to
approximately $7,119,000 compared to fiscal 2003. This increase was attributable
to increased  payroll  expense  primarily due to the hiring and  recruitment  of
additional  employees  and rent  expense  due to the leasing  and  occupying  of
additional  space for our operations.  These increases were offset by a $736,000
decrease in compensation  expense related to variable accounting  adjustments to
certain of our stock  options,  as well as the  decreases  for the  fiscal  2004
period,  as compared to the fiscal 2003 period,  of approximately  $1,147,000 in
consulting  fees  primarily  due to non-cash  charges for options  issued to two
consultants  during the fiscal 2003 period,  and lower costs of clinical studies
primarily due to fewer studies during the fiscal 2004 period.

Interest income  increased  approximately  $49,000 or 100% to $98,000 for fiscal
2004 from $49,000 for fiscal 2003 due to an increased average cash balance.

Deferred income tax benefit for fiscal 2004 was approximately  $214,000 compared
to approximately  $84,000 for fiscal 2003. These benefits resulted from the sale
of our net operating losses for New Jersey income tax purposes.

The resulting net loss for fiscal 2004 was $6,341,000  compared to a net loss of
$6,956,000 for fiscal 2003.

LIQUIDITY AND CAPITAL RESOURCES

From its inception,  the Company's  principal sources of capital were consulting
revenues, private placements and a public offering of its securities, as well as
loans and capital  contributions from the Company's principal  stockholders.  At
July 31, 2004, we had working capital of approximately $7,676,000 as compared to
working  capital of $2,799,000 at July 31, 2003,  representing a net increase in
working  capital of  approximately  $4,877,000.  During fiscal 2004, the Company
successfully  closed an  offering of its common  stock and  warrants to purchase
shares of its common stock ("Private Placement"). The Private Placement provided
for the sale of  approximately  13.3 million  shares of common stock,  par value
$.001 per share (the "Common Stock") and warrants to purchase  3,999,940  shares
of Common  Stock.  The Company  received  proceeds,  net of offering  costs,  of
approximately $12,785,000.

Net cash used in operating  activities was  approximately  $6,120,000 for fiscal
2004  compared  to net  cash  used  in  operating  activities  of  approximately
$4,320,000  for fiscal 2003.  Net cash used in operating  activities  for fiscal
2004 was  primarily  attributable  to the net loss of  $6,341,000  including the
impact of variable plan accounting ($736,000).

The Company  believes  that its current cash levels  together with revenues from
operations,  will be sufficient to satisfy its cash requirements through the end
of calendar  2005.  However,  beyond this point the Company  will likely have to
obtain  additional  financing  and/or  consummate  a strategic  alliance  with a
well-funded   business  partner.   Although  the  Company  is  actively  seeking
additional  financing and strategic  alliances,  there are a number of risks and
uncertainties  related to its  attempt  to  complete a  financing  or  strategic
partnering arrangement that are outside its control. The Company may not be able
to successfully  obtain  additional  financing on terms  acceptable to it, or at
all.


                                       22
<PAGE>

CRITICAL ACCOUNTING POLICIES

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

REVENUE  RECOGNITION,  ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS -
Revenue is recognized as earned. Invoices, for client project costs, are created
and  presented  at the end of each month,  for that month.  Accounts  receivable
reflects  these  invoices  at the end of the  month in  which  the  invoice  was
created.  Consulting  revenues from contract clinical research are recognized as
earned.  The Company also  receives  milestone  and upfront  payments  which are
initially deferred and subsequently  amortized into revenue over the contractual
period.

STOCK-BASED  COMPENSATION  - The  Company  uses  the  intrinsic  value  method
prescribed by APB Opinion No. 25 to measure compensation expense. As a result of
cashless  exercise  provisions  in its  employee  stock option  agreements,  the
Company has used variable  accounting  treatment under the Financial  Accounting
Standards  Board's  Interpretation  44, for issued and outstanding stock options
since January 2002. By the second fiscal  quarter of 2005,  the Company  expects
that it will no longer be required to use  variable  plan  accounting  for stock
options because the cashless  exercise  provision giving rise to such accounting
treatment has been rescinded for outstanding options.

CAPITAL  EXPENDITURES - The Company  anticipates  that the lab facilities in the
new  corporate  location  will be completed  by the end of the first  quarter of
calendar  2005.  The  Company  estimates  that the  costs of the  build-out  and
necessary equipment are approximately $1,300,000.

RESEARCH AND DEVELOPMENT EXPENSES

Research  and  development  expenses  for the years ended July 31, 2004 and 2003
were $2,492,000 and $1,087,000, respectively. Our 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 following
expenses.


                                       23
<PAGE>


Research and Pre-Clinical Operations and Direct Expenses - Clinical Trials

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.

The following  summarizes our research and development expenses by the foregoing
categories for the fiscal years ended July 31, 2004 and 2003:

<TABLE>
<CAPTION>
                                                                         FISCAL YEAR ENDED
                                                                             JULY 31,
                                                               -------------------------------------
                                                                     2004                2003
                                                               ------------------   ----------------
<S>                                                            <C>                  <C>
RESEARCH AND DEVELOPMENT EXPENSES:
     Research and pre-clinical operations                             $2,414,000           $905,000
     Direct clinical trial expenses                                       78,000            182,000
                                                               ------------------   ----------------
               RESEARCH AND DEVELOPMENT EXPENSES                      $2,492,000         $1,087,000
                                                               ==================   ================
</TABLE>


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  interpretation 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.

Currently,  none of our drug product  candidates  are available  for  commercial
sale.  All  of  our  potential  products  are  in  regulatory  review,  clinical
development  or  pre-clinical  development.  The  status  of each of our six (6)
tier-one  priority  products  is  discussed  in  "General,"  above.   Successful
completion  of  development  of  our  six  (6)  tier-one  priority  programs  is
contingent  on  numerous  risks,  uncertainties,  and other  factors,  which are
described  in detail in the  section  entitled  "Risk  Factors".  These  factors
include:

      o     Completion  of  pre-clinical  and  clinical  trials  of the  product
            candidate   with  the  scientific   results  that  support   further
            development and/or regulatory approval

      o     Receipt of necessary regulatory approvals

      o     Obtaining   adequate   supplies  of  surfactant   raw  materials  on
            commercially reasonable terms


                                       24
<PAGE>

      o     Obtaining  capital  necessary to fund our operations,  including our
            research and development  efforts,  manufacturing  requirements  and
            clinical trials

      o     Performance of third-party collaborators on whom we rely heavily for
            the commercialization and manufacture of drug product

      o     Obtaining manufacturing,  sales and marketing capabilities for which
            we presently have limited resources

As a result of the amount and nature of these factors, many of which are outside
our control, the success, timing of completion, and ultimate cost of development
of any of our 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:

      o     Slow patient enrollment

      o     Long treatment time required to demonstrate effectiveness

      o     Lack of sufficient clinical supplies and material

      o     Adverse medical events or side effects in treated patients

      o     Lack of effectiveness of the product candidate being tested

      o     Lack of sufficient funds

If we do  not  successfully  complete  clinical  trials,  we  will  not  receive
regulatory  approval to market our six (6) tier-one priority products.  If we do
not  obtain and  maintain  regulatory  approval  for our  products,  we will not
generate any revenues from the sale of our products and the value of our company
and our  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 Manhattan, Par, Velcera and
Hana. We are 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.

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have any so-called  "off-balance  sheet  arrangements" that
have or are  reasonably  likely  to  have a  current  or  future  effect  on its
financial condition, results of operations, liquidity or capital resources.


                                       25
<PAGE>


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.

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2002, the FASB issued FASB Interpretation  (FIN) No. 45, Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  including  Indirect
Guarantees  of  Indebtedness  of Others.  FIN 45 requires  that a  liability  be
recorded in the  guarantor's  balance  sheet upon  issuance of a  guarantee.  In
addition,  FIN 45 requires  disclosures  about the guarantees that an entity has
issued,  including a rollforward of the entity's product  warranty  liabilities.
The Company  does not expect FIN 45 to have a material  impact on its  financial
position, results of operations or cash flows.

In December  2002,  the FASB issued SFAS No.  148,  Accounting  for  Stock-Based
Compensation,  Transition  and  Disclosure.  SFAS No. 148  provides  alternative
methods of  transition  for a voluntary  change to the fair value base method of
accounting for  stock-based  employee  compensation.  SFAS No. 148 also requires
that  disclosures  of the pro forma  effect of using  the fair  value  method of
accounting for stock-based  employee  compensation be displayed more prominently
and in tabular format. Additionally, SFAS No. 148 requires disclosure of the pro
forma  effect  in  interim  financial  statements.  The  transition  and  annual
disclosure  requirements  are  effective  for our 2003 fiscal year.  The interim
disclosure  requirements  are not  effective.  The  Company  does not expect the
adoption of SFAS NO. 148 to have a material  impact on its  financial  position,
results of operations or cash flows.

In January  2003,  the FASB issued FIN 46,  Consolidation  of Variable  Interest
Entities.  This Interpretation  clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, to certain entities in which
equity  investors do not have the  characteristics  of a  controlling  financial
interest or do not have sufficient  equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 applies to variable interest entities created after January 31, 2003, and
is effective as of July 31, 2003 for variable interest entities created prior to
February 1, 2003.  The Company  does not expect the adoption of FIN 46 to have a
material effect on its financial position, results of operations or cash flows.

In April  2003,  the FASB issued SFAS No. 149,  Amendment  of  Statement  133 on
Derivative  Instruments and Hedging  Activities.  This statement amends SFAS No.
133,  Accounting  for  Derivative   Instruments  and  Hedging  Activities,   for
implementation  issues  related to the definition of a derivative and other FASB
projects related to financial instruments.  SFAS No. 149 requires that contracts
with comparable  characteristics be accounts for in a similar fashion.  SFAS No.
149 applies  prospectively to contracts  entered into or modified after June 30,
2003 and for hedging  relationships  designated after June 30, 2003. The Company
does not expect the  adoption  of SFAS No. 149 to have a material  effect on its
financial position, results of operations or cash flows.


                                       26
<PAGE>


In May 2003,  the FASB  issued SFAS No. 150,  Accounting  for Certain  Financial
Instruments with  Characteristics of both Liabilities and Equity. This statement
establishes  standards  for  how  an  issuer  classifies  and  measures  certain
financial  instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that financial  instruments  within the scope of SFS No. 150 be
classified  as a  liability  or an  asset.  SFAS No.  150 is  effective  for all
financial  instruments  entered  into  after  May 31,  2003 and  otherwise,  the
beginning of the first interim  period after June 15, 2003. The Company does not
expect the adoption of SFAS No. 150 to have a material  effect on its  financial
position, results of operations or cash flows.

                                  RISK FACTORS

You  should  carefully  consider  the  following  risk  factors  and  all  other
information  contained  in this Annual  Report  before  investing  in our common
stock.  Investing in our common stock involves a high degree of risk. Any of the
following risks could  adversely  affect our business,  financial  condition and
results of operations  and could result in a complete  loss of your  investment.
The risks and uncertainties described below are not the only ones we may face.

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

We are a pre-commercialization  biopharmaceutical  company.  Therefore, you must
evaluate  us in light of the  uncertainties  and  complexities  present  in such
companies.  We have not  generated any revenue from the  commercial  sale of our
proposed  products and do not expect to receive such revenue in the near future.
We have no material  licensing or royalty  revenue or products  ready for use or
licensing in the marketplace. This limited history may not be adequate to enable
one to fully  assess our  ability  to  develop  our  technologies  and  proposed
products,  obtain FDA approval  and achieve  market  acceptance  of our proposed
products  and  respond  to  competition.  We  cannot  be  certain  as to when to
anticipate  commercializing  and  marketing  any of  our  proposed  products  in
development,  if at all, and do not expect to generate  sufficient revenues from
proposed  product  sales to cover our expenses or achieve  profitability  in the
near future.

We had an accumulated deficit as of July 31, 2004 of approximately  $24,941,000.
We incurred losses in each of our last eight fiscal years,  including a net loss
of approximately  $6,341,000 for the fiscal year ended July 31, 2004. Because we
increased our product development  activities,  we anticipate that we will incur
substantial  operating  expenses  in  connection  with  continued  research  and
development, clinical trials, testing and approval of our proposed products, and
expect  these  expenses  will result in  continuing  and,  perhaps,  significant
operating  losses until such time, if ever, that we are able to achieve adequate
product sales levels. Our ability to generate revenue and achieve  profitability
depends upon our ability,  alone or with others,  to complete the development of
our proposed products, obtain the required regulatory approvals and manufacture,
market and sell our proposed products.


                                       27
<PAGE>


WE   WILL   REQUIRE    SIGNIFICANT   CAPITAL   FOR   PRODUCT   DEVELOPMENT   AND
COMMERCIALIZATION.

The research, development, testing and approval of our proposed products involve
significant  expenditures and accordingly we require significant capital to fund
such  expenditures.  We  anticipate,  based on our  current  proposed  plans and
assumptions  relating to our  operations  (including the timetable of, and costs
associated with, new product development), our existing capital resources should
be sufficient to satisfy our  contemplated  cash  requirements  through calendar
year 2005. Due to our small revenue base, low level of working capital and until
recently,   our  relative  inability  to  increase  the  number  of  development
agreements  with  pharmaceutical  companies,  we  have  been  unable  to  pursue
aggressively  our product  development  strategy.  We will  require  significant
additional financing and/or a strategic alliance with a well-funded  development
partner  to   aggressively   pursue  our  business  plan.  We  have  no  current
arrangements  with  respect  to,  or  sources  of,  additional  financing,   and
additional  financing may not be available to us on acceptable terms, if at all.
Unless we raise  additional  financing,  we may not have sufficient funds and we
may not be able to complete  development and  commercialization  of our proposed
products or continue operating.

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

The  additional  financings  we  require  may be  obtained  through  one or more
transactions   which   effectively   dilute  the  ownership   interests  of  our
stockholders. Further, we may not be able to secure such additional financing on
terms  acceptable  to us, if at all. We have the  authority to issue  additional
shares of common  stock,  as well as  additional  classes or series of ownership
interests  or debt  obligations  which may be  convertible  into any one or more
classes or series of ownership interests.  We are authorized to issue a total of
100,000,000 shares of common stock and 1,000,000 shares of preferred stock. Such
securities  may  be  issued  without  the  approval  or  other  consent  of  our
stockholders.  In addition,  certain of our stockholders who purchased shares of
common  stock in a private  placement  completed by us in April and May 2003 are
entitled  to,  until  the  second  anniversary  of  the  closing  of  each  such
stockholder's  purchase of our common stock,  purchase  additional shares of our
common stock in  connection  with  subsequent  offerings by us so as to maintain
their prior  ownership  percentages.  See "Risk  Factors--Additional  authorized
shares of common stock and preferred  stock available for issuance may adversely
affect the market."


                                       28
<PAGE>

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

Our strategy is to concentrate our product development  activities  primarily on
pharmaceutical  products for which there  already are  significant  prescription
sales,  where the use of our  proprietary,  novel drug delivery  technology 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.  We have
completed pilot  pharmacokinetic  studies for two  antihistamine  lingual sprays
(loratadine and clemastine),  an estradiol lingual spray, a progesterone lingual
spray, a nitroglycerin lingual spray, a propofol lingual spray and a sumatriptan
lingual  spray.  In  addition,  we  completed  phase 2  clinical  trials for the
clemastine and nitroglycerin lingual sprays.

Additional   development   work  on   loratadine,   clemastine,   estradiol  and
progesterone  has been put on hold due to changes in the marketplace  which have
significantly reduced the market potential for these compounds.  We filed an NDA
for our  nitroglycerin  lingual  spray on June 21, 2004,  which was accepted for
filing by the FDA on September  29, 2004.  We have  initiated a  pharmacokinetic
study of an anxiolytic  lingual spray and plan to conduct pilot  pharmacokinetic
studies on our other Tier I priority products during late calendar year 2004 and
early  calendar  year 2005.  These  products are lingual spray  formulations  of
ondansetron and zolpidem. The goal of these pilot pharmacokinetic  studies is to
determine whether or not a specific lingual spray can achieve  therapeutic blood
levels of an active  ingredient via  administration  through the oral mucosa. If
blood levels are not achieved,  it could result in the need to  reformulate  the
lingual spray and/or to terminate work on a specific compound which would have a
material adverse effect on our operations.

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

--the number of clinical sites;

--the size of the patient population;

--the proximity of patients to the clinical sites;

--the eligibility criteria for the study;

--the existence of competing clinical trials; and

--the existence of alternative available products.

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


                                       29
<PAGE>


THERE  ARE  CERTAIN  INTERLOCKING   RELATIONSHIPS  AND  POTENTIAL  CONFLICTS  OF
INTEREST.

Lindsay A.  Rosenwald,  M.D.,  a  significant  stockholder  of  NovaDel,  is the
Chairman of the Paramount  Capital,  Inc.,  the placement  agent for the private
placements we completed  during  calendar year 2003, and the Managing  Member of
BioMedical  Investment Group,  LLC, also a major stockholder of NovaDel.  In the
regular course of its business and the business of its  affiliates,  and outside
of its arrangement with us, Paramount and/or its affiliates  identify,  evaluate
and pursue investment  opportunities in biomedical and pharmaceutical  products,
technologies  and  companies.  In  addition,  Dr.  Rosenwald  may be  deemed  to
beneficially  own  approximately  33% of our outstanding  common stock (assuming
exercise of certain warrants beneficially owned by Dr. Rosenwald).  As such, Dr.
Rosenwald,  BioMedical  Investment  Group and  Paramount may be deemed to be our
affiliates.  Generally,  Delaware  corporate law requires that any  transactions
between us and any of our  affiliates  be on terms that,  when taken as a whole,
are  substantially as favorable to us as those then reasonably  obtainable in an
arms length  transaction  from a person who is not an  affiliate.  Nevertheless,
neither  such  affiliates  nor  Paramount  or  BioMedical  Investment  Group are
obligated  pursuant  to any  agreement  or  understanding  with us to  make  any
additional  products  or  technologies  available  to us,  nor can  there be any
assurance, and we do not expect and our stockholders should not expect, that any
biomedical  or   pharmaceutical   product  or  technology   identified  by  such
affiliates,  Paramount or  BioMedical  Investment  Company in the future will be
made available to us. In addition, certain of our current officers and directors
or any  officers or  directors  hereafter  appointed by us may from time to time
serve as officers  or  directors  of other  biopharmaceutical  or  biotechnology
companies.  Such  other  companies  may  have  interests  in  conflict  with our
interests.

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

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


                                       30
<PAGE>

WE DO NOT HAVE COMMERCIALLY AVAILABLE PRODUCTS.

Our principal efforts are the development of, and obtaining regulatory approvals
for, our proposed  products.  We anticipate  that  marketing  activities for our
proprietary  products,  whether by us or one or more of our  licensees,  if any,
will not begin until late in calendar year 2005 at the earliest. Accordingly, it
is not anticipated that we will generate any revenues from royalties or sales of
proprietary  products  until  regulatory  approvals  are obtained and  marketing
activities begin. Any one or more of our proposed  proprietary  products may not
prove to be commercially  viable, or if viable, may not reach the marketplace on
a basis consistent with our desired timetables.  The failure or the delay of any
one or more of our proposed products to achieve commercial  viability would have
a material  adverse effect on us. See Item 1 "Description  of Business - Product
Development," "Proposed Products" and "Government Regulation."

WE HAVE NOT COMPLETED PRODUCT DEVELOPMENT.

We have not completed the  development  of our proposed  products and we will be
required  to devote  considerable  effort  and  expenditures  to  complete  such
development.   In  addition  to  obtaining  adequate   financing,   satisfactory
completion  of  development,   testing,   government   approval  and  sufficient
production levels of such products must be obtained before the proposed products
will become  available  for  commercial  sale. We do not  anticipate  generating
material  revenue from product sales until perhaps late in calendar year 2005 or
thereafter.  Other  potential  products  remain in the  conceptual or very early
development  stage  and  remain  subject  to  all  the  risks  inherent  in  the
development of  pharmaceutical  products,  including  unanticipated  development
problems and possible lack of funds to undertake or continue development.  These
factors could result in abandonment or substantial  change in the development of
a specific formulated  product.  We may not be able to successfully  develop any
one or more of our  proposed  products or develop  such  proposed  products on a
timely basis.  Further,  such proposed products may not be commercially accepted
if  developed.  The  inability  to  successfully  complete  development,   or  a
determination  by us,  for  financial  or other  reasons,  not to  undertake  to
complete development of any proposed product, particularly in instances in which
we have made  significant  capital  expenditures,  could have a material adverse
effect on our business and operations.

WE DO NOT HAVE DIRECT CONSUMER MARKETING EXPERIENCE.

We have no experience in marketing or  distribution at the consumer level of our
proposed products.  Moreover, we do not have the financial or other resources to
undertake extensive marketing and advertising activities. Accordingly, we intend
generally to rely on marketing  arrangements,  including possible joint ventures
or license or  distribution  arrangements  with  third  parties.  Except for our
agreements,   with  Par  Pharmaceutical,   Manhattan  Pharmaceuticals,   Velcera
Pharmaceuticals,  Inc.  and  Hana  Biosciences,  we have  not  entered  into any
significant  agreements  or  arrangements  with respect to the  marketing of our
proposed  products.  We may not be able to enter  into any  such  agreements  or
similar arrangements in the future and we may not be able to successfully market
our  products.  If we fail to enter into these  agreements or if we or the third
parties do not perform  under such  agreements,  it could  impair our ability to
commercialize  our products.  If we do not develop a marketing force of our own,
then we will depend on  arrangements  with corporate  partners or other entities
for the marketing and sale of our  remaining  products.  Our strategy to rely on
third party marketing  arrangements  could adversely  affect our profit margins.
See Item 1 "Description of Business - Marketing and Distribution."


                                       31
<PAGE>

WE MUST COMPLY WITH GOOD MANUFACTURING PRACTICES.

The manufacture of our pharmaceutical products under development will be subject
to  current  Good   Manufacturing   Practices  (cGMP)  prescribed  by  the  FDA,
pre-approval inspections by the FDA or comparable foreign authorities,  or both,
before commercial  manufacture of any such products and periodic cGMP compliance
inspections  thereafter by the FDA. We, or any of our third party manufacturers,
may not be able to comply with cGMP or satisfy pre- or post-approval inspections
by the FDA or comparable Foreign  authorities in connection with the manufacture
of our proposed  products.  Failure or delay by us or any such  manufacturer  to
comply  with cGMP or  satisfy  pre- or  post-approval  inspections  would have a
material adverse effect on our business and operations.  See Item 1 "Description
of Business - Manufacturing."

WE ARE DEPENDENT ON OUR SUPPLIERS.

We believe that the active  ingredients  used in the manufacture of our proposed
pharmaceutical  products are presently available from numerous suppliers located
in the United  States,  Europe,  India and Japan.  We believe  that  certain raw
materials,  including inactive ingredients,  are available from a limited number
of suppliers and that certain packaging materials intended for use in connection
with our spray products currently are available only from sole source suppliers.
Although we do not  believe we will  encounter  difficulties  in  obtaining  the
inactive ingredients or packaging materials necessary for the manufacture of our
proposed products,  we may not be able to enter into satisfactory  agreements or
arrangements  for the purchase of commercial  quantities of such  materials.  We
have a written supply agreement with Dynamit Nobel for certain raw materials for
our  nitroglycerin  lingual spray and a purchase  order  agreement in place with
INyX  Pharmaceuticals,  located in Manchester,  United Kingdom.  With respect to
other  suppliers,  we operate  primarily on a purchase  order basis beyond which
there is no contract memorializing our purchasing arrangements. The inability to
enter into  agreements or otherwise  arrange for adequate or timely  supplies of
principal raw materials and the possible inability to secure alternative sources
of raw  material  supplies,  or the failure of Dynamit  Nobel to comply with its
supply obligations to us, could have a material adverse effect on our ability to
arrange for the manufacture of formulated products. In addition, development and
regulatory  approval of our products are  dependent  upon our ability to procure
active  ingredients and certain packaging  materials from FDA-approved  sources.
Since the FDA approval process requires  manufacturers to specify their proposed
suppliers  of  active  ingredients  and  certain  packaging  materials  in their
applications,  FDA approval of a supplemental  application to use a new supplier
would be required if active  ingredients  or such  packaging  materials  were no
longer  available from the originally  specified  supplier,  which may result in
manufacturing   delays.   If  we  do  not   maintain   important   manufacturing
relationships,  we may fail to find a replacement manufacturer or to develop our
own manufacturing capabilities. If we cannot do so, it could delay or impair our
ability  to  obtain  regulatory  approval  for our  products  and  substantially
increase  our costs or deplete  any profit  margins.  If we do find  replacement
manufacturers,  we may not be able to enter into  agreements  with them on terms
and conditions  favorable to us and, there could be a substantial delay before a
new  facility  could  be  qualified  and  registered  with  the FDA and  foreign
regulatory authorities.  See Item 1 "Description of Business - Raw Materials and
Suppliers."


                                       32
<PAGE>


OUR INTERNAL CONTROLS AND PROCEDURES HAVE BEEN MATERIALLY DEFICIENT,  AND WE ARE
BEGINNING THE PROCESS OF CORRECTING INTERNAL CONTROL DEFICIENCIES.

In October 2004, the Company and its independent  registered  public  accounting
firm recognized that the Company's  internal  controls had material  weaknesses.
These  material  weaknesses  led in part to the delay in the  production  of our
audited  financial  statements  for fiscal 2004. We have restated our results of
operations  for the fiscal years ended July 31, 2002, and July 31, 2003, and for
the  Company's  quarterly  results  in fiscal  years  2004,  2003 and 2002.  Our
independent  registered  public  accounting  firm  has  advised  us of  material
weaknesses  noted  during  their  audit of our 2004  financial  statements.  For
further  information  concerning our internal controls,  see Item 8A - "Controls
and Procedures".

If we cannot rectify these material  weaknesses  through  remedial  measures and
improvements   to  our  systems  and   procedures,   management   may  encounter
difficulties in timely assessing business performance and identifying  incipient
strategic and  oversight  issues.  Management is currently  focused on remedying
internal control deficiencies,  and this focus will require management from time
to time to  devote  its  attention  away from  other  planning,  oversight,  and
performance functions.

We will apply substantial resources at all relevant managerial levels toward the
task of improving our internal control environment. We cannot provide assurances
as to the  timing  of the  completion  of  these  efforts  or  estimates  of the
prospective  costs of these  efforts,  either in dollar  terms or in the form of
management attention. We cannot be certain that the measures we take will ensure
that we implement and maintain  adequate  internal  controls in the future.  Any
failure  to  implement  required  new  or  improved  controls,  or  difficulties
encountered in their  implementation,  could harm our operating results or cause
us to fail to meet our reporting obligations.

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

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

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


                                       33
<PAGE>


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

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

WE FACE INTENSE COMPETITION.

The markets which we intend to enter are  characterized by intense  competition.
We  or  our  licensees  may  be  competing  against  established  pharmaceutical
companies which  currently  market products which are equivalent or functionally
similar to those we intend to market.  Prices of drug products are significantly
affected by competitive factors and tend to decline as competition increases. In
addition, numerous companies are developing or may, in the future, engage in the
development of products  competitive with our proposed products.  We expect that
technological  developments  will occur at a rapid rate and that  competition is
likely  to  intensify  as  enhanced  dosage  from   technologies   gain  greater
acceptance.  Additionally,  the markets for  formulated  products  which we have
targeted  for  development  are  intensely   competitive,   involving   numerous
competitors  and  products.   Most  of  our  prospective   competitors   possess
substantially  greater  financial,  technical  and other  resources  than we do.
Moreover, many of these companies possess greater marketing capabilities than we
do,  including  the  resources  necessary to enable them to implement  extensive
advertising  campaigns.  We may not be able to  compete  successfully  with such
competitors. See Item 1 "Description of Business - Competition."


                                       34
<PAGE>


Accordingly,  our  competitors  may  succeed  in  obtaining  patent  protection,
receiving FDA or comparable foreign approval or commercializing  products before
us. If we commence  commercial  product sales, we will compete against companies
with greater  marketing  and  manufacturing  capabilities  who may  successfully
develop and  commercialize  products that are more  effective or less  expensive
than ours.  These are areas in which,  as yet, we have limited or no experience.
In addition,  developments by our competitors may render our product  candidates
obsolete or noncompetitive.

We are aware of several  companies that are selling or developing  lingual spray
products. First Horizon Pharmaceutical Corporation, headquartered in Alpharetta,
Georgia,  currently markets  Nitrolingual(R)  Pumpspray, a nitroglycerin lingual
spray  which is in an  "air"  propelled  dispensing  system  (our  nitroglycerin
lingual  spray  is  in  a  "propellant"   based  dispensing   system).   Generex
Biotechnology  Corporation,  based in Toronto,  Canada, is developing an insulin
formulation  that is delivered  directly into the mouth via their  RapidMist(TM)
device.  They also state that they have begun  research on four specific  target
molecules for their RapidMist delivery system: morphine,  fentanyl,  heparin and
flu vaccine.  Sirus  Pharmaceuticals  Ltd.,  based in the United  Kingdom,  also
claims to be developing drugs to be delivered sublingually via an aerosol spray.
Sirus is  working  in the  areas of pain and  emesis.  There are  several  other
companies  that we are aware of that market  lingual spray  products  containing
vitamins and homeopathic ingredients.

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


                                       35
<PAGE>

LIMITED PRODUCT LIABILITY INSURANCE COVERAGE MAY AFFECT OUR BUSINESS.

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

EXTENSIVE GOVERNMENT REGULATION MAY AFFECT OUR BUSINESS.

The development, manufacture and commercialization of pharmaceutical products is
generally  subject  to  extensive   regulation  by  various  federal  and  state
governmental  entities. The FDA, which is the principal United States regulatory
authority over  pharmaceutical  products,  has the power to seize adulterated or
misbranded  products and unapproved new drugs,  to request their recall from the
market,  to enjoin  further  manufacture  or sale,  to publicize  certain  facts
concerning  a  product  and to  initiate  criminal  proceedings.  As a result of
federal statutes and FDA regulations  pursuant to which new  pharmaceuticals are
required  to  undergo  extensive  and  rigorous  testing,  obtaining  pre-market
regulatory  approval requires  extensive time and  expenditures.  Under the FFDC
Act, a new drug may not be commercialized or otherwise distributed in the United
States  without  the prior  approval  of the FDA or  pursuant  to an  applicable
exemption  from the  FFDC.  The FDA  approval  processes  relating  to new drugs
differ,  depending on the nature of the  particular  drug for which  approval is
sought.  With respect to any drug product with active ingredients not previously
approved by the FDA, a prospective drug manufacturer is required to submit a new
drug  application  an NDA,  which  includes  complete  reports of  pre-clinical,
clinical and laboratory studies to prove such product's safety and efficacy. The
NDA process generally requires,  before the submission of the NDA, submission of
an investigative new drug  application,  an IND, pursuant to which permission is
sought to begin  preliminary  clinical testing of the new drug. An NDA, based on
published safety and efficacy studies conducted by others,  may also be required
to be submitted for a drug product with a previously  approved active ingredient
if the method of delivery, strength or dosage form is changed.  Alternatively, a
drug having the same active ingredients as a drug previously approved by the FDA
may be eligible  to be  submitted  under an ANDA,  which is  significantly  less
stringent  than the NDA  approval  process.  While the ANDA  process  requires a
manufacturer  to establish  bioequivalence  to the previously  approved drug, it
permits the manufacturer to rely on the safety and efficacy studies contained in
the NDA for the  previously  approved  drug.  We believe  that the  products  we
develop in spray dosage form will require the  submission of an NDA. We estimate
that the development of new formulations of pharmaceutical  products,  including
formulation,  testing and obtaining FDA approval,  generally takes four to seven
years for the NDA process.  Our  determinations  may prove to be  inaccurate  or
pre-marketing  approval relating to our proposed products may not be obtained on
a timely  basis,  if at all.  The failure by us to obtain  necessary  regulatory
approvals,  whether on a timely basis or at all,  would have a material  adverse
effect on our business.


                                       36
<PAGE>


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

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

The approval  process is lengthy,  expensive and uncertain.  It is also possible
that the FDA or comparable foreign regulatory authorities could interrupt, delay
or halt  any  one or  more of our  clinical  trials.  If we,  or any  regulatory
authorities, believe that trial participants face unacceptable health risks, any
one or more of our trials  could be  suspended  or  terminated.  We also may not
reach agreement with the FDA and/or comparable foreign agencies on the design of
any one or more of the  clinical  studies  necessary  for  approval.  Conditions
imposed by the FDA and comparable  agencies in foreign countries on our clinical
trials could  significantly  increase the time  required for  completion of such
clinical trials and the costs of conducting the clinical  trials.  Data obtained
from clinical trials are susceptible to varying interpretations which may delay,
limit or prevent regulatory approval.

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

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


                                       37
<PAGE>


WE EXPECT TO FACE UNCERTAINTY OVER REIMBURSEMENT AND HEALTHCARE REFORM.

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

OUR STRATEGY,  IN MANY CASES,  IS TO ENTER INTO  COLLABORATION  AGREEMENTS  WITH
THIRD PARTIES AND WE MAY REQUIRE ADDITIONAL COLLABORATION AGREEMENTS. IF WE FAIL
TO ENTER  INTO THESE  AGREEMENTS  OR IF WE OR THE THIRD  PARTIES DO NOT  PERFORM
UNDER SUCH AGREEMENTS, IT COULD IMPAIR OUR ABILITY TO COMMERCIALIZE OUR PROPOSED
PRODUCTS.

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


                                       38
<PAGE>


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

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

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

--protect trade secrets; and

--operate without infringing upon the proprietary rights of others,  both in the
United States and in other countries.

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

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

We, and the parties  licensing  technologies  to us, have filed  various  United
States  and  foreign  patent  applications  with  respect  to the  products  and
technologies  under our development,  and the United States Patent and Trademark
Office and foreign  patent  offices  have  issued  patents  with  respect to our
products and  technologies.  These  patent  applications  include  international
applications  filed under the Patent  Cooperation  Treaty.  Our  pending  patent
applications, those we may file in the future or those we may license from third
parties  may not result in the United  States  Patent  and  Trademark  Office or
foreign  patent office  issuing  patents.  Also,  if patent rights  covering our
products are not  sufficiently  broad,  they may not provide us with  sufficient
proprietary  protection  or  competitive  advantages  against  competitors  with
similar products and technologies.  Furthermore, if the United States Patent and
Trademark Office or foreign patent offices issue patents to us or our licensors,
others may challenge the patents or circumvent the patents, or the patent office
or the courts may  invalidate  the patents.  Thus, any patents we own or license
from or to third parties may not provide any protection against competitors.

Furthermore,  the life of our patents is limited.  Such  patents,  which include
relevant  foreign  patents,  expire on various  dates.  We have filed,  and when
possible and appropriate,  will file, other patent  applications with respect to
our products and processes in the United States and in foreign countries. We may
not be able to develop additional  products or processes that will be patentable
or  additional  patents may not be issued to us. See also "Risk  Factors - If we
cannot meet requirements under our license agreements,  we could lose the rights
to our products."


                                       39
<PAGE>


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

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

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

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

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

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


                                       40
<PAGE>


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

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

--they will breach these agreements;

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

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

WE ARE DEPENDENT ON EXISTING MANAGEMENT.

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

Our future success also will depend in part on the continued  service of our key
scientific and management personnel and our ability to identify, hire and retain
additional personnel, including scientific, development and manufacturing staff.
We experience intense competition for qualified personnel,  and the existence of
non-competition  agreements  between  prospective  employees  and  their  former
employers  may prevent us from hiring  those  individuals  or subject us to suit
from their former employers.

While we attempt to provide  competitive  compensation  packages  to attract and
retain  key  personnel,  some of our  competitors  are  likely  to have  greater
resources  and more  experience  than we have,  making  it  difficult  for us to
compete successfully for key personnel.


                                       41
<PAGE>


WE ARE CONTROLLED BY CURRENT STOCKHOLDERS, OFFICERS AND DIRECTORS.

Our directors,  executive officers and principal stockholders and certain of our
affiliates  have the ability to influence the election of our directors and most
other stockholder actions.  Management and our affiliates currently beneficially
own  (including  shares they have the right to acquire)  greater than 50% of our
common stock.  Specifically,  Dr. Rosenwald has the ability to exert significant
influence  over the  election of the Board and other  matters  submitted  to our
stockholders for approval. Such positions may discourage or prevent any proposed
takeover of NovaDel,  including  transactions  in which our  stockholders  might
otherwise  receive  a premium  for their  shares  over the then  current  market
prices.  Our  directors,  executive  officers  and  principal  stockholders  may
influence corporate actions,  including  influencing  elections of directors and
significant corporate events.

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

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

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

--adverse reactions to products;

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

--changes in the United States or foreign regulatory policy during the period of
  product development;

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

--announcements of technological innovations by us or our competitors;

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

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

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

--conditions and trends in the pharmaceutical and other industries;

--new accounting standards; and

--the occurrence of any of the risks described in these Risk Factors.

Our common  stock has been listed for  quotation on the AMEX since May 11, 2004.
Prior to May 11, 2004, our common stock was traded on the OTC Bulletin  Board(R)
of the National  Association  of Securities  Dealers,  Inc.  During the 12-month
period ended July 31, 2004,  the price of our common stock has ranged from $1.35
to  $2.45.  We expect  the price of our  common  stock to remain  volatile.  The
average daily trading volume in our common stock varies  significantly.  For the
12-month  period ended July 31, 2004,  the average daily  trading  volume in our
common stock was approximately  96,390 shares. Our relatively low average volume
and low  average  number of  transactions  per day may affect the ability of our
stockholders to sell their shares in the public market at prevailing  prices and
a more active market may never develop.


                                       42
<PAGE>


In  addition,  our  earnings  and losses may be volatile  because of our need to
account for  compensation  expense on a variable  accounting basis on certain of
our  outstanding  stock options  through the first fiscal  quarter of 2005.  The
impact on our earnings and losses  because of such expense will vary in relation
to the  volatility  of our stock price during such  quarter.  (See Note 3 of the
Notes to Financial Statements.)

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

In the  past,  following  periods  of  volatility  in the  market  price  of the
securities of companies in our industry,  securities class action litigation has
often been instituted  against companies in our industry.  If we face securities
litigation in the future, even if meritless or unsuccessful,  it would result in
substantial costs and a diversion of management  attention and resources,  which
would negatively impact our business.

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

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


                                       43
<PAGE>


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

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

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

--"boiler room" practices  involving high pressure sales tactics and unrealistic
  price projections by inexperienced sales persons;

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

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

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

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

We are authorized to issue a total of 100,000,000 shares of our common stock. As
of July 31,  2004,  there  were  33,091,467  shares of common  stock  issued and
outstanding.  However, the total number of shares of our common stock issued and
outstanding  does not include shares reserved in anticipation of the exercise of
options or warrants.  As of July 31, 2004, we had outstanding  stock options and
warrants to purchase  approximately  21,399,541  shares of our common stock, the
exercise price of which range between $.63 per share to $3.18 per share,  and we
have  reserved  shares of our common stock for issuance in  connection  with the
potential exercise thereof.  Of the reserved shares, a total of 2,302,500 shares
are currently  reserved for issuance in connection  with our 1992, 1997 and 1998
Stock Option Plans,  respectively,  of which options to purchase an aggregate of
500,000,  500,000 and  1,570,500,  shares have been issued under the  respective
stock  option  plans.  Another  4,618,000  shares are  reserved for issuance and
available  for  the  non-plan  options  granted  pursuant  to the  terms  of the
employment  agreements  of various of our  current and former  officers.  To the
extent such options or warrants are  exercised,  the holders of our common stock
will  experience  further  dilution.  In addition,  in the event that any future
financing  should be in the form of, be convertible  into or  exchangeable  for,
equity securities, and upon the exercise of options and warrants,  investors may
experience  additional  dilution.  See "Risk Factors - Our Additional  Financing
Requirements Could Result in Dilution to Existing Stockholders."

The exercise of the outstanding derivative securities will reduce the percentage
of  common  stock  held  by  our  stockholders  in  relation  to  our  aggregate
outstanding  capital  stock.  Further,  the  terms  on  which  we  could  obtain
additional capital during the life of the derivative securities may be adversely
affected,  and it  should  be  expected  that  the  holders  of  the  derivative
securities  would exercise them at a time when we would be able to obtain equity
capital  on terms more  favorable  than those  provided  for by such  derivative
securities.  As a result,  any issuance of additional shares of common stock may
cause  our  current  stockholders  to  suffer  significant  dilution  which  may
adversely affect the market.


                                       44
<PAGE>


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

SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET.

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

LIMITATION ON DIRECTOR/OFFICER LIABILITY.

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

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

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


                                       45
<PAGE>


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

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

ITEM 7. FINANCIAL STATEMENTS.

The  financial  statements  required  by this Item are  included  as a  separate
section of this report commencing on page F-1.

ITEM 8. CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
        FINANCIAL DISCLOSURE.

Not applicable.

ITEM 8A. CONTROLS AND PROCEDURES.

(a) Evaluation of disclosure controls and procedures

Disclosure  controls and procedures are controls and other  procedures  that are
designed to ensure that the information required to be disclosed by a company in
the reports that it files or submits under the  Securities  Exchange Act of 1934
(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.

Our Chief Executive  Officer and our Interim  Principal  Financial  Officer have
evaluated  the  effectiveness  of the design  and  operation  of our  disclosure
controls and  procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the
Exchange Act as of the end of the period  covered by this annual  report on Form
10-KSB.  Based on this evaluation,  our Chief Executive  Officer and our Interim
Principal  Financial  Officer concluded that as of the end of the period covered
by  this  report,  except  as set  forth  below,  our  disclosure  controls  and
procedures were effective in their design to ensure that information required to
be  disclosed by us in the reports that we file or submit under the Exchange Act
is  recorded,  processed,  summarized  and  reported  within  the  time  periods
specified in the SEC's rules and forms.



                                       46
<PAGE>


In  connection  with its audit of our financial  statements  for the fiscal year
ended July 31, 2004, J.H. Cohn LLP, our independent registered public accounting
firm,  brought  to  the  attention  of  the  Company  that  certain  issued  and
outstanding  options  that  permit  "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 our 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 Financial  Statements
commencing at Page F-1 of this report.

J.H.  Cohn LLP 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 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 LLP  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 our
internal  controls,  commencing in the first quarter of our 2005 fiscal year, we
are beginning to undertake a review of our disclosure, financial information and
internal  controls  and  procedures.  This  review will  include  efforts by our
management and directors, as well as the use of additional outside resources. We
are committed to addressing our control environment and reporting procedures.

Our  management,  including our Chief  Executive  Officer and Interim  Principal
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  limitation of a cost-effective  control system,
misstatements due to error or fraud may occur and not be detected.


                                       47
<PAGE>


(b) Changes in internal controls

Subsequent  to  the  date  of  the  evaluation  referenced  above,  the  Company
recognized certain material weaknesses in its internal controls and procedures:

      o     Failure to record and retain  comprehensive  option grants that have
            been issued by the Company.

      o     Inability  to  prepare   financial   statements   and  footnotes  in
            accordance  with generally  accepted  accounting  principles and SEC
            rules.

      o     Lack of an  appropriate  system of policies and  procedures  for the
            internal review of financial reports, including inadequate staffing,
            training and expertise.

      o     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".

We have rescinded our cashless  exercise  provision for all  outstanding  option
grants pursuant to a resolution adopted by the Board of Directors of the Company
on October 20, 2004. Thus, we expect that variable  accounting will no longer be
required  after the end of the Company's  fiscal quarter ended October 31, 2004.
Nonetheless,  to address  weakness  in  recordkeeping  related to issued  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.

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 our company have been 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.

ITEM 8B. OTHER INFORMATION.

Not applicable.


                                       48
<PAGE>


                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(A) OF THE EXCHANGE ACT

The names and ages of our Directors  and  Executive  Officers are set out below.
All Directors are elected  annually,  to serve until the next annual  meeting of
stockholders and until their successors are duly elected and qualified. Officers
are  elected  annually  by the  Board of  Directors  and  serve at the  Board of
Directors' pleasure.

<TABLE>
<CAPTION>

----------------------------------- ------------- -------------------------------------------
NAME                                    AGE               POSITION WITH THE COMPANY
----------------------------------- ------------- -------------------------------------------
<S>                                     <C>       <C>
Gary A. Shangold, M.D.                   51       President, Chief Executive Officer and
                                                  Director
----------------------------------- ------------- -------------------------------------------
Harry A. Dugger, III, Ph.D.              68       Chief Scientific Officer
----------------------------------- ------------- -------------------------------------------
Robert F. Schaul, Esq.                   65       Secretary and Director
----------------------------------- ------------- -------------------------------------------
Donald J. Deitman                        62       Chief Financial Officer
----------------------------------- ------------- -------------------------------------------
Mohammed Abd El Shafy                    49       Vice President,
                                                  Pharmaceutical Development
----------------------------------- ------------- -------------------------------------------
William F. Hamilton, Ph.D.               65       Director
----------------------------------- ------------- -------------------------------------------
Lawrence J. Kessel, M.D., FACP           51       Director
----------------------------------- ------------- -------------------------------------------
Mark H. Rachesky, M.D.                   45       Director
----------------------------------- ------------- -------------------------------------------
Charles Nemeroff, M.D., Ph.D.            55       Director
----------------------------------- ------------- -------------------------------------------
Robert G. Savage                         51       Director
----------------------------------- ------------- -------------------------------------------
Barry Cohen                              41       Vice President - New Business and Product
                                                  Development
----------------------------------- ------------- -------------------------------------------
Jean W. Frydman                          51       Vice President-General Counsel
----------------------------------- ------------- -------------------------------------------
</TABLE>

GARY  SHANGOLD,  M.D.,  President,  Chief  Executive  Officer and Director.  Dr.
Shangold  joined NovaDel in December 2002 and was elected as a Director in March
2003.  Previously  he had  been  Vice  President  and  Regulatory  Head  of Drug
Development at Johnson & Johnson Pharmaceutical  Research and Development,  LLC.
Before  joining the Johnson & Johnson  family of companies in 1992,  he had been
Medical Director of Obstetrics, Gynecology & Infertility at Serono Laboratories,
Inc. and had been a member of the faculty of  Obstetrics  and  Gynecology at the
University  of  Chicago's  Pritzker  School of Medicine  from 1983 to 1991.  Dr.
Shangold  also was an Associate  Clinical  Professor  at the Harvard  University
School of Medicine and a Clinical  Associate at Massachusetts  General Hospital.
Dr.  Shangold is a graduate of the University of  Pennsylvania  and received his
M.D. from Columbia University's College of Physicians and Surgeons.

HARRY A. DUGGER, III, PH.D., Chief Scientific Officer. Dr. Dugger is the founder
of NovaDel and served as its  President and a Director from its inception in May
1982 until December 2002. Prior to founding NovaDel,  from June 1980 to November
1982, Dr. Dugger was employed as Vice  President of Research and  Development by
Bauers-Kray  Associates,  a company engaged in the development of pharmaceutical
products.  From 1964 to 1980, Dr. Dugger was Associate Section Head for Research
and Development at Sandoz  Pharmaceuticals  Corporation.  Dr. Dugger received an
M.S. in Chemistry  from the  University of Michigan in 1960 and received a Ph.D.
in Chemistry from the University of Michigan in 1962.


                                       49
<PAGE>


DONALD DEITMAN,  Former Chief Financial  Officer.  Mr. Deitman joined NovaDel in
1998.  From 1988 until joining  NovaDel,  Mr. Deitman was employed as a business
consultant implementing multi-module MRP II software systems. From 1982 to 1988,
Mr. Deitman was corporate  controller for FCS  Industries,  Inc., of Flemington,
New Jersey. Mr. Deitman received a B.S. in Accounting from Rutgers University in
1972. Mr. Deitman retired from the Company in September 2004.

ROBERT F. SCHAUL,  ESQ.,  Former  Secretary and Director.  Mr. Schaul had been a
Director  of NovaDel  since  November  1991 and Vice  President,  Secretary  and
General  Counsel of NovaDel  from  November  1991 to February  1995.  He advised
NovaDel  since its  formation.  Mr. Schaul is also a part-time  Municipal  Court
Judge for a number of New Jersey  municipalities.  From 1995 to 1998, Mr. Schaul
was Vice President and General  Counsel of Landmark  Financial  Corp. Mr. Schaul
received  a B.A.  from  New York  University  in 1961  and a J.D.  from  Harvard
University in 1964. Mr. Schaul left the Company in July 2004.

WILLIAM F. HAMILTON,  PH.D.,  Director. Dr. Hamilton was elected to our Board in
March 2003. Dr.  Hamilton has served on the University of  Pennsylvania  faculty
since 1967,  and is the Landau  Professor  of  Management  and  Technology,  and
Director  of the Jerome  Fisher  Program in  Management  and  Technology  at The
Wharton School and the School of Engineering and Applied Science. He serves as a
director of Neose Technologies,  Inc., a company developing a drug manufacturing
process and  proprietary  drugs.  Dr.  Hamilton  received  his B.S.  and M.S. in
chemical engineering and his M.B.A. from the University of Pennsylvania, and his
Ph.D. in applied economics from the London School of Economics.  Dr. Hamilton is
a member of the Board's Audit Committee of which he is our Chairman,  as well as
our Corporate Governance and Nominating Committee and Compensation Committee.

LAWRENCE JAY KESSEL, M.D., FACP,  Director.  Dr. Kessel was elected to our Board
in March 2003.  Dr.  Kessel,  a  physician,  is President of Lawrence J. Kessel,
M.D., &  Associates,  PC, a five  physician  practice  specializing  in Internal
Medicine  and  Geriatrics  since  1984.  He  received  a B.S.  degree  from  the
University of Pittsburgh with honors in Biology and subsequently  graduated with
an M.D.  degree from Temple Medical School.  He completed a formal  residency in
Internal  Medicine at Abington  Memorial  Hospital,  and is Board  Certified  in
Internal Medicine with added  qualification as a diplomat in Geriatric Medicine.
He is an active  staff  attending  and  Clinical  Instructor  at  Chestnut  Hill
Hospital (University of Pennsylvania affiliate) and Roxborough Memorial Hospital
in Philadelphia,  Pennsylvania.  Dr. Kessel is a Board Reviewer for the American
Board of  Internal  Medicine,  as well as a Fellow of the  American  College  of
Physicians.  He also serves on the advisory board of Independence Blue Cross and
is a Clinical  Assistant  Professor  in the  Department  of  Medicine  at Temple
University  Medical School.  Dr. Kessel  presently serves as a director of Keryx
Biopharmaceuticals,  Inc. and BioPharma,  Inc. He previously served on the Board
of Directors of Genta Incorporated. He is a member of our Compensation Committee
and Corporate Governance and Nominating Committee.


                                       50
<PAGE>

MOHAMMED ABD EL SHAFY,  PH.D., Vice  President-Pharmaceutical  Development.  Dr.
El-Shafy joined NovaDel in May 2002. From 1999 to 2002 he was employed as a Team
Leader and Senior Scientist with Nastech  Pharmaceutical  Inc.,  Hauppauge,  New
York.  From  1998  to  1999  Dr.  El-Shafy  was a  Post-Doctoral  Fellow  at the
University of Wisconsin's School of Pharmacy.  He received his doctorate in 1997
from the School of Pharmacy,  University of Wales, Cardiff, Wales, UK. From 1983
to 1993 he was an Assistant  Lecturer of Pharmaceutical  Sciences on the Faculty
of Pharmacy, Al-Azhar University, Cairo, Egypt.

BARRY COHEN, Vice President of New Business and Product  Development.  Mr. Cohen
joined   NovaDel   in  May   2003.   Before   joining   NovaDel,   he  was  Vice
President-Business Development at Keryx Biopharmaceuticals Inc., and before that
held several executive marketing and business development  positions at Novartis
Consumer Health.  Mr. Cohen holds a B.B.A. in Marketing from Hofstra  University
and an M.B.A in Marketing from Pace University.

JEAN W.  FRYDMAN,  J.D.,  Vice  President,  Secretary and General  Counsel.  Ms.
Frydman  joined NovaDel in May 2004,  bringing more than 20 years  experience in
the pharmaceutical,  medical device and biotechnology  industries.  She has been
part  of  Counsel's   Office  for  several  major   companies   such  as  Abbott
Laboratories,  Knoll  Pharmaceuticals,  Pharmacia  Corp.  and most recently with
Pfizer Inc. Ms.  Frydman also practiced law with the firm of Fenwick & West, LLP
in its  Washington  D.C.  office where she  specialized  in  regulatory  law for
biotechnology  companies.  She is currently  Adjunct Professor at Seton Hall Law
School.

MARK H. RACHESKY,  M.D.,  Director.  Dr. Rachesky joined our Board in June 2003.
Dr.  Rachesky  is the  founder  and  President  of MHR Fund  Management  LLC and
affiliates,  investment managers of various private investment funds that invest
in  inefficient  market  sectors,   including  special  situation  equities  and
distressed  investments.  Dr. Rachesky is currently on the board of directors of
Neose Technologies,  Inc. a company developing a drug manufacturing  process and
proprietary  drugs. Dr. Rachesky is a graduate of Stanford  University School of
Medicine,  and Stanford  University School of Business.  Dr. Rachesky  graduated
from the University of Pennsylvania with a B.S. in Molecular Aspects of Cancer.

CHARLES  NEMEROFF,  M.D.,  PH.D.,  Director.  Dr.  Nemeroff  joined our Board in
September  2003.  Dr.  Nemeroff  has been the Reunette W. Harris  Professor  and
Chairman of the Department of Psychiatry  and  Behavioral  Sciences at the Emory
University School of Medicine in Atlanta,  Georgia, since 1991. He has served on
the Mental Health  Advisory  Council of the National  Institute of Mental Health
and the Biomedical  Research  Council for NASA. Dr. Nemeroff is a past President
of the American  College of  Psychiatrists  and a past President of the American
College    of     Neuropsychopharmacology     and    is    Editor-in-Chief    of
Neuropsychopharmacology.    He   has   served   as    Editor-in-Chief   of   the
Psychopharmacology  Bulletin,  Associate Editor of Biological  Psychiatry and as
the  Co-Editor-in-Chief  of both Critical Reviews in Neurobiology and Depression
and Anxiety.  Dr. Nemeroff  serves on the Scientific  Advisory Board of numerous
pharmaceutical   companies,   including  Acadia  Pharmaceuticals,   Astra-Zeneca
Pharmaceuticals, Forest Laboratories, Janssen, Organon, Glaxo-SmithKline Beecham
and  Wyeth-Ayerst.  Dr. Nemeroff has received  numerous awards for his research,
including  the Bowis Award from the American  College of  Psychiatrists  and the
Menninger Prize from the American College of Physicians. In 2002, he was elected
to the Institute of Medicine. He is a member of the Compensation Committee.


                                       51
<PAGE>

ROBERT G. SAVAGE,  M.B.A.,  Director.  From March 2002 to April 2003, Mr. Savage
was  Group  Vice  President  and  President  for the  General  Therapeutics  and
Inflammation Business, of Pharmacia Corporation, a research-based pharmaceutical
firm acquired by Pfizer Inc. in April 2003. From September 1996 to January 2002,
Mr.  Savage held several  senior  positions  with  Johnson & Johnson,  including
Worldwide  Chairman for the  Pharmaceuticals  Group during 2001,  Company  Group
Chairman responsible for the North America pharmaceuticals business from 2000 to
2001,  President,  Ortho-McNeil  Pharmaceuticals,  from  1998 to 2000  and  Vice
President  Sales & Marketing  from 1996 to 1998.  From 1985 to 1996,  Mr. Savage
held several positions at Hoffmann-La Roche, Inc., a healthcare firm. Mr. Savage
also serves as a director for Noven Pharmaceuticals, a leader in the development
of advance  drug  delivery  technologies,  and  Medicines  Company,  a specialty
pharmaceutical  company.  Mr.  Savage  received a B.S.  in biology  from  Upsala
College  and an  M.B.A.  from  Rutgers  University.  He is a member of our Audit
Committee and Corporate Governance and Nominating Committee.

CODE OF ETHICS

Our  Board  of  Directors  adopted  a Code of  Ethics  to be  applicable  to all
employees.  The Code of Ethics is intended  to be designed to deter  wrong-doing
and promote  honest and ethical  behavior,  full,  fair,  timely,  accurate  and
understandable  disclosure,  and  compliance  with  applicable  laws.  The Board
adopted the Code of Ethics before the end of calendar year 2003 and a subsequent
revised  Code of Ethics was adopted by the Board in August  2004.  A copy of the
Code of Ethics can be obtained and will be provided to any person without charge
upon written request to our Secretary at our executive offices,  25 Minneakoning
Road, Flemington, New Jersey 08822.

The   Code   of   Business    Conduct    can   be    obtained    on    NovaDel's
website,"http://www.NovaDel.com"  (this is not a hyperlink;  you must visit this
website through an Internet browser).  Our Website and the information contained
therein or connected  thereto are not  incorporated  into this Annual  Report on
Form 10-KSB.

AUDIT COMMITTEE

The  Audit  Committee  consists  of  Robert  Savage  and  Dr.  William  Hamilton
(Chairman).  The Audit  Committee  selects  the  independent  registered  public
accounting  firm,  review the results and scope of the audit and other  services
provided by the Company's  independent  registered  public  accounting firm, and
reviews and evaluates the Company's internal control functions.

At this  time,  we do not  have  on our  Audit  Committee  an  "audit  committee
financial  expert"  within the meaning of the  Federal  laws.  We are  presently
seeking  to  identify  an  individual  willing  to serve on our  Board who would
qualify as an audit committee financial expert.


                                       52
<PAGE>

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires officers, directors and other persons
who own more than 10% of a class of equity  securities  registered  pursuant  to
Section 12 of the  Exchange  Act to file  reports of  ownership  and  changes in
ownership  with  both  the  SEC and  the  principal  exchange  upon  which  such
securities are traded or quoted. Officers, directors and persons holding greater
than 10% of our outstanding common stock ("Reporting Persons") are also required
to furnish us with copies of any such reports filed pursuant to Section 16(a) of
the Exchange Act. Based solely on a review of the copies of such forms furnished
to us, we believe that from August 1, 2003, to July 31, 2004,  Gary A. Shangold,
Barry C.  Cohen and  Mohammed  Abd El Shafy  were not in  compliance  with their
respective Section 16(a) filing requirements. We have revised our administrative
procedures  to enhance  the  ability of our  Reporting  Person  comply with such
requirements. All others required to file reports have done so.

ITEM 10. EXECUTIVE COMPENSATION.

                             EXECUTIVE COMPENSATION

The  following  table sets forth a summary  for the fiscal  years ended July 31,
2004,  2003  and  2002,  respectively,  of the cash  and  non-cash  compensation
awarded,  paid or accrued by the Company to our Chief Executive  Officer and our
four most  highly  compensated  officers  other  than the CEO who served in such
capacities  at the  end of  fiscal  2004  (collectively,  the  "Named  Executive
Officers").  There were no restricted  stock awards,  long-term  incentive  plan
payouts or other  compensation  paid during  fiscal  2002,  2003 and 2004 to the
Named Executive Officers, except as set forth below:

<TABLE>
<CAPTION>
                                    SUMMARY COMPENSATION TABLE
------------------------------------------- ------------------------------------ -------------------------------------- ------------
                                                    ANNUAL COMPENSATION                 LONG-TERM COMPENSATION
                                             ----------- ---------- ------------ --------------------------- ----------
                                                                                           AWARDS             PAYOUTS
                                                                                 --------------------------- ----------
                                                                                                SECURITIES                   ALL
                                                                       OTHER       RESTRICTED   UNDERLYING     LTIP         OTHER
                                                                      ANNUAL         STOCK       OPTIONS/    PAYOUTS       COMPEN-
        NAME AND                    FISCAL    SALARY       BONUS    COMPENSATION    AWARD(S)       SAR(1)                  SATION
  PRINCIPAL POSITION                 YEAR       ($)         ($)         ($)          ($)            (#)        ($)          ($)
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
<S>                                 <C>       <C>         <C>       <C>           <C>          <C>           <C>        <C>
Gary A. Shangold, M.D.
President and CEO                   2004      350,000     150,000                                125,000
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
                                    2003      350,000     249,780        0            0         1,000,000        0           0
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
Harry A. Dugger, III, Ph.D.         2004      274,000          --       --           --            50,000
Chief Scientific Officer,
formerly President and CEO
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
                                    2003      246,900           0        0            0           275,000        0        12,000
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
                                    2002      347,000           0        0            0                 0        0        10,000
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
Donald Deitman                      2004      138,000
Chief Financial Officer
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
                                    2003      124,200           0        0            0                 0        0         7,200
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
                                    2002      104,400           0        0            0                 0        0         4,200
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
Mohammed Abd El Shafy, Ph.D.,
Vice President - Formulation        2004      200,000     20,000         0            0            50,000        0             0
Development
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
                                    2003      144,000           0        0            0           100,000        0         5,400
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
Jean W. Frydman                     2004      42,308 *          0        0            0           100,000        0             0
Vice President, Secretary &
General Counsel
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
  *  Partial year
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
Barry C. Cohen                      2004      193,754           0        0            0            75,000        0        12,000
Vice President - New Business &
Product Development
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
</TABLE>

      (1)   No Stock Appreciation Rights have been issued.


                                       53
<PAGE>


                        OPTION GRANTS IN LAST FISCAL YEAR
                               (INDIVIDUAL GRANTS)


The following table sets forth  information  with respect to the Named Executive
Officers concerning grants of options during fiscal 2004:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                              OPTION/SAR GRANTS IN LAST FISCAL YEAR
----------------------------------------------------------------------------------------------------------------------------------
                                                        Individual Grants
----------------------------------------------------------------------------------------------------------------------------------
               (a)                           (b)                        (c)                     (d)                     (e)
---------------------------------- -------------------------- -------------------------- ---------------------- ------------------
              Name                   Number of Securities      % of Total Options/SARs     Exercise or Base        Expiration
                                    Underlying Options/SARs    Granted to Employees in       Price ($/Sh)             Date
                                         Granted (#)                  Fiscal Year
---------------------------------- -------------------------- -------------------------- ---------------------- ------------------
<S>                                 <C>                        <C>                         <C>                   <C>
Gary A. Shangold, M.D.                      125,000                     9.5%                     $1.82            22 Feb. 2009
---------------------------------- -------------------------- -------------------------- ---------------------- ------------------
Harry A. Dugger III, Ph.D.                   50,000                     3.8%                     $1.82            22 Feb. 2009
---------------------------------- -------------------------- -------------------------- ---------------------- ------------------
Donald J. Deitman                                 0                     N/A                       N/A                  N/A
---------------------------------- -------------------------- -------------------------- ---------------------- ------------------
Mohammed Abd El Shafy, Ph.D.                 50,000                     3.8%                     $1.65            22 Feb. 2009
---------------------------------- -------------------------- -------------------------- ---------------------- ------------------
Barry C. Cohen                               75,000                     5.7%                     $1.65            22 Feb. 2009
---------------------------------- -------------------------- -------------------------- ---------------------- ------------------
Jean W. Frydman                             100,000                     7.6%                     $1.98             16 May 2009
---------------------------------- -------------------------- -------------------------- ---------------------- ------------------
</TABLE>

                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR-END OPTION VALUES

The following table sets forth  information  with respect to the Named Executive
Officers  concerning  the exercises of options during fiscal 2004 and the number
and value of unexercised options held as of the end of fiscal 2004.

<TABLE>
<CAPTION>
------------------------------------ -------------- ------------ ------------------------------------- ----------------------------
                                                                                                          VALUE OF UNEXERCISED
                                       NUMBER OF                                                         IN-THE-MONEY OPTIONS AT
                                        SHARES         VALUE       NUMBER OF SECURITIES UNDERLYING        FISCAL YEAR END ($);
         NAME OF EXECUTIVE            ACQUIRED ON    REALIZED     UNEXERCISED OPTIONS AT FISCAL YEAR          (EXERCISABLE/
              OFFICER                  EXERCISE         ($)        END; (EXERCISABLE/UNEXERCISABLE)          UNEXERCISABLE)
------------------------------------ -------------- ------------ ------------------------------------- ----------------------------
<S>                                   <C>            <C>          <C>                                    <C>
Harry A. Dugger, III, Ph.D.                0             -                    970,000/0                         379,200/0
------------------------------------ -------------- ------------ ------------------------------------- ----------------------------
Gary A. Shangold, M.D.                     0             -                 458,333/667,000                         0/0
------------------------------------ -------------- ------------ ------------------------------------- ----------------------------
Donald Deitman                             0             -                        -                                 -
------------------------------------ -------------- ------------ ------------------------------------- ----------------------------
Mohammed Abd El Shafy, Ph.D.               0             -                  200,000/50,000                      13,000/0
------------------------------------ -------------- ------------ ------------------------------------- ----------------------------
Barry Cohen                                0             -                  20,000/130,000                       4,500/0
------------------------------------ -------------- ------------ ------------------------------------- ----------------------------
Jean Frydman                               0                                  0/100,000                            0/0
------------------------------------ -------------- ------------ ------------------------------------- ----------------------------
</TABLE>


                                       54
<PAGE>


EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS

GARY A. SHANGOLD, M.D. In December 2002, we entered into a three-year employment
agreement  with  Dr.  Shangold  pursuant  to  which  he  agreed  to serve as our
President and Chief Executive  Officer.  We agreed to pay Dr. Shangold an annual
base salary of $350,000 and a guaranteed  bonus of  $150,000.  In addition,  Dr.
Shangold  is eligible to  receive:  (i) an annual  discretionary  bonus of up to
$262,500,  which shall be  determined at the sole  discretion of the Board;  and
(ii) an  investment  and fee bonus equal to 5% of all amounts up to an aggregate
of  $7,500,000  (I.E.,  $375,000 in bonus)  invested  in, or earned by,  NovaDel
during the term of his agreement.  We paid Dr.  Shangold a contractual  bonus of
$200,000  during the fourth  quarter of fiscal year 2003 and $49,780 in calendar
year 2004.  Pursuant to the agreement,  Dr.  Shangold was also granted  Non-plan
options to purchase  1,000,000  shares of our common stock (at an exercise price
of $1.93 per share) which vest over a three-year period.

HARRY A. DUGGER,  III,  PH.D. In February  2002,  effective  January 1, 2002, we
entered into a new  three-year  employment  agreement  with Dr. Dugger at a base
salary,  for the first year, of $248,500 per year (which  increases each year by
the greater of the CPI index or 5%). His agreement  will expire January 2005, at
which time it is  expected  that he will  retire and no longer be an employee of
the Company.

DONALD DEITMAN.  In February 2002,  effective January 1, 2002, we entered into a
three year employment  agreement with Mr. Deitman pursuant to which he agreed to
serve as our Chief Financial Officer.  The agreement provided for a base salary,
for the first year,  of  $125,000  per year  (which  increases  each year by the
greater of the CPI index or 5%).  At the end of the  fiscal  year his salary was
137,812 per year. Mr. Deitman subsequently retired in September 2004.

MOHAMMED  ABD  EL SHAFY,  PH.D.  In May  2002,  we  entered  into a  three  year
employment    agreement   with   Dr.   El-Shafy,    who   was   appointed   Vice
President-Pharmaceutical  Development.  Pursuant to the agreement, he received a
base salary,  for the first year, of $110,000,  which increased in April 2003 to
$180,000.  In April 2004, he entered into an amended employment agreement for an
additional  three  year term at a base  salary of  200,000  per year.  Since his
employment,  he has been granted 150,000 Non-plan options at $3.02 per share and
an additional  50,000  options at $1.51 per share and another  50,000 options at
$1.65 per share under the 1998 Option Plan.


                                       55
<PAGE>

BARRY COHEN. In May 2003, we entered into a three year employment agreement with
Barry  Cohen,  who  was  appointed  Vice  President-New   Business  and  Product
Development.  Pursuant to the agreement,  he receives a base salary of $185,000,
plus incentive bonuses.  Pursuant to the agreement, he was issued 75,000 options
(exercisable  at $2.04 per share)  under the 1998 Plan.  60,000 of such  options
vest in three equal  installments  commencing May 2004.  These options expire in
May  2008.  The  balance  of such  options  vest  upon  achievement  of  certain
objectives.  In  January  2004,  Mr.  Cohen was given an  increase  of salary to
$200,000 per year and an  additional  stock  option grant of 75,000  shares at a
price of $1.65 per share.

JEAN  FRYDMAN.  In May 2004,  The Company  entered into a three-year  employment
agreement  with Jean W. Frydman,  Esq.  pursuant to which she agreed to serve as
the Company's Vice President and General Counsel.  The Company agreed to pay Ms.
Frydman an annual  base  salary of  $200,000.  Pursuant  to the  agreement,  Ms.
Frydman was also  granted  Non-plan  options to purchase  100,000  shares of the
Company's common stock at an exercise price of $1.98 per share (110% of the fair
market  value on the grant  date)  which  vest,  subject to  conditions,  over a
three-year period. Such options have a term of 10 years.

The  foregoing   agreements  also  provide  for  certain   non-competition   and
non-disclosure covenants on the part of such executive. However, with respect to
the  non-competition  covenants,  a court  may  determine  not to  enforce  such
provisions or only partially enforce such provisions.  Additionally, each of the
foregoing agreements provides for certain fringe benefits,  such as inclusion in
pension,  profit  sharing,  stock  option,  savings,  hospitalization  and other
benefit plans at such times as we may adopt them.

STOCK OPTION PLANS

We have three stock option plans,  adopted in 1992, 1997 and 1998,  respectively
(collectively  referred to as the "Plans"). The 1992 and 1997 Plans each provide
for the issuance of options to purchase  500,000 shares of common stock, and the
1998 Plan provides for the issuance of options to purchase  3,400,000  shares of
common  stock,  for a total of 4,400,000  shares.  The 1997 Stock Option Plan is
administered  by William  Hamilton,  Lawrence  Kessel and Charles  Nemeroff  who
constitute the Compensation  Committee of the Board of Directors  ("Committee"),
and the 1992 Stock  Option Plan and 1998 Stock Option Plan are  administered  by
the entire Board of  Directors.  For purposes of the following  discussion,  the
term  "Committee"  will be used to reference the  Committee  with respect to the
1997 Stock  Option Plan and the entire  Board of  Directors  with respect to the
1992 Stock Option Plan and 1998 Stock Option Plan, as applicable.  The Committee
has sole discretion and authority,  consistent with the provisions of the Plans,
to select the Eligible  Participants  to whom options will be granted  under the
Plans,  the number of shares  which will be covered by each  option and the form
and terms of the  agreement to be used.  All of our  employees  and officers are
eligible to participate in the Plans.

At July 31, 2004,  0, 0 and  1,829,500  shares of our common stock were reserved
for  issuance  pursuant  to the 1992,  1997 and 1998  Plans,  respectively.  The
exercise  prices for the  outstanding  options  reserved under the 1992 and 1997
Plans range  between $.63 and $2.00 per share;  and the exercise  prices for the
outstanding  options  reserved under the 1998 Plan range between $1.30 and $1.99
per share.


                                       56
<PAGE>


The  Committee is empowered to determine the exercise  price of options  granted
under the Plans, but the exercise price of ISOs must be equal to or greater than
the fair  market  value of a share of  common  stock on the date the  option  is
granted (110% with respect to optionees who own at least 10% of our  outstanding
common stock). The Committee has the authority to determine the time or times at
which options granted under the Plans become exercisable,  but options expire no
later  than ten  years  from  the date of grant  (five  years  with  respect  to
Optionees who own at least 10% of our  outstanding  common  stock).  Options are
nontransferable,  other than by will and the laws of descent,  and generally may
be exercised  only by an employee  while  employed by us or within 90 days after
termination  of employment  (one year from  termination  resulting from death or
disability).

No ISO may be  granted  to an  employee  if, as the  result of such  grant,  the
aggregate fair market value  (determined at the time each option was granted) of
the shares with respect to which ISOs are exercisable for the first time by such
employee  during any  calendar  year  (under  all such plans of NovaDel  and any
parent  and  subsidiary)  exceeds  $100,000.  The Plans do not  confer  upon any
employee any right with respect to the  continuation of employment by us, nor do
the  Plans  interfere  in any way with  the  employee's  right  or our  right to
terminate the employee's employment at any time.

NON-PLAN OPTIONS

As of July 31, 2004, we had 3,950,000  Non-plan options  outstanding as follows:
600,000 options exercisable at $1.84 per share; 1,050,000 options exercisable at
$.75 per  share;  1,000,000  options  exercisable  at $1.93 per  share;  200,000
options exercisable at $1.30 per share; 200,000 options exercisable at $1.51 per
share;  250,000  options  exercisable  at $3.18 per share;  and 150,000  options
exercisable at $3.02 per share;  300,000 options exercisable at $1.95 per share;
100,000 options  exercisable,  at $1.85 and 100,000 options exercisable at $1.65
per share.

COMPENSATION OF DIRECTORS

Our  Directors are elected  annually and serve until the next annual  meeting of
stockholders  and until a successor  shall have been duly elected and qualified.
Effective  September  2003,  our Directors who are not employees or  consultants
receive fees of $2,000 for each  meeting of the Board of  Directors  attended in
person or $1,000 if participated in by telephone. Directors are also compensated
$3,000 per annum for serving or $5,000 per annum for chairing a committee of the
Board of Directors.  Such Directors also are awarded  100,000  Non-plan  Options
upon their  election to the Board of  Directors,  to vest in three equal  annual
installments  beginning  on the  first  anniversary  of  their  appointment.  In
addition, such Directors are to be awarded an additional 50,000 Non-plan Options
at the time of their re-election of the Board, i.e., at the annual meeting. Such
annually awarded options also vest over a three-year period.  Such Directors are
also  reimbursed for expenses  incurred in connection  with their  attendance at
meetings of the Board of Directors or committees.  Directors may be removed with
or without cause by a vote of the majority of the stockholders  then entitled to
vote.

                                       57
<PAGE>

In March 2003, we issued 100,000  Non-plan  Options to each of Dr.  Hamilton and
Dr. Kessel upon their being elected to the Board of Directors. In March 2003, we
also issued 10,000 options to each of Messrs. Schaul and a former director under
the 1998 Plan. All of these options have an exercise price of $1.51; the options
issued to Messrs. Schaul and a former director vested immediately,  those issued
to Drs. Hamilton and Kessel vest in three equal annual installments beginning in
March 2004 and expire in March 2008.  In April 2004,  both Dr.  Hamilton and Dr.
Kessel were issued 50,000  options,  respectively at an exercise price of $1.95.
These options will vest in three equal annual installments.

In June, 2003, we issued 100,000 Non-plan Options to Dr. Rachesky upon his being
appointed to the Board of  Directors.  These  options have an exercise  price of
$2.15 and vest in three equal  annual  installments  beginning  in June 2004 and
expire in June 2008. Dr. Rachesky was issued an additional  50,000 options at an
exercise  price  of  $1.95.  These  options  will  vest in  three  equal  annual
installments.

In September 2003, we issued 100,000  Non-plan  Options to Dr. Nemeroff upon his
being  elected  to the Board of  Directors.  Strike  price for these  options is
$1.95.  These  options  vest in three equal  annual  installments  and expire in
September 2008. Dr.  Nemeroff was than granted 50,000 Non-plan  Options on April
2004, at a strike price of $1.95.  These options will expire in April,  2009 and
vest annually over the next three years.

An additional member,  Robert Savage, was appointed to the Board of Directors in
early  calendar  2004.  Upon  appointment,  he  received  100,000  options at an
exercise  price of $1.65 per  share.  The  options  vest in three  equal  annual
installments. The option grants expire February, 2009. He received an additional
50,000 Non-plan Options on April 2004 at a strike price of $1.95.  These options
expire in April, 2009 and vest annually over the next three years.

There were no other arrangements  pursuant to which any Director was compensated
during fiscal 2004 for any services provided as a Director.


ITEM 11.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
RELATED MATTERS.

The following table sets forth information, as of July 31, 2004, with respect to
the  beneficial  ownership of the  outstanding  shares of our common stock as of
such date plus, where relevant for particular  beneficial  owners,  shares which
such beneficial owner has the right to acquire within 60 days, by (i) any holder
known to us owning more than five percent (5%) of the outstanding  shares;  (ii)
our officers and directors; and (iii) the directors and officers of NovaDel as a
group:


                                       58
<PAGE>

<TABLE>
<CAPTION>
--------------------- ------------------------------------------ ----------------------------------- --------------------
      TITLE OF        NAME AND ADDRESS OR                               AMOUNT AND NATURE OF            PERCENTAGE OF
       CLASS          NUMBER IN GROUP(1)                                BENEFICIAL OWNERSHIP                CLASS
--------------------- ------------------------------------------ ----------------------------------- --------------------
<S>                   <C>                                               <C>                             <C>
Common Stock          Harry A. Dugger, III, Ph.D.                           2,154,003(2)                    6.3%
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock          Gary A. Shangold, M.D.                                 458,333(3)                     1.4%
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock          Robert Savage                                             0(4)                          *
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock          Donald Deitman                                             0                            *
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock          Jean W. Frydman, Esq.                                     0(5)                          *
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock          Mohammed Abd El Shafy, Ph.D.                           250,000(6)                       *
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock          William F. Hamilton, Ph.D.                             33,333(7)                        *
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock          Lawrence J. Kessel, M.D., FACP                         33,333(7)                        *
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock          Barry Cohen                                            95,000(8)                        *
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock          Mark H. Rachesky, M.D.                                1,119,047(9)                    3.3%
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock          Charles Nemeroff, M.D., Ph.D.                            0(10)                          *
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock          Lindsay A. Rosenwald, M.D.                           13,233,334(11)                   32.9%
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock          Biomedical Investment Group, LLC                     5,333,334(12)                    14.8%
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock          All Executive Officers and Directors as     4,109,716 (2)(3)(4) (6)(7)(8)(9)         11.78%
                      a group (11 persons)                                      (10)
--------------------- ------------------------------------------ ----------------------------------- --------------------
</TABLE>

* DENOTES LESS THAN ONE PERCENT (1%).

(1) The address of all holders  listed  herein is c/o NovaDel  Pharma  Inc.,  25
Minneakoning Road, Flemington, New Jersey 08822.

(2) Includes options to purchase 200,000 shares of common stock  (exercisable at
$.70 per share)  issued  under the 1992 Stock  Option Plan which  expire in July
2006; options to purchase 50,000 shares of common stock (exercisable at $.70 per
share) under the 1997 Stock Option Plan which expire in December  2006;  options
to purchase 95,000 shares of common stock (exercisable at $.70 per share) issued
under the 1998 Stock  Option  Plan  which  expire in  January  2005;  options to
purchase 300,000 shares of common stock issued outside of the Plans (exercisable
at $1.84 per share)  which expire  November  2007;  options to purchase  200,000
shares of common stock  issued  outside of the Plans  (exercisable  at $1.30 per
share) which expire  October 2007;  options to purchase  75,000 shares of common
stock  (exercisable at $1.30 per share) issued under the 1998 Stock Option Plan,
which expire in October 2007;  options to purchase 50,000 shares of common stock
(exercisable  at $1.82 per share)  issued under the 1998 Stock Option Plan which
expire in February 22,  2009;  152,000  shares  owned by his daughter  Christina
Dugger; and 152,000 shares owned by his son Andrew Dugger.

(3) Does not include two-thirds of Non-plan Options, issued in December 2002, to
purchase  1,000,000  shares of common  stock at an  exercise  price of $1.93 per
share.  These  options  vest in three equal  annual  installments,  beginning in
December  2003,  and expire in  December  2007.  It  includes  one-third  of the
1,000,000  shares and  additional  options to purchase  125,000 shares of common
stock  (exercisable  at $1.82 per share issued under the 1998 Stock Option Plan,
which expire in February 2009.

(4) Mr. Savage was granted Non-plan options to purchase 100,000 shares of common
stock at an  exercisable  price of $1.65 per  share,  which  shall vest in three
annual installments  beginning in February 2005. Not included were an additional
grant of 50,000 shares of Non-plan Options at an exercisable  price of $1.95 per
share which shall vest in three annual installments beginning April 2005.

(5) Does not include 100,000  Non-plan  Options  exercisable at $1.98 per share.
These options vest in three equal annual installments  beginning in May 2005 and
expire May 2014.

(6) Includes  150,000  Non-plan  Options  exercisable at $3.02 per share;  These
options expire in May 2012.  Also includes  50,000 options issued under the 1998
Option Plan to purchase  common  stock at an exercise  price of $1.51 per share,
expiring in March 2008 and 50,000  options  issued under the 1998 Option Plan to
purchase  common  stock at an  exercise  price of $1.65  per share  expiring  in
February 2009.


                                       59
<PAGE>


(7) Does not include  options to purchase  66,667  shares of common  stock at an
exercise price of $1.51 per share,  which shall vest in two annual  installments
beginning March 2005. The options expire in March 2008. Does not include options
to purchase  50,000  shares of common  stock at an exercise  price o $1.95 which
will vest in three annual installments beginning April 2005.

(8) Does not include  55,000  options  issued  under the 1998 Plan,  to purchase
common stock at an exercise price of $2.01 per share.  The options expire in May
2008 and vest subject to certain conditions.

(9) Does not include  options to purchase  66,667  shares of common  stock at an
exercise price of $2.15 per share,  which shall vest in two annual  installments
beginning in June 2005. Does not include 50,000 Non-plan Options  exercisable at
$1.95 per share, which shall vest in three annual  installments  beginning April
2005.  Includes  952,380 shares of common stock and warrants to purchase 166,667
shares of common  stock at an exercise  price of $2.00 per share which expire in
April 2008.  Such shares and warrants are held by MHR Capital  Partnership,  LP,
which is controlled by Dr. Rachesky.

(10) Does not include  options to purchase  100,000 shares of common stock at an
exercise price of $1.85 per share, which shall vest in three annual installments
beginning  September 2004. Does not include 50,000 Non-plan Options  exercisable
price of $1.95 per share which shall vest in three annual installments beginning
April 2005.

(11)  Includes  3,950,000  shares  of  common  stock and  warrants  to  purchase
3,950,000  shares of common  stock at an exercise  price of $.75 per share which
expire in December  2008.  Also  includes  2,666,667  shares of common stock and
2,666,667 warrants to purchase 2,666,667 shares of common stock, which expire in
February 2009, owned by Biomedical Investment Group.

(12)  Includes  warrants  to  purchase  2,666,667  shares of common  stock at an
exercise price of $.75 per share which expire in February 2009.

SHAREHOLDER APPROVAL OF EQUITY COMPENSATION PLANS

The  following  table sets forth  information  as of the end of fiscal 2004 with
respect to the number of shares of our common stock issuable  pursuant to equity
compensation plans which have and have not been approved by our stockholders.

<TABLE>
<CAPTION>
                                        EQUITY COMPENSATION PLAN INFORMATION
=============================== ============================ ============================ ============================
                                Number of securities to be    Weighted average exercise
                                  issued upon exercise of       price of outstanding         Number of securities
        Plan Category              outstanding options,         options, warrants and       remaining available for
                                    warrants and rights                rights                   future issuance
=============================== ============================ ============================ ============================
                                           (a)                           (b)                          (c)

=============================== ============================ ============================ ============================
<S>                             <C>                          <C>                          <C>
Equity compensation plans
 approved by security holders                0                           N/A                          N/A
=============================== ============================ ============================ ============================
Equity compensation plans not
 approved by security holders            3,717,472                     $1.658                         N/A
=============================== ============================ ============================ ============================
            TOTAL                        3,717,472                     $1.658                         N/A
=============================== ============================ ============================ ============================
</TABLE>


                                       60
<PAGE>


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

To the best of management's knowledge,  other than (i) compensation for services
as officers and  directors  described  under Item 10 or (ii) as set forth below,
there were no material transactions,  or series of similar transactions,  or any
currently proposed transactions,  or series of similar transactions, to which we
were or are to be a party, in which the amount involved exceeds $60,000,  and in
which any director or executive officer,  or any security holder who is known by
us to own of record  or  beneficially  more  than 5% of any class of our  common
stock,  or any member of the immediate  family of any of the foregoing  persons,
has an interest.

During December 2001, we received net proceeds of approximately  $3,000,000 from
a private  placement of 4,000,000 units,  which were purchased by Dr. Rosenwald.
Each unit  consisted of one share of common stock,  and a warrant (which expires
December  2008)  to  purchase  an  additional  share of our  common  stock at an
exercise price of $.75. As part of the purchase agreement, we agreed to elect to
the Board of Directors,  a Director to be nominated by Dr.  Rosenwald (as of the
date hereof, no such nominee had been selected) and to permit Dr. Rosenwald or a
representative of his to attend meetings of our Board of Directors.  Appropriate
confidentiality  and  non-disclosure  agreements  are in  place to  protect  our
confidential information.

In March 2002,  we received  net  proceeds of  approximately  $2,000,000  from a
private  placement  of  2,666,667  additional  units at a sale price of $.75 per
unit.  These  units were  purchased  by  Biomedical  Investment  Group  which is
affiliated with Dr. Rosenwald. These warrants expire in March 2009.

In April  and May  2003,  we  engaged  Paramount  Capital  to  assist  us in the
placement  of  units on a "best  efforts"  basis in  connection  with a  private
placement.  In connection  with this offering,  we entered into a  non-exclusive
Placement Agent Agreement dated as of January 15, 2003, with Paramount  Capital,
pursuant to which we paid to Paramount for its services, a cash payment equal to
approximately $360,000 and issued to Paramount or its designees 160,017 warrants
with an exercise price equal to $1.65 per share and warrants to purchase  40,004
shares of common  stock at an exercise  price equal to $2.00 per share.  We also
agreed to pay to Paramount a non-accountable  expense allowance equal to $25,000
to reimburse  Paramount for its  out-of-pocket  expenses.  Lastly,  we agreed to
indemnify Paramount against certain liabilities, including liabilities under the
Securities Act.

In November 2003, we engaged  Paramount Capital to assist us in the placement of
units on a "best  efforts"  basis in  connection  with a private  placement.  In
connection with this offering,  we entered into a non-exclusive  Placement Agent
Agreement  dated as of January 15, 2003,  with  Paramount  Capital,  pursuant to
which we made a cash  payment  equal to  approximately  $850,000  and  issued to
Paramount  Capital  (and  its  designees)  unit  purchase  options  to  purchase
1,330,303  shares of common stock at an exercise  price equal to $1.40 per share
and  warrants to purchase an  additional  399,091  shares of common  stock at an
exercise  price  of  $1.40  per  share.   We  also  paid  Paramount   Capital  a
non-accountable  expense allowance of $25,000 to reimburse Paramount Capital for
its out-of- pocket expenses.  Lastly,  we agreed to indemnify  Paramount against
certain liabilities, including liabilities under the Securities Act.


                                       61
<PAGE>

In April  2003,  we  entered  into a  license  and  development  agreement  with
Manhattan  Pharmaceuticals  for the worldwide,  exclusive  rights to our lingual
spray technology to deliver propofol for pre-procedural  sedation.  In September
2004,  we  entered  into  a  license  and  development  agreement  with  Velcera
Pharmaceuticals  Inc. a veterinary  company.  In October 2004, we entered into a
license  agreement with Hana  Biosciences for the marketing rights in the United
States and Canada for our ondansetron  lingual spray  technology.  Dr. Rosenwald
may be deemed to be an affiliate of Manhattan, Velcera and Hana.

During  fiscal  2004,  we paid  Mr.  Schaul,  a former  director,  approximately
$195,000,  and  approximately  $160,000  for  fiscal  2003,  for legal  services
rendered.

During  fiscal  2004,  we paid Mr.  Klein,  our  former  Chairman  of the Board,
approximately  $186,000 and approximately  $300,000 for fiscal 2003, pursuant to
our  consulting  agreement  with Mr. Klein , as well as  additional  finder fees
relating to the Company's  licensing  agreements.  The amount of the  additional
fees will be determined by the net revenue received by us in connection with the
Par  Pharmaceutical  agreement.  The  amount  of  fees  paid to Mr.  Klein  will
fluctuate over the term of the agreement,  primarily  dependent on the amount of
milestone  payments  received by the  Company.  At no time will the fees be more
than four percent (4%) of the net revenue  received by the Company in connection
with the Par Pharmaceutical agreement.

ITEM 13. EXHIBITS.

Exhibits are listed on the Index to Exhibits,  pages E-1 through E-4, at the end
of this Annual  Report.  The exhibits  required by Item 601 of  Regulation  S-B,
listed on such  Index in  response  to this  Item,  are  incorporated  herein by
reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The following table sets forth fees billed to us by our  independent  registered
public  accounting  firms during the fiscal years ended July 31, 2004,  and July
31,  2003,  for: (i)  services  rendered  for the audit of our annual  financial
statements and the review of our quarterly financial  statements;  (ii) services
by our  independent  registered  public  accounting  firms  that are  reasonably
related to the  performance  of the audit or review of our financial  statements
and that are not reported as Audit Fees;  (iii) services  rendered in connection
with tax  compliance,  tax advice and tax planning;  and (iv) all other fees for
services rendered.

                                             JULY 31, 2003     JULY 31, 2004
                                             -------------     -------------
Audit Fees                                      $21,541           $20,000
Audit Related Fees                              $    --           $11,802
Tax Fees                                        $ 5,000           $ 1,790
All Other Fees                                  $ 6,675           $    --


                                       62
<PAGE>


                                   SIGNATURES

      In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                       NovaDel Pharma Inc.

Date: November 15, 2004                By: /S/ GARY A. SHANGOLD
                                           -----------------------
                                           Gary A. Shangold, M.D.
                                           and Chief Executive Officer


      In accordance with the Exchange Act , this report has been signed below by
the following  persons on behalf of the  registrant and in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>
            SIGNATURES                                      TITLE                                      DATE
            ----------                                      -----                                      ----
<S>                                            <C>                                                 <C>
/S/ GARY A. SHANGOLD                           President and Chief Executive Officer               November 15, 2004
---------------------------------              (Principal Executive Officer) and Director
Gary A. Shangold, M.D.


/S/ HOWARD KANCE                               Interim Principal Financial Officer                 November 15, 2004
---------------------------------              (Principal Financial Officer)
Howard Kance


/S/ WILLIAM F. HAMILTON                        Director                                            November 15, 2004
---------------------------------
William F. Hamilton, Ph.D.


/S/ LAWRENCE J. KESSEL                         Director                                            November 15, 2004
---------------------------------
Lawrence J. Kessel, M.D., FACP


/S/ MARK H. RACHESKY                           Director                                            November 15, 2004
---------------------------------
Mark H. Rachesky, M.D.


/S/ CHARLES NEMEROFF                           Director                                            November 15, 2004
---------------------------------
Charles Nemeroff, M.D., Ph.D.


/S/ROBERT G. SAVAGE                            Director                                            November 15, 2004
---------------------------------
Robert G. Savage
</TABLE>


                                       63
<PAGE>

                        INDEX TO FINANCIAL STATEMENTS AND
                          RESTATEMENT OF QUARTERLY DATA


The following financial statements are included in Part II, Item 7:

     Reports of Independent Registered Public Accounting Firms       F-1

     Balance Sheets                                                  F-3

     Statements of Operations                                        F-4

     Statements of Changes in Stockholders' Equity                   F-5

     Statements of Cash Flows                                        F-6

     Notes to Financial Statements                                   F-7

     Restatement of Quarterly Data (Unaudited)                       F-22


<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Stockholders and
Board of Directors of
NovaDel Pharma Inc.

We have audited the accompanying balance sheet of NovaDel Pharma Inc. as of July
31, 2004,  and the related  statements of operations,  stockholders'  equity and
cash  flows  for  the  year  then  ended.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of NovaDel Pharma Inc. as of July
31, 2004,  and its results of operations and cash flows for the year then ended,
in conformity with accounting principles generally accepted in the United States
of America.

/S/ J.H. COHN LLP

Roseland, New Jersey
November 11, 2004


                                      F-1
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee of
   NovaDel Pharma Inc.

We have  audited the  restated  financial  statements  of NovaDel  Pharma  Inc.,
(formerly  Flemington  Pharmaceutical  Corporation) as of July 31, 2003 and 2002
and for the years then ended. These financial  statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of NovaDel Pharma Inc. at July 31,
2003 and 2002,  and the  results  of its  operations  and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.

As  discussed in Note 3 to the  financial  statements,  previously  unrecognized
compensation  expenses were  discovered in the current year affecting the fiscal
2003 and 2002 financial statements. Accordingly, the accompanying balance sheets
as of July 31, 2003 and 2002 and related statements of operations, stockholders'
equity and cash flows for the years then ended have been restated.


/s/ WISS & COMPANY, LLP

Livingston, New Jersey
September 8, 2003, except for Notes 2 and 3
which are as of November 11, 2004


                                      F-2
<PAGE>

                               NOVADEL PHARMA INC.
                                 BALANCE SHEETS
                          AS OF JULY 31, 2004 AND 2003

<TABLE>
<CAPTION>
                                                                            July 31, 2003
ASSETS                                                    July 31, 2004  As Restated (Note 3)
                                                          ------------      ------------
<S>                                                       <C>               <C>
Current Assets:
  Cash and cash equivalents                               $  2,166,000      $  3,086,000
  Short term investments                                     6,211,000                --
  Accounts receivable - trade                                  130,000             2,000
  Prepaid expenses and other current assets                    255,000           168,000
                                                          ------------      ------------
    Total Current Assets                                     8,762,000         3,256,000

  Property and equipment, net                                1,066,000           714,000
  Long term investments                                      1,307,000                --
  Other Assets                                                 351,000           357,000
                                                          ------------      ------------
TOTAL ASSETS                                              $ 11,486,000      $  4,327,000
                                                          ============      ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable-trade                                  $    241,000      $    139,000
  Accrued expenses and other current liabilities               798,000           318,000
  Current portion of deferred revenue                           19,000                --
  Current portion of capitalized lease obligation               28,000                --
                                                          ------------      ------------
    Total Current Liabilities                                1,086,000           457,000

  Non current portion of deferred revenue                      343,000                --
  Non current portion of capitalized lease obligation           34,000                --
                                                          ------------      ------------
    Total Liabilities                                        1,463,000           457,000
                                                          ------------      ------------

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 33,091,467 and 17,972,760 shares at July
  31, 2004 and 2003, respectively                               33,000            18,000
Additional paid-in capital                                  34,937,000        22,452,000
Accumulated deficit                                        (24,941,000)      (18,600,000)
Less: Treasury stock, at cost, 3,012 shares in 2004             (6,000)               --
                                                          ------------      ------------
    Total Stockholders' Equity                              10,023,000         3,870,000
                                                          ------------      ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                $ 11,486,000      $  4,327,000
                                                          ============      ============
</TABLE>

See accompanying notes to financial statements.

                                      F-3
<PAGE>

                               NOVADEL PHARMA INC.
                            STATEMENTS OF OPERATIONS
                          FOR THE YEARS ENDED JULY 31,
                                  2004 AND 2003

<TABLE>
<CAPTION>
                                                                                    For The Year
                                                                                       Ended
                                                                                     7/31/03 As
                                                                For The Year          Restated
                                                               Ended 7/31/04          (Note 3)
                                                               ------------        ------------
<S>                                                            <C>                 <C>
License Fee                                                    $     13,000        $         --
Consulting Revenues                                                 453,000               2,000
                                                               ------------        ------------
Total Revenues                                                      466,000               2,000
                                                               ------------        ------------

Research and Development Expenses                                 2,492,000           1,087,000
Consulting, Selling, General and Administrative Expenses          4,627,000           6,004,000
                                                               ------------        ------------
Total Expenses                                                    7,119,000           7,091,000
                                                               ------------        ------------
Loss From Operations                                             (6,653,000)         (7,089,000)

Interest Income                                                      98,000              49,000
                                                               ------------        ------------
Loss Before Income Taxes                                         (6,555,000)         (7,040,000)


Deferred Income Tax Benefit                                        (214,000)            (84,000)
                                                               ------------        ------------
Net Loss                                                       $ (6,341,000)       $ (6,956,000)
                                                               ============        ============
Basic and Diluted Loss Per Common Share                        $       (.24)       $       (.45)
                                                               ============        ============
Weighted Average Number of Common Shares Outstanding             26,269,000          15,419,000
                                                               ============        ============

</TABLE>

See accompanying notes to financial statements.

                                      F-4
<PAGE>

                               NOVADEL PHARMA INC.
                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                   FOR THE YEARS ENDED JULY 31, 2004 AND 2003
                              AS RESTATED (NOTE 3)

<TABLE>
<CAPTION>
                                                Common Stock
                                        ---------------------------
                                                                        Additional                                        Total
                                          Shares         Amount          Paid-in       Accumulated       Treasury      Stockholders'
                                                                         Capital         Deficit          Stock           Equity
                                        ------------   ------------    ------------    ------------    ------------    ------------
<S>                                       <C>          <C>             <C>             <C>             <C>             <C>
BALANCE, July 31, 2002,
  as previously reported                  14,448,817   $     14,000    $ 13,322,000    $ (9,813,000)   $         --    $  3,523,000
Restatement adjustment (Note 3)                   --             --       1,831,000      (1,831,000)             --              --
                                        ------------   ------------    ------------    ------------    ------------    ------------

BALANCE, July 31, 2002, as restated       14,448,817         14,000      15,153,000     (11,644,000)             --       3,523,000
Stock issued in connection
with private placements, net of costs      3,200,345          3,000       4,333,000              --              --       4,336,000
Stock issued for options exercised           210,577             --              --              --              --              --
Stock issued for warrants exercised          113,021          1,000          19,000              --              --          20,000
Options issued for services                       --             --       1,674,000              --              --       1,674,000
Warrants issued for services                      --             --           7,000              --              --           7,000
Impact of variable plan accounting                --             --       1,141,000              --              --       1,141,000
Equity investment from related party              --             --         125,000              --              --         125,000
   Net Loss                                       --             --              --      (6,956,000)             --      (6,956,000)
                                        ------------   ------------    ------------    ------------    ------------    ------------

BALANCE,  July 31, 2003, as restated      17,972,760         18,000      22,452,000     (18,600,000)             --       3,870,000
Stock issued in connection
with private placements, net of costs     13,333,333         14,000      12,771,000              --              --      12,785,000
Stock issued to 2003 private investors
in connection with reset provision         1,371,549          1,000          (1,000)             --              --              --
Stock issued for options exercised           229,719             --         200,000              --          (6,000)        194,000
Stock issued for warrants exercised          184,106             --         251,000              --              --         251,000
Impact of variable plan accounting                --             --        (736,000)             --              --        (736,000)
   Net Loss                                       --             --              --      (6,341,000)             --      (6,341,000)
                                        ------------   ------------    ------------    ------------    ------------    ------------

BALANCE, JULY 31, 2004                    33,091,467   $     33,000    $ 34,937,000    $(24,941,000)   $     (6,000)   $ 10,023,000
                                        ============   ============    ============    ============    ============    ============
</TABLE>

See accompanying notes to financial statements.

                                      F-5
<PAGE>

                               NOVADEL PHARMA INC.
                            STATEMENTS OF CASH FLOWS
                   FOR THE YEARS ENDED JULY 31, 2004 AND 2003

<TABLE>
<CAPTION>
                                                                                                     2003
                                                                                                  As Restated
                                                                                2004               (Note 3)
                                                                             ------------        ------------
<S>                                                                          <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net  loss                                                                  $ (6,341,000)       $ (6,956,000)
  Adjustments to reconcile net loss to net cash
      used in operating activities:
      Options issued for services                                                      --           1,674,000
      Warrants issued for services                                                     --               7,000
      Impact of variable plan accounting                                         (736,000)          1,141,000
      Depreciation and amortization                                               222,000              81,000
      Allowance for doubtful accounts                                                  --             (88,000)
  Changes in operating assets and liabilities:
      Accounts receivable-trade                                                  (128,000)             87,000
      Prepaid expenses and other current assets                                   (87,000)            (72,000)
      Other assets                                                                  6,000            (335,000)
      Accounts payable - trade                                                    102,000              14,000
      Accrued expenses and other current liabilities                              480,000             127,000
      Deferred revenue                                                            362,000                  --
                                                                             ------------        ------------
         Net cash used in operating activities                                 (6,120,000)         (4,320,000)
                                                                             ------------        ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Purchase of property and equipment                                         (487,000)           (389,000)
      Purchase of investments                                                  (9,560,000)                 --
      Maturities of investments                                                 2,042,000                  --
                                                                             ------------        ------------
        Net cash used in investing activities                                  (8,005,000)           (389,000)
                                                                             ------------        ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Proceeds received from issuance of common stock through
      private placements                                                       12,785,000           4,336,000
      Cash received from warrants exercised                                       251,000              20,000
      Cash received from options exercised                                        194,000                  --
      Capital contributions from related parties                                       --             125,000
      Payments of capitalized lease obligation                                    (25,000)                 --
                                                                             ------------        ------------
         Net cash provided by financing activities                             13,205,000           4,481,000
                                                                             ------------        ------------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                        (920,000)           (228,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                    3,086,000           3,314,000
                                                                             ------------        ------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                       $  2,166,000        $  3,086,000
                                                                             ============        ============

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
   Equipment acquired under capitalized lease obligation                     $     87,000        $         --
                                                                             ============        ============
   Treasury stock acquired                                                   $      6,000        $         --
                                                                             ============        ============
</TABLE>

See accompanying notes to financial statements.

                                      F-6
<PAGE>


                               NOVADEL PHARMA INC.
                          NOTES TO FINANCIAL STATEMENTS


NOTE 1 - NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      NATURE OF THE BUSINESS - NovaDel  Pharma Inc. (the  "Company"),  which was
      formerly known as Flemington Pharmaceutical  Corporation,  is incorporated
      in the State of  Delaware.  The Company is engaged in the  development  of
      novel  pharmaceutical  products  combining  presently  marketed drugs with
      patents  and pending  patents  with oral  dosage  delivery  systems of the
      Company,  designed to enhance and accelerate the onset of the  therapeutic
      benefits which the drugs are intended to produce.  The Company has entered
      into  collaboration  agreements with other  pharmaceutical  and veterinary
      companies for development and marketing its delivery systems.

      REVENUES AND COSTS - Consulting  revenues from contract  clinical research
      are  recognized  as earned  provided  collection  is probable.  Consulting
      contract  costs  normally  consist  of fees paid to  outside  clinics  for
      studies and an  allocable  portion of the  Company's  operating  expenses.
      General and  administrative  costs  pertaining to contracts are charged to
      expense as incurred.  Revenues from  collaboration  agreements  consist of
      upfront payments and milestone  payments which are initially  deferred and
      subsequently recognized as revenues are earned. Such agreements have costs
      consisting  of  operating  costs for goods and  services  required to meet
      obligations  under  the  collaboration  agreements  which are  charged  to
      expense as incurred.

      CASH EQUIVALENTS AND INVESTMENTS - Cash equivalents  include  certificates
      of deposit and money market instruments purchased with original maturities
      of three  months  or less  when  purchased.  Short-term  investments  with
      original  maturities  greater than three months and less than one year and
      long-term  investments  with  maturities  greater than one year consist of
      certificates of deposit are valued at cost which  approximates fair market
      value.

      FINANCIAL  INSTRUMENTS  -  Financial  instruments  include  cash  and cash
      equivalents,   investments,  accounts  receivable,  accounts  payable  and
      accrued  expenses.  The amounts  reported for  financial  instruments  are
      considered to be reasonable approximations of their fair values.

      PROPERTY  AND  EQUIPMENT - Property  and  equipment,  including  leasehold
      improvements,  are stated at cost. The Company  provides for  depreciation
      and  amortization  using the  straight-line  method,  based upon estimated
      useful lives of five to 10 years or the lease term, if shorter.


                                      F-7
<PAGE>

                               NOVADEL PHARMA INC.
                          NOTES TO FINANCIAL STATEMENTS


      RESEARCH  AND  DEVELOPMENT  COSTS -  Research  and  development  costs are
      expensed as incurred.

      INCOME  TAXES - Temporary  differences  between  financial  statement  and
      income tax reporting  result  primarily  from net operating  losses.  As a
      result of these temporary differences, the Company has recorded a deferred
      tax asset with an  offsetting  valuation  allowance  for the same  amount.
      Deferred  tax assets and  liabilities  are  recognized  for the future tax
      consequences  attributable to temporary  differences between the financial
      statement  carrying  amounts of existing  assets and liabilities and their
      respective  tax bases.  Deferred tax assets and  liabilities  are measured
      using enacted tax rates  expected to apply to taxable  income in the years
      in which those  temporary  differences  are  expected to be  recovered  or
      settled.  The effect on deferred tax assets and liabilities of a change in
      tax  rates is  recognized  in  income  in the  period  that  includes  the
      enactment date.  Valuation  allowances are established when realization of
      deferred tax assets is not considered more likely than not.

      DEFINED  CONTRIBUTION  RETIREMENT PLANS - During January 2004, the Company
      established  a 401(k)  retirement  plan,  available to all  employees  and
      requiring  contributions  by the  Company.  During the year ended July 31,
      2004, the Company contributed approximately $56,000 to this plan. Prior to
      January 2004, the Company had a Simple IRA retirement  plan,  available to
      all employees and providing for contributions at management's  discretion.
      During  the  years  ended  July  31,  2004  and  2003,  the  Company  made
      contributions  to this Simple IRA of  approximately  $37,000 and  $15,000,
      respectively.

      USE OF ESTIMATES - The  preparation of financial  statements in conformity
      with  accounting  principles  generally  accepted  in the  United  States,
      require  management  to make  estimates  and  assumptions  that affect the
      reported  amounts of assets and  liabilities and disclosures of contingent
      assets and  liabilities  at the date of the financial  statements  and the
      reported  amounts of revenues and expenses  during the  reporting  period.
      Actual results could differ from those estimates.

      EARNINGS  (LOSS) PER SHARE - Statement of Financial  Accounting  Standards
      (FAS) No. 128,  "Earnings Per Share" requires the disclosure of both basic
      and diluted earnings (loss) per share.  Basic earnings (loss) per share is
      based on the  weighted  average  of all  common  shares  outstanding.  The
      computation  of  diluted  earnings  (loss)  per share  does not assume the
      conversion,  exercise  or  contingent  issuance  of  potentially  dilutive
      securities  that  would  have  an  antidilutive   effect.  The  amount  of
      potentially  dilutive securities includes options and warrants exercisable
      for  20,044,000  shares of common  stock at July 31,  2004 and  18,766,000
      shares of common stock at July 31, 2003.


                                      F-8
<PAGE>

                               NOVADEL PHARMA INC.
                          NOTES TO FINANCIAL STATEMENTS

      STOCK-BASED  COMPENSATION - The Company follows the intrinsic value method
      of  Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock
      Issued to Employees"  (APB 25) and related  interpretations  in accounting
      for its employee  stock  options.  Financial  Accounting  Standards  Board
      Statement No. 123,  "Accounting  for Stock-Based  Compensation"  (FAS 123)
      permits a company to elect to follow the intrinsic  value method of APB 25
      rather than the alternative fair value accounting  provided under FAS 123,
      but  requires pro forma net income  (loss) and  earnings  (loss) per share
      disclosures  as well as various other  disclosures  not required under FAS
      123 for companies following APB 25. The Company has adopted the disclosure
      provisions required under Financial  Accounting  Standards Board Statement
      No.  148,  "Accounting  for  Stock-Based  Compensation  -  Transition  and
      Disclosure"  (FAS 148).  Because the exercise price of the Company's stock
      options  equals the market  price of the  underlying  stock on the date of
      grant, no compensation  expense is initially  recognized under APB 25. The
      Registrant,  its Audit  Committee  and its current and former  independent
      registered  public  accounting  firms  have  agreed  that  certain  of the
      Company's  issued and  outstanding  stock  options  that  permit  cashless
      exercise  should be subject to variable plan  accounting  treatment  under
      applicable accounting standards, and, accordingly, previously unrecognized
      compensation  expenses  should be 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 No. 25" (Issue  Date 3/00).
      Accordingly,  management has restated the Company's  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.  This  report
      contains  restated  financial  information  for  all of the  above  fiscal
      periods.  The reasons for, and financial  impact of, the  adjustments  are
      described in Note 3.

      The fair values of options  granted in 2004 and 2003 were 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 the expected
      market price of the Company's common stock of 56% in 2004 and 74% in 2003,
      and an  expected  life of the  options of six years and five years in 2004
      and 2003, respectively.

      If the  Company  had  elected  to  recognize  compensation  cost  for  all
      outstanding  options  granted by the Company to  employees by applying the
      fair value recognition  provisions of FAS No. 123 to stock-based  employee
      compensation  using the Black Scholes option  pricing model,  net loss and
      net loss per share would have been increased or decreased to the pro forma
      amounts indicated below:


                                      F-9
<PAGE>

                               NOVADEL PHARMA INC.
                          NOTES TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                               Years ended July 31
                                                                                         ------------------------------
                                                                                            2004             2003 As
                                                                                                             Restated
                                                                                                           (See Note 3)
                                                                                         -----------        -----------
<S>                                                                                      <C>                <C>
             Net loss - basic and diluted, as reported                                   $(6,341,000)       $(6,956,000)

             Compensation expense (credit) resulting from variable plan accounting          (736,000)         1,141,000
             Total stock-based employee compensation expense using the fair                 (795,000)          (486,000)
             value based method for all awards                                           -----------        -----------

             Pro forma                                                                   $(7,872,000)       $(6,301,000)
                                                                                         ===========        ===========

             Basic and diluted net loss per common share:
             As reported                                                                 $      (.24)       $      (.45)

             Pro forma                                                                   $      (.30)       $      (.41)
          </TABLE>


NOTE 2 - LIQUIDITY

      The Company has reported a net loss of $6,341,000  for the year ended July
      31, 2004 and a net loss of $6,956,000  for the year ended July 31, 2003 as
      restated (see Note 3). Management  believes that the Company will continue
      to incur net losses through at least July 31, 2005. Based on the Company's
      resources available at July 31, 2004,  management believes these resources
      are adequate to fund the operations  through at least July 31, 2005. As of
      July 31, 2004,  the Company had working  capital of  $7,676,000,  cash and
      cash  equivalents of $2,166,000 and short term  investments of $6,211,000.
      Until and unless the Company's operations generate  significant  revenues,
      the Company will attempt to continue to fund  operations from cash on hand
      and through the sources of capital  described  below.  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.


                                      F-10
<PAGE>

                               NOVADEL PHARMA INC.
                          NOTES TO FINANCIAL STATEMENTS


NOTE 3 - RESTATEMENT OF FINANCIAL STATEMENTS

      In connection  with the preparation of the Annual Report on Form 10-KSB of
      the  Company  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 are subject to variable plan accounting treatment under applicable
      accounting   standards,   and,   accordingly,    previously   unrecognized
      compensation  expenses  should be 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 has identified  certain
      adjustments that  necessitate 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  adjustments to the Company's financial statements for the
      years  ended  July 31,  2003 and 2002,  respectively,  are  summarized  as
      follows:


                                      F-11
<PAGE>

                               NOVADEL PHARMA INC.
                          NOTES TO FINANCIAL STATEMENTS

                             RESTATED BALANCE SHEETS
                          AS OF JULY 31, 2003 AND 2002



<TABLE>
<CAPTION>
                                       As Previously    Restatement                    As Previously   Restatement
                                         Reported       Adjustment      As Restated      Reported       Adjustment      As Restated
                                         7/31/03          7/31/03        7/31/03          7/31/02         7/31/02        7/31/02
                                       ------------    ------------    ------------    ------------    ------------    ------------
<S>                                    <C>             <C>             <C>             <C>             <C>             <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents            $  3,086,000    $         --    $  3,086,000    $  3,314,000    $         --    $  3,314,000

  Accounts receivable - trade                 2,000              --           2,000           1,000              --           1,000
  Prepaid expenses and other
    current assets                          168,000              --         168,000          96,000              --          96,000
                                       ------------    ------------    ------------    ------------    ------------    ------------
Total Current Assets                      3,256,000              --       3,256,000       3,411,000              --       3,411,000

Property and Equipment, net                 714,000              --         714,000         406,000              --         406,000

OTHER ASSETS                                357,000              --         357,000          22,000              --          22,000
                                       ------------    ------------    ------------    ------------    ------------    ------------

TOTAL ASSETS                           $  4,327,000    $         --    $  4,327,000    $  3,839,000    $         --    $  3,839,000
                                       ============    ============    ============    ============    ============    ============


CURRENT LIABILITIES:

  Accounts payable-trade               $    139,000    $         --    $    139,000    $    125,000    $         --    $    125,000
  Accrued expenses and other
    current liabilities                     318,000              --         318,000         191,000              --         191,000
                                       ------------    ------------    ------------    ------------    ------------    ------------
    Total Liabilities                       457,000              --         457,000         316,000              --         316,000
                                       ------------    ------------    ------------    ------------    ------------    ------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
  Preferred stock                                --              --              --              --              --              --
  Common stock                               18,000              --          18,000          14,000              --          14,000
  Additional paid-in capital             19,480,000       2,972,000      22,452,000      13,322,000       1,831,000      15,153,000
  Accumulated deficit                   (15,628,000)     (2,972,000)    (18,600,000)     (9,813,000)     (1,831,000)    (11,644,000)
                                       ------------    ------------    ------------    ------------    ------------    ------------
     Total Stockholders' Equity           3,870,000              --       3,870,000       3,523,000              --       3,523,000
                                       ------------    ------------    ------------    ------------    ------------    ------------

TOTAL LIABILITIES AND
  STOCKHOLDERS' EQUITY                 $  4,327,000    $         --    $  4,327,000    $  3,839,000    $         --    $  3,839,000
                                       ============    ============    ============    ============    ============    ============
</TABLE>

                                      F-12

<PAGE>

                               NOVADEL PHARMA INC.
                          NOTES TO FINANCIAL STATEMENTS

                        RESTATED STATEMENTS OF OPERATIONS
                   FOR THE YEARS ENDED JULY 31, 2003 AND 2002


<TABLE>
<CAPTION>
                                         For The Year    For The Year
                                             Ended         Ended         For The       For The Year  For The Year      For The
                                            7/31/03        7/31/03         Year         7/31/02        7/31/02        Year Ended
                                         As Previously   Restatement     7/31/03      As Previously   Restatement      7/31/02
                                           Reported       Adjustment    As Restated     Reported      Adjustment     As Restated
                                         ------------   ------------   ------------   ------------   ------------   ------------
<S>                                      <C>            <C>            <C>            <C>            <C>            <C>
LICENSE FEE                              $         --   $         --   $         --   $         --   $         --   $         --

CONSULTING REVENUES                             2,000             --          2,000        339,000             --        339,000
                                         ------------   ------------   ------------   ------------   ------------   ------------

TOTAL REVENUES                                  2,000             --          2,000        339,000             --        339,000
                                         ------------   ------------   ------------   ------------   ------------   ------------

RESEARCH AND DEVELOPMENT EXPENSES           1,048,000         39,000      1,087,000        962,000         11,000        973,000

CONSULTING, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES                     4,902,000      1,102,000      6,004,000      3,799,000      1,820,000      5,619,000
                                         ------------   ------------   ------------   ------------   ------------   ------------

TOTAL EXPENSES                              5,950,000      1,141,000      7,091,000      4,761,000      1,831,000      6,592,000
                                         ------------   ------------   ------------   ------------   ------------   ------------

LOSS FROM OPERATIONS                       (5,948,000)    (1,141,000)    (7,089,000)    (4,422,000)    (1,831,000)    (6,253,000)

INTEREST INCOME                                49,000             --         49,000         44,000             --         44,000
                                         ------------   ------------   ------------   ------------   ------------   ------------

LOSS BEFORE INCOME TAXES                   (5,899,000)    (1,141,000)    (7,040,000)    (4,378,000)    (1,831,000)    (6,209,000)

DEFERRED INCOME TAX BENEFIT                   (84,000)            --        (84,000)       (88,000)            --        (88,000)
                                         ------------   ------------   ------------   ------------   ------------   ------------

NET LOSS                                 $ (5,815,000)  $ (1,141,000)  $ (6,956,000)  $ (4,290,000)  $ (1,831,000)  $ (6,121,000)
                                         ============   ============   ============   ============   ============   ============


BASIC AND DILUTED LOSS PER COMMON SHARE  $      (0.38)  $      (0.07)  $      (0.45)  $      (0.38)  $      (0.16)  $      (0.54)
                                         ============   ============   ============   ============   ============   ============

WEIGHTED-AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING                  15,419,000     15,419,000     15,419,000     11,361,000     11,361,000     11,361,000
                                         ============   ============   ============   ============   ============   ============
</TABLE>


                                      F-13
<PAGE>

                               NOVADEL PHARMA INC.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 4 - PROPERTY AND EQUIPMENT

      Property and equipment are summarized as follows:


                                               July 31, 2004     July 31, 2003
                                             ----------------- ----------------
     Equipment                                      $ 303,000        $ 713,000
     Furniture and fixtures                         1,054,000          122,000
     Leasehold improvements                           184,000          131,000
                                             ----------------- ----------------
                                                    1,541,000          966,000
     Less: Accumulated depreciation and
     amortization                                     475,000          252,000
                                             ================= ================
                                                   $1,066,000         $714,000
                                             ================= ================


NOTE 5 - RELATED PARTY TRANSACTIONS

      LEGAL FEES - The  Company  has  incurred  legal  fees  charged by a former
      officer and director of the Company.  These fees approximated $195,000 and
      $160,000 for the years ended July 31, 2004 and 2003, respectively.

      CONSULTING  AGREEMENT - Mr. John H.  Klein's,  the former  Chairman of the
      Company's Board of Directors,  consulting  agreement ceased on January 31,
      2004.  During fiscal 2004, we paid Mr. Klein,  our former  Chairman of the
      Board,  approximately $186,000, and we paid him approximately $300,000 for
      fiscal  2003,  pursuant  to  our  consulting   agreement  with  Mr.  Klein
      (including  finder fees relating to the Company's  licensing  agreements).
      The amount of the fees is determined according to the net revenue received
      by us in connection with the Par Pharmaceutical  agreement.  The amount of
      fees paid to Mr.  Klein  will  fluctuate  over the term of the  agreement,
      primarily  dependent on the amount of milestone  payments  received by the
      Company.  At no time will the fees be more than four  percent  (4%) of the
      net  revenue   received  by  the  Company  in  connection   with  the  Par
      Pharmaceutical agreement.

      LICENSE  AGREEMENTS WITH RELATED PARTIES (SEE NOTE 7) - In April 2003, the
      Company  entered into a license and  development  agreement with Manhattan
      Pharmaceuticals, Inc. (Manhattan) for the worldwide, exclusive rights to
      the Company's proprietary lingual spray technology to deliver propofol for
      pre-procedural sedation.

      In June 2004,  the  Company  entered  into a 20-year  worldwide  exclusive
      license  agreement  with  Velcera  Pharmaceuticals,  Inc.  (Velcera),  a
      veterinary company.


                                      F-14
<PAGE>

                               NOVADEL PHARMA INC.
                          NOTES TO FINANCIAL STATEMENTS

      The  license  agreement  is for  the  exclusive  rights  to the  Company's
      proprietary lingual spray technology in animals.

      In October  2004,  the  Company  entered  into a license  and  development
      agreement with Hana  Biosciences,  Inc. (Hana) to develop and market the
      Company's  lingualspray  version  of  ondansetron.  The  agreement  is  an
      exclusive license for the United States and Canada.

      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 6 - STOCKHOLDERS' EQUITY

      PRIVATE PLACEMENTS:

      In January 2004,  the Company  completed a private  placement and received
      net proceeds of  $12,785,000  from the sale of a total of 140 units of the
      Company's  securities.  Each unit consisted of 95,238 common  shares,  par
      value $.001,  and 28,571  warrants.  Each  warrant  entitles the holder to
      purchase an additional  share of the Company's common stock at an exercise
      price  of $1.40  within  five  years.  The  sale  price  of each  unit was
      $100,000.  A  total  of  13,333,333  shares  and  approximately  4,000,000
      warrants were issued.

      The securities were sold through Paramount Capital, Inc. (Paramount),  a
      NASD broker-dealer.  For its services as placement agent, the Company paid
      Paramount  a  commission  of 7% of the  aggregate  amount  raised and also
      issued to Paramount (and its designees) unit purchase  options to purchase
      1,330,303  shares of common stock at an exercise  price of $1.40 per share
      and warrants to purchase an additional  399,091  shares of common stock at
      an exercise  price of $1.40 per share.  The Company also paid  Paramount a
      non-accountable  expense  allowance of $25,000 to reimburse  Paramount for
      its out-of- pocket expenses. A significant stockholder of the Company is a
      controlling principal of Paramount.

      In May 2003,  the Company  completed a private  placement and received net
      proceeds of  approximately  $4,336,000  from the  placement  of a total of
      48.01 units of the Company's securities. Each unit consisted of 66,666-2/3
      common  shares,  par value $.001,  and 16,666-2/3  warrants.  Each warrant
      entitles  the holder to  purchase  an  additional  share of the  Company's
      common stock at an exercise price


                                      F-15
<PAGE>

                               NOVADEL PHARMA INC.
                          NOTES TO FINANCIAL STATEMENTS


      of $2.00  within five (5) years.  The sale price of each unit was $100,000
      ($1.50 per share).  In  connection  with the  Company's  May 2003  private
      placement,  the Company had agreed,  for a period of one year, that if the
      Company issued shares of common stock at a par share price less than $1.50
      (the price per share in such offering)  that such investors  would receive
      "reset price" shares  without any additional  consideration  being paid to
      the Company (so that those investors would receive additional shares as if
      they purchased their shares at such lower per share purchase  price).  The
      per share sale price of the  January  2004  offering  triggered  the reset
      rights of such investors and 1,371,549  shares of common stock were issued
      to these investors for no additional  consideration.  The reset provisions
      expire in May 2004.

      PREFERRED STOCK - The Company's  Certificate of  Incorporation  authorizes
      the issuance of up to 1,000,000  shares of Preferred  Stock.  None of such
      Preferred  Stock has been  designated or issued through July 31, 2004. The
      Board is authorized  to issue shares of Preferred  Stock from time to time
      in one or more series and to establish  and  designate any such series and
      to fix the number of shares and the relative  conversion  rights,  voting,
      terms of redemption and liquidation.

NOTE 7 - COMMITMENTS AND CONTINGENCIES

      EMPLOYMENT AND  CONSULTING  AGREEMENTS - At July 31, 2004, the Company had
      employment  agreements  with six officers of the Company  providing for an
      aggregate annual salary of $1,356,000.

      Each of these employment agreements has a three year term. They are due to
      expire on the following schedule:  Dr. Dugger's agreement in January 2005,
      Dr.  Shangold's  agreement in December 2005, Mr. Cohen's  agreement in May
      2006,  Dr.  El Shafy's  agreement  in  January  2007,  and  Ms.  Frydman's
      agreement in May 2007.  Mr.  Deitman  resigned  from his position as Chief
      Financial Officer on September 30, 2004. The employment  agreements of Dr.
      Shangold,  Dr. El Shafy and Mr. Cohen automatically  extend for additional
      one-year periods unless either party to the agreement advises the other to
      the contrary in writing at least 90 days prior to the  expiration of their
      term.

      All of the  foregoing  employment  agreements  provide for the issuance of
      bonuses based on certain factors.  The agreements with Dr.  Shangold,  Ms.
      Frydman,  Dr.  El Shafy and Mr. Cohen  provide for the grant of options to
      purchase  shares of the Company's  common stock,  vesting ratably over the
      term of the agreement.


                                      F-16
<PAGE>

                               NOVADEL PHARMA INC.
                          NOTES TO FINANCIAL STATEMENTS


      Additionally,  at July 31, 2004,  the Company had a  consulting  agreement
      with Robert C. Galler  providing  for an annual  salary of  $180,000.  The
      agreement terminates in February 2005.

      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 year ended July 31,
      2004,  the  Company  invoiced  Manhattan  approximately  $400,000  for the
      Company's  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.

      In June 2004,  the  Company  entered  into a 20-year  worldwide  exclusive
      license  agreement  with  Velcera,  a  veterinary  company.   The  license
      agreement is for the exclusive rights to the Company's  propriety  lingual
      spray  technology  in animals.  In September  2004,  the Company  received
      $1,500,000  from  Velcera as an upfront  payment  in  connection  with the
      commercialization  agreement.  The upfront  payment  has been  included in
      deferred revenue and will be recognized in income over the 20-year term of
      the agreement.  The Company may receive additional  milestone payments and
      royalty payments over the 20-year term of the agreement.

      In July 2004,  the Company  entered  into a licensing  agreement  with Par
      Pharmaceutical,  Inc.  (Par  Pharmaceutical)  for the  exclusive  right to
      market,  sell and  distribute  nitroglycerin  lingual  spray in the United
      States and  Canada.  The  Company  has  received  $250,000  in upfront and
      milestone  payments and may receive  additional fees and royalty  payments
      over  the  10-year  term of the  license.  The  upfront  payment  has been
      included in deferred  revenue  and will be  recognized  in income over the
      10-year term of the agreement.

      In October  2004,  the  Company  entered  into a license  and  development
      agreement  with Hana to develop  and market the  Company's  lingual  spray
      version of  ondansetron.  The  agreement is an  exclusive  license for the
      United  States and  Canada.  Pursuant  to the terms of the  agreement,  in
      exchange for $1,000,000,  Hana purchased  400,000 shares of Company common
      stock at a per share price of $2.50.  Hana issued to the Company  $500,000
      of  common  stock of Hana  (73,121  shares  at  $6.84  per  share)  for no
      additional consideration. The proceeds received from Hana will be included
      in deferred  revenue  and  recognized  over the period of the  development
      agreement.  The Company may receive  additional license fees and royalties
      over the 20-year term of the agreement.


                                      F-17
<PAGE>

                               NOVADEL PHARMA INC.
                          NOTES TO FINANCIAL STATEMENTS

      LEASES - In August  2000,  the  Company  entered  into a  five-year  lease
      agreement,  effective October 2000, for approximately 4,500 square feet of
      office,  laboratory and manufacturing  space. Annual rent is approximately
      $63,000 plus real estate taxes,  currently  estimated to be  approximately
      $11,000 annually.

      In March 2003, the Company entered into a 10-year lease for  approximately
      31,500  square feet of office,  laboratory,  manufacturing  and  warehouse
      space.  During  the first five  years of the  lease,  the  annual  rent is
      approximately $332,000 plus a proportionate share of real estate taxes and
      common areas. Beginning in the sixth year and continuing through the tenth
      year of the lease, the annual rent will be  approximately  $365,000 plus a
      proportionate share of real estate taxes and common areas.

      Future minimum rental payments subsequent to July 31, 2004 are as follows:

                 Years Ending July 31,
                 ---------------------

                        2005                            $506,000
                        2006                            $443,000
                        2007                            $476,000
                        2008                            $476,000
                        2009                            $476,000
                        Thereafter                      $476,000
                                                      ----------
                                                      $2,853,000
                                                      ==========


NOTE 8 - INCOME TAXES

      The  significant  components  of the  Company's net deferred tax asset are
      summarized as follows:

                                                       Year ended July 31
                                               ---------------------------------
                                                  2004                 2003
                                                                    As Restated
                                               -----------          -----------
Net operating loss carryforwards .........     $ 8,001,000          $ 5,300,000

Valuation allowance ......................      (8,001,000)          (5,300,000)
                                               -----------          -----------
Net deferred tax asset ...................     $        --          $        --
                                               ===========          ===========


                                      F-18
<PAGE>


                               NOVADEL PHARMA INC.
                          NOTES TO FINANCIAL STATEMENTS

      The following is a  reconciliation  of the income tax benefit  computed at
      the statutory rate to the provision for income taxes:

                                                       Year ended July 31
                                                 -------------------------------
                                                    2004                2003
                                                                     As Restated
                                                                      (Note 3)
                                                 -----------        -----------

Federal tax at statutory rate of 34%......       $(2,228,000)       $(2,393,000)
State income tax .........................          (393,000)          (422,000)
Non deductible options issued for services          (294,000)         1,126,000
Sale of net operating losses .............          (214,000)           (84,000)
Increase in valuation allowance ..........         2,915,000          1,689,000
                                                 -----------        -----------
                                                 $  (214,000)       $   (84,000)
                                                 ===========        ===========


      At July 31,  2004,  the Company has federal and state net  operating  loss
      carryforwards   for  financial   reporting  and  income  tax  purposes  of
      approximately $23,029,000 and $13,648,000, respectively, which can be used
      to offset current and future  taxable  income,  if any,  through 2024. The
      Company has  provided  valuation  allowances  to offset its  deferred  tax
      assets due to the  significant  uncertainties  related  to its  ability to
      generate future taxable income.

      During  December  2003,  the Company  received  approximately  $214,000 as
      consideration for transferring  approximately $2,854,000 of New Jersey net
      operating  loss tax benefits to a third party  corporation  buyer.  During
      December  2002,  the  Company  received  approximately  $84,000  from this
      program.

NOTE 9 - STOCK OPTIONS

      At July 31, 2004, the Company had three plans which allow for the issuance
      of stock  options and other awards,  the 1992 Stock Option Plan,  the 1997
      Stock Option Plan and the 1998 Stock  Option Plan (the  Plans).  The total
      number  of  shares  of  common  stock  reserved  for  issuance,  either as
      incentive  stock  options  (ISOs)  under the  Internal  Revenue Code or as
      non-qualified  options,  under the 1992 and 1997 Plans is  500,000  shares
      each and 1,829,500  under the 1998 Plan.  ISOs may be granted to employees
      and  officers of the Company and  non-qualified  options may be granted to
      consultants,  directors, employees and officers of the Company. Options to
      purchase  the  Company's  common  stock may not be granted at a price less
      than the fair  market  value of the common  stock at the date of grant and
      will expire not more than 10 years from the date of grant. ISOs granted to
      a 10% or more  stockholder  may not be for less than  110% of fair  market
      value or for a term of more than five years.


                                      F-19
<PAGE>

                               NOVADEL PHARMA INC.
                          NOTES TO FINANCIAL STATEMENTS

      The Plans had  provisions  that  permitted the cashless  exercise of stock
      options. The accompanying restated financial statements reflect the use of
      variable  plan  accounting  for such options  (see Note 3). The  Company's
      Board of Directors  rescinded  the cashless  exercise  provisions  for all
      outstanding options in October 2004, and variable plan accounting will not
      be required after the quarter ended October 31, 2004.

      At July 31,  2004,  there were  4,618,000  non-plan  options  reserved for
      issuance.

      Information  with  respect to stock  option  activity  is as  follows  (in
      thousands, except exercise price amounts):

<TABLE>
<CAPTION>
                                                             Outstanding Options
                                                         ----------------------------
                                                         Number of   Weighted Average
                                                          Options     Exercise Price
                                                          -------     --------------
<S>                                                      <C>         <C>
Balance at August 1, 2002 .........                         4,478          $1.61
Additional Shares reserved ........                            --             --
Grants ............................                         2,159           1.60
Exercises .........................                           445            .94
Cancellation ......................                            --             --
                                                            -----
Balance at July 31, 2003 ..........                         6,192          $1.66
                                                                           =====

Additional Shares reserved ........                            --             $-
Grants ............................                         1,308           1.75
Exercises .........................                           260            .99
Cancellations .....................                         1,195           2.31
                                                            -----
Balance at July 31, 2004 ..........                         6,045          $1.60
                                                            =====          =====
</TABLE>

      The following table summarizes  information related to options outstanding
      at July 31, 2004:

<TABLE>
<CAPTION>
                                             Outstanding Options                         Options Exercisable
                                -----------------------------------------------     ------------------------------
RANGE OF EXERCISE PRICES                            Weighted         Weighted
 -----------------------                            Average           Average                          Weighted
                                  Options          Remaining         Exercise        Options            Average
                                   000's          Life in Years        Price          000's        Exercise Price
                                ----------      --------------     ------------     ---------      ---------------
<S>                             <C>             <C>                <C>              <C>            <C>
$0.01 - $1.00..............         1,775                 5.9            $ .73         1,775                $ .73
$1.01 - $2.00..............         3,373                 4.8             1.77         1,949                 1.81
$2.01 - $3.00..............           497                 7.7             2.34           363                 2.45
$3.01 - $4.00..............           400                 7.8             3.12           350                 3.10
                                ----------
                                    6,045                 6.5            $1.60         4,437                $1.53
                                ==========      ==============     ============     =========      ===============
</TABLE>


                                      F-20
<PAGE>

                               NOVADEL PHARMA INC.
                          NOTES TO FINANCIAL STATEMENTS

      The following table summarizes information related to warrants outstanding
      at July 31, 2004:

<TABLE>
<CAPTION>
                                                                           REMAINING              NUMBER OF
                                                   NUMBER                 CONTRACTUAL              OPTIONS
                    PRICE RANGE                  OUTSTANDING             LIFE (YEARS)            EXERCISABLE
                    -----------                  -----------             ------------            -----------
<S>                                            <C>                       <C>                    <C>
                    $0.01-1.00                    7,343,140                  5.40                   7,343,140
                    $1.01-1.99                    6,556,397                  3.95                   6,556,397
                    $2.00                           100,004                  3.28                     100,004
                                                 ----------                                        ----------

                     Totals                      13,999,541                                        13,999,541
                                                 ==========                                        ==========
</TABLE>


                                      F-21
<PAGE>

                    RESTATEMENT OF QUARTERLY DATA (UNAUDITED)

      In connection  with the preparation of the Annual Report on Form 10-KSB of
      the  Company  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 are subject to variable plan accounting treatment under applicable
      accounting   standards,   and,   accordingly,    previously   unrecognized
      compensation  expenses  should be 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 has identified  certain
      adjustments that  necessitate 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  (see Note 3 to
      financial statements).

      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 following  table shows the effects of the restatement on the Company's
      quarterly  results of operations.  In the tables that follow,  the columns
      labeled "Restatement  Adjustments"  represent adjustments for compensation
      expense (credit) previously not recognized.


                                      F-22
<PAGE>
                               NOVADEL PHARMA INC.
                        RESTATED STATEMENT OF OPERATIONS
                      FOR THE QUARTER ENDED APRIL 30, 2004



<TABLE>
<CAPTION>
                                        As Previously       Restatement
                                          Reported           Adjustment         As Restated
                                        For The Qtr         For The Qtr         For The Qtr
                                           Ended               Ended               Ended
                                          4/30/04             4/30/04             4/30/04
                                       ------------        ------------        ------------
<S>                                    <C>                 <C>                 <C>
LICENSE FEE                            $      5,000        $         --        $      5,000

CONSULTING REVENUES                          11,000                  --              11,000
                                       ------------        ------------        ------------
TOTAL REVENUES                               16,000                  --              16,000
                                       ------------        ------------        ------------

RESEARCH AND DEVELOPMENT EXPENSES           587,000              (6,000)            581,000

CONSULTING, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES                   1,218,000            (193,000)          1,025,000
                                       ------------        ------------        ------------
TOTAL EXPENSES                            1,805,000            (199,000)          1,606,000
                                       ------------        ------------        ------------

LOSS FROM OPERATIONS                     (1,789,000)            199,000          (1,590,000)

INTEREST INCOME                              59,000                  --              59,000
                                       ------------        ------------        ------------

LOSS BEFORE INCOME TAXES                 (1,730,000)            199,000          (1,531,000)

DEFERRED INCOME TAX BENEFIT                      --                  --                  --
                                       ------------        ------------        ------------
NET LOSS                               $ (1,730,000)       $    199,000        $ (1,531,000)
                                       ============        ============        ============

BASIC LOSS PER COMMON SHARE            $      (0.05)       $       0.00        $      (0.05)
                                       ============        ============        ============
SHARES USED IN COMPUTATION OF
BASIC LOSS PER COMMON SHARE              32,866,531          32,866,531          32,866,531
                                       ============        ============        ============
</TABLE>


                                      F-23
<PAGE>

                               NOVADEL PHARMA INC.
                        RESTATED STATEMENTS OF OPERATIONS
          FOR THE QUARTERS ENDED JANUARY 31, 2004 AND OCTOBER 31, 2003


<TABLE>
<CAPTION>
                                   As Previously     Restatement                   As Previously    Restatement
                                     Reported        Adjustment     As Restated      Reported        Adjustment     As Restated
                                    For The Qtr      For The Qtr    For The Qtr     For The Qtr     For The Qtr     For The Qtr
                                       Ended           Ended          Ended           Ended           Ended            Ended
                                      1/31/04         1/31/04        1/31/04         10/31/03        10/31/03        10/31/03
                                   ------------    ------------    ------------    ------------    ------------    ------------
<S>                                <C>             <C>             <C>             <C>             <C>             <C>
LICENSE FEE                        $      3,000    $         --    $      3,000    $         --    $         --    $         --

CONSULTING REVENUES                      18,000              --          18,000              --           2,000           2,000
                                   ------------    ------------    ------------    ------------    ------------    ------------

TOTAL REVENUES                           21,000              --          21,000              --           2,000           2,000
                                   ------------    ------------    ------------    ------------    ------------    ------------

RESEARCH AND DEVELOPMENT EXPENSES       389,000          (3,000)        386,000              --         (24,000)        (24,000)

CONSULTING, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES               1,265,000         (72,000)      1,193,000       1,733,000        (671,000)      1,062,000
                                   ------------    ------------    ------------    ------------    ------------    ------------

TOTAL EXPENSES                        1,654,000         (75,000)      1,579,000       1,733,000        (695,000)      1,038,000
                                   ------------    ------------    ------------    ------------    ------------    ------------

LOSS FROM OPERATIONS                 (1,633,000)         75,000      (1,558,000)     (1,733,000)        697,000      (1,036,000)

INTEREST INCOME                           5,000              --           5,000           6,000              --           6,000
                                   ------------    ------------    ------------    ------------    ------------    ------------

LOSS BEFORE INCOME TAXES             (1,628,000)         75,000      (1,553,000)     (1,727,000)        697,000      (1,030,000)

DEFERRED INCOME TAX BENEFIT            (214,000)             --        (214,000)             --              --              --
                                   ------------    ------------    ------------    ------------    ------------    ------------

NET LOSS                           $ (1,414,000)   $     75,000    $ (1,339,000)   $ (1,727,000)   $    697,000    $ (1,030,000)
                                   ============    ============    ============    ============    ============    ============

BASIC LOSS PER COMMON SHARE        $      (0.06)   $       0.00    $      (0.06)   $      (0.10)   $       0.04    $      (0.06)
                                   ============    ============    ============    ============    ============    ============

SHARES USED IN COMPUTATION OF
BASIC LOSS PER COMMON SHARE          23,247,336      23,247,336      23,247,336      17,972,760      17,972,760      17,972,760
                                   ============    ============    ============    ============    ============    ============
</TABLE>

                                      F-24
<PAGE>

                               NOVADEL PHARMA INC.
                        RESTATED STATEMENTS OF OPERATIONS
             FOR THE QUARTERS ENDED JULY 31, 2003 AND APRIL 30, 2003



<TABLE>
<CAPTION>
                                       As Previously   Restatement                     As Previously    Restatement
                                         Reported      Adjustment      As Restated       Reported        Adjustment    As Restated
                                        For The Qtr    For The Qtr     For The Qtr      For The Qtr     For The Qtr    For The Qtr
                                          Ended            Ended           Ended           Ended           Ended          Ended
                                         7/31/03          7/31/03         7/31/03         4/30/03         4/30/03        4/30/03
                                       ------------    ------------    ------------    ------------    ------------    ------------
<S>                                    <C>             <C>             <C>             <C>             <C>             <C>
LICENSE FEE                            $         --    $         --    $         --    $         --    $         --    $         --

CONSULTING REVENUES                           2,000              --           2,000              --              --              --
                                       ------------    ------------    ------------    ------------    ------------    ------------

TOTAL REVENUES                                2,000              --           2,000              --              --              --
                                       ------------    ------------    ------------    ------------    ------------    ------------

RESEARCH AND DEVELOPMENT EXPENSES         1,048,000          16,000       1,064,000         264,000         (68,000)        196,000

CONSULTING, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES                     424,000       1,437,000       1,861,000         614,000      (2,296,000)     (1,682,000)
                                       ------------    ------------    ------------    ------------    ------------    ------------

TOTAL EXPENSES                            1,472,000       1,453,000       2,925,000         878,000      (2,364,000)     (1,486,000)
                                       ------------    ------------    ------------    ------------    ------------    ------------

INCOME (LOSS) FROM OPERATIONS            (1,470,000)     (1,453,000)     (2,923,000)       (878,000)      2,364,000       1,486,000

INTEREST INCOME                               9,000              --           9,000           7,000              --           7,000
                                       ------------    ------------    ------------    ------------    ------------    ------------

INCOME (LOSS) BEFORE INCOME TAXES        (1,461,000)     (1,453,000)     (2,914,000)       (871,000)      2,364,000       1,493,000

DEFERRED INCOME TAX BENEFIT                 (84,000)             --         (84,000)             --              --              --
                                       ------------    ------------    ------------    ------------    ------------    ------------

NET INCOME (LOSS)                      $ (1,377,000)   $ (1,453,000)   $ (2,830,000)   $   (871,000)   $  2,364,000    $  1,493,000
                                       ============    ============    ============    ============    ============    ============

BASIC INCOME (LOSS) PER COMMON SHARE   $      (0.09)   $      (0.09)   $      (0.18)   $      (0.06)   $       0.16    $       0.10
                                       ============    ============    ============    ============    ============    ============

SHARES USED IN COMPUTATION OF
BASIC INCOME (LOSS) PER COMMON SHARE     15,419,000      15,419,000      15,419,000      15,155,662      15,155,662      15,155,662
                                       ============    ============    ============    ============    ============    ============
</TABLE>


                                      F-25
<PAGE>

                               NOVADEL PHARMA INC.
                        RESATED STATEMENTS OF OPERATIONS
          FOR THE QUARTERS ENDED JANUARY 31, 2003 AND OCTOBER 31, 2002



<TABLE>
<CAPTION>
                                    As Previously   Restatement                    As Previously    Restatement
                                     Reported        Adjustment     As Restated      Reported        Adjustment     As Restated
                                    For The Qtr     For The Qtr    For The Qtr      For The Qtr     For The Qtr     For The Qtr
                                       Ended           Ended          Ended           Ended           Ended           Ended
                                      1/31/03         1/31/03        1/31/03         10/31/02        10/31/02        10/31/02
                                   ------------    ------------    ------------    ------------    ------------    ------------
<S>                                <C>             <C>             <C>             <C>             <C>             <C>
LICENSE FEE                        $         --    $         --    $         --    $         --    $         --    $         --

CONSULTING REVENUES                          --              --              --              --              --              --
                                   ------------    ------------    ------------    ------------    ------------    ------------

TOTAL REVENUES                               --              --              --              --              --              --
                                   ------------    ------------    ------------    ------------    ------------    ------------

RESEARCH AND DEVELOPMENT EXPENSES       348,000          56,000         404,000              --         (12,000)        (12,000)

CONSULTING, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES               1,523,000       2,413,000       3,936,000       1,729,000        (405,000)      1,324,000
                                   ------------    ------------    ------------    ------------    ------------    ------------

TOTAL EXPENSES                        1,871,000       2,469,000       4,340,000       1,729,000        (417,000)      1,312,000
                                   ------------    ------------    ------------    ------------    ------------    ------------

LOSS FROM OPERATIONS                 (1,871,000)     (2,469,000)     (4,340,000)     (1,729,000)        417,000      (1,312,000)

INTEREST INCOME                          18,000              --          18,000          15,000              --          15,000
                                   ------------    ------------    ------------    ------------    ------------    ------------

LOSS BEFORE INCOME TAXES           $ (1,853,000)   $ (2,469,000)   $ (4,322,000)   $ (1,714,000)   $    417,000    $ (1,297,000)

DEFERRED INCOME TAX BENEFIT             (84,000)             --         (84,000)             --              --              --
                                   ------------    ------------    ------------    ------------    ------------    ------------

NET LOSS                           $ (1,769,000)   $ (2,469,000)   $ (4,238,000)   $ (1,714,000)   $    417,000    $ (1,297,000)
                                   ============    ============    ============    ============    ============    ============

BASIC LOSS PER COMMON SHARE        $      (0.12)   $      (0.17)   $      (0.29)   $      (0.12)   $       0.03    $      (0.09)
                                   ============    ============    ============    ============    ============    ============

SHARES USED IN COMPUTATION OF
BASIC LOSS PER  COMMON SHARE         14,542,821      14,542,821      14,542,821      14,509,523      14,509,523      14,509,523
                                   ============    ============    ============    ============    ============    ============
</TABLE>


                                      F-26
<PAGE>


                               NOVADEL PHARMA INC.
                        RESTATED STATEMENTS OF OPERATIONS
             FOR THE QUARTERS ENDED JULY 31, 2002 AND APRIL 30, 2002


<TABLE>
<CAPTION>
                                        As Previously   Restatement                     As previously   Restatement
                                         Reported        Adjustment     As Restated      Reported       Adjustment      As Restated
                                        For The Qtr     For The Qtr     For The Qtr     For The Qtr     For The Qtr     For The Qtr
                                          Ended            Ended          Ended            Ended           Ended           Ended
                                         7/31/02          7/31/02        7/31/02          4/30/02         4/30/02         4/30/02
                                       ------------    ------------    ------------    ------------    ------------    ------------
<S>                                    <C>             <C>             <C>             <C>             <C>             <C>
LICENSE FEE                            $         --    $         --    $         --    $         --    $         --    $         --

CONSULTING REVENUES                           4,000              --           4,000          81,000              --          81,000
                                       ------------    ------------    ------------    ------------    ------------    ------------

TOTAL REVENUES                                4,000              --           4,000          81,000              --          81,000
                                       ------------    ------------    ------------    ------------    ------------    ------------

RESEARCH AND DEVELOPMENT EXPENSES           962,000        (154,000)        808,000              --          76,000          76,000

CONSULTING, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES                     756,000      (5,126,000)     (4,370,000)      2,139,000       3,475,000       5,614,000
                                       ------------    ------------    ------------    ------------    ------------    ------------

TOTAL EXPENSES                            1,718,000      (5,280,000)     (3,562,000)      2,139,000       3,551,000       5,690,000
                                       ------------    ------------    ------------    ------------    ------------    ------------

INCOME (LOSS) FROM OPERATIONS            (1,714,000)      5,280,000       3,566,000      (2,058,000)     (3,551,000)     (5,609,000)

INTEREST INCOME                              12,000              --          12,000          17,000              --          17,000
                                       ------------    ------------    ------------    ------------    ------------    ------------

INCOME (LOSS) BEFORE INCOME TAXES        (1,702,000)      5,280,000       3,578,000      (2,041,000)     (3,551,000)     (5,592,000)

DEFERRED INCOME TAX BENEFIT                      --              --              --              --              --              --
                                       ------------    ------------    ------------    ------------    ------------    ------------


NET INCOME (LOSS)                      $ (1,702,000)   $  5,280,000    $  3,578,000    $ (2,041,000)   $ (3,551,000)   $ (5,592,000)
                                       ============    ============    ============    ============    ============    ============

BASIC INCOME (LOSS) PER COMMON SHARE
                                       $      (0.15)   $       0.46    $       0.31    $      (0.15)   $      (0.27)   $      (0.42)
                                       ============    ============    ============    ============    ============    ============

SHARES USED IN COMPUTATION OF
BASIC INCOME (LOSS) PER COMMON SHARE     11,361,000      11,361,000      11,361,000      13,432,765      13,432,765      13,432,765
                                       ============    ============    ============    ============    ============    ============
</TABLE>


                                      F-27
<PAGE>

                               NOVADEL PHARMA INC.
                        RESTATED STATEMENT OF OPERATIONS
                     FOR THE QUARTER ENDED JANUARY 31, 2002



<TABLE>
<CAPTION>
                                        As Previously     Restatement
                                         Reported          Adjustment         As Restated
                                        For The Qtr       For The Qtr        For The Qtr
                                          Ended              Ended              Ended
                                         1/31/02            1/31/02            1/31/02
                                       -----------        -----------        -----------
<S>                                    <C>                <C>                <C>
LICENSE FEE                            $        --        $        --        $        --

CONSULTING REVENUES                        183,000                 --            183,000
                                       -----------        -----------        -----------

TOTAL REVENUES                             183,000                 --            183,000
                                       -----------        -----------        -----------
RESEARCH AND DEVELOPMENT EXPENSES               --             89,000             89,000

CONSULTING, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES                    548,000          3,471,000          4,019,000
                                       -----------        -----------        -----------

TOTAL EXPENSES                             548,000          3,560,000          4,108,000
                                       -----------        -----------        -----------

LOSS FROM OPERATIONS                      (365,000)        (3,560,000)        (3,925,000)

BUY-OUT OF CONSULTANT'S CONTRACT           (33,000)                --            (33,000)

INTEREST INCOME                             10,000                 --             10,000
                                       -----------        -----------        -----------

LOSS BEFORE INCOME TAXES                  (388,000)        (3,560,000)        (3,948,000)


DEFERRED INCOME TAX BENEFIT                (88,000)                --            (88,000)
                                       -----------        -----------        -----------

NET LOSS                               $  (300,000)       $(3,560,000)       $(3,860,000)
                                       ===========        ===========        ===========

BASIC LOSS PER COMMON SHARE            $     (0.03)       $     (0.36)       $     (0.39)
                                       ===========        ===========        ===========

SHARES USED IN COMPUTATION OF
BASIC LOSS PER COMMON SHARE              9,942,291          9,942,291          9,942,291
                                       ===========        ===========        ===========
</TABLE>


                                      F-28
<PAGE>

                                INDEX TO EXHIBITS

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

<TABLE>
<CAPTION>
EXHIBIT NO.        DESCRIPTION                                    METHOD OF FILING
-----------        -----------                                    ----------------
<S>                <C>                                            <C>
3.1                Restated Certificate of Incorporation of       Incorporated by reference to Exhibit 3.1 of the
                   the Company                                    Company's Quarterly Report on Form 10-QSB, as filed
                                                                  with the SEC on June 14, 2004

3.2                Amended and Restated By-laws of the Company    Incorporated by reference to Exhibit 3.2 of the
                                                                  Company's Registration Statement on Form SB-2, as
                                                                  filed with the SEC on August 8, 1997 (File No.
                                                                  333-33201)

4.1                Form of Class C Warrant for the Purchase of    Incorporated by reference to Exhibit 4.1 to the
                   Shares of Common Stock                         Company's Current Report on Form 8-K, as filed with
                                                                  the SEC on January 12, 2004

10.1               *1992 Stock Option Plan                        Incorporated by reference to the Company's
                                                                  Registration Statement on Form SB-2, as filed with
                                                                  the SEC on August 8, 1997 (File No. 333-33201)

10.2               *Form of Incentive Stock Option Agreement      Incorporated by reference to the Company's
                   under the 1992 Stock Option Plan               Registration Statement on Form SB-2, as filed with
                                                                  the SEC on August 8, 1997 (File No. 333-33201)

10.3               *1997 Stock Option Plan                        Incorporated by reference to Exhibit 10.8 to the
                                                                  Company's Registration Statement on Form SB-2, as
                                                                  filed with the SEC on August 8, 1997 (File No.
                                                                  333-33201)

10.4               *Form of Non-Qualified Option Agreement under  Incorporated by reference to the Company's
                   the 1997 Stock Option Plan                     Registration Statement on Form SB-2, as filed with
                                                                  the SEC on August 8, 1997 (File No. 333-33201)
</TABLE>


                                      E-1
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.        DESCRIPTION                                    METHOD OF FILING
-----------        -----------                                    ----------------
<S>                <C>                                            <C>

10.5               *1998 Stock Option Plan                        Incorporated by reference to Exhibit 4.1 to the
                                                                  Company's Registration Statement on Form S-8, as
                                                                  filed with the SEC on June 18, 2004 (File No.
                                                                  333-116665)

10.6               *Form of Stock Option Agreement under the      Incorporated by reference to Exhibit 4.2 to the
                   1998 Stock Option Plan                         Company's Registration Statement on Form S-8, as
                                                                  filed with the SEC on June 18, 2004 (File No.
                                                                  333-116665)

10.7               *Form of Nonqualified Stock Option Agreement   Incorporated by reference to Exhibit 4.3 to the
                                                                  Company's Registration Statement on Form S-8, as
                                                                  filed with the SEC on June 18, 2004 (File No.
                                                                  333-116665)

10.8               Common Stock and Warrant Purchase Agreement,   Incorporated by reference to Exhibit A to the
                   dated December 12, 2001, by and among the      Schedule 13D as filed by Lindsay A. Rosenwald with
                   Company and certain purchasers                 the SEC on December 21, 2001

10.9               Amendment No. 1, dated January 6, 2002, to     Incorporated by reference to Exhibit 10.25 to the
                   the Common Stock and Warrant Purchase          Company's Registration Statement on Form SB-2, as
                   Agreement dated December 12, 2001 between      filed with the SEC on April 15, 2002 (File No.
                   the Company and certain purchasers             333-86262)

10.10              Lease Agreement, dated March 19, 2003, by      Incorporated by reference to Exhibit 10.28 to the
                   and between the Company and Macedo Business    Company's Quarterly Report on Form 10-QSB for the
                   Park, II, L.L.C.                               period ended April 30, 2003, as filed with the SEC
                                                                  on June 19, 2003

10.11              Form of Amendment Number 1 to Lease            Incorporated by reference to Exhibit 10.29 to the
                   Agreement dated March 19, 2003 between         Company's Quarterly Report on Form 10-QSB for the
                   Macedo Business Park, II, L.L.C. and the       period ended April 30, 2003, as filed with the SEC
                   Company, dated as of March 19, 2003            on June 19, 2003

10.12              License and Development Agreement, effective   Incorporated by reference to Exhibit 10.31 to the
                   as of April 4, 2003, by and between the        Amendment No. 1 to the Company's Annual Report on
                   Company and Manhattan Pharmaceuticals, Inc.    Form 10-KSB, as filed with the SEC on March 11, 2004
</TABLE>


                                      E-2
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.        DESCRIPTION                                    METHOD OF FILING
-----------        -----------                                    ----------------
<S>                <C>                                            <C>
10.13              Development, Manufacturing and Supply          Filed herewith
                   Agreement, dated July 28, 2004, by and
                   between the Company and Par Pharmaceutical,
                   Inc.

10.14              Second Amendment to License and Development    Filed herewith
                   Agreement, dated as of June 22, 2004, by and
                   between the Company and the Veterinary
                   Company, Inc.

10.15              *Employment Agreement, dated as of January     Incorporated by reference to Exhibit 10.1 to the
                   1, 2002, between the Company and Harry A.      Company's Registration Statement on Form SB-2, as
                   Dugger III, Ph.D.                              filed with the SEC on April 15, 2002 (File No.
                                                                  333-86262)

10.16              *Employment Agreement, dated as of December    Incorporated by reference to Exhibit 10.26 of the
                   3, 2002, by and between the Company and Gary   Company's Quarterly Report on Form 10-QSB for the
                   Shangold                                       period ending January 31, 2003, as filed with the
                                                                  SEC on March 10, 2003

10.17              *Amendment Number 1, dated December 22,        Incorporated by reference to Exhibit 10.27 of the
                   2002, to the Employment Agreement dated        Company's Quarterly Report on Form 10-QSB for the
                   December 3, 2002, between the Company and      period ending January 31, 2003, as filed with the
                   Gary Shangold                                  SEC on March 10, 2003

10.18              *Employment Agreement, dated as of May 23,     Incorporated by reference to Exhibit 10.30 to the
                   2003, by and between the Company and Barry     Company's Quarterly Report on Form 10-QSB for the
                   Cohen                                          period ended April 30, 2003, as filed with the SEC
                                                                  on June 19, 2003

10.19              *Amendment to Mohammed Abd El-Shafy            Incorporated by reference to Exhibit 10.32 of the
                   Employment Agreement, dated as of April 9,     Company's Quarterly Report on Form 10-QSB, as filed
                   2004, between the Company and Mohammed Abd     with the SEC on June 14, 2004
                   El-Shafy, Ph.D.

10.20              *Employment Agreement, dated as of April 9,    Filed herewith
                   2004, by and between the Company and Jean
                   Frydman
</TABLE>


                                      E-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.        DESCRIPTION                                    METHOD OF FILING
-----------        -----------                                    ----------------
<S>                <C>                                            <C>
23.1               Consent of J.H. Cohn LLP                       Filed herewith

23.2               Consent of Wiss & Company, LLP                 Filed herewith

31.1               Certification of Chief Executive Officer       Filed herewith
                   under Rule 13a-14(a)

31.2               Certification of Interim Principal Financial   Filed herewith
                   Officer under Rule 13a-14(a)

32                 Certifications of the Chief Executive          Filed herewith
                   Officer and Interim Principal Financial
                   Officer under 18 USC 1350
</TABLE>


                                      E-4