**UNITED        STATES**

**SECURITIES AND EXCHANGE COMMISSION**

Washington, D.C. 20549

 

**FORM        10-K**

 

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

 

OR

 

**o****TRANSITION        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES**

**EXCHANGE ACT OF 1934**

 

For the        year ended December 31, 2007

 

*COMMISSION FILE NO. 001-32177*

 

**NOVADEL PHARMA INC.**

 

(Exact        Name of registrant as specified in its charter)

 

 

|                                                            |   |                  |   |                                  |
|-----------------------------------------------------------------|--------|-----------------------|--------|---------------------------------------|
| Delaware                                                        |   | 001-32177             |   | 22-2407152                            |
| (State or other jurisdiction

of incorporation or organization) |   | (Commission File No.) |   | (I.R.S. Employer

Identification No.) |

 

 

25        MINNEAKONING ROAD, FLEMINGTON, NEW JERSEY 08822

(Address        of principal executive offices) (Zip Code)

 

(908)        782-3431

Registrant’s telephone number, including area code

 

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

 

| **Title of each class**                     |   | **Name of each exchange on which registered** |
|---------------------------------------------|--------|-----------------------------------------------|
| **Common Stock, par value $.001 per share** |   | **American Stock Exchange**                   |

 

**Securities registered pursuant to Section 12(g) of**

**the        Exchange Act:**

 

**None**

 

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

 

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

 

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

 

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

 

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

 

| Large accelerated filero | Accelerated filero | Non-accelerated filero |
|--------------------------|--------------------|------------------------|

| Smaller reporting companyx | (Do not check if a smaller reporting company) |
|----------------------------|-----------------------------------------------|

 

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

 

As of June        29, 2007, the aggregate market value of the voting and non-voting common equity of the        issuer held by non-affiliates of the registrant was approximately $65.4 million based upon        the closing sale price of $1.15 for the Registrant’s common stock, $.001 par value,        as reported by the American Stock Exchange on that date. This determination of affiliate        status is not necessarily a conclusive determination for other purposes.

 

As of March        19, 2008, the issuer had 60,692,260 shares of common stock, $.001 par value,        outstanding.

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions        of the definitive proxy statement to be filed pursuant to Regulation 14A within 120 days of        the end of the fiscal year (December 31, 2007) are incorporated by reference into Part III        of this Annual Report on Form 10-K.

 

 

2

 

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**NOVADEL PHARMA INC.**

 

**ANNUAL        REPORT ON FORM 10-K**

**FOR        THE YEAR ENDED DECEMBER 31, 2007**

 

**TABLE        OF CONTENTS**

 

|      |                                                                                                                                       |   |
|-----------|--------------------------------------------------------------------------------------------------------------------------------------------|--------|
|      | PART I                                                                                                                                     | PAGE   |
| Item 1.   | Business.                                                                                                                                  | 5      |
|      |                                                                                                                                       |   |
| Item 1A.  | Risk Factors.                                                                                                                              | 27     |
|      |                                                                                                                                       |   |
| Item 1B.  | Unresolved Staff Comments.                                                                                                                 | 47     |
|      |                                                                                                                                       |   |
| Item 2.   | Properties.                                                                                                                                | 48     |
|      |                                                                                                                                       |   |
| Item 3.   | Legal Proceedings.                                                                                                                         | 48     |
|      |                                                                                                                                       |   |
| Item 4.   | Submission of Matters to a Vote of Security                        Holders.                                                                | 48     |
|      |                                                                                                                                       |   |
|      |                                                                                                                                       |   |
|      | PART II                                                                                                                                    |   |
| Item 5.   | Market for Registrant’s Common Equity, Related                        Stockholder Matters and Issuer Purchases of Equity Securities. | 49     |
|      |                                                                                                                                       |   |
| Item 6.   | Selected Consolidated Financial Data.                                                                                                      | 52     |
|      |                                                                                                                                       |   |
| Item 7.   | Management’s Discussion and Analysis of Financial                        Conditions and Results of Operations.                       | 53     |
|      |                                                                                                                                       |   |
| Item 7A.  | Quantitative and Qualitative Disclosures About Market                        Risk.                                                         | 68     |
|      |                                                                                                                                       |   |
| Item 8.   | Financial Statements and Supplementary Data.                                                                                               | 68     |
|      |                                                                                                                                       |   |
| Item 9.   | Changes In and Disagreements With Accountants on Accounting                        and Financial Disclosure.                               | 68     |
|      |                                                                                                                                       |   |
| Item 9AT. | Controls and Procedures.                                                                                                                   | 68     |
|      |                                                                                                                                       |   |
| Item 9B.  | Other Information.                                                                                                                         | 69     |
|      |                                                                                                                                       |   |
|      | PART III                                                                                                                                   |   |
| Item 10.  | Directors, Executive Officers and Corporate                        Governance.                                                             | 70     |
|      |                                                                                                                                       |   |
| Item 11.  | Executive Compensation.                                                                                                                    | 70     |
|      |                                                                                                                                       |   |
| Item 12.  | Security Ownership of Certain Beneficial Owners and                        Management and Related Stockholder Matters.                     | 70     |
|      |                                                                                                                                       |   |
| Item 13.  | Certain Relationships and Related Transactions, and Director                        Independence.                                          | 70     |
|      |                                                                                                                                       |   |
|      |                                                                                                                                       |   |
| Item 14.  | Principal Accountant Fees and Services.                                                                                                    | 71     |
|      |                                                                                                                                       |   |
|      | PART IV                                                                                                                                    |   |
|      |                                                                                                                                       |   |
| Item 15.  | Exhibits, Financial Statement Schedules.                                                                                                   | 71     |
|      |                                                                                                                                       |   |
|      | Signatures                                                                                                                                 | 77     |

 

 

3

 

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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 on Form 10-K includes “forward-looking statements”, including        statements regarding NovaDel Pharma Inc.’s (the “Company,”        “we,” “us” or “NovaDel”) expectations, beliefs,        intentions or strategies for the future and the Company’s internal controls and        procedures and outstanding financial reporting obligations and other accounting issues. The        Company intends that all forward-looking statements be subject to the safe-harbor        provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking        statements are only predictions and reflect the Company’s views as of the date they        are made with respect to future events and financial performance. In particular, the        “Management’s Discussion and Analysis of Financial Condition and Results of        Operations” section in Part II, Item 7 of this Annual Report includes forward-looking        statements that reflect the Company’s current views with respect to future events and        financial performance. The Company uses words such as “expect,”        “anticipate,” “believe,” “intend” and similar        expressions to identify forward-looking statements. You can also identify forward-looking        statements by the fact that they do not relate strictly to historical or current facts. A        number of important risks and uncertainties could, individually or in the aggregate, cause        actual results to differ materially from those expressed or implied in any forward-looking        statements.

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

 

4

 

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**PART        I**

 

**ITEM 1.        BUSINESS.**

 

**GENERAL**

 

NovaDel        Pharma Inc., a Delaware corporation, referred to herein as “we”,        “us” and “our”, is a specialty pharmaceutical company developing        oral spray formulations for a broad range of marketed pharmaceuticals. Our proprietary        technology offers, in comparison to conventional oral dosage forms, the potential for        faster absorption of drugs into the bloodstream leading to quicker onset of therapeutic        effects and possibly lower doses. Oral sprays eliminate the requirement for water or the        need to swallow, potentially improving patient convenience and compliance. Our oral spray        technology is focused on addressing unmet medical needs for a broad array of existing and        future pharmaceutical products. Our most advanced oral spray candidates target angina,        nausea, insomnia, migraine headaches and disorders of the central nervous system. We plan        to develop these and other products independently and through collaborative arrangements        with pharmaceutical and biotechnology companies. Currently, we have eight patents which        have been issued in the U.S. and 71 patents which have been issued outside of the U.S.        Additionally, we have over 90 patents pending around the world. We look for drug compounds        that are off patent or are coming off patent in the near future, and we formulate these        compounds in conjunction with our proprietary drug delivery method.  Once formulated,        we file for new patent applications on these formulated compounds that comprise our product        candidates.  Our patent portfolio includes patents and patent applications with claims        directed to the pharmaceutical formulations, methods of use and methods of manufacturing        for our product candidates.    

 

Our goal        is to become a leading specialty pharmaceutical company that develops and commercializes        improved formulations of existing drugs using our patented oral spray technology. We        believe that our technology has application to a broad number of therapeutic areas and        product categories. Our strategy is to concentrate our product development activities        primarily on pharmaceutical products which meet the following characteristics:

 

|   | **•** | Significant prescription sales already exist; |
|--------|------------|-----------------------------------------------|

|   | **•** | Our proprietary novel drug delivery technology enhances the                        performance of the active ingredient of the target compound, potentially                        addressing unmet patient needs; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Increasing focus on products in targeted therapeutic areas,                        where the benefits of our technology may apply to multiple target                        compounds, and where distribution can be achieved with a specialized sales                        and marketing group; and |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Applicability of an efficient regulatory pathway to approval                        using the 505(b)(2) pathway. |
|--------|------------|------------------------------------------------------------------------------------------------------------------|

 

In        today’s environment of escalating drug development costs and time to market, we        believe that the ability to bring products with some degree of differentiation and        competitive advantage to the marketplace in a timely and cost-effective manner is a viable        strategy.

 

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

 

We have        a history of recurring losses, giving rise to an accumulated deficit as of December 31,        2007 of $65,243,000, as compared to $48,280,000 as of December 31, 2006. Additionally, we        have had negative cash flow from operating activities of $15,240,000 for the year ended        December 31, 2007, $1,782,000 for the five-months ended December 31, 2006, $8,855,000 for        the fiscal year ended July 31, 2006, and $6,258,000 for the fiscal year ended July 31,        2005. As of December 31, 2007, we had working capital of $3,811,000, as compared to        $18,686,000 as of December 31, 2006, representing a net decrease in working capital of        approximately $14,875,000.

 

5

 

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The most        likely sources of financing include private placements of our equity or debt securities or        bridge loans to us from third-party lenders, license payments from current and future        partners, and royalty payments from sales of approved product candidates by partners. We        can give no assurances that any additional capital that we are able to obtain will be        sufficient to meet our needs, or on terms favorable to us. During the fourth quarter 2007,        we significantly reduced clinical development activities on our product candidate pipeline,        as we did not believe that we had sufficient cash to sustain such activities. Despite this        reduction in expenditures for clinical activities, we require capital to sustain our        existing organization until such time as clinical activities can be resumed. Given the        current level of spending, we estimate that we will have sufficient cash on hand to fund        operations through the middle of the second calendar quarter, 2008. Funding for the        Company’s future development activities could be secured through new strategic        partnerships and/or the sale of our common stock or other securities. There can be no        assurance that such capital will be available to us in a timely manner or on favorable        terms, if at all. There are a number of risks and uncertainties related to a financing or        strategic partnering arrangement that are outside our control. We may not be able to obtain        additional financing on terms acceptable to us, or at all. If we are unsuccessful at        obtaining additional financing as needed, we may be required to significantly curtail or        cease operations. We will need additional financing thereafter until we achieve        profitability, if ever.

Our        audited financial statements for the year ended December 31, 2007, were prepared under the        assumption that we will continue our operations as a going concern. We were incorporated in        1982, and have a history of losses. As a result, our independent registered public        accounting firm in their audit report has expressed substantial doubt about our ability to        continue as a going concern. Continued operations are dependent on our ability to complete        equity or debt formation activities or to generate profitable operations. Such capital        formation activities may not be available or may not be available on reasonable terms. Our        financial statements do not include any adjustments that may result from the outcome of        this uncertainty. If we cannot continue as a viable entity, our shareholders may lose some        or all of their investment in the Company.

 

At our        inception in 1982, then known as Pharmaconsult, we 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, supplemented by equity financing. Our focus on developing our own        product candidates 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 again changed our name to NovaDel Pharma Inc.

On June        28, 2006, our Board of Directors approved a change of our fiscal year end from July 31 to        December 31. Accordingly, the new fiscal year began on January 1 and ended on December 31.        We filed a Transition Report on Form 10-K for the five months ended December 31, 2006. As        such, the end of the quarters in the new fiscal year does not coincide with the end of the        quarters in the previous fiscal years. Due to significant costs, the Company is not        recasting the quarterly data from the previous fiscal years as such costs would exceed any        potential benefits. Instead, the Company is presenting financial statements and other        financial information, including Management’s Discussion and Analysis of Financial        Condition and Results of Operations, for the year ended December 31, 2007, the five months        ended December 31, 2006, and the fiscal years ended July 31, 2006 and July 31, 2005. In        Management’s Discussion and Analysis of Financial Condition and Results of        Operations, the year ended December 31, 2007 is compared to the unaudited year ended        December 31, 2006, and the five months ended December 31, 2006 are compared to the        unaudited five months ended December 31, 2005. There are no seasonal or other significant        factors which affect comparability.

 

Highlights for the year ended December 31, 2007, and additionally through        the date of filing of this Form 10-K, include the following product development and        business achievements:

 

*Product        Pipeline*

 

| **•** | Announced that the Company’s New Drug Application for                        ZolpiMistTM to treat insomnia was accepted for filing by the                        FDA. |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | Announced that Par Pharmaceuticals has been granted a                        sublicense for the development and commercialization of                        ZensanaTM. |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | Announced that Par Pharmaceuticals has returned the rights                        to NitroMistTM to us. |
|------------|--------------------------------------------------------------------------------------------------------------|

 

| **•** | Announced that two clinical studies comparing our zolpidem                        oral spray with zolpidem tablets met their primary pharmacokinetic and                        pharmacodynamic and safety objectives. |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

6

 

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

 

*Intellectual Property*

 

| **•** | Received notification of the issuance of additional patents                        in Canada and Europe which further strengthens our intellectual property                        position in the oral delivery of pharmaceuticals. The issued patents cover                        the use of multiple classes of drugs in oral sprays, including those for                        the treatment of pain, and for central nervous system disorders under our                        oral spray delivery system in Canada, and analgesics, alkaloids, and                        nicotine in Europe. |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

*Executive Team and Board of Directors*

 

| **•** | Appointed Mr. Steven B. Ratoff, our current Chairman of the                        Board, to serve as interim President and Chief Executive                        Officer. |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | Announced that Jan H. Egberts, M.D. resigned as President,                        Chief Executive Officer and Director. |
|------------|-------------------------------------------------------------------------------------------------------------------------|

 

| **•** | Appointed Mr. Mark J. Baric as a member of the Board of                        Directors. |
|------------|-------------------------------------------------------------------------------------------|

 

| **•** | Appointed Deni M. Zodda, Ph.D. as Senior Vice President and                        Chief Business Officer. |
|------------|------------------------------------------------------------------------------------------------------------|

 

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

 

| **•** | Renewed the employment agreement of Mr. Michael E. Spicer as                        Chief Financial Officer. |
|------------|--------------------------------------------------------------------------------------------------------------|

 

**PRODUCT DEVELOPMENT**

 

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

 

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

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

 

|   | **•** | the scope, rate of progress and expense of our clinical                        trials and other research and development activities; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------|

         

|   | **•** | results of future clinical trials; |
|--------|------------|------------------------------------|

 

7

 

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|   | **•** | the expense of clinical trials for additional                        indications; |
|--------|------------|-----------------------------------------------------------------------------------|

 

|   | **•** | the terms and timing of any collaborative, licensing and                        other arrangements that we may establish; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | the expense and timing of regulatory approvals or changes in                        the regulatory approval process; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | the expense of establishing clinical and commercial supplies                        of our product candidates and any products that we may develop; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | the effect of competing technologies and market                        developments; and |
|--------|------------|------------------------------------------------------------------------------------------|

 

|   | **•** | the expense of filing, prosecuting, defending and enforcing                        any patent claims and other intellectual property rights. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|

 

We        currently have six product candidates in our pipeline. One of these product candidates,        ZensanaTM, is currently licensed to a marketing partner who will commercialize this        product candidate, with us receiving milestone and royalty income from revenue upon product        approval. For our approved product NitroMistTM, and for ZolpiMistTM (zolpidem        oral spray) and sumatriptan oral spray, currently in development, we will most likely seek        marketing partners to commercialize these three product candidates, as their broad        distribution will require significant resources. We are actively seeking partners for these        products and would anticipate that such marketing partners would provide us with milestone        payments and royalties based on revenues.

 

Our two        remaining earlier-stage product candidates, tizanidine and ropinirole, are targeted for a        specific therapeutic area: neurology. Similar to other products, we will seek to secure        marketing partners, once we have generated sufficient clinical data to demonstrate their        performance.

 

As        discussed above, certain of our product candidates are in early stages of clinical        development and some are in preclinical testing. These product candidates are continuously        evaluated and assessed and are often subject to changes in formulation.

 

We        expect to continue to spend significant amounts on the development of our product        candidates and we expect our costs to increase as we continue to develop and ultimately        commercialize our product candidates. The following table summarizes our product        candidates:

 

 

|  

                          | **Active Ingredient or Class of Molecule** |  

**Indications**                           |  

**Stage of Development**               |  

**Partner**                  |
|----------------------------------------|--------------------------------------------|---------------------------------------------------|------------------------------------------------|--------------------------------------|
| ***Approved Product***                 |                                       |                                              |                                           |                                 |
|  

NitroMistTM               |  

Nitroglycerin                      |  

Acute angina                              |  

FDA Approved                           | -                                    |
| ***Product Candidates***               |                                       |                                              |                                           |                                 |
|  

ZolpiMistTM               |  

Zolpidem tartrate                  |  

Sleeplessness                             | NDA submitted; FDA acceptance January 23, 2008 | -                                    |
|  

Sumatriptan                    |  

Sumatriptan succinate              |  

                         

Migraines |  

Pilot Efficacy study complete          | -                                    |
|  

Ropinirole                     |  

Ropinirole                         | Idiopathic Parkinson’s Disease              |  

Clinical development                   | -                                    |
|  

Tizanidine                     | Tizanidine hydrochloride                   |  

Spasticity                                |  

Clinical development                   | -                                    |
|  

ZensanaTM                 |  

Ondansetron                        |  

Anti-emetic                               | Clinical development                           | Hana Biosciences/Par Pharmaceuticals |

 

 

**NitroMistTM (nitroglycerin lingual        aerosol)**. This product is indicated for acute relief of an attack        or acute prophylaxis of angina pectoris due to coronary artery disease, and was approved by        the FDA in November 2006. Previously, this product was partnered with Par Pharmaceuticals,        or Par; however, on August 1, 2007, we announced that Par returned the rights to        NitroMistTM to us as part of Par's strategy to concentrate its resources on supportive        care in AIDS and oncology markets. We are currently investigating strategic partners for        this product.

 

8

 

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**ZolpiMistTM (zolpidem oral spray)**.        Zolpidem is the active ingredient in Ambien®, the leading hypnotic marketed by        Sanofi-Aventis. A pilot pharmacokinetic, or PK, study in zolpidem oral spray with 10        healthy subjects, completed in the first half of calendar 2005, suggested that our        formulation of zolpidem oral spray had a comparable PK profile to the Ambien® tablet        but with a more rapid time to detectable drug levels. In October 2006, we announced        positive results from a pilot pharmacokinetic study comparing our formulation of        ZolpiMistTM to Ambien® tablets. In the study, 10 healthy male volunteers received        ZolpiMistTM or Ambien® tablets in 5mg or 10mg doses. For fasting subjects, fifteen        minutes after dosing, 80% of subjects using ZolpiMistTM achieved blood concentrations        of greater than 20 ng/ml, compared to 33% of subjects in the 5mg Ambien® tablet group        and 40% of subjects in the 10mg Ambien® tablet group. The difference between the oral        spray groups and tablet groups was statistically significant (p=0.016). Twenty ng/ml is a        level generally believed to approximate the lower limit of the therapeutic range for        zolpidem. Additionally, drug concentrations were measured at five and ten minutes        post-dosing. At these early time points, the oral spray groups achieved drug levels        five-to-thirty times greater than subjects in the corresponding tablet groups. These        differences were also statistically significant. ZolpiMistTM has the potential to        provide patients with the meaningful benefit of faster onset of sleep as compared to        existing sleep remedies should future studies validate the already completed Pilot PK        study. We submitted the NDA for our zolpidem product candidate in the second half of 2007,        and the FDA indicated acceptance of this NDA filing in January 2008. We may obtain final        approval from the FDA by the fourth quarter of 2008.

         

**Sumatriptan oral spray**. Sumatriptan is the        active ingredient in Imitrex® which is the largest selling migraine remedy marketed by        GlaxoSmithKline, or GSK. A pilot PK study of our sumatriptan oral spray with 9 healthy        subjects, completed in the second half of calendar 2004, suggested that the formulation        achieved plasma concentrations of sumatriptan in the therapeutic range. In September 2006        we announced positive results from an additional pilot pharmacokinetic study, with our oral        spray formulation of sumatriptan which demonstrated that sumatriptan oral spray achieves a        statistically significant increase in absorption rate as compared with        Imitrex® tablets. The rate of drug absorption is believed to be the most        important predictor of the degree and speed of migraine relief. Sumatriptan oral spray was        evaluated in a four-arm, crossover pharmacokinetic study comparing 50mg        Imitrex® tablets to 20mg and 30mg of the oral spray in 10 healthy male        volunteers under fasting conditions. At least 90% of subjects receiving sumatriptan oral        spray had detectable drug levels at three minutes post-dosing, while at the same timepoint,        only 10% of subjects receiving 50mg Imitrex® tablets had detectable drug levels. These        differences are statistically significant.  At 3 to 6 minutes post dosing, all oral        spray groups had statistically significantly higher mean concentration levels compared to        50mg Imitrex® tablets.   Using published data for the currently marketed        Imitrex® nasal spray as a proxy for therapeutic blood levels, we observed that by 6        minutes post-dosing, 100% of the 20mg oral spray users achieved these critical plasma        concentration levels while none of the subjects from the Imitrex® tablet group did so        by this timepoint. This result was also statistically significant.  Furthermore,        the study indicates up to a 50% increase in relative bioavailability of oral spray in        comparison to the Imitrex® tablet.  Additionally, the pharmacokinetics of 20mg        oral spray after a meal were evaluated. Sumatriptan oral spray was well        tolerated.

         

While        Imitrex® nasal spray was not included in this clinical study, the following represents        a discussion of the results of our clinical study as compared to published data for        Imitrex® nasal spray. Time to the first peak plasma concentration of sumatriptan --        which represents drug absorbed directly across the oral mucosa -- was approximately 70%        faster with the 20mg oral spray than what has been reported in the literature for the same        dose of the Imitrex® nasal spray (6 min. vs. 20 min.).  The mean concentration        level achieved during this critical first phase of absorption is approximately 30% greater        for the oral spray than what was observed in published studies of the nasal spray (10.9        ng/mL vs. 8.5 ng/mL).  Relative bioavailability after administration of 20mg oral        spray appears to be greater than published estimates for the same dose of the Imitrex®        nasal spray.

Sumatriptan oral spray may provide clinical benefits to migraine sufferers        including, possibly, faster relief than Imitrex® tablets as well as greater        tolerability than triptan nasal sprays. Further, if proven to be safe and effective,        sumatriptan oral spray may be attractive to patients who have trouble taking oral        medications due to nausea and vomiting caused by the migraine attack. Previously, we were        targeting an NDA submission for our sumatriptan product candidate in the first half of        calendar 2008; however, due primarily to funding constraints, at the present time, we are        unable to make predictions for this program relative to sufficient funding, timing, future        strategic partnerships, regulatory pathway or approval with the FDA. Furthermore, during        the fourth quarter 2007, we significantly reduced clinical development activities on our        product candidate pipeline, including sumatriptan, as we did not believe that we had        sufficient cash to sustain such activities. As of the current date, we have not yet secured        additional financing, and have therefore not resumed clinical development activity. There        can be no assurances that we will be able to secure additional capital, and as a result,        there can be no assurances as to whether, and when, we will be able to resume our clinical        development activities.

 

 

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**Tizanidine oral spray**. Tizanidine is indicated        for the treatment of spasticity, a symptom of several neurological disorders, including        multiple sclerosis, spinal cord injury, stroke and cerebral palsy, which leads to        involuntary tensing, stiffening and contracting of muscles. Tizanidine treats spasticity by        blocking nerve impulses through pre-synaptic inhibition of motor neurons. This method of        action results in decreased spasticity without a corresponding reduction in muscle        strength. Because patients experiencing spasticity may have difficulty swallowing the        tablet formulation of the drug, our tizanidine oral spray may provide patients suffering        from spasticity with a very convenient solution to this serious treatment problem. We were        previously targeting an NDA submission for our tizanidine product candidate in calendar        2008. However, in June 2007, we announced our near-term clinical development strategy and        our intention to focus the majority of our research and development resources on our two        lead product candidates, zolpidem and sumatriptan oral spray. Furthermore, during the        fourth quarter 2007, we significantly reduced clinical development activities on our        product candidate pipeline, including tizanidine, as we did not believe that we had        sufficient cash to sustain such activities. As of the current date, we have not yet secured        additional financing, and have therefore not resumed clinical development activity. There        can be no assurances that we will be able to secure additional capital, and as a result,        there can be no assurances as to whether, and when, we will be able to resume our clinical        development activities.

**Ropinirole oral spray**. Ropinirole is indicated        for the treatment of the signs and symptoms of idiopathic Parkinson's disease. Ropinirole        oral spray is ideal for the geriatric population who may be suffering from dysphagia        (difficulty swallowing); 85% of sufferers of Parkinson's are 65 years of age or older and        it is estimated that 45% of elderly people have some difficulty in swallowing. Our        formulation of ropinirole oral spray may represent a more convenient way for the patient or        healthcare provider to deliver ropinirole to patients suffering stiffness and/or tremors.        We were previously targeting an NDA submission for our ropinirole product candidate in        calendar 2008. However, in June 2007, we announced our near-term clinical development        strategy and our intention to focus the majority of our research and development resources        on our two lead product candidates, zolpidem and sumatriptan oral spray. Furthermore,        during the fourth quarter 2007, we significantly reduced clinical development activities on        our product candidate pipeline, including ropinirole, as we did not believe that we had        sufficient cash to sustain such activities. As of the current date, we have not yet secured        additional financing, and have therefore not resumed clinical development activity. There        can be no assurances that we will be able to secure additional capital, and as a result,        there can be no assurances as to whether, and when, we will be able to resume our clinical        development activities.

 

**ZensanaTM (ondansetron oral spray)**.        Ondansetron is the active ingredient in Zofran®, the leading anti-emetic marketed by        GSK. Through July 31, 2007, this product candidate was licensed to Hana Biosciences, who        was overseeing all clinical development and regulatory approval activities for this product        in the U.S. and Canada. On July 31, 2007, we entered into a Product Development and        Commercialization Sublicense Agreement with Hana Biosciences and Par, pursuant to which        Hana Biosciences granted a sublicense to Par to develop and commercialize ZensanaTM.        Par is responsible for all development, regulatory, manufacturing and commercialization        activities of ZensanaTM in the United States and Canada, including the development and        re-filing of the NDA in the United States. In addition, we entered into an Amended and        Restated License Agreement with Hana Biosciences, pursuant to which Hana Biosciences        relinquished its right to pay reduced royalty rates to us until such time as Hana        Biosciences had recovered one-half of its costs and expenses incurred in developing        ZensanaTM from sales of ZensanaTM and we agreed to surrender for cancellation all        73,121 shares of the Hana Biosciences common stock we acquired in connection with execution        of the original license agreement with Hana Biosciences. Par has announced that it expects        to complete clinical development on the revised formulation of ZensanaTM during 2008,        and expects to submit a new NDA for ZensanaTM by the end of 2008.

 

In        January 2006, Hana Biosciences announced positive study results of a pivotal clinical trial        for ZensanaTM. Hana Biosciences submitted its NDA on June 30, 2006, and such NDA was        accepted for review by the FDA in August 2006. Previously, Hana Biosciences targeted final        approval from the FDA and commercial launch in calendar 2007.  However, on February        20, 2007, we announced that Hana Biosciences notified us that ongoing scale-up and        stability experiments indicate that there is a need to make adjustments to the formulation        and/or manufacturing process, and that there is likely to be a delay in the FDA approval        and commercial launch of ZensanaTM as a result thereof.  On March 23, 2007, Hana        Biosciences announced its plan to withdraw, without prejudice, its pending NDA for        ZensanaTM with the FDA.

 

We will        receive a milestone payment from Hana Biosciences upon final approval from the FDA. In        addition, we will receive double-digit royalty payments based upon a percentage of net        sales.  We retain the rights to our ondansetron oral spray outside of the U.S. and        Canada.

 

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**Propofol oral spray**. Propofol is the active        ingredient in Diprivan®, a leading intravenous anesthetic marketed by AstraZeneca. We        continue to support our partner, Manhattan Pharmaceuticals, Inc., or Manhattan        Pharmaceuticals, who will oversee all clinical development and regulatory approval for this        product candidate. On July 10, 2007, Manhattan Pharmaceuticals announced its intention to        pursue appropriate sub-licensing opportunities for this product candidate.

 

**Veterinary.**Our veterinary initiatives are        being carried out largely by our partner, Velcera, Inc., or Velcera. In June 2007, Velcera        announced that it had entered into a global license and development agreement with Novartis        Animal Health. The agreement calls for Novartis Animal Health to develop, register and        commercialize a novel canine product utilizing Velcera’s PromistTM platform,        which is based on our patented oral spray technology.

 

**BUSINESS DEVELOPMENT**

 

To date,        we have entered into license agreements with (i) Hana Biosciences, for the development and        marketing rights in the U.S. and Canada for our ondansetron oral spray, (ii) Par, for the        marketing rights in the U.S. and Canada for NitroMistTM, (iii) Manhattan        Pharmaceuticals, in connection with propofol, and (iv) Velcera, in connection with        veterinary applications for currently marketed veterinary drugs. In addition, we have        entered into a sub-license agreement with Hana Biosciences and Par, pursuant to which Hana        Biosciences granted a sublicense to Par to develop and commercialize ZensanaTM.        Lindsay A. Rosenwald, M.D., a significant stockholder, directly and indirectly, of us, is        the Chairman and sole shareholder of Paramount BioCapital, Inc., Paramount. In the regular        course of its business and the business of its affiliates, and outside of its arrangement        with us, Paramount and/or its affiliates identify, evaluate and pursue investment        opportunities in biomedical and pharmaceutical products, technologies and companies. In        addition, as of March 19, 2008, Dr. Rosenwald may be deemed to beneficially own        approximately 14% of our outstanding common stock (assuming exercise of certain warrants        beneficially owned by Dr. Rosenwald). Dr. Rosenwald and Paramount may be deemed        to be our affiliates. Dr. Rosenwald and Paramount may also be deemed to be affiliates        of Manhattan Pharmaceuticals, Velcera and Hana Biosciences.

 

In July        2007, the Company, entered into a Product Development and Commercialization Sublicense        Agreement (the “Sublicense Agreement”) with Hana Biosciences and Par        Pharmaceutical, Inc. (“Par”), pursuant to which Hana Biosciences granted a        non-transferable, non-sublicenseable, royalty-bearing, exclusive sublicense to Par to        develop and commercialize ZensanaTM. In connection therewith, the Company and Hana        Biosciences amended and restated their existing License and Development Agreement, as        amended, relating to the development and commercialization of ZensanaTM (the        “Amended and Restated License Agreement”) to coordinate certain of the terms of        the Sublicense Agreement. Under the terms of the Sublicense Agreement, Par is responsible        for all development, regulatory, manufacturing and commercialization activities of        ZensanaTM in the United States and Canada. The Company retains its rights to        ZensanaTM outside of the United States and Canada.

 

In        addition, under the terms of the Amended and Restated License Agreement, Hana Biosciences        relinquished its right to pay reduced royalty rates to the Company until such time as Hana        Biosciences had recovered one-half of its costs and expenses incurred in developing        ZensanaTM from sales of ZensanaTM and the Company agreed to surrender for        cancellation all 73,121 shares of the Hana Biosciences common stock acquired by the Company        in connection with execution of the original License Agreement.

 

Also in        July 2007, the Company and Par agreed to terminate the agreement relating to        NitroMistTM. The Company is currently investigating strategic partners for the        commercialization of NitroMistTM. During the three months ended September 30, 2007,        the Company recorded $177,000 of revenue to write-off the remaining deferred revenue        relating to this agreement.

 

We        intend to enter into additional license agreements and strategic alliances,        including:

 

| **•** | Marketing partners outside of North America for                        ZensanaTM, for which we retain marketing rights outside of North                        America; |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | Marketing partners for our zolpidem oral spray and                        sumatriptan oral spray, to commercialize these products assuming that we                        are successful in attaining approval for these products from the FDA;                        and |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | Additional marketing partners and strategic alliances as may                        be appropriate for the remaining present and future products in our                        development pipeline. |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

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**AGREEMENT WITH PAR PHARMACEUTICAL, INC. AND HANA BIOSCIENCES,        INC.**

 

In        October 2004, we entered into a 20-year license and development agreement with Hana        Biosciences, whereby Hana Biosciences would develop and market our oral spray version of        ondansetron, a leading anti-emetic for preventing chemotherapy-induced nausea and vomiting.        Under the agreement, Hana Biosciences was granted exclusive rights to market, sell and        distribute our ondansetron oral spray in the U.S. and Canada. We are entitled to receive        milestone payments at several junctures of development, including completion of a        pharmacokinetic study, filing of an IND, FDA acceptance of the NDA and NDA approval. In        August 2005, our license and development agreement with Hana Biosciences was amended to        transfer the responsibility to Hana Biosciences of selecting and managing a contract        manufacturer who will provide clinical and commercial quantities of the ondansetron oral        spray product. Double-digit royalties on net sales of the product may be due to us if and        when the product launches. In October 2004, in exchange for $1 million, Hana Biosciences        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 Biosciences’ common stock        during the 10 business days prior to the effective date of the agreement ($6.84 per        share).

 

On July        31, 2007, we entered into a Product Development and Commercialization Sublicense Agreement        with Hana Biosciences and Par, pursuant to which Hana Biosciences granted a sublicense to        Par to develop and commercialize ZensanaTM. Par is responsible for all development,        regulatory, manufacturing and commercialization activities of ZensanaTM in the United        States and Canada, including the development and re-filing of the NDA in the United States.        In addition, we entered into an Amended and Restated License Agreement with Hana        Biosciences, pursuant to which Hana Biosciences relinquished its right to pay reduced        royalty rates to us until such time as Hana Biosciences had recovered one-half of its costs        and expenses incurred in developing ZensanaTM from sales of ZensanaTM and we        agreed to surrender for cancellation all 73,121 shares of the Hana Biosciences common stock        we acquired in connection with execution of the original license agreement with Hana        Biosciences.

 

We will        receive a milestone payment from Hana Biosciences upon final approval from the FDA. In        addition, we will receive double-digit royalty payments based upon a percentage of net        sales.  We retain the rights to our ondansetron oral spray outside of the U.S. and        Canada.

 

**LICENSE        AND SUPPLY AGREEMENT WITH PAR PHARMACEUTICAL, INC.**

 

In July        2004, we entered into a 10-year license and supply agreement with Par, a wholly owned        subsidiary of Par Pharmaceutical Companies, Inc., whereby Par has the exclusive rights to        market, sell and distribute our nitroglycerin lingual spray in the U.S. 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, another potential milestone        payment if and when the NDA is approved for marketing in the U.S., and double-digit        percentage royalties on net sales of the product in the U.S. and Canada. We are responsible        for obtaining regulatory approval for the product and for supplying the product to        Par.

 

In July        2007, the Company and Par agreed to terminate the agreement relating to NitroMistTM.        The Company is currently investigating strategic partners for the commercialization of        NitroMistTM. During the three months ended September 30, 2007, the Company recorded        $177,000 of revenue to write-off the remaining deferred revenue relating to this        agreement.

 

**AGREEMENT WITH MANHATTAN PHARMACEUTICALS, INC.**

 

In April        2003, we entered into a 10-year license and development agreement with Manhattan        Pharmaceuticals for the worldwide, exclusive rights to our oral 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.

 

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

 

In June        2004, we announced the granting of an exclusive worldwide 20-year license for our        proprietary oral spray technology to Velcera, a veterinary company. We received an equity        stake of 529,500 shares of common stock in Velcera, along with an upfront cash technology        fee of $1,500,000 in September 2004. At the time of the signing of the agreement with        Velcera it was determined that the Velcera common stock had a deminimus value. Such        investment continues to be carried at its cost basis of $0 as of December 31, 2007. In        February 2007, Velcera merged with Denali Sciences, Inc., a publicly reporting Delaware        corporation. The common stock of Denali Sciences, Inc. is not traded on any stock exchange.        The agreement, which amends an earlier agreement, provides that Velcera shall make certain        milestone payments to us upon the achievement of key events associated with product        development. 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 by Velcera, at Velcera’s expense, and Velcera will        fund all development and regulatory expenses.

 

**BUSINESS        STRATEGY**

 

***Strategy***

 

Our goal        is to become a leading specialty pharmaceutical company that develops and commercializes        improved formulations of existing drugs using our patented oral spray technology. We        believe that our technology has application to a broad number of therapeutic areas and        product categories. Our strategy is to concentrate our product development activities        primarily on pharmaceutical products which meet the following characteristics:

 

| **•** | Significant prescription sales already exist; |
|------------|-----------------------------------------------|

         

| **•** | Our proprietary novel drug delivery technology enhances the                        performance of the active ingredient of the target compound, potentially                        addressing unmet patient needs; |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| **•** | Increasing focus on products in targeted therapeutic areas                        (e.g., neurology) where the benefits of our technology may apply to                        multiple target compounds, and where we can achieve distribution with a                        small specialized sales and marketing group; and |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| **•** | Applicability of an efficient regulatory pathway to approval                        using the 505(b)(2) pathway. |
|------------|------------------------------------------------------------------------------------------------------------------|

 

In        today’s environment of escalating drug development costs and time to market, we        believe that the ability to bring products with some degree of differentiation and        competitive advantage to the marketplace in a timely and cost-effective manner is a viable        strategy.

 

***Products***

 

We        currently have six product candidates in our pipeline. One of these product candidates,        ZensanaTM, is currently licensed to a marketing partner who will commercialize this        product candidate, with us receiving milestone and royalty income from revenue upon product        approval. For our NitroMistTM product which is approved, and for our zolpidem oral        spray and sumatriptan oral spray, currently in development, we will most likely seek        marketing partners to commercialize these product candidates, as their broad distribution        will require significant resources. No current marketing partners exist for these product        candidates. We expect to secure marketing partners for these product candidates after we        have generated sufficient clinical data to demonstrate the effectiveness of these product        candidates, and would anticipate that such marketing partners would provide us with        milestone payments and royalties based on revenues.

 

Our two        remaining product candidates, tizanidine and ropinirole, are targeted for a specific        therapeutic area: neurology. Similarly to our other products, we will seek to secure        marketing partners once we have generated sufficient clinical data to demonstrate        performance.

 

In        addition to our existing product candidates, we intend to continue to identify and pursue        additional product candidates for development.

 

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**PATENTED        AND PATENT PENDING DELIVERY SYSTEMS**

 

We have        certain patents and pending patent applications for our oral spray delivery system. FDA        approval is not a prerequisite for patent approval. The expected year of marketability of a        given product candidate 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 buccal portion of the mouth for rapid absorption into the        bloodstream via the mucosal membranes. Ourproprietary technology        offers, in comparison to conventional oral dosage forms, the potential for faster        absorption of drugs into the bloodstream leading to quicker onset of therapeutic effects        and possibly reduced first pass liver metabolism, which may result in lower doses. Oral        sprays eliminate the requirement for water or the need to swallow, potentially improving        patient convenience and adherence. Our oral spray technology is focused on addressing unmet        medical needs for a broad array of existing and future pharmaceutical products.

 

**MARKETING AND DISTRIBUTION**

 

To date,        we have chosen to license products developed with our technology to other drug companies.        We intend to pursue additional strategic alliances, as well as to consider fully developing        and commercializing product candidates internally.

 

We        anticipate that promotion of our product candidates, whether conducted by us or by a        strategic partner, will be characterized by an emphasis on their distinguishing        characteristics, such as dosage form and packaging, as well as possible therapeutic        advantages of such product candidates. We intend to position our product candidates 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.

 

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. If we are unable to enter into additional agreements, we may not be        able to successfully market our product candidates.

 

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 product candidates, 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 contract out the manufacturing of our product candidates. Our current facility        does not yet have a pilot manufacturing operation that meets current Good Manufacturing        Practices, or cGMP, and would require additional investment in order to attain that        capability. We will have to contract out manufacturing and/or invest additional funds in        the current facility in order to provide internal manufacturing capability. The manufacture        of our pharmaceutical product candidates is subject to 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, Business-“Raw Materials and        Suppliers” and “Government Regulation.”

 

On        November 18, 2004, we entered into a manufacturing and supply agreement with INyX USA, Ltd,        or INyX, whereby INyX will manufacture and supply our nitroglycerin lingual spray. For a        five-year period that began November 18, 2004, INyX will be the exclusive provider of the        nitroglycerin lingual spray to us worldwide, excluding Poland, Byelorussia, the former        Russian Republics of Ukraine, Latvia, Lithuania, Estonia and the United Arab Emirates.        Pursuant to the terms and conditions of the agreement, it will be INyX’s        responsibility to manufacture, package and supply the nitroglycerin lingual spray in such        territories. Thereafter, INyX will have a non-exclusive right to manufacture such spray for        an additional five years.

 

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In July        2007, INyX announced it filed for protection under the Chapter 11 bankruptcy laws. The        Company is taking all necessary steps to ensure that any assets of the Company located at        INyX are protected.

 

In        February 2008, we entered into a Master Services Agreement with Rechon Life Sciences        (Malmo, Sweden), whereby Rechon will provide services related to the manufacturing        development and the manufacture of clinical supplies for our products. Rechon provides        these services on a fee-for-service basis.

 

**RAW        MATERIALS AND SUPPLIERS**

 

We        believe that the active ingredients used in the manufacture of our product candidates are        presently available from numerous suppliers located in the U.S., Europe and Japan and can        be 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 product        candidates. 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 costs (which will, in turn, have an impact on the cost of our product        candidates). To the extent that transactions relating to the purchase of raw materials        involve currencies other than U.S. dollars, 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 product candidates 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 product candidates 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**

***FDA        approval process***

In the        United States, pharmaceutical products are subject to extensive regulation by the U.S. Food        and Drug Administration, or the FDA. The Federal Food, Drug, and Cosmetic Act, or the FDC        Act, and other federal and state statutes and regulations, govern, among other things, the        research, development, testing, manufacture, storage, recordkeeping, approval, labeling,        promotion and marketing, distribution, post-approval monitoring and reporting, sampling,        and import and export of pharmaceutical products. Failure to comply with applicable U.S.        requirements may subject a company to a variety of administrative or judicial sanctions,        such as FDA refusal to approve pending new drug applications or NDAs, warning letters,        product recalls, product seizures, total or partial suspension of production or        distribution, injunctions, fines, civil penalties, and criminal prosecution.

Pharmaceutical product development in the U.S. typically involves        preclinical laboratory and animal tests, the submission to the FDA of a notice of claimed        investigational exemption or an investigational new drug application or IND, which must        become effective before clinical testing may commence, and adequate and well-controlled        clinical trials to establish the safety and effectiveness of the drug for each indication        for which FDA approval is sought. Satisfaction of FDA pre-market approval requirements        typically takes many years and the actual time required may vary substantially based upon        the type, complexity and novelty of the product or disease.

Preclinical tests include laboratory evaluation of product chemistry,        formulation and toxicity, as well as animal trials to assess the characteristics and        potential safety and efficacy of the product. The conduct of the preclinical tests must        comply with federal regulations and requirements including good laboratory practices. The        results of preclinical testing are submitted to the FDA as part of an IND along with other        information including information about product chemistry, manufacturing and controls and a        proposed clinical trial protocol. Long term preclinical tests, such as animal tests of        reproductive toxicity and carcinogenicity, may continue after the IND is        submitted.

 

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A 30-day        waiting period after the submission of each IND is required prior to the commencement of        clinical testing in humans. If the FDA has not commented on or questioned the IND within        this 30-day period, the clinical trial proposed in the IND may begin.

Clinical        trials involve the administration of the investigational new drug to healthy volunteers or        patients under the supervision of a qualified investigator. Clinical trials must be        conducted in compliance with federal regulations, good clinical practices or GCP, as well        as under protocols detailing the objectives of the trial, the parameters to be used in        monitoring safety and the effectiveness criteria to be evaluated. Each protocol involving        testing on U.S. patients and subsequent protocol amendments must be submitted to the FDA as        part of the IND.

The FDA        may order the temporary or permanent discontinuation of a clinical trial at any time or        impose other sanctions if it believes that the clinical trial is not being conducted in        accordance with FDA requirements or presents an unacceptable risk to the clinical trial        subjects. The study protocol and informed consent information for subjects in clinical        trials must also be submitted to an institutional review board, or IRB, for approval. An        IRB may also require the clinical trial at the site to be halted, either temporarily or        permanently, for failure to comply with the IRB’s requirements, or may impose other        conditions.

Clinical        trials to support NDAs for marketing approval are typically conducted in three sequential        phases, but the phases may overlap. In Phase 1, the initial introduction of the drug into        healthy human subjects or patients, the drug is tested to assess metabolism,        pharmacokinetics, pharmacological actions, side effects associated with increasing doses        and, if possible, early evidence of effectiveness. Phase 2 usually involves trials in a        limited patient population, to determine the effectiveness of the drug for a particular        indication or indications, dosage tolerance and optimum dosage, and identify common adverse        effects and safety risks. If a compound demonstrates evidence of effectiveness and an        acceptable safety profile in Phase 2 evaluations, Phase 3 trials are undertaken to obtain        additional information about clinical efficacy and safety in a larger number of patients,        typically at geographically dispersed clinical trial sites, to permit FDA to evaluate the        overall benefit-risk relationship of the drug and to provide adequate information for the        labeling of the drug.

Under        the Pediatric Research Equity Act of 2003, or PREA, NDAs or supplements to NDAs must        contain data to assess the safety and effectiveness of the drug for the claimed indications        in all relevant pediatric subpopulations and to support dosing and administration for each        pediatric subpopulation for which the drug is safe and effective. The FDA may grant        deferrals for submission of data or full or partial waivers.

After        completion of the required clinical testing, an NDA is prepared and submitted to the FDA.        FDA approval of the NDA is required before marketing of the product may begin in the U.S.        The NDA must include the results of all preclinical, clinical and other testing and a        compilation of data relating to the product's pharmacology, chemistry, manufacture, and        controls. The cost of preparing and submitting an NDA is substantial. Under federal law,        the submission of most NDAs is additionally subject to a substantial application user fee,        currently $1,178,000, and the manufacturer and/or sponsor under an approved new drug        application are also subject to annual product and establishment user fees, currently        $65,030 per product and $392,700 per establishment. These fees are typically increased        annually.

The FDA        has 60 days from its receipt of a NDA to determine whether the application will be accepted        for filing based on the agency's threshold determination that it is sufficiently complete        to permit substantive review. Once the submission is accepted for filing, the FDA begins an        in-depth review. The FDA has agreed to certain performance goals in the review of new drug        applications. Most such applications for non-priority drug products are reviewed within ten        months. The review process may be extended by FDA for three additional months to consider        certain new information or clarification regarding information already provided in the        submission. The FDA may also refer applications for novel drug products or drug products        which present difficult questions of safety or efficacy to an advisory committee, typically        a panel that includes clinicians and other experts, for review, evaluation and a        recommendation as to whether the application should be approved. The FDA is not bound by        the recommendation of an advisory committee, but it generally follows such recommendations.        Before approving an NDA, the FDA will typically inspect one or more clinical sites to        assure compliance with good clinical practices, or GCP. Additionally, the FDA will inspect        the facility or the facilities at which the drug is manufactured. FDA will not approve the        product unless compliance with current good manufacturing practices is satisfactory and the        NDA contains data that provide substantial evidence that the drug is safe and effective in        the indication proposed for marketing.

After        FDA evaluates the NDA and the manufacturing facilities, it issues an approval letter, an        approvable letter or a not-approvable letter. Both approvable and not-approvable letters        generally outline the deficiencies in the submission and may require substantial additional        testing or information in order for the FDA to reconsider the application. If and when        those deficiencies have been addressed to the FDA's satisfaction in a resubmission of the        NDA, the FDA will issue an approval letter. FDA has committed to reviewing such        resubmissions in 2 or 6 months depending on the type of information included.

 

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An        approval letter authorizes commercial marketing of the drug with specific prescribing        information for specific indications. As a condition of NDA approval, the FDA may require        substantial post-approval testing and surveillance to monitor the drug's safety or efficacy        and may impose other conditions, including labeling restrictions which can materially        affect the potential market and profitability of the drug. Once granted, product approvals        may be withdrawn if compliance with regulatory standards is not maintained or problems are        identified following initial marketing.

***The Hatch-Waxman Act***

In        seeking approval for a drug through an NDA, applicants are required to list with the FDA        each patent with claims that cover the applicant’s product. Upon approval of a drug,        each of the patents listed in the application for the drug is then published in the        FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known        as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potential        generic competitors in support of approval of an abbreviated new drug application, or ANDA.        An ANDA provides for marketing of a drug product that has the same active ingredients in        the same strengths and dosage form as the listed drug and has been shown through        bioequivalence testing to be therapeutically equivalent to the listed drug. ANDA applicants        are not required to conduct or submit results of pre-clinical or clinical tests to prove        the safety or effectiveness of their drug product, other than the requirement for        bioequivalence testing. Drugs approved in this way are commonly referred to as "generic        equivalents" to the listed drug, and can often be substituted by pharmacists under        prescriptions written for the original listed drug.

The ANDA        applicant is required to certify to the FDA concerning any patents listed for the approved        product in the FDA’s Orange Book. Specifically, the applicant must certify that: (i)        the required patent information has not been filed; (ii) the listed patent has expired;        (iii) the listed patent has not expired, but will expire on a particular date and approval        is sought after patent expiration; or (iv) the listed patent is invalid or will not be        infringed by the new product. A certification that the new product will not infringe the        already approved product’s listed patents or that such patents are invalid is called        a Paragraph IV certification. If the applicant does not challenge the listed patents, the        ANDA application will not be approved until all the listed patents claiming the referenced        product have expired.

If the        ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must        also send notice of the Paragraph IV certification to the NDA and patent holders once the        ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate        a patent infringement lawsuit in response to the notice of the Paragraph IV certification.        The filing of a patent infringement lawsuit within 45 days of the receipt of a Paragraph IV        certification automatically prevents the FDA from approving the ANDA until the earlier of        30 months, expiration of the patent, settlement of the lawsuit or a decision in the        infringement case that is favorable to the ANDA applicant.

The ANDA        also will not be approved until any non-patent exclusivity, such as exclusivity for        obtaining approval of a new chemical entity, listed in the Orange Book for the referenced        product has expired. Federal law provides a period of five years following approval of a        drug containing no previously approved active ingredients, during which ANDAs for generic        versions of those drugs cannot be submitted unless the submission contains a Paragraph IV        challenge to a listed patent, in which case the submission may be made four years following        the original product approval. Federal law provides for a period of three years of        exclusivity following approval of a listed drug that contains previously approved active        ingredients but is approved in a new dosage form, route of administration or combination,        or for a new use, the approval of which was required to be supported by new clinical trials        conducted by or for the sponsor, during which FDA cannot grant effective approval of an        ANDA based on that listed drug.

***Section*** ***505(b)(2) New Drug Applications***

Most        drug products obtain FDA marketing approval pursuant to an NDA or an ANDA. A third        alternative is a special type of NDA, commonly referred to as a Section 505(b)(2) NDA,        which enables the applicant to rely, in part, on the safety and efficacy data of an        existing product, or published literature, in support of its application.

505(b)(2) NDAs often provide an alternate path to FDA approval for new or        improved formulations or new uses of previously approved products. Section 505(b)(2)        permits the filing of an NDA where at least some of the information required for approval        comes from studies not conducted by or for the applicant and for which the applicant has        not obtained a right of reference. The applicant may rely upon certain preclinical or        clinical studies conducted for an approved product. The FDA may also require companies to        perform additional studies or measurements to support the change from the approved product.        The FDA may then approve the new product candidate for all or some of the label indications        for which the referenced product has been approved, as well as for any new indication        sought by the Section 505(b)(2) applicant.

 

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To the        extent that the Section 505(b)(2) applicant is relying on studies conducted for an        already approved product, the applicant is required to certify to the FDA concerning any        patents listed for the approved product in the Orange Book to the same extent that an ANDA        applicant would. Thus, approval of a 505(b)(2) NDA can be stalled until all the listed        patents claiming the referenced product have expired, until any non-patent exclusivity,        such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange        Book for the referenced product has expired, and, in the case of a Paragraph IV        certification and subsequent patent infringement suit, until the earlier of 30 months,        settlement of the lawsuit or a decision in the infringement case that is favorable to the        Section 505(b)(2) applicant.

We        expect that the majority of our product candidates in development will require the filing        of 505(b)(2) NDAs because, although such products contain previously approved chemical        entities, we or our licensees may seek to make new claims regarding therapeutic effects or        lessened side effects, or both.

Our        partner, Hana Biosciences, submitted an NDA under Section 505(b)(2) for ZensanaTM in        June 2006. Previously, Hana Biosciences targeted final approval from the FDA and commercial        launch in calendar 2007.  However, on February 20, 2007, we announced that Hana        Biosciences notified us that ongoing scale-up and stability experiments indicate that there        is a need to make adjustments to the formulation and/or manufacturing process, and that        there is likely to be a delay in the FDA approval and commercial launch of ZensanaTM        as a result thereof.  On March 23, 2007, Hana Biosciences announced its plan to        withdraw, without prejudice, its pending NDA for ZensanaTM with the FDA, and that it        plans to re-direct the development plan for ZensanaTM using our patent-protected        European formulation of the product.  On July 31, 2007, we entered into a Product        Development and Commercialization Sublicense Agreement with Hana Biosciences and Par        Pharmaceutical, pursuant to which Hana Biosciences granted a sublicense to Par to develop        and commercialize ZensanaTM. Par is responsible for all development, regulatory,        manufacturing and commercialization activities of ZensanaTM in the United States and        Canada, including the development and re-filing of the NDA in the United States. Subject to        successful scale-up and manufacturing tests of the new formulation of ondansetron, Par        expects to conduct the appropriate clinical trials and re-file the NDA for ZensanaTM        by the end of 2008. Because we rely upon Par to develop and file the NDA for ZensanaTM        we can give no assurances that Par will be able to re-file the NDA for ZensanaTM in        2008, if at all, and ultimately receive final FDA approval. The safety and efficacy of the        drug is based on a demonstration of the bioequivalence of ZensanaTM to oral        ondansetron, marketed under the tradename Zofran®. This Zofran® formulation is        protected by one unexpired patent, which is scheduled to expire in September 2011, and is        subject to a period of pediatric exclusivity expiring in March 2012. Additionally, this        Zofran® formulation was covered by another patent which, after pediatric exclusivity,        expired in December 2006. Hana Biosciences’ Section 505(b)(2) NDA contained a        paragraph III certification acknowledging that the now expired patent would expire in        December 2006, and a paragraph IV certification to the patent which is due to expire in        March 2012. Based on the paragraph IV certification, it is possible that the NDA holder or        the patent owner will sue us, Hana Biosciences, and/or Par for patent infringement, and        that the FDA will be prevented from approving our application until the earliest of        30 months, settlement of the lawsuit, or a decision in an infringement case that is        favorable to us. Hana Biosciences previously announced that it had not received any        objections related to these patent certifications.

***Other        Regulatory Requirements***

Once an        NDA is approved, a product will be subject to certain post-approval requirements. For        instance, FDA closely regulates the marketing and promotion of drugs, including standards        and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored        scientific and educational activities and promotional activities involving the        internet.

Drugs        may be marketed only for the approved indications and in accordance with the provisions of        the approved labeling. Changes to some of the conditions established in an approved        application, including changes in indications, labeling, or manufacturing processes or        facilities, require submission and FDA approval of a new NDA or NDA supplement before the        change can be implemented. An NDA supplement for a new indication typically requires        clinical data similar to that in the original application, and the FDA uses the same        procedures and actions in reviewing NDA supplements as it does in reviewing        NDAs.

 

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Adverse        event reporting and submission of periodic reports is required following FDA approval of an        NDA. The FDA also may require post-marketing testing, known as Phase 4 testing, risk        minimization action plans, and surveillance to monitor the effects of an approved product        or place conditions on an approval that could restrict the distribution or use of the        product. In addition, quality control as well as drug manufacture, packaging, and labeling        procedures must continue to conform to current good manufacturing practices, or cGMPs,        after approval. Drug manufacturers and certain of their subcontractors are required to        register their establishments with FDA and certain state agencies, and are subject to        periodic inspections by the FDA during which the agency inspects manufacturing facilities        to access compliance with cGMPs. Accordingly, manufacturers must continue to expend time,        money and effort in the areas of production and quality control to maintain compliance with        cGMPs. Regulatory authorities may withdraw product approvals or request product recalls if        a company fails to comply with regulatory standards, if it encounters problems following        initial marketing, or if previously unrecognized problems are subsequently        discovered.

***Anti-Kickback, False Claims Laws & The Prescription Drug Marketing        Act***

In        addition to FDA restrictions on marketing of pharmaceutical products, several other types        of state and federal laws have been applied to restrict certain marketing practices in the        pharmaceutical industry in recent years. These laws include anti-kickback statutes and        false claims statutes. The federal healthcare program anti-kickback statute prohibits,        among other things, knowingly and willfully offering, paying, soliciting or receiving        remuneration to induce or in return for purchasing, leasing, ordering or arranging for the        purchase, lease or order of any healthcare item or service reimbursable under Medicare,        Medicaid or other federally financed healthcare programs. This statute has been interpreted        to apply to arrangements between pharmaceutical manufacturers on the one hand and        prescribers, purchasers and formulary managers on the other. Violations of the        anti-kickback statute are punishable by imprisonment, criminal fines, civil monetary        penalties and exclusion from participation in federal healthcare programs. Although there        are a number of statutory exemptions and regulatory safe harbors protecting certain common        activities from prosecution or other regulatory sanctions, the exemptions and safe harbors        are drawn narrowly, and practices that involve remuneration intended to induce prescribing,        purchases or recommendations may be subject to scrutiny if they do not qualify for an        exemption or safe harbor.

Federal        false claims laws prohibit any person from knowingly presenting, or causing to be        presented, a false claim for payment to the federal government, or knowingly making, or        causing to be made, a false statement to have a false claim paid. Recently, several        pharmaceutical and other healthcare companies have been prosecuted under these laws for        allegedly inflating drug prices they report to pricing services, which in turn were used by        the government to set Medicare and Medicaid reimbursement rates, and for allegedly        providing free product to customers with the expectation that the customers would bill        federal programs for the product. In addition, certain marketing practices, including        off-label promotion, may also violate false claims laws. The majority of states also have        statutes or regulations similar to the federal anti-kickback law and false claims laws,        which apply to items and services reimbursed under Medicaid and other state programs, or,        in several states, apply regardless of the payor.

***Physician Drug Samples***

As part        of the sales and marketing process, pharmaceutical companies frequently provide samples of        approved drugs to physicians. The Prescription Drug Marketing Act, or the PDMA, imposes        requirements and limitations upon the provision of drug samples to physicians, as well as        prohibits states from licensing distributors of prescription drugs unless the state        licensing program meets certain federal guidelines that include minimum standards for        storage, handling and record keeping. In addition, the PDMA sets forth civil and criminal        penalties for violations.

**COMPETITION**

 

The        markets which we intend to enter are characterized by intense competition, often from        organizations which are larger and/or better capitalized than us. 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.

 

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We are        aware of several companies that are selling or developing oral spray products. Sciele        Pharma Inc. (formerly First Horizon Pharmaceutical Corporation), headquartered in        Alpharetta, Georgia, currently markets Nitrolingual® Pumpspray, a        nitroglycerin oral spray which is an “air” propelled dispensing system (our        nitroglycerin lingual spray is a “propellant” based dispensing system). Generex        Biotechnology Corporation, based in Toronto, Canada, is developing an insulin formulation        that is delivered directly into the mouth via its RapidMistTM device. This product was        approved in Ecuador, certain Middle Eastern countries, and India. They also state that they        have begun research on four specific target molecules for their RapidMistTM delivery        system: morphine, fentanyl, heparin and flu vaccine. Generex Biotechnology Corporation is        listed as the assignee on 15 U.S. patents. RapidMistTM is a pending trademark of        Generex Biotechnology Corporation. There are several other companies that we are aware of        that develop and/or market oral spray products containing vitamins and homeopathic        ingredients. GW Pharmaceuticals plc, based in the UK, has developed a cannabinoid lingual        spray called Sativex®. Sativex® was approved by Health Canada in April 2005 for the        relief of neuropathic pain in Multiple Sclerosis, or MS, and was launched in Canada in June        2005 by Bayer HealthCare, who will exclusively market Sativex® in Canada. Sosei Co.        Ltd. is conducting Phase III clinical studies for its Fentanyl sublingual spray (AD923), an        opioid analgesic for the treatment of cancer breakthrough pain. Insys Therapeutics Inc. is        developing a Fentanyl sublingual spray for breakthrough cancer pain in opioid-tolerant        patients.

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.

 

**PATENTS        AND PROTECTION OF PROPRIETARY INFORMATION**

 

We have        applied for U.S. 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. Eight U.S. patents, three Canadian patents and sixty-eight        European patents have been issued. The sixty-eight patents in Europe consist of four unique        patents which have been issued in seventeen different countries. We have over ninety patent        applications pending in the U.S. and overseas. 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 U.S. Patent and        Trademark Office, or the 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 on April 12, 2016.

 

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On        February 21, 1997, we filed an application under the Patent Cooperation Treaty, or the PCT,        (PCT Application No. WO 97/38663) 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.

 

With        respect to the above PCT application, in October and November 1998, we entered the national        phase in Canada and Europe, 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 (i.e.,        anti-histamines, steroid hormones, non-steroidal anti-inflammatories, benzodiazepines,        anti-depressants and nicotine) to those in the corresponding issued U.S. patent. This        European patent has been validated in the UK, 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. The Canadian Patent Office        granted the application on December 27, 2005 as Canadian Patent No. 2,252,050. The allowed        claims are similar to those granted by the European Patent Office.

 

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 (i.e., non-steroidal anti-inflammatories,        anti-histamines, steroid hormones, benzodiazepams, and anti-depressants), 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, or 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 on April 12, 2016.

 

On        February 21, 1997, we filed an application under the PCT (PCT Application No. WO 97/38662)        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.

 

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 February 2, 2005, European Patent No. 0 910 339 was granted to us with claims directed        to use of polar solvent containing pump sprays containing similar drugs to those in the        corresponding issued U.S. patent. This European patent has been validated in the UK,        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. In November 2005, Akzo Nobel N.V. filed an        opposition against this patent in the European Patent Office alleging “lack of        inventive step” and “insufficient disclosure.” We have filed a Response        to the Opposition. The Opposition Proceeding is currently pending before the European        Patent Office. We have also 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. On February 10,        2006, the Canadian Patent Office issued a Notice of Allowance for this        application.

 

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 on April 12, 2016.

 

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On        February 21, 1997, we filed a PCT application (PCT Application No. WO 97/38687) 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. 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 a second office action to us dated        July 11, 2005. We responded to the office action on January 11, 2006 and await further        communication from the Canadian Patent Office.

 

In        November 1998, we entered the national phase in Europe. European Patent No. 0 927 032 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 UK, 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 (PCT        Application No. WO 99/16417) designating a large number of countries including the U.S.,        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.

 

On March        29, 2000, we entered the national phase in the U.S. 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 on October 1, 2017. 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        been received from the Canadian Patent Office and we have responded to that office action.        Based on the above-identified PCT application, we also entered the national phase in Japan        on April 3, 2000. We filed a request for examination of this Japanese application on        September 30, 2004.

 

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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 have subsequently filed corresponding        applications in Europe, Japan and Canada for the subject matter for a majority of these CIP        applications.

 

STABLE        HYDROALCOHOLIC ORAL SPRAY FORMULATIONS AND METHODS. On April 19, 2007, we filed an        application with the USPTO with claims directed to hydroalcoholic spray compositions and        methods. The application was published on October 25, 2007, and is currently pending.        Substantive examination of the application by the USPTO has not yet begun. On April 19,        2007 we also filed a corresponding PCT application

 

ANTI-MIGRAINE ORAL SPRAY FORMULATIONS AND METHODS. On July 27, 2007 we filed        an application with the USPTO with claims directed to compositions comprising a selective        5-hydroxytryptamine receptor subtype agonist and methods of treatment. The application was        published on February 7, 2008, and is currently pending. Substantive examination of the        application by the USPTO has not yet begun. On July 27, 2007 we also filed a corresponding        PCT application.

 

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 on November 10, 2017.

 

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 U.S., 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.

 

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**EMPLOYEES**

 

As of        March 19, 2008, we had 14 total employees, all of whom were full-time employees.

 

The        names and ages of our Directors and Executive Officers as of the date of filing this Annual        Report 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.        Executive Officers are elected annually by the Board of Directors and serve at the Board of        Directors’ pleasure. The Board of Directors has determined that the following        individuals are the Executive Officers of the Company: Mr. Ratoff, Dr. Bergstrom,        Mr. Spicer and Dr. Zodda.

 

 

| NAME                          | AGE | POSITION WITH THE COMPANY                                                                                |
|-------------------------------|-----|----------------------------------------------------------------------------------------------------------|
| Mark J. Baric                 | 49  | Director                                                                                                 |
| Thomas E. Bonney              | 43  | Director                                                                                                 |
| William F. Hamilton, Ph.D.    | 68  | Director                                                                                                 |
| J. Jay Lobell                 | 45  | Director                                                                                                 |
| Charles Nemeroff, M.D., Ph.D. | 58  | Director                                                                                                 |
| Steven B. Ratoff              | 65  | Chairman of the Board of Directors, Interim President and                        Chief Executive Officer |
| David H. Bergstrom, Ph.D.     | 53  | Senior Vice President and Chief Operating Officer                                                        |
| Michael E. Spicer             | 54  | Chief Financial Officer and Corporate Secretary                                                          |
| Deni M. Zodda, Ph.D.          | 54  | Senior Vice President and Chief Business Officer                                                         |

 

 

***Mark J. Baric***, Director, 49. Mr. Baric        was elected to the Board in February 2007. Since 2005, Mr. Baric has been the President and        co-founder of CeNeRx BioPharma, Inc., a privately-held development company with a        therapeutic focus on diseases of the central nervous system. In 2001 he co-founded and        served, until 2005, as Chief Executive Officer and Chairman of 2ThumbZ Entertainment Inc.,        a privately-held company which develops and markets entertainment applications for users of        handheld wireless devices and networks. From 1996 to 2001, Mr. Baric was Chairman and Chief        Executive Officer of Virtus Entertainment Corporation, an emerging company in the        fast-growing interactive entertainment industry. From 1990 to 1996, Mr. Baric held various        leadership positions, including Chief Operating Officer and Chief Financial and        Administrative Officer of Seer Technologies Inc. (now known as Cicero, Inc.), a provider of        business integration software. Prior to 1990, Mr. Baric held various leadership positions        at several firms, including CS First Boston and Coopers and Lybrand. Mr. Baric serves on        the boards of CeNeRx BioPharma, Inc., 2ThumbZ Entertainment Inc. and Concert Technologies,        a privately-held company focused on rich media technology and licensing. Mr. Baric received        an M.B.A. from the Wharton School of the University of Pennsylvania and a B.S. from Clarion        University. He is a member of our Audit Committee and a member of our Compensation        Committee.

 

***Thomas E. Bonney***, CPA, Director, 43. Mr.        Bonney was elected to the Board in March 2005. From 2002 to the present, Mr. Bonney has        been Managing Director of CMF Associates, LLC, a financial and management consulting firm.        Since December 2006, Mr. Bonney has been a General Partner in West Place LLC, and West        Place Restaurant Group, LLC, privately-held companies that invest in and manage hotels and        real estate. Since June 2005, Mr. Bonney has been a Director of Leblon Holdings LLC, a        privately-held beverage supplier and from June 2005 through July 2007 was the Chief        Financial Officer of Leblon Holdings, LLC. From 2001 to 2002, he was Chief Financial        Officer of Akcelerant Holdings, Inc., a technology holding company. From 1995 to 2001, Mr.        Bonney was President and a Director of Polaris Consulting & Information Technologies, a        technology solutions provider. Mr. Bonney was at Deloitte & Touché from 1987 to        1995 in various positions including Senior Manager. Mr. Bonney received his B.S. in        Accounting at the Pennsylvania State University and is a member of the Pennsylvania        Institute of Certified Public Accountants. He is a member and chair of our Audit Committee        and a member of our Corporate Governance and Nominating Committee.

 

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***William F. Hamilton***, Ph.D., Director,        68. Dr. Hamilton was elected to the Board in March 2003. In January 2006, Dr. Hamilton was        appointed Lead Independent Director. 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 publicly-traded company developing proprietary drugs. Dr. Hamilton is        also a director of Yaupon Therapeutics, Inc., a privately-held specialty pharmaceutical        company that develops small molecule pharmaceuticals licensed from under-served academic        laboratories, Avid Radiopharmaceuticals, Inc., a privately-held clinical-stage        product-focused molecular imaging company and Neuro Diagnostic Devices, a privately-held        development-stage medical device company. 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 our        Audit Committee and a member and chair of our Corporate Governance and Nominating        Committee.

 

***J.        Jay Lobell***, Director, 45. Mr. Lobell was elected to the Board        in December 2005. Mr. Lobell has served as Chief Executive Officer, Secretary and a member        of the Board of Directors of Paramount Acquisition Corp. since October 2005. Mr. Lobell has        served as President and Chief Operating Officer of Paramount BioCapital Asset Management,        Inc. and Paramount Biosciences, LLC since January 2005, and is a registered representative        of Paramount BioCapital, Inc. Mr. Lobell also serves as President and Secretary of Sitka        Sciences, Inc. and Norton Sound Acquisition Corp. which are affiliates of Paramount        BioCapital, Inc. From 1996 until January 2005, Mr. Lobell was a partner at Covington &        Burling, a law firm. Mr. Lobell received his B.A. from Queens College and his J.D. from        Yale Law School. Mr. Lobell is a director of Innovive Pharmaceuticals, Inc., a        publicly-traded biopharmaceutical company, and Chem Rx Corporation, a publicly-traded        long-term care pharmacy, as well as several private biotechnology companies. Mr. Lobell is        a member and chair of our Compensation Committee.

 

***Charles Nemeroff***, M.D., Ph.D., Director,        58. Dr. Nemeroff was elected to the Board in September 2003. Dr. Nemeroff has been the        Reunette W. Harris Professor and Chairman of the Department of Psychiatry and Behavioral        Sciences at Emory University School of Medicine in Atlanta, Georgia, since 1991. Dr.        Nemeroff serves on the Scientific Advisory Board of numerous publicly-traded pharmaceutical        companies, including Astra-Zeneca Pharmaceuticals, Forest Laboratories, Janssen and        Quintiles. In 2002, he was elected to the Institute of Medicine of the National Academy of        Sciences. Dr. Nemeroff received his B.S. from the City College of New York, his M.S. from        Northeastern University, his Ph.D. and post doctorate training from the University of North        Carolina and his M.D. from the University of North Carolina. Dr. Nemeroff is chair of our        Scientific Advisory Board. He is also a member of our Compensation Committee and is a        member of our Corporate Governance and Nominating Committee.

 

***Steven B. Ratoff***, Chairman of the Board,        Interim President and Chief Executive Officer, 65. Mr. Ratoff was elected to the Board in        January 2006 and was elected Chairman of the Board on September 15, 2006. He was appointed        as Interim President and Chief Executive Officer of NovaDel on July 23, 2007. Mr. Ratoff is        a private investor and since December 2004 has served as a venture partner with ProQuest        Investments, a health care venture capital firm. Mr. Ratoff has been a director, since May        2005, and was Chairman of the Board, from September 2005 to October 2006, of Torrey Pines        Therapeutics Inc. (formerly Axonyx Inc.), a NASDAQ development stage pharmaceutical        company. Mr. Ratoff served as a director of Inkine Pharmaceuticals, Inc. from February 1998        to its sale to Salix, Inc. in September 2005. He also served as a board member since March        1995 and as Chairman of the Board and Interim Chief Executive Officer of CIMA Labs, Inc.        from May 2003 to its sale to Cephalon, Inc. in August 2004. Mr. Ratoff also served as a        director, since 1998 and as President and Chief Executive Officer of MacroMed, Inc. from        February to December, 2001. From December 1994 to February 2001, Mr. Ratoff served as        Executive Vice President and Chief Financial Officer of Brown-Forman Corporation, a        publicly-traded diversified manufacturer of consumer products. Mr. Ratoff received his B.S.        in Business Administration from Boston University and an M.B.A. with Distinction from the        University of Michigan.

 

***David H. Bergstrom***, Ph.D., Senior Vice        President and Chief Operating Officer, 53.Dr. Bergstrom joined        NovaDel in December 2006 as Senior Vice President and Chief Operating        Officer.From 1999 to November 2006, Dr. Bergstrom served in several        capacities at Cardinal Health, Inc., including Vice President, Research & Development        and Senior Vice President and General Manager. From 1998 to 1999, Dr. Bergstrom was Vice        President of Pharmaceutical & Chemical Development at Guilford Pharmaceuticals Inc. Dr.        Bergstrom was employed by Hoechst Marion Roussel, Inc. as the Director of Pharmaceutical        and Analytical Sciences from 1996 to 1998. Dr. Bergstrom served as Director of        Pharmaceutical and Analytical Development for the predecessor company, Hoechst-Roussel        Pharmaceuticals Inc., from 1991 to 1996, and Group Manager, Formulations, Pharmaceutical        Research from 1990 to 1991. Prior thereto, Dr. Bergstrom held various positions at        Ciba-Geigy Corporation. Dr. Bergstrom received his Ph.D. in Pharmaceutics at the University        of Utah in 1985. In addition, he received his M.S. in Pharmaceutical Chemistry at the        University of Michigan in 1982 and his B.S. degree in Pharmacy in 1978 at Ferris State        University.

 

25

 

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***Michael E. Spicer***, CPA, Chief Financial        Officer and Corporate Secretary, 54. Mr. Spicer joined NovaDel as Chief Financial Officer        in December 2004 and was named Corporate Secretary in April 2006. From December 2001 to        December 2004, Mr. Spicer was Chief Financial Officer of Orchid Biosciences, Inc. (now        known as Orchid Cellmark Inc.). From September 1998 to December 2001, Mr. Spicer served as        Vice President, Chief Financial Officer of Lifecodes Corporation until it was acquired by        Orchid. Mr. Spicer is a Certified Public Accountant and holds an undergraduate degree in        Accounting from the University of Virginia and an M.B.A. from Harvard Business        School.

 

***Deni M. Zodda***, Ph.D., Senior Vice        President and Chief Business Officer, 54. Dr. Zodda joined NovaDel in February 2007 as        Senior Vice President and Chief Business Officer. From May 2006 to February 2007, Dr. Zodda        was Principal of Medignostica, LLC, a consulting firm he owns which provided business        development services to various clients and was acting Chief Executive Officer of        StemCapture, Inc., a privately-held stem cell research company. From 2000 to May 2006, Dr.        Zodda served in varying capacities, including Senior Vice President, Business Development        and Principal Financial Officer of Discovery Laboratories, Inc. From 1998 to 2000, Dr.        Zodda served as Managing Director of the Life Sciences Practice at KPMG. During the course        of his career, Dr. Zodda also held senior management positions in business development,        marketing and commercial operations at Cephalon, Inc., Wyeth, Baxter International Inc. and        SmithKline Beckman, Inc. Dr. Zodda received his M.B.A. in Marketing and Finance from the        University of Santa Clara in 1986, his Ph.D. in Biology from the University of Notre Dame        in 1980 and his B.S. in Biology from Villanova University in 1975.

 

**AVAILABLE INFORMATION**

 

We file        annual, quarterly and current reports, proxy statements and other information with the        Securities and Exchange Commission, or the 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. Please call the Commission at 1-800-SEC-0330 for        further information on the public reference room. 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        mspicer@novadel.com or contact Michael Spicer, our Chief Financial Officer at 25        Minneakoning Road, Flemington, New Jersey, 08822 or at 908-782-3431, ext. 2550.

 

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-K.

 

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**ITEM        1A. RISK FACTORS**

 

This        report contains forward-looking statements that involve risks and uncertainties. Our actual        results could differ materially from those discussed in this report. Factors that could        cause or contribute to these differences include, but are not limited to, those discussed        below, elsewhere in this report, and in any documents incorporated in this report by        reference.

***RISKS RELATED TO OUR BUSINESS***

**OUR        AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING        CONCERN.**

Our        audited financial statements for the year ended December 31, 2007, were prepared under the        assumption that we will continue our operations as a going concern. We were incorporated in        1982, and have a history of losses. As a result, our independent registered public        accounting firm in their audit report has expressed substantial doubt about our ability to        continue as a going concern. Continued operations are dependent on our ability to complete        equity or debt formation activities or to generate profitable operations. Such capital        formation activities may not be available or may not be available on reasonable terms. Our        financial statements do not include any adjustments that may result from the outcome of        this uncertainty. If we cannot continue as a viable entity, our shareholders may lose some        or all of their investment in the Company.

**WE WILL        REQUIRE SIGNIFICANT CAPITAL FOR PRODUCT DEVELOPMENT AND COMMERCIALIZATION IN THE NEAR        TERM.**

 

The        research, development, testing and approval of our product candidates involve significant        expenditures, and, accordingly, we require significant capital to fund such expenditures.        Due to our small revenue base, low level of working capital and, until recently, our        relative inability to increase the number of development agreements with pharmaceutical        companies, we have been unable to pursue aggressively our product development strategy.        Until and unless our operations generate significant revenues and cash flow, we will        attempt to continue to fund operations from cash on hand and through the sources of capital        described below. Our long-term liquidity is contingent upon achieving sales and positive        cash flows from operating activities, and/or obtaining additional financing. The most        likely sources of financing include private placements of our equity or debt securities or        bridge loans to us from third-party lenders, license payments from current and future        partners, and royalty payments from sales of approved product candidates by partners. We        can give no assurances that any additional capital that we are able to obtain will be        sufficient to meet our needs, or on terms favorable to us. During the fourth quarter 2007,        we significantly reduced clinical development activities on our product candidate pipeline,        as we did not believe that we had sufficient cash to sustain such activities. Despite this        reduction in expenditures for clinical activities, we require capital to sustain our        existing organization until such time as clinical activities can be resumed. Given the        current level of spending, we estimate that we will have sufficient cash on hand to fund        operations through the middle of the second quarter, 2008. Funding for the Company’s        future development activities could be secured through new strategic partnerships and/or        the sale of our common stock or other securities. There can be no assurance that such        capital will be available to us in a timely manner or on favorable terms, if at all. There        are a number of risks and uncertainties related to our attempt to complete a financing or        strategic partnering arrangement that are outside our control. We may not be able to obtain        additional financing on terms acceptable to us, or at all. If we are unsuccessful at        obtaining additional financing as needed, we may be required to significantly curtail or        cease operations. We will need additional financing thereafter until we achieve        profitability, if ever.

**WE        MAY NEED ADDITIONAL CAPITAL TO FUND OUR OPERATIONS UNTIL WE ARE ABLE TO GENERATE A        PROFIT.**

 

Our        operations to date have required significant cash expenditures. Our future capital        requirements will depend on the results of our research and development activities, and        preclinical studies.

 

Although        we have significantly reduced clinical development activities on our product candidate        pipeline since the fourth quarter 2007, we do not expect that our revenue and/or cash will        cover our expenses during the next twelve months.  As a result, we will need to obtain        more funding in the future through collaborations or other arrangements with research        institutions and corporate partners or public and private offerings of our securities,        including debt or equity financing.  We may not be able to obtain adequate funds for        our operations from these sources when needed or on acceptable terms.  Future        collaborations or similar arrangements may require us to license valuable intellectual        property to, or to share substantial economic benefits with, our collaborators.  If we        raise additional capital by issuing additional equity or securities convertible into        equity, our stockholders may experience dilution and our share price may decline.  Any        debt financing may result in restrictions on our spending.

 

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If we are        unable to raise additional funds, we will need to do one or more of the        following:

 

|   | **•** | further delay, scale-back or eliminate some or all of our                        research and product development programs; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------|

         

|   | **•** | license third parties to develop and commercialize products                        or technologies that we would otherwise seek to develop and commercialize                        ourselves; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | attempt to sell our company; |
|--------|------------|------------------------------|

 

|   | **•** | cease operations; or |
|--------|------------|----------------------|

 

|   | **•** | declare bankruptcy. |
|--------|------------|---------------------|

         

We will        continue to maintain current levels of spending over the upcoming fiscal year, given the        uncertainties inherent in our business and our current liquidity position.  We believe        that at the current rate of spending, we should have sufficient cash funds to maintain our        present operations through the middle of the second quarter 2008.

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

We are a        pre-commercialization specialty pharmaceutical company developing oral spray formulations        of a broad range of marketed treatments. There are many uncertainties and complexities with        respect to such companies. We have not generated any revenue from the commercial sale of        our proposed products and do not expect to receive such revenue in the near future. We have        no material licensing or royalty revenue or products ready for sale or licensing in the        marketplace. This limited history may not be adequate to enable one to fully assess our        ability to develop our technologies and proposed products, obtain U.S. Food and Drug        Administration, or FDA, approval and achieve market acceptance of our proposed products and        respond to competition. The filing of a New Drug Application, or NDA, with the FDA is an        important step in the approval process in the U.S. Acceptance for filing by the FDA does        not mean that the NDA has been or will be approved, nor does it represent an evaluation of        the adequacy of the data submitted. On November 3, 2006, we announced that we received an        approval letter from the FDA regarding our NDA for NitroMistTM. Previously, this        product was partnered with Par Pharmaceutical, or Par; however, on August 1, 2007, we        announced that Par returned the rights to NitroMistTM to us as part of Par's strategy        to concentrate its resources on supportive care in AIDS and oncology markets. On January        23, 2008, we announced that our NDA filing for ZolpiMistTM, our zolpidem oral spray,        was accepted by the FDA. Based on this acceptance, we would anticipate a final response        from the FDA during the second half of 2008. We are currently investigating strategic        partners for both NitroMistTM and ZolpiMistTM. We cannot be certain as to when to        anticipate commercializing and marketing any of our product candidates in development, if        at all, and do not expect to generate sufficient revenues from proposed product sales to        cover our expenses or achieve profitability in the near future. During the fourth quarter        2007, we significantly reduced clinical development activities on our product candidate        pipeline, as we did not believe that we had sufficient cash to sustain such activities. As        of the current date, we have not yet secured additional financing, and have therefore not        resumed clinical development activity. There can be no assurances that we will be able to        secure additional capital, and as a result, there can be no assurances as to whether, and        when, we will be able to resume our clinical development activities.

We had        an accumulated deficit as of December 31, 2007 of approximately $65.2 million. We incurred        losses in each of our last ten fiscal years, including net losses of approximately $17.0        million for the year ended December 31, 2007, $3.8 million for the five months ended        December 31, 2006, $10.1 million for the fiscal year ended July 31, 2006 and $9.5 million        for the fiscal year ended July 31, 2005. Additionally, we have reported negative cash flows        from operations of approximately $15.2 million for the year ended December 31, 2007, $1.8        million for the five months ended December 31, 2006, $8.9 million for the fiscal year ended        July 31, 2006 and $6.3 million for the fiscal year ended July 31, 2005. We anticipate that        we will incur substantial operating expenses in connection with continued research and        development, clinical trials, testing and approval of our proposed products, and expect        these expenses will result in continuing and, perhaps, significant operating losses until        such time, if ever, that we are able to achieve adequate product sales levels. Our ability        to generate revenue and achieve profitability depends upon our ability, alone or with        others, to complete the development of our product candidates, obtain the required        regulatory approvals and manufacture, market and sell our product candidates.

 

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

 

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

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

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

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

 

Through        July 31, 2007, our ondansetron oral spray product candidate, ZensanaTM was licensed to        Hana Biosciences, who was overseeing all clinical development and regulatory approval        activities for this product in the U.S. and Canada. On July 31, 2007, we entered into a        Product Development and Commercialization Sublicense Agreement with Hana Biosciences and        Par, pursuant to which Hana Biosciences granted a sublicense to Par to develop and        commercialize ZensanaTM. Par is responsible for all development, regulatory,        manufacturing and commercialization activities of ZensanaTM in the United States and        Canada. In January 2006, Hana Biosciences announced positive study results of a pivotal        clinical trial for ZensanaTM. Hana Biosciences submitted its NDA on June 30, 2006.        Such NDA was accepted for filing by the FDA in August 2006. Previously, Hana Biosciences        targeted final approval from the FDA and commercial launch in calendar year 2007.         However, on February 20, 2007, we announced that Hana Biosciences notified us that        ongoing scale-up and stability experiments indicate that there is a need to make        adjustments to the formulation and/or manufacturing process, and that there is likely to be        a delay in the FDA approval and commercial launch of ZensanaTM as a result thereof.         On March 23, 2007, Hana Biosciences announced its plan to withdraw, without        prejudice, its pending NDA for ZensanaTM with the FDA.

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

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

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

 

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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.

**THERE ARE CERTAIN INTERLOCKING RELATIONSHIPS AND POTENTIAL CONFLICTS OF        INTEREST.**

Lindsay        A. Rosenwald, M.D., a significant stockholder, directly and indirectly, of us, is the        Chairman and sole shareholder of Paramount. In the regular course of its business and the        business of its affiliates, and outside of its arrangement with us, Paramount and/or its        affiliates identify, evaluate and pursue investment opportunities in biomedical and        pharmaceutical products, technologies and companies. As of March 19, 2008, Dr. Rosenwald        beneficially owns approximately 14% of our outstanding common stock (assuming exercise of        certain warrants beneficially owned by Dr. Rosenwald). As such, Dr. Rosenwald and Paramount        may be deemed to be our affiliates. Dr. Rosenwald has the ability to designate an        individual to serve on our Board of Directors, or the Board, and has exercised such ability        by designating Mr. J. Jay Lobell to serve on the Board. Although Mr. Lobell is a designee        of Dr. Rosenwald’s, he does not have any voting or dispositive control over the        shares held directly or indirectly by Dr. Rosenwald. On December 14, 2005 based upon the        recommendation of the Corporate Governance and Nominating Committee, the Board elected Mr.        Lobell as a member of the Board. Pursuant to the listing standards of the American Stock        Exchange, or AMEX, Mr. Lobell has been deemed to be an independent director by our Board as        of September 15, 2006. Dr. Rosenwald and Paramount may also be deemed to be affiliates of        Manhattan Pharmaceuticals, Velcera and Hana Biosciences. In addition, Paramount has        assisted us in the placement of shares in connection with various private placements. Refer        to Note 6 “Related Party Transactions and License and Development Agreements”        of the Financial Statements included in this Annual Report for additional information.        Generally, Delaware corporate law requires that any transactions between us and any of our        affiliates be on terms that, when taken as a whole, are substantially as favorable to us as        those then reasonably obtainable in an arms length transaction from a person who is not an        affiliate. Nevertheless, neither Dr. Rosenwald nor Paramount, nor their affiliates, are        obligated pursuant to any agreement or understanding with us to make any additional        products or technologies available to us, nor can there be any assurance, and we do not        expect and our stockholders should not expect, that any biomedical or pharmaceutical        product or technology identified by Dr. Rosenwald or Paramount, or their affiliates, in the        future will be made available to us. In addition, certain of our current officers and        directors or any officers or directors hereafter appointed by us may from time to time        serve as officers or directors of other biopharmaceutical or biotechnology companies. Such        other companies may have interests in conflict with our interests.

 

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

 

Revenue        received from our product development efforts consists of payments by pharmaceutical        companies for research and bioavailability studies, pilot clinical trials and similar        milestone-related payments. Our future growth and profitability will be dependent upon our        ability to successfully raise additional funds to complete the development of, obtain        regulatory approvals for and license out or market our product candidates. Accordingly, our        prospects must be considered in light of the risks, expenses and difficulties frequently        encountered in connection with the establishment of a new business in a highly competitive        industry, characterized by frequent new product introductions. We anticipate that we will        incur substantial operating expenses in connection with the development, testing and        approval of our product candidates and expect these expenses to result in continuing and        significant operating losses until such time, if ever, that we are able to achieve adequate        levels of sales or license revenues. We may not be able to raise additional financing,        increase revenues significantly, or achieve profitable operations. During the fourth        quarter 2007, we significantly reduced clinical development activities on our product        candidate pipeline, as we did not believe that we had sufficient cash to sustain such        activities. As of the current date, we have not yet secured additional financing, and have        therefore not resumed clinical development activity. There can be no assurances that we        will be able to secure additional capital, and as a result, there can be no assurances as        to whether, and when, we will be able to resume our clinical development activities.See “Risk Factors - We Will Require Significant Capital For Product        Development And Commercialization” and “Our Strategy Includes Entering Into        Collaboration Agreements With Third Parties For Certain of our Product Candidates And We        May Require Additional Collaboration Agreements. If We Fail To Enter Into These Agreements        Or If We Or The Third Parties Do Not Perform Under Such Agreements, It Could Impair Our        Ability To Commercialize Our Proposed Products.”

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

 

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

**WE DO        NOT HAVE COMMERCIALLY AVAILABLE PRODUCTS.**

Our        principal efforts are the development of, and obtaining regulatory approvals for, our        product candidates. We anticipate that marketing activities for our product candidates,        whether by us or one or more of our licensees, if any, will not begin until the second half        of calendar 2008 at the earliest. On November 3, 2006, we announced that we received an        approval letter from the FDA regarding our NDA for NitroMistTM. Previously, this        product was partnered with Par Pharmaceutical, or Par; however, on August 1, 2007, we        announced that Par returned the rights to NitroMistTM to us as part of Par's strategy        to concentrate its resources on supportive care in AIDS and oncology markets. On January        23, 2008, we announced that our NDA filing for ZolpiMistTM, our zolpidem oral spray,        was accepted by the FDA. Based on this acceptance, we would anticipate a final response        from the FDA during the second half of 2008. We are currently investigating strategic        partners for both NitroMistTM and ZolpiMistTM. Accordingly, it is not anticipated        that we will generate any revenues from royalties or sales of our product candidates until        regulatory approvals are obtained, if ever, and marketing activities begin. Any one or more        of our product candidates may not prove to be commercially viable, or if viable, may not        reach the marketplace on a basis consistent with our desired timetables. The failure or the        delay of any one or more of our proposed product candidates to achieve commercial viability        would have a material adverse effect on us. During the fourth quarter 2007, we        significantly reduced clinical development activities on our product candidate pipeline, as        we did not believe that we had sufficient cash to sustain such activities. We have not yet        secured additional financing, and have therefore not resumed clinical development activity.        There can be no assurances that we will be able to secure additional capital, and as a        result, there can be no assurances as to whether, and when, we will be able to resume our        clinical development activities.

 

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**WE HAVE        NOT COMPLETED PRODUCT DEVELOPMENT.**

We have        not completed the development of our product candidates and we will be required to devote        considerable effort and expenditures to complete such development. In addition to obtaining        adequate financing, satisfactory completion of development, testing, government approval        and sufficient production levels of such product candidates must be obtained before the        product candidates will become available for commercial sale. On November 3, 2006, we        announced that we received an approval letter from the FDA regarding our NDA for        NitroMistTM. Previously, this product was partnered with Par Pharmaceutical, or Par;        however, on August 1, 2007, we announced that Par returned the rights to NitroMistTM        to us as part of Par's strategy to concentrate its resources on supportive care in AIDS and        oncology markets. On January 23, 2008, we announced that our NDA filing for        ZolpiMistTM, our zolpidem oral spray, was accepted by the FDA. Based on this        acceptance, we would anticipate a final response from the FDA during the second half of        2008. We are currently investigating strategic partners for both NitroMistTM and        ZolpiMistTM. Other potential products remain in the conceptual or very early        development stage and remain subject to all the risks inherent in the development of        pharmaceutical products, including unanticipated development problems and possible lack of        funds to undertake or continue development. These factors could result in abandonment or        substantial change in the development of a specific formulated product. We may not be able        to successfully develop any one or more of our product candidates or develop such product        candidates on a timely basis. Further, such product candidates may not be commercially        accepted if developed. The inability to successfully complete development, or a        determination by us, for financial or other reasons, not to undertake to complete        development of any product candidates, particularly in instances in which we have made        significant capital expenditures, could have a material adverse effect on our business and        operations. Furthermore, during the fourth quarter 2007, we significantly reduced clinical        development activities on our product candidate pipeline, as we did not believe that we had        sufficient cash to sustain such activities. As of the current date, we have not yet secured        additional financing, and have therefore not resumed clinical development activity. There        can be no assurances that we will be able to secure additional capital, and as a result,        there can be no assurances as to whether, and when, we will be able to resume our clinical        development activities.

**WE DO        NOT HAVE DIRECT CONSUMER MARKETING EXPERIENCE.**

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

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

**WE MUST        COMPLY WITH GOOD MANUFACTURING PRACTICES.**

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

 

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**WE ARE        DEPENDENT ON OUR SUPPLIERS.**

 

We        believe that the active ingredients used in the manufacture of our product candidates are        presently available from numerous suppliers located in the U.S., Europe, India and Japan.        We believe that certain raw materials, including inactive ingredients, are available from a        limited number of suppliers and that certain packaging materials intended for use in        connection with our spray products currently are available only from sole source suppliers.        Although we do not believe we will encounter difficulties in obtaining the inactive        ingredients or packaging materials necessary for the manufacture of our product candidates,        we may not be able to enter into satisfactory agreements or arrangements for the purchase        of commercial quantities of such materials. We have a written supply agreement with Dynamit        Nobel for certain raw materials for our nitroglycerin lingual spray and a written supply        agreement in place with INyX USA, Ltd., which intends to manufacture our nitroglycerin        lingual spray in its Manatee, Puerto Rico facility. On July 3, 2007, INyX, our manufacturer        for our NitroMistTM product candidate, announced it filed for protection under the        Chapter 11 bankruptcy laws. The Company is taking all necessary steps to ensure that any        limited assets of NovaDel at the manufacturer's facility are protected.

 

In        February 2008, we entered into a Master Services Agreement with Rechon Life Sciences        (Malmo, Sweden), whereby Rechon will provide services related to the manufacturing        development and the manufacture of clinical supplies for our products. Rechon provides        these services on a fee-for-service basis.

 

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, INyX USA, Ltd., or Rechon Life Sciences to comply with their        supply obligations to us, could have a material adverse effect on our ability to arrange        for the manufacture of formulated products. In addition, development and regulatory        approval of our products are dependent upon our ability to procure active ingredients and        certain packaging materials from FDA-approved sources. Since the FDA approval process        requires manufacturers to specify their proposed suppliers of active ingredients and        certain packaging materials in their applications, FDA approval of a supplemental        application to use a new supplier would be required if active ingredients or such packaging        materials were no longer available from the originally specified supplier, which may result        in manufacturing delays. If we do not maintain important manufacturing relationships, we        may fail to find a replacement manufacturer or to develop our own manufacturing        capabilities. If we cannot do so, it could delay or impair our ability to obtain regulatory        approval for our products and substantially increase our costs or deplete any profit        margins. If we do find replacement manufacturers, we may not be able to enter into        agreements with them on terms and conditions favorable to us and, there could be a        substantial delay before a new facility could be qualified and registered with the FDA and        foreign regulatory authorities.

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

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

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

 

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

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

**WE FACE        INTENSE COMPETITION.**

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

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

 

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We are        aware of several companies that are selling or developing oral spray products. Sciele        Pharma Inc. (formerly First Horizon Pharmaceutical Corporation), headquartered in        Alpharetta, Georgia, currently markets Nitrolingual® Pumpspray, a        nitroglycerin oral spray which is an “air” propelled dispensing system (our        nitroglycerin lingual spray is a “propellant” based dispensing system). Generex        Biotechnology Corporation, based in Toronto, Canada, is developing an insulin formulation        that is delivered directly into the mouth via its RapidMistTM device. This product was        approved in Ecuador, certain Middle Eastern countries, and India. They also state that they        have begun research on four specific target molecules for their RapidMistTM delivery        system: morphine, fentanyl, heparin and flu vaccine. Generex Biotechnology Corporation is        listed as the assignee on 15 U.S. patents. RapidMistTM is a pending trademark of        Generex Biotechnology Corporation. There are several other companies that we are aware of        that develop and/or market oral spray products containing vitamins and homeopathic        ingredients. GW Pharmaceuticals plc, based in the UK, has developed a cannabinoid lingual        spray called Sativex®. Sativex® was approved by Health Canada in April 2005 for the        relief of neuropathic pain in Multiple Sclerosis, or MS, and was launched in Canada in June        2005 by Bayer HealthCare, who will exclusively market Sativex® in Canada. Sosei Co.        Ltd. is conducting Phase III clinical studies for its Fentanyl sublingual spray (AD923), an        opioid analgesic for the treatment of cancer breakthrough pain. Insys Therapeutics Inc. is        developing a Fentanyl sublingual spray for breakthrough cancer pain in opioid-tolerant        patients.

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

**LIMITED        PRODUCT LIABILITY INSURANCE COVERAGE MAY AFFECT OUR BUSINESS.**

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

 

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**EXTENSIVE GOVERNMENT REGULATION MAY AFFECT OUR BUSINESS.**

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

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

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

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

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

 

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

**WE        EXPECT TO FACE UNCERTAINTY OVER REIMBURSEMENT AND HEALTHCARE REFORM.**

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

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

Our        strategy for the completion of the required development and clinical testing of certain of        our product candidates and for the manufacturing, marketing and commercialization of such        product candidates includes entering into collaboration arrangements with pharmaceutical        companies to market, commercialize and distribute the products.

Through        June 30, 2007, we entered into strategic license agreements with Hana Biosciences, for the        marketing rights in the U.S. and Canada for our ondansetron oral spray, (ii) Par for the        marketing rights in the U.S. and Canada for our nitroglycerin oral spray, (iii) Manhattan        Pharmaceuticals, in connection with propofol, and (iv) Velcera, in connection with        veterinary applications for currently marketed veterinary drugs. Subsequent to June 30,        2007, the following events occurred with respect our strategic license        agreements:

On July        10, 2007, Manhattan Pharmaceuticals announced that as part of its change in strategic focus        it intends to pursue appropriate out-licensing opportunities for this product        candidate.

 

On July        31, 2007, we entered into a Product Development and Commercialization Sublicense Agreement        with Hana Biosciences and Par, or the Sublicense Agreement, pursuant to which Hana        Biosciences granted a non-transferable, non-sublicenseable, royalty-bearing, exclusive        sublicense to Par to develop and commercialize ZensanaTM, our oral spray version of        ondansetron. In connection therewith, we and Hana Biosciences amended and restated their        existing License and Development Agreement, as amended, relating to the development and        commercialization of ZensanaTM, or the Amended and Restated License Agreement, to        coordinate certain of the terms of the Sublicense Agreement. Under the terms of the        Sublicense Agreement, Par is responsible for all development, regulatory, manufacturing and        commercialization activities of ZensanaTM in the United States and Canada, with us        able to collaborate on development in certain instances. We retain its rights to        ZensanaTM outside of the United States and Canada. In addition, under the terms of the        Amended and Restated License Agreement, Hana Biosciences relinquished its right to reduced        royalty rates to us until such time as Hana Biosciences had recovered one-half of its costs        and expenses incurred in developing ZensanaTM from sales of ZensanaTM or payments        or other fees from a sublicense and we agreed to surrender for cancellation all 73,121        shares of the Hana Biosciences common stock acquired by us in connection with execution of        the original License Agreement.

 

On July        31, 2007, we and Par agreed to terminate the Development, Manufacturing and Supply        Agreement, dated July 28, 2004, or the DMS Agreement, relating to NitroMistTM. Under        the DMS Agreement, Par had exclusive rights to market, sell and distribute NitroMistTM        in the U.S. and Canada, with us entitled to royalty payments based upon a percentage of net        sales. We are currently investigating strategic partners for the commercialization of        NitroMistTM.

 

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Our        success depends upon obtaining additional collaboration partners and maintaining our        relationships with our current partners. In addition, we may depend on our partners’        expertise and dedication of sufficient resources to develop and commercialize proposed        products. We may, in the future, grant to collaboration partners, rights to license and        commercialize pharmaceutical products developed under collaboration agreements. Under these        arrangements, our collaboration partners may control key decisions relating to the        development of the products. The rights of our collaboration partners could limit our        flexibility in considering alternatives for the commercialization of such product        candidates. If we fail to successfully develop these relationships or if our collaboration        partners fail to successfully develop or commercialize such product candidates, it may        delay or prevent us from developing or commercializing our proposed products in a        competitive and timely manner and would have a material adverse effect on our        business.

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

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

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

| **•** | protect our trade secrets; and |
|------------|--------------------------------|

| **•** | operate without infringing upon the proprietary rights of                        others, both in the U.S. and in other countries. |
|------------|-----------------------------------------------------------------------------------------------------------------------------------|

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

 

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

 

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

 

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

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

 

Our        partner, Hana Biosciences, submitted an NDA under Section 505(b)(2) for ZensanaTM in        June 2006. The safety and efficacy of the drug will be based on a demonstration of the        bioequivalence of ZensanaTM to oral ondansetron, marketed under the tradename        Zofran®. This Zofran® formulation is protected by one unexpired patent, which is        scheduled to expire in September 2011, and is subject to a period of pediatric exclusivity        expiring in March 2012. Additionally, this Zofran® formulation was covered by another        patent which, after pediatric exclusivity, expired in December 2006. Hana        Biosciences’ Section 505(b)(2) NDA contained a paragraph III certification        acknowledging that the now expired patent would expire in December 2006, and a paragraph IV        certification to the patent which is due to expire in March 2012. Based on the paragraph IV        certification, it is possible that the NDA holder or the patent owner will sue us and/or        Hana Biosciences for patent infringement, and that the FDA will be prevented from approving        our application until the earliest of 30 months, settlement of the lawsuit, or a        decision in an infringement case that is favorable to us. Hana Biosciences has announced        that it has not received any objections related to these patent certifications.  On        March 23, 2007, Hana Biosciences announced its plan to withdraw, without prejudice, its        pending NDA for ZensanaTM with the FDA.

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

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

We, and        the parties licensing technologies to us, have filed various U.S. and foreign patent        applications with respect to the products and technologies under our development, and the        USPTO and foreign patent offices have issued patents with respect to our products and        technologies. These patent applications include international applications filed under the        Patent Cooperation Treaty. Currently, we have eight patents which have been issued in the        U.S. and 71 patents which have been issued outside of the U.S. Additionally, we have over        90 patents pending around the world. Our pending patent applications, those we may file in        the future and those we may license from third parties, may not result in the USPTO or any        foreign patent office issuing patents. Also, if patent rights covering our products are not        sufficiently broad, they may not provide us with sufficient proprietary protection or        competitive advantages against competitors with similar products and technologies.        Furthermore, if the USPTO or foreign patent offices issue patents to us or our licensors,        others may challenge the patents or circumvent the patents, or the patent office or the        courts may invalidate the patents. Thus, any patents we own or license from or to third        parties may not provide any protection against competitors.

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

 

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

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

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

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

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

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

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

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

| **•** | they will breach these agreements; |
|------------|------------------------------------|

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

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

**WE ARE        DEPENDENT ON EXISTING MANAGEMENT AND BOARD MEMBERS.**

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

 

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

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

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

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

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

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

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

On July        23, 2007, our Board accepted the resignation of Jan H. Egberts, M.D., President, Chief        Executive Officer and Director, effective July 25, 2007.

On July        23, 2007, our Board appointed Steven B. Ratoff, our current Chairman, as Interim President        and Chief Executive Officer, effective July 25, 2007.

On        December 14, 2007, our Board renewed the employment agreement of Michael E. Spicer, as        Chief Financial Officer and Corporate Secretary, effective December 20, 2007.

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

***RISKS        RELATED TO OUR COMMON STOCK***

**WE MAY        RECEIVE NOTICE FROM THE AMERICAN STOCK EXCHANGE THAT WE FAIL TO COMPLY WITH CERTAIN OF ITS        CONTINUED LISTING STANDARDS, WHICH MAY RESULT IN A DELISTING OF OUR COMMON STOCK FROM THE        EXCHANGE.**

Our        common stock is currently listed for trading on the American Stock Exchange, or AMEX, and        the continued listing of our common stock on the AMEX is subject to our compliance with a        number of listing standards. These listing standards include the requirement for        maintaining stockholders’ equity of at least $6,000,000. As of December 31, 2007, our        net worth position was $4,174,000, which is below the minimum net worth continued listing        requirement. Unless we can increase our net worth position above the required minimum, we        may receive notice from the AMEX informing us that we are not in compliance with the AMEX        listing standard, and we may be required to submit a plan to the AMEX advising the actions        we have taken, or will take, that would bring us into compliance with all of the continued        listing standards. If we are not in compliance with the continued listing standards at the        end of the plan period, or if we don not make progress consistent with the plan during the        plan period, the AMEX staff may initiate delisting proceedings. There can be no assurance        that we will be able to make progress consistent with such plan.

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

 

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**WE ARE        INFLUENCED BY CURRENT STOCKHOLDERS, OFFICERS AND DIRECTORS.**

Our        directors, executive officers and principal stockholders and certain of our affiliates have        the ability to influence the election of our directors and most other stockholder actions.        As of March 19, 2008, management and our affiliates currently beneficially own, including        shares they have the right to acquire, approximately 20% of the common stock on a        fully-diluted basis. This determination of affiliate status is not necessarily a conclusive        determination for other purposes. Specifically, Dr. Rosenwald has the ability to exert        significant influence over the election of the Board and other matters submitted to our        stockholders for approval. Dr. Rosenwald has the ability to designate an individual to        serve on our Board and has exercised such ability by designating Mr. J. Jay Lobell to serve        on the Board. Although Mr. Lobell is a designee of Dr. Rosenwald’s, he does not have        any voting or dispositive control over the shares held directly or indirectly by Dr.        Rosenwald. On December 14, 2005 based upon the recommendation of the Corporate Governance        and Nominating Committee, the Board elected Mr. Lobell as a member of the Board. Pursuant        to the listing standards of the AMEX, Mr. Lobell has been deemed to be an independent        director by our Board on September 15, 2006.

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

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

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

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

| **•** | adverse reactions to products; |
|------------|--------------------------------|

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

| **•** | changes in the U.S. or foreign regulatory policy during the                        period of product development; |
|------------|-------------------------------------------------------------------------------------------------------------------|

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

| **•** | announcements of technological innovations by us or our                        competitors; |
|------------|---------------------------------------------------------------------------------------------|

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

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

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

| **•** | conditions and trends in the pharmaceutical and other                        industries; |
|------------|------------------------------------------------------------------------------------------|

| **•** | new accounting standards; and |
|------------|-------------------------------|

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

Our        common stock has been listed for quotation on the AMEX since May 11, 2004 under the symbol        “NVD”. Prior to May 11, 2004, our common stock was traded on the OTC Bulletin        Board® of the National Association of Securities Dealers, Inc. During the        year ended December 31, 2007, the closing price of our common stock has ranged from $0.21        to $1.81. We expect the price of our common stock to remain volatile. The average daily        trading volume in our common stock varies significantly. For the year ended December 31,        2007, the average daily trading volume in our common stock was approximately 151,000        shares. Our relatively low average volume and low average number of transactions per day        may affect the ability of our stockholders to sell their shares in the public market at        prevailing prices and a more active market may never develop.

 

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

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

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

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

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

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

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

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

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

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

|   | **•** | “boiler room” practices involving high pressure                        sales tactics and unrealistic price projections by inexperienced sales                        persons; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

 

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

We are        authorized to issue a total of 200,000,000 shares of common stock and 1,000,000 shares of        preferred stock. Such securities may be issued without the approval or other consent of our        stockholders. As of March 19, 2008, there were 60,692,260 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 March 19, 2008, we had outstanding stock options and warrants to purchase approximately        35.1 million shares of common stock, the exercise prices of which range between $0.45 per        share and $3.18 per share, and we have reserved shares of our common stock for issuance in        connection with the potential exercise thereof.

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

 

 

| Plan                       |   | Shares Authorized |   | Options Outstanding at March 19, 2008 |   | Remaining Shares Available for Issuance |   | Comments    |   |
|----------------------------|--------|-------------------|--------|---------------------------------------|--------|-----------------------------------------|--------|-------------|--------|
| 1992 Stock Option Plan     |   | 500,000           |   | 40,000                                |   | —                                 |   | Plan Closed |   |
| 1997 Stock Option Plan     |   | 500,000           |   | 100,000                               |   | —                                 |   | Plan Closed |   |
| 1998 Stock Option Plan     |   | 3,400,000         |   | 1,619,300                             |   | 1,485,700                               |   | —     |   |
| 2006 Equity Incentive Plan |   | 6,000,000         |   | 4,116,800                             |   | 683,200                                 |   | —     |   |
| Non-Plan                   |   | n/a               |   | 2,553,200                             |   | n/a                                     |   | —     |   |

 

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

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

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

 

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

**SHARES        ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET.**

From        time to time, certain of our stockholders may be eligible to sell all or some of their        shares of our common stock by means of ordinary brokerage transactions in the open market        pursuant to Rule 144, promulgated under the Securities Act of 1933, as amended, subject to        certain limitations. In general, pursuant to Rule 144, a stockholder (or stockholders whose        shares are aggregated) who has satisfied a six-month 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 one-year        holding period. Any substantial sale of our common stock pursuant to Rule 144 or pursuant        to any resale prospectus may have a material adverse effect on the market price of our        common stock.

 

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**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.

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

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

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

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

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

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

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

 

45

 

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

|   | **•** | The depth and liquidity of the markets for our common                        stock; |
|--------|------------|-------------------------------------------------------------------------------------|

|   | **•** | Investor perception of us and the industry in which we                        participate; and |
|--------|------------|------------------------------------------------------------------------------------------------|

|   | **•** | General economic and market conditions. |
|--------|------------|-----------------------------------------|

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

As of        March 19, 2008, we have 60,692,260 shares of common stock issued and outstanding and        approximately 35.1 million shares of common stock issuable upon the exercise of outstanding        stock options and warrants. In the event we wish to offer and sell shares of our common        stock in excess of the 200,000,000 shares of common stock currently authorized by our        certificate of incorporation, we will first need to receive stockholder approval. Such        stockholder approval has the potential to adversely affect the timing of any potential        transactions.

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

 

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

 

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

 

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

 

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

 

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

 

46

 

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

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

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

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

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

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

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

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

 

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

 

**ITEM        1B. UNRESOLVED STAFF COMMENTS.**

 

None.

 

47

 

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**ITEM        2. PROPERTIES.**

 

Our        executive offices, laboratory, and warehousing space are located at 25 Minneakoning Road,        Flemington, New Jersey, known as the New Facility. The New Facility, constituting        approximately 31,800 square feet, is occupied under a 10-year lease, expiring in August        2013. Presently, we are only occupying a portion of our space in the New Facility. Through        the lease expiration date of December 31, 2005, we also occupied approximately 4,500 square        feet of laboratory and office space at 31 Route 12 West, Flemington, New Jersey, known as        the Old Facility, which also formerly housed our executive offices. During the five months        ended December 31, 2006, we paid rent for the New Facility of approximately $184,000.        During the year ended December 31, 2007, we paid rent for the New Facility of approximately        $443,000. The New Facility does not yet have a pilot manufacturing operation that meets        current Good Manufacturing Practices, or cGMP, and would require additional investment in        order to attain that capability. With the expiration of the lease on the Old Facility, we        have contracted out manufacturing for our product candidates. The manufacture of our        product candidates is subject to cGMP prescribed by the Food & Drug Administration, or        FDA, and pre-approval inspections by the FDA and foreign authorities prior to the        commercial manufacture of any such products. See Item 1, “Business- Raw Materials and        Suppliers” and Business-Government Regulations.”

 

**ITEM 3.        LEGAL PROCEEDINGS.**

 

We are        not a named party in any material legal proceedings.

 

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

 

None.

 

48

 

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**PART        II**

 

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

 

Our        common stock is traded on the American Stock Exchange, or AMEX, under the ticker symbol        “NVD” since May 11, 2004. The following table sets forth the range of high and        low closing sales prices of our common stock as reported by the AMEX during the year ended        December 31, 2007, the five months ended December 31, 2006 and for each fiscal quarter for        the fiscal years ended July 31, 2006 and 2005.

 

|                                                                              | CLOSING SALE PRICES

                          |
|-----------------------------------------------------------------------------------|-----------------------------------------------------|
|                                                                              | ($)                                                 |
|                                                                              | HIGH                                                | LOW |
|                                                                              |                                                |
| YEAR ENDED DECEMBER 31, 2007                                                      |                                                |
| First Quarter (January 1, 2997 through March 31,                        2007)     | 1.81                                                | 1.30 |
| Second Quarter (April 1, 2007 through June 30,                        2007)       | 1.33                                                | 1.02 |
| Third Quarter (July 1, 2007 through September 30,                        2007)    | 1.11                                                | 0.50 |
| Fourth Quarter (October 1, 2007 through December 31,                        2007) | 0.54                                                | 0.21 |
|                                                                              |                                                |
| FIVE MONTHS ENDED DECEMBER 31, 2006                                               |                                                |
| First Quarter (August 1, 2006 through October 31,                        2006)    | 1.35                                                | 1.13 |
| Two Months Ended December 31, 2006                                                | 1.86                                                | 1.24 |
|                                                                              |                                                |
| FISCAL 2006                                                                       |                                                |
| First Quarter (August 1, 2005 through October 31,                        2005)    | 1.85                                                | 1.21 |
| Second Quarter (November 1, 2005 through January 31,                        2006) | 1.44                                                | 1.16 |
| Third Quarter (February 1, 2006 through April 30,                        2006)    | 1.90                                                | 1.22 |
| Fourth Quarter (May 1, 2006 through July 31,                        2006)         | 1.80                                                | 1.11 |
|                                                                              |                                                |

 

The last        closing sales price of our common stock as reported on the AMEX on March 19, 2008 was        $0.32. As of March 19, 2008, there were approximately 115 record holders of our common        stock.

 

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.

 

49

 

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**EQUITY        COMPENSATION PLANS**

 

The        following table provides information with respect to our compensation plans under which        equity compensation is authorized as of December 31, 2007.

 

| Plan Category                                                                     |   | Number of securities to be issued upon exercise of                        outstanding options, warrants and rights |   |   | Weighted-average exercise price of outstanding options,                        warrants and rights |   | Number of securities remaining available for future issuance                        under equity compensation plans |
|-----------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------|--------|--------|----------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|
| Equity compensation plans approved by security                        holders     |   | 5,876,000                                                                                                          |   | $      | 1.66                                                                                               |   | 3,269,000                                                                                                           |
| Equity compensation plans not approved by security                        holders |   | 2,553,000                                                                                                          |   |   | 1.87                                                                                               |   | —                                                                                                             |
| Total                                                                             |   | 8,429,000                                                                                                          |   | $      | 1.69                                                                                               |   | 3,269,000                                                                                                           |
|                                                                              |   |                                                                                                               |   |   |                                                                                               |   |                                                                                                                |

 

 

50

 

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**PERFORMANCE GRAPH**

The        graph below compares changes in the cumulative total stockholder return (change in stock        price plus reinvested dividends) for the period from July 31, 2002 through December 31,        2007 of an initial investment of $100 invested in (a) NovaDel Pharma Inc.’s common        stock, (b) the Total Return Index for the AMEX Composite and (c) the Research Data Group        (RDG) Microcap Pharmaceutical Index. Total Return Index values are prepared by the Research        Data Group. The stock price performance is not included to forecast or indicate future        price performance.

 

 

 

|                            |   |   | **7/02** |   | **7/03** |   | **7/04** |   | **7/05** |   | **7/06** |   | **12/06** |   | **12/07** |   |
|---------------------------------|--------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|-----------|--------|-----------|--------|
| **NovaDel Pharma Inc.**         |   |   | $        | 100.00 |     | $      | 119.41   |   | $        | 100.59 |     | $      | 73.53     |   | $         | 70.59  |   | $ | 96.47 |   | $ | 14.12 |   |
| **AMEX Composite**              |   |   | $        | 100.00 |     | $      | 110.80   |   | $        | 143.68 |     | $      | 190.27    |   | $         | 230.38 |   | $ | 249.13 |   | $ | 290.15 |   |
| **RDG MicroCap Pharmaceutical** |   |   | $        | 100.00 |     | $      | 160.07   |   | $        | 132.98 |     | $      | 120.17    |   | $         | 98.53  |   | $ | 89.04 |   | $ | 52.15 |   |

                

 

 

51

 

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**ITEM        6. SELECTED CONSOLIDATED FINANCIAL DATA.**

 

The        following Selected Financial Data should be read in conjunction with our Financial        Statements and the related Notes thereto, Management’s Discussion and Analysis of        Financial Condition and Results of Operations and other financial information included        elsewhere in this Annual Report on Form 10-K. The data set forth below with respect to our        Statements of Operations for the year ended December 31, 2007, the five months ended        December 31, 2006 and for the fiscal years ended July 31, 2006, and 2005 and the Balance        Sheet data as of December 31, 2007, December 31, 2006 and fiscal year ended July 31, 2006        are derived from our Financial Statements which are included elsewhere in this Annual        Report on Form 10-K and are qualified by reference to such Financial Statements and related        Notes thereto. The data set forth below for the year ended December 31, 2006 and for the        five months ended December 31, 2005, are unaudited. In Management’s Discussion and        Analysis of Financial Condition and Results of Operations, the year ended December 31, 2007        is compared to the unaudited year ended December 31, 2006, and the five months ended        December 31, 2006 are compared to the unaudited five months ended December 31, 2005. There        are no seasonal or other significant factors which affect comparability. The data set forth        below with respect to our Statements of Operations for the fiscal years ended July 31,        2004, 2003 and 2002 and the Balance Sheets data as of July 31, 2006, July 31, 2005, July        31, 2004 and 2003 are derived from our Financial Statements, which are not included        elsewhere in this Annual Report. Our historical results are not necessarily indicative of        future results of operations.

 

 

|                                                                                                                             |   |   | **Years Ended December                        31**, |   | **Five Months Ended**

**December 31**, |            | **Years Ended July 31**, |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------------------------------------------------|--------|-----------------------------------------|-----------------|--------------------------|--------|
| **Statement of**

**Operations Data:**                                                                                           |   |   | **2007**                                            |   |                                    | **2006**        |                     |   | **2006** |   |   | **2005** |   |   | **2006** |   |   | **2005** |   |   | **2004** |   |   | **2003** |   |
|                                                                                                                             |   |   |                                                |   |                                    | **(unaudited)** |                     |   |   |   |   | **(unaudited**) |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Revenues                                                                                                                   |   | $      | 469,000                                             |   | $                                       | 3,280,000       |                     | $      | 2,067,000 |   | $ | 677,000 |   | $ | 1,890,000 |   | $ | 439,000 |   | $ | 466,000 |   | $ | 2,000 |   |
| Total Expenses                                                                                                                   |   |   | 18,656,000                                          |   |                                    | 13,544,000      |                     |   | 6,519,000 |   |   | 5,429,000 |   |   | 12,454,000 |   |   | 10,217,000 |   |   | 7,119,000 |   |   | 7,091,000 |   |
| Loss from Operations                                                                                                             |   |   | (18,187,000                                         | )      |                                    | (10,264,000     | )                        |   | (4,452,000 | ) |   | (4,752,000 | ) |   | (10,564,000 | ) |   | (9,778,000 | ) |   | (6,653,000 | ) |   | (7,089,000 | ) |
| Interest Income                                                                                                                  |   |   | 632,000                                             |   |                                    | 337,000         |                     |   | 180,000 |   |   | 67,000 |   |   | 224,000 |   |   | 87,000 |   |   | 98,000 |   |   | 49,000 |   |
| Income Tax Benefit                                                                                                               |   |   | (658,000                                            | )      |                                    | (467,000        | )                        |   | (467,000 | ) |   | (256,000 | ) |   | (256,000 | ) |   | (241,000 | ) |   | (214,000 | ) |   | (84,000 | ) |
| Net Loss                                                                                                                         |   | $      | (16,963,000                                         | )      |                                    | (9,460,000      | )                        | $      | (3,805,000 | ) |   | (4,429,000 | ) | $ | (10,084,000 | ) | $ | (9,450,000 | ) | $ | (6,341,000 | ) | $ | (6,956,000 | ) |
|                                                                                                                             |   |   |                                                |   |                                    |            |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and Diluted Loss Per Common Share                                                                                          |   | $      | (.29                                                | )      |  

$                               | (.20            | )                        | $      | (.08 | ) | $ | (.11 | ) | $ | (.23 | ) | $ | (.27 | ) | $ | (.24 | ) | $ | (.45 | ) |
| Weighted Average Number of Shares of Common Stock Used in                        Computation of Basic and Diluted Loss Per Share |   |   | 59,497,000                                          |   |                                    | 46,732,000      |                     |   | 49,522,000 |   |   | 40,619,000 |   |   | 43,000,000 |   |   | 34,808,000 |   |   | 26,269,000 |   |   | 15,419,000 |   |
|                                                                                                                             |   |   |                                                |   |                                    |            |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

 

|                                                                      |   | **December 31,** | **July 31,** |     |
|---------------------------------------------------------------------------|--------|------------------|--------------|----------|
| **BALANCE SHEET DATA:**                                                   |   | **2007**         |         | **2006** |   | **2006** |   | **2005** |   | **2004** |   | **2003** |   |
| Cash, cash equivalents, and short-term                        investments |   | $                | 6,384,000    |     | $ | 20,276,000 |   | $ | 10,138,000 |   | $ | 8,223,000 |   | $ | 8,377,000 |   | $ | 3,086,000 |   |
| Total Assets                                                              |   |             | 10,363,000   |     |   | 24,316,000 |   |   | 14,822,000 |   |   | 13,028,000 |   |   | 11,486,000 |   |   | 4,327,000 |   |
| Total Current Liabilities                                                 |   |             | 4,211,000    |     |   | 3,146,000 |   |   | 2,200,000 |   |   | 2,405,000 |   |   | 1,086,000 |   |   | 457,000 |   |
| Total Liabilities                                                         |   |             | 6,189,000    |     |   | 5,718,000 |   |   | 4,777,000 |   |   | 5,079,000 |   |   | 1,463,000 |   |   | 457,000 |   |
| Accumulated deficit                                                       |   |             | (65,243,000  | )        |   | (48,280,000 | ) |   | (44,475,000 | ) |   | (34,391,000 | ) |   | (24,941,000 | ) |   | (18,600,000 | ) |
| Total Stockholders’ Equity                                          |   | $                | 4,174,000    |     | $ | 18,598,000 |   | $ | 10,045,000 |   | $ | 7,949,000 |   | $ | 10,023,000 |   | $ | 3,870,000 |   |

 

 

52

 

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

 

The        following discussion of our financial condition and result of operations should be read in        conjunction with the financial statements and the notes to those statements included        elsewhere in this Annual Report on Form 10-K. The discussion includes forward-looking        statements that involve risks and uncertainties. As a result of many factors, such as those        set forth in Item 1A. “Risk Factors” of this Annual Report on Form 10-K, our        actual results may differ materially from those anticipated in these forward looking        statements.

 

**GENERAL**

 

NovaDel        Pharma Inc. is a specialty pharmaceutical company developing oral spray formulations for a        broad range of marketed drugs. Our proprietary technology offers, in comparison to        conventional oral dosage forms, the potential for faster absorption of drugs into the        bloodstream leading to quicker onset of therapeutic effects and possibly lower doses. Oral        sprays eliminate the requirement for water or the need to swallow, potentially improving        patient convenience and compliance. Our oral spray technology is focused on addressing        unmet medical needs for a broad array of existing and future pharmaceutical products. Our        most advanced oral spray candidates target angina, nausea, insomnia, migraine headaches and        disorders of the central nervous system. We plan to develop these and other products        independently and through collaborative arrangements with pharmaceutical and biotechnology        companies. Currently, we have eight patents which have been issued in the U.S. and 71        patents which have been issued outside of the U.S. Additionally, we have over 90 patents        pending around the world. We look for drug compounds that are off patent or are coming off        patent in the near future, and we formulate these compounds in conjunction with our        proprietary drug delivery method.  Once formulated, we file for new patent        applications on these formulated compounds that comprise our product candidates.  Our        patent portfolio includes patents and patent applications with claims directed to the        pharmaceutical formulations, methods of use and methods of manufacturing for our product        candidates.  

 

We have        had a history of recurring losses, giving rise to an accumulated deficit as of December 31,        2007 of $65,243,000, as compared to $48,280,000 as of December 31, 2006. We have had        negative cash flow from operating activities of $15,240,000 for the year ended December 31,        2007, $1,782,000 for the five-months ended December 31, 2006, $8,855,000 for the fiscal        year ended July 31, 2006, and $6,258,000 for the fiscal year ended July 31, 2005. As of        December 31, 2007, we had working capital of $3,811,000, as compared to $18,686,000 as of        December 31, 2006, representing a net decrease in working capital of approximately        $14,875,000.

 

During        the fourth quarter 2007, we significantly reduced clinical development activities on our        product candidate pipeline, as we did not believe that we had sufficient cash to sustain        such activities. Despite this reduction in expenditures for clinical activities, we require        capital to sustain our existing organization until such time as clinical activities can be        resumed. Given the current level of spending, we estimate that we will have sufficient cash        on hand to fund operations through the middle of the second calendar quarter, 2008. Funding        for the Company’s future development activities could be secured through new        strategic partnerships and/or the sale of our common stock or other securities. There can        be no assurance that such capital will be available to us in a timely manner or on        favorable terms, if at all. There are a number of risks and uncertainties related to our        attempt to complete a financing or strategic partnering arrangement that are outside our        control. We may not be able to obtain additional financing on terms acceptable to us, or at        all. If we are unsuccessful at obtaining additional financing as needed, we may be required        to significantly curtail or cease operations. We will need additional financing thereafter        until we achieve profitability, if ever.

Our        audited financial statements for the fiscal year ended December 31, 2007, were prepared        under the assumption that we will continue our operations as a going concern. We were        incorporated in 1982, and do not have a history of earnings. As a result, our independent        registered public accounting firm in their audit report has expressed substantial doubt        about our ability to continue as a going concern. Continued operations are dependent on our        ability to complete equity or debt formation activities or to generate profitable        operations. Such capital formation activities may not be available or may not be available        on reasonable terms. Our financial statements do not include any adjustments that may        result from the outcome of this uncertainty. If we cannot continue as a viable entity, our        shareholders may lose some or all of their investment in the Company.

 

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

 

53

 

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On June        28, 2006, our Board of Directors approved a change of our fiscal year end from July 31 to        December 31. Accordingly, our new fiscal year begins on January 1 and ends on December 31.        We filed a Transition Report on Form 10-K for the five months ended December 31, 2006. As        such, the end of the quarters in the new fiscal year does not coincide with the end of the        quarters in the previous fiscal years. Due to the significant costs, the Company is not        recasting the quarterly data from the previous fiscal year as such costs would exceed any        potential benefits. Instead, the Company is presenting financial statements and other        financial information, including Management’s Discussion and Analysis of Financial        Condition and Results of Operations, for the years ended December 31, 2007, the five months        ended December 31, 2006, and the fiscal years ended July 31, 2006 and July 31, 2005. In        Management’s Discussion and Analysis of Financial Condition and Results of        Operations, the year ended December 31, 2007 are compared to the unaudited year ended        December 31, 2006, and the five months ended December 31, 2006 are compared to the        unaudited five months ended December 31, 2005. There are no seasonal or other significant        factors which affect comparability.

Highlights        for the year ended December 31, 2007, and additionally through the date of filing of this        prospectus, include the following:

*Product        Pipeline*

 

| **•** | Announced that the Company’s New Drug Application for                        ZolpiMistTM to treat insomnia was accepted for filing by the U.S. Food                        and Drug Administration |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | Announced that Par Pharmaceuticals has been granted a                        sublicense for the development and commercialization of                        ZensanaTM. |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | Announced that Par Pharmaceuticals has returned the rights                        to NitroMistTM to us. |
|------------|--------------------------------------------------------------------------------------------------------------|

 

| **•** | Announced that two clinical studies comparing our zolpidem                        oral spray with zolpidem tablets met their primary pharmacokinetic and                        pharmacodynamic and safety objectives. |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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

 

*Intellectual Property*

 

| **•** | Received notification of the issuance of additional patents                        in Canada and Europe which further strengthens our intellectual property                        position in the oral delivery of pharmaceuticals. The issued patents cover                        the use of multiple classes of drugs in oral sprays, including those for                        the treatment of pain, and for central nervous system disorders under our                        oral spray delivery system in Canada, and analgesics, alkaloids, and                        nicotine in Europe. |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

*Executive Team and Board of Directors*

 

| **•** | Appointed Steven B. Ratoff, our current Chairman of the                        Board, to serve as interim President and Chief Executive                        Officer. |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | Announced that Jan H. Egberts, M.D. resigned as President,                        Chief Executive Officer and Director. |
|------------|-------------------------------------------------------------------------------------------------------------------------|

 

| **•** | Appointed Mr. Mark J. Baric as a member of the Board of                        Directors. |
|------------|-------------------------------------------------------------------------------------------|

 

| **•** | Appointed Deni M. Zodda, Ph.D. as Senior Vice President and                        Chief Business Officer. |
|------------|------------------------------------------------------------------------------------------------------------|

 

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

 

| **•** | Renewed the employment agreement of Mr. Michael E. Spicer as                        Chief Financial Officer. |
|------------|--------------------------------------------------------------------------------------------------------------|

 

54

 

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

 

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

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

 

|   | **•** | the scope, rate of progress and expense of our clinical                        trials and other research and development activities; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------|

         

|   | **•** | results of future clinical trials; |
|--------|------------|------------------------------------|

 

|   | **•** | the expense of clinical trials for additional                        indications; |
|--------|------------|-----------------------------------------------------------------------------------|

 

|   | **•** | the terms and timing of any collaborative, licensing and                        other arrangements that we may establish; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | the expense and timing of regulatory approvals or changes in                        the regulatory approval process; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | the expense of establishing clinical and commercial supplies                        of our product candidates and any products that we may develop; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | the effect of competing technologies and market                        developments; and |
|--------|------------|------------------------------------------------------------------------------------------|

 

|   | **•** | the expense of filing, prosecuting, defending and enforcing                        any patent claims and other intellectual property rights. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|

 

55

 

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We        expect to continue to spend significant amounts on the development of our product        candidates and we expect our costs to increase as we continue to develop and ultimately        commercialize our product candidates. The following table summarizes our product        candidates:

 

|  

                          | **Active Ingredient or Class of Molecule** |  

**Indications**                           |  

**Stage of Development**                                             |  

**Partner**                  |
|----------------------------------------|--------------------------------------------|---------------------------------------------------|------------------------------------------------------------------------------|--------------------------------------|
| ***Approved Product***                 |                                       |                                              |                                                                         |                                 |
|  

NitroMistTM               |  

Nitroglycerin                      |  

Acute angina                              |  

FDA Approved                                                         | -                                    |
| ***Product Candidates***               |                                       |                                              |                                                                         |                                 |
|  

ZolpiMistTM               |  

Zolpidem tartrate                  |  

Sleeplessness                             | NDA submitted – FDA acceptance January 23,                        2008 | -                                    |
|  

Sumatriptan                    |  

Sumatriptan succinate              |  

                         

Migraines |  

Pilot Efficacy study complete                                        | -                                    |
|  

Ropinirole                     |  

Ropinirole                         | Idiopathic Parkinson’s Disease              |  

Clinical development                                                 | -                                    |
|  

Tizanidine                     | Tizanidine hydrochloride                   |  

Spasticity                                |  

Clinical development                                                 | -                                    |
|  

ZensanaTM                 |  

Ondansetron                        |  

Anti-emetic                               | Clinical development                                                         | Hana Biosciences/Par Pharmaceuticals |

 

 

**NitroMistTM (nitroglycerin lingual        aerosol)**. This product is indicated for acute relief of an attack        or acute prophylaxis of angina pectoris due to coronary artery disease, and was approved by        the FDA in November 2006. Previously, this product was partnered with Par Pharmaceuticals,        or Par; however, on August 1, 2007, we announced that Par returned the rights to        NitroMistTM to us as part of Par's strategy to concentrate its resources on supportive        care in AIDS and oncology markets. We are currently investigating strategic partners for        this product.

 

**ZolpiMistTM (zolpidem oral spray)**.        Zolpidem is the active ingredient in Ambien®, the leading hypnotic marketed by        Sanofi-Aventis. A pilot pharmacokinetic, or PK, study in zolpidem oral spray with 10        healthy subjects, completed in the first half of calendar 2005, suggested that our        formulation of zolpidem oral spray had a comparable PK profile to the Ambien® tablet        but with a more rapid time to detectable drug levels. In October 2006, we announced        positive results from a pilot pharmacokinetic study comparing our formulation of        ZolpiMistTM to Ambien® tablets. In the study, 10 healthy male volunteers received        ZolpiMistTM or Ambien® tablets in 5mg or 10mg doses. For fasting subjects, fifteen        minutes after dosing, 80% of subjects using ZolpiMistTM achieved blood concentrations        of greater than 20 ng/ml, compared to 33% of subjects in the 5mg Ambien® tablet group        and 40% of subjects in the 10mg Ambien® tablet group. The difference between the oral        spray groups and tablet groups was statistically significant (p=0.016). Twenty ng/ml is a        level generally believed to approximate the lower limit of the therapeutic range for        zolpidem. Additionally, drug concentrations were measured at five and ten minutes        post-dosing. At these early time points, the oral spray groups achieved drug levels        five-to-thirty times greater than subjects in the corresponding tablet groups. These        differences were also statistically significant. ZolpiMistTM has the potential to        provide patients with the meaningful benefit of faster onset of sleep as compared to        existing sleep remedies should future studies validate the already completed Pilot PK        study. We submitted the NDA for our zolpidem product candidate in the second half of 2007,        and the FDA indicated acceptance of this NDA filing in January 2008. We may obtain final        approval from the FDA by the fourth quarter of 2008.

         

56

 

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**Sumatriptan oral spray**. Sumatriptan is the        active ingredient in Imitrex® which is the largest selling migraine remedy marketed by        GlaxoSmithKline, or GSK. A pilot PK study of our sumatriptan oral spray with 9 healthy        subjects, completed in the second half of calendar 2004, suggested that the formulation        achieved plasma concentrations of sumatriptan in the therapeutic range. In September 2006        we announced positive results from an additional pilot pharmacokinetic study, with our oral        spray formulation of sumatriptan which demonstrated that sumatriptan oral spray achieves a        statistically significant increase in absorption rate as compared with        Imitrex® tablets. The rate of drug absorption is believed to be the most        important predictor of the degree and speed of migraine relief. Sumatriptan oral spray was        evaluated in a four-arm, crossover pharmacokinetic study comparing 50mg        Imitrex® tablets to 20mg and 30mg of the oral spray in 10 healthy male        volunteers under fasting conditions. At least 90% of subjects receiving sumatriptan oral        spray had detectable drug levels at three minutes post-dosing, while at the same timepoint,        only 10% of subjects receiving 50mg Imitrex® tablets had detectable drug levels. These        differences are statistically significant.  At 3 to 6 minutes post dosing, all oral        spray groups had statistically significantly higher mean concentration levels compared to        50mg Imitrex® tablets.   Using published data for the currently marketed        Imitrex® nasal spray as a proxy for therapeutic blood levels, we observed that by 6        minutes post-dosing, 100% of the 20mg oral spray users achieved these critical plasma        concentration levels while none of the subjects from the Imitrex® tablet group did so        by this timepoint. This result was also statistically significant.  Furthermore,        the study indicates up to a 50% increase in relative bioavailability of oral spray in        comparison to the Imitrex® tablet.  Additionally, the pharmacokinetics of 20mg        oral spray after a meal were evaluated. Sumatriptan oral spray was well        tolerated.

         

While        Imitrex® nasal spray was not included in this clinical study, the following represents        a discussion of the results of our clinical study as compared to published data for        Imitrex® nasal spray. Time to the first peak plasma concentration of sumatriptan --        which represents drug absorbed directly across the oral mucosa -- was approximately 70%        faster with the 20mg oral spray than what has been reported in the literature for the same        dose of the Imitrex® nasal spray (6 min. vs. 20 min.).  The mean concentration        level achieved during this critical first phase of absorption is approximately 30% greater        for the oral spray than what was observed in published studies of the nasal spray (10.9        ng/mL vs. 8.5 ng/mL).  Relative bioavailability after administration of 20mg oral        spray appears to be greater than published estimates for the same dose of the Imitrex®        nasal spray.

Sumatriptan oral spray may provide clinical benefits to migraine sufferers        including, possibly, faster relief than Imitrex® tablets as well as greater        tolerability than triptan nasal sprays. Further, if proven to be safe and effective,        sumatriptan oral spray may be attractive to patients who have trouble taking oral        medications due to nausea and vomiting caused by the migraine attack. Previously, we were        targeting an NDA submission for our sumatriptan product candidate in the first half of        calendar 2008; however, due primarily to funding constraints, at the present time, we are        unable to make predictions for this program relative to sufficient funding, timing, future        strategic partnerships, regulatory pathway or approval with the FDA. During the fourth        quarter 2007, we significantly reduced clinical development activities on our product        candidate pipeline, including sumatriptan, as we did not believe that we had sufficient        cash to sustain such activities. As of the current date, we have not yet secured additional        financing, and have therefore not resumed clinical development activity. There can be no        assurances that we will be able to secure additional capital, and as a result, there can be        no assurances as to whether, and when, we will be able to resume our clinical development        activities.

**Tizanidine oral spray**. Tizanidine is indicated        for the treatment of spasticity, a symptom of several neurological disorders, including        multiple sclerosis, spinal cord injury, stroke and cerebral palsy, which leads to        involuntary tensing, stiffening and contracting of muscles. Tizanidine treats spasticity by        blocking nerve impulses through pre-synaptic inhibition of motor neurons. This method of        action results in decreased spasticity without a corresponding reduction in muscle        strength. Because patients experiencing spasticity may have difficulty swallowing the        tablet formulation of the drug, our tizanidine oral spray may provide patients suffering        from spasticity with a very convenient solution to this serious treatment problem. We were        previously targeting an NDA submission for our tizanidine product candidate in calendar        2008. However, in June 2007, we announced our near-term clinical development strategy and        our intention to focus the majority of our research and development resources on our two        lead product candidates, zolpidem and sumatriptan oral spray. Furthermore, during the        fourth quarter 2007, we significantly reduced clinical development activities on our        product candidate pipeline, including tizanidine, as we did not believe that we had        sufficient cash to sustain such activities. As of the current date, we have not yet secured        additional financing, and have therefore not resumed clinical development activity. There        can be no assurances that we will be able to secure additional capital, and as a result,        there can be no assurances as to whether, and when, we will be able to resume our clinical        development activities.

 

57

 

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**Ropinirole oral spray**. Ropinirole is indicated        for the treatment of the signs and symptoms of idiopathic Parkinson's disease. Ropinirole        oral spray is ideal for the geriatric population who may be suffering from dysphagia        (difficulty swallowing); 85% of sufferers of Parkinson's are 65 years of age or older and        it is estimated that 45% of elderly people have some difficulty in swallowing. Our        formulation of ropinirole oral spray may represent a more convenient way for the patient or        healthcare provider to deliver ropinirole to patients suffering stiffness and/or tremors.        We were previously targeting an NDA submission for our ropinirole product candidate in        calendar 2008. However, in June 2007, we announced our near-term clinical development        strategy and our intention to focus the majority of our research and development resources        on our two lead product candidates, zolpidem and sumatriptan oral spray. Furthermore,        during the fourth quarter 2007, we significantly reduced clinical development activities on        our product candidate pipeline, including ropinirole, as we did not believe that we had        sufficient cash to sustain such activities. As of the current date, we have not yet secured        additional financing, and have therefore not resumed clinical development activity. There        can be no assurances that we will be able to secure additional capital, and as a result,        there can be no assurances as to whether, and when, we will be able to resume our clinical        development activities.

 

**ZensanaTM (ondansetron oral spray)**.        Ondansetron is the active ingredient in Zofran®, the leading anti-emetic marketed by        GSK. Through July 31, 2007, this product candidate was licensed to Hana Biosciences, who        was overseeing all clinical development and regulatory approval activities for this product        in the U.S. and Canada. On July 31, 2007, we entered into a Product Development and        Commercialization Sublicense Agreement with Hana Biosciences and Par, pursuant to which        Hana Biosciences granted a sublicense to Par to develop and commercialize ZensanaTM.        Par is responsible for all development, regulatory, manufacturing and commercialization        activities of ZensanaTM in the United States and Canada, including the development and        re-filing of the NDA in the United States. In addition, we entered into an Amended and        Restated License Agreement with Hana Biosciences, pursuant to which Hana Biosciences        relinquished its right to pay reduced royalty rates to us until such time as Hana        Biosciences had recovered one-half of its costs and expenses incurred in developing        ZensanaTM from sales of ZensanaTM and we agreed to surrender for cancellation all        73,121 shares of the Hana Biosciences common stock we acquired in connection with execution        of the original license agreement with Hana Biosciences. Par has announced that it expects        to complete clinical development on the revised formulation of ZensanaTM during 2008,        and expects to submit a new NDA for ZensanaTM by the end of 2008.

 

In        January 2006, Hana Biosciences announced positive study results of a pivotal clinical trial        for ZensanaTM. Hana Biosciences submitted its NDA on June 30, 2006 and such NDA was        accepted for review by the FDA in August 2006. Previously, Hana Biosciences targeted final        approval from the FDA and commercial launch in calendar 2007. However, on February 20,        2007, we announced that Hana Biosciences notified us that ongoing scale-up and stability        experiments indicate that there is a need to make adjustments to the formulation and/or        manufacturing process, and that there is likely to be a delay in the FDA approval and        commercial launch of ZensanaTM as a result thereof.  On March 23, 2007, Hana        Biosciences announced its plan to withdraw, without prejudice, its pending NDA for        ZensanaTM with the FDA.

 

We will        receive a milestone payment from Hana Biosciences upon final approval from the FDA. In        addition, we will receive double-digit royalty payments based upon a percentage of net        sales.  We retain the rights to our ondansetron oral spray outside of the U.S. and        Canada.

 

**Propofol oral spray**. Propofol is the active        ingredient in Diprivan®, a leading intravenous anesthetic marketed by AstraZeneca. We        continue to support our partner, Manhattan Pharmaceuticals, Inc., or Manhattan        Pharmaceuticals, who will oversee all clinical development and regulatory approval for this        product candidate. On July 10, 2007, Manhattan Pharmaceuticals announced its intention to        pursue appropriate sub-licensing opportunities for this product candidate.

 

**Veterinary.**Our veterinary initiatives are        being carried out largely by our partner, Velcera, Inc., or Velcera. In June 2007, Velcera        announced that it had entered into a global license and development agreement with Novartis        Animal Health. The agreement calls for Novartis Animal Health to develop, register and        commercialize a novel canine product utilizing Velcera’s PromistTM platform,        which is based on our patented oral spray technology.

 

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

 

58

 

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**CRITICAL ACCOUNTING POLICIES**

 

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

 

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

 

VALUATION OF LONG-LIVED ASSETS – We assess the impairment of        long-lived assets whenever events or changes in circumstances indicate that the carrying        value may not be recoverable. Long-lived assets of the Company as of December 31, 2007 were        represented by property and equipment, as the Company has no intangible assets on its        balance sheet. Factors we consider important which could trigger an impairment review        include the following:

 

|   | **•** | significant underperformance relative to expected historical                        or projected future operating results; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------|

         

|   | **•** | significant changes in the manner of our use of the acquired                        assets or the strategy for our overall business; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | significant negative industry or economic trends;                        and |
|--------|------------|------------------------------------------------------------------------------|

 

|   | **•** | significant decrease in the market value of the                        assets. |
|--------|------------|--------------------------------------------------------------------------------|

 

The        impairment test is based upon a comparison of the estimated undiscounted cash flows to the        carrying value of the long-lived assets. If we determine that the carrying value of        long-lived assets may not be recoverable based upon the existence of one or more of the        above indicators of impairment, we measure any impairment based on projected discounted        cash flows. The cash flow estimates used to determine the impairment, if any, contain        management’s best estimate using appropriate assumptions and projections at that        time. Net long-lived property and equipment as of December 31, 2007 was $2.0 million. The        Company reviewed its long-lived property and equipment as of December 31, 2007, and has        determined that their estimated fair value exceeds the carrying amount of such assets;        therefore, the Company has not recognized an impairment loss for its long-lived property        and equipment.

 

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

 

59

 

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We have        adopted the provisions of Statement of Financial Accounting Standards, or SFAS, No. 123        (revised 2004), “Share-Based Payment,” or SFAS 123R, effective August 1, 2005        and have selected the Black-Scholes method of valuation for share-based compensation. SFAS        123R requires that compensation cost be recorded as earned for all unvested stock options        outstanding at the beginning of the first quarter of adoption of SFAS 123R and for all        options granted after the date of adoption. The charge is being recognized in research and        development and consulting, selling, general and administrative expenses over the remaining        service period after the adoption date based on the original estimate of fair value of the        options as of the grant date. Using the fair value method required by SFAS 123R, for the        years ended December 31, 2007 and 2006, we recorded share-based compensation of $910,000,        or $0.02 per share, and $1,179,000, or $0.03 per share. For the five months ended December        31, 2006 and 2005, we recorded share-based compensation of approximately $498,000 or $0.01        per share and $520,000 or $0.01 per share, respectively. For the fiscal year ended July 31,        2006, we recorded share-based compensation expense of approximately $1.2 million or $0.03        per share. Share-based compensation for the year ended December 31, 2007 included a $0.5        million credit relating to the modification and accelerated vesting of stock options issued        to our former President and CEO, Dr. Jan Egberts. We will continue to incur share-based        compensation charges in future periods. As of December 31, 2007, unamortized stock-based        compensation expense of $2.0 million remains to be recognized, which is comprised of $1.2        million related to non-performance based stock options to be recognized over a weighted        average period of 1.4 years, $0.1 million related to restricted stock to be recognized over        a weighted average period of 1.9 years, and $0.7 million related to performance-based stock        options which vest upon reaching certain milestones. Expenses related to the        performance-based stock options will be recognized if and when the Company determines that        it is probable that the milestone will be reached.

 

As a        result of cashless exercise provisions in our employee stock option agreements, the Company        used variable accounting treatment under the Financial Accounting Standards Board’s        Interpretation 44, for issued and outstanding stock options from January 2002 through July        2005. On October 20, 2004, the Company’s Board of Directors rescinded the cashless        exercise provision for all of the Company’s outstanding option grants. Through July        31, 2005, variable plan accounting continued to be applied for approximately 310,000        outstanding options, for which option exercise prices were modified from the original        agreement.

 

The        following table illustrates the pro forma effect on the Company’s net loss and net        loss per common share as if the Company had adopted the fair-value-based method of        accounting for share-based compensation under SFAS 123 (R) for the fiscal year ended July        31, 2005:

 

  

|                                                                                                                    |   |   |   | **July 31, 2005** |        |   |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|-------------------|-------------|--------|--------|
| Net loss – as reported                                                                                            |   |   |   | $                 | (9,450,000  | )      |   |   |
| Compensation credit resulting from variable plan                        accounting                                      |   |   |   |              | (106,000    | )      |   |   |
| Total share-based employee compensation expense using the                        fair value based method for all awards |   |   |   |              | (854,000    | )      |   |   |
|                                                                                                                    |   |   |   |              |        |   |   |   |
| Pro forma net loss                                                                                                      |   |   |   | $                 | (10,410,000 | )      |   |   |
|                                                                                                                    |   |   |   |              |        |   |   |   |
| Basic and diluted net loss per common share:                                                                            |   |   |   |              |        |   |   |   |
| As reported                                                                                                             |   |   |   | $                 | (0.27       | )      |   |   |
|                                                                                                                    |   |   |   |              |        |   |   |   |
| Pro forma net loss                                                                                                      |   |   |   |              | (0.30       | )      |   |   |

 

The fair        values of options granted during the fiscal year ended July 31, 2005 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 66%, and an expected life of the options of five to ten years.

 

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

 

60

 

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**RESULTS        OF OPERATIONS**

 

**YEARS        ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006 (UNAUDITED)**

 

License        fees and milestone fees earned from related parties for the year ended December 31, 2007        were $469,000, as compared to $3.2 million for the unaudited fiscal year ended December 31,        2006. The decrease is primarily due to non-recurring milestone payments received in        connection with our license and development agreement with Hana Biosciences in the year        ended December 31, 2006.

 

Consulting revenues from related parties for the year ended December 31,        2007 were $0, as compared to $118,000 for the year ended December 31, 2006. The decrease is        due to lower revenue from Velcera for veterinary products. We are not currently performing        any development work for Velcera.

 

Research        and development expenses for the year ended December 31, 2007 were $11,940,000 as compared        to $6,589,000 for the year ended December 31, 2006. Research and development costs consist        primarily of salaries and benefits, contractor and consulting fees, clinical drug supplies        of preclinical and clinical development programs, consumable research supplies and        allocated facility and administrative costs. Below is a summary of our research and        development expenses for the years ended December 31, 2007 and December 31, 2006        (unaudited).

 

 

|                                    |   | **Fiscal Year Ended** |       |
|-----------------------------------------|--------|-----------------------|------------|
|                                    |   | **December 31, 2007** |       | **December 31, 2006** |   |
|                                    |   |                  |       |   |   | **(Unaudited)** |   |
| NitroMistTM                        |   | $                     | 558,000    |   | $ | 1,331,000 |   |
| Zolpidem                                |   |                  | 5,669,000  |   |   | 1,719,000 |   |
| Sumatriptan                             |   |                  | 813,000    |   |   | 394,000 |   |
| ZensanaTM                          |   |                  | 213,000    |   |   | — |   |
| Propofol                                |   |                  | —    |   |   | — |   |
| Tizanidine                              |   |                  | 75,000     |   |   | 161,000 |   |
| Ropinirole                              |   |                  | 3,000      |   |   | 58,000 |   |
| Other research and development costs    |   |                  | 1,763,000  |   |   | 1,110,000 |   |
| Internal costs                          |   |                  | 2,847,000  |   |   | 1,816,000 |   |
| Total research and development expenses |   | $                     | 11,940,000 |   | $ | 6,589,000 |   |

 

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

 

|   | **•** | NitroMistTM, Zolpidem, Sumatriptan, Tizanidine and                        Ropinirole - third-party direct project expenses relating to the                        development of the respective product candidates. The majority of our                        research and development resources were devoted to our zolpidem and                        sumatriptan product candidates. During the fourth quarter 2007, we                        significantly reduced clinical development activities on our product                        candidate pipeline, as we did not believe that we had sufficient cash to                        sustain such activities. As of the current date, we have not yet secured                        additional financing, and have therefore not resumed clinical development                        activity. There can be no assurances that we will be able to secure                        additional capital, and as a result, there can be no assurances as to                        whether, and when, we will be able to resume our clinical development                        activities; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

|   | **•** | ZensanaTM and Propofol - third-party direct project                        expenses relating to the development of ZensanaTM and our Propofol                        product candidate. As our partners for the Propofol product candidate,                        Manhattan Pharmaceuticals, and for ZensanaTM, Par, are overseeing all                        clinical development and regulatory approval activities, we do not expect                        to devote a significant amount of resources to these product candidates. In                        light of Hana Biosciences’ announcements in February 2007 and March                        2007 regarding the status of ZensanaTM, as described above, we devoted                        resources to this project during the three months ended March 31, 2007,                        including approximately $204,000 in third-party costs; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Other research and development costs – direct expenses                        not attributable to a specific product candidate; and |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Internal costs – costs related primarily to personnel                        and overhead. We do not allocate these expenses to specific product                        candidates as these costs relate to all research and development                        activities. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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Research        and development expenses in the year ended December 31, 2007 increased primarily as a        result of the following items:

         

|   | **•** | $3,950,000 increase primarily related to product development                        costs for our Zolpidem product candidate, including costs for clinical                        trials, manufacturing preparedness and other NDA preparatory                        costs; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

|   | **•** | $419,000 increase primarily related to product development                        costs for our Sumatriptan product candidate, including costs for clinical                        trials and manufacturing preparedness; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

|   | **•** | $1,031,000 increase in internal costs primarily due to an                        increase in payroll and other compensation costs as of result of research                        and development related higher headcount; and |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | $773,000 decrease in costs associated with our                        NitroMistTM product candidate primarily due to process validation and                        method transfer activities in the year ended December 31, 2006, which did                        not recur in the year ended December 31, 2007. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

General        and administrative expenses for the year ended December 31, 2007 were $6,716,000 as        compared to $6,955,000 for the year ended December 31, 2006. General and administrative        expenses consist primarily of salaries and related expenses for executive, finance, legal        and other administrative personnel, recruitment expenses, professional fees and other        corporate expenses. The slight decrease in general and administrative expenses is primarily        attributable to lower stock compensation charges and a greater proportion of payroll        associated with research and development activities, partially offset by higher legal        expenses.

 

Primarily as a result of the factors described above, total expenses for the        year ended December 31, 2007 were $18,656,000, as compared to $13,544,000 for the year        ended December 31, 2006.

 

Other        Loss, net for the year ended December 31, 2007 is comprised of the following        items:

 

 

|                                                                                                      |   |   | **December 31, 2007** |   |
|-----------------------------------------------------------------------------------------------------------|--------|--------|-----------------------|--------|
|                                                                                                      |   |   |                  |   |
| Other than temporary impairment of investment in marketable                        equity security        |   | $      | (360,000              | )      |
| Loss from return of investment in marketable equity security                        to issuer             |   |   | (140,000              | )      |
| Write-off of deferred revenue relating to investment in                        marketable equity security |   |   | 434,000               |   |
| Total Other Loss, net                                                                                     |   | $      | (66,000               | )      |
|                                                                                                      |   |   |                  |   |

 

|   | **•** | $360,000 non-cash charge recorded to write-down our                        investment in Hana Biosciences as we determined that the decline in market                        value was other than temporary; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

|   | **•** | $140,000 non-cash charge to account for the return of Hana                        Biosciences’ shares, as a result of the Amended and Restated License                        Agreement with Hana Biosciences; and |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

|   | **•** | $434,000 benefit to write-off the remaining deferred revenue                        related to the shares received Hana Biosciences. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------|

         

Interest        income for the year ended December 31, 2007 was $632,000, as compared to $337,000 for the        year ended December 31, 2006 due to higher average cash and short-term investment        balances.

 

Income        tax benefit for the year ended December 31, 2007 was $658,000, as compared to $467,000 for        the year ended December 31, 2006. These increased income tax benefits resulted from the        sale of our New Jersey Net Operating Losses.

 

The        resulting net loss for the year ended December 31, 2007 was $16,963,000, as compared to        $9,460,000 for the year ended December 31, 2006.

 

62

 

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**FIVE        MONTHS ENDED DECEMBER 31, 2006 AND 2005 (UNAUDITED)**

 

License        fees and milestone fees earned from related parties for the five months ended December 31,        2006 were $2,067,000, as compared to $568,000 for the unaudited five months ended December        31, 2005. The increase is primarily due to milestone payments received in connection with        our license and development agreements for ZensanaTM with Hana Biosciences and        NitroMistTM with Par Pharmaceuticals.

 

Consulting revenues from related parties for the five months ended December        31, 2006 were $0 as compared to $109,000 for the five months ended December 31, 2005. The        decrease is primarily attributable to lower levels of revenue from Velcera related to        veterinary products.

 

Research        and development expenses for the five months ended December 31, 2006 were $3,396,000, as        compared to $2,082,000 for the five months ended December 31, 2005. Research and        development costs consist primarily of salaries and benefits, contractor and consulting        fees, clinical drug supplies of preclinical and clinical development programs, consumable        research supplies and allocated facility and administrative costs. Below is a summary of        our research and development expenses for the five months ended December 31, 2006 and        2005.

 

 

|                                    |   |   | **2006** |      | **2005** |   |
|-----------------------------------------|--------|--------|----------|-----------|----------|--------|
|                                    |   |   |     |      |     |   | **(Unaudited)** |   |
| NitroMistTM                        |   |   | $        | 602,000   |     | $      | 355,000 |   |
| Zolpidem                                |   |   |     | 1,216,000 |     |   | 380,000 |   |
| Sumatriptan                             |   |   |     | 109,000   |     |   | 118,000 |   |
| ZensanaTM                          |   |   |     | —   |     |   | 221,000 |   |
| Propofol                                |   |   |     | —   |     |   | — |   |
| Alprazolam                              |   |   |     | —   |     |   | — |   |
| Tizanidine                              |   |   |     | 161,000   |     |   | — |   |
| Ropinirole                              |   |   |     | 43,000    |     |   | — |   |
| Other research and development costs    |   |   |     | 467,000   |     |   | 283,000 |   |
| Internal costs                          |   |   |     | 798,000   |     |   | 725,000 |   |
| Total research and development expenses |   |   | $        | 3,396,000 |     | $      | 2,082,000 |   |

 

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

 

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

         

|   | **•** | ZensanaTM and Propofol - third-party direct project                        expenses relating to the development of ZensanaTM. As our partners,                        Hana Biosciences and Manhattan Pharmaceuticals, are overseeing all clinical                        development and regulatory approval activities for these product                        candidates, we do not expect to devote a significant amount of resources to                        these product candidates; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Alprazolam – third-party direct project expenses                        relating to the development of our alprazolam oral spray product candidate.                        We have determined that, in order to devote sufficient resources to other                        product candidates, it is appropriate to defer further efforts on                        alprazolam; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Other research and development costs – direct expenses                        not attributable to a specific product candidate; and |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Internal costs – costs related primarily to personnel                        and overhead. We do not allocate these expenses to specific product                        candidates as these costs relate to all research and development                        activities. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Research        and development expenses in the five months ended December 31, 2006 increased primarily as        a result of the following items:

 

|   | **•** | $247,000 increase related to the establishment of a reserve                        for certain raw materials and process validation batches for our                        NitroMistTM product candidate; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

63

 

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|   | **•** | $836,000 increase primarily related to product development                        and clinical trial costs for our zolpidem product candidate; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | $161,000 increase primarily related to product development                        costs for our tizanidine product candidate; and |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------|

         

|   | **•** | $221,000 decrease related to clinical trail material costs                        for ZensanaTM incurred during the five months ended December 31, 2005.                        Such costs did not recur during the five months ended December 31,                        2006. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

Consulting, selling, general and administrative expenses for the five months        ended December 31, 2006 were $3,123,000 as compared to $3,347,000 for the five months ended        December 31, 2005. Consulting, selling, general and administrative expenses consist        primarily of salaries and related expenses for executive, finance, legal and other        administrative personnel, recruitment expenses, professional fees and other corporate        expenses. The decrease in consulting, selling, general and administrative costs is        primarily related to lower payroll and other personnel related costs during the period,        partially offset by higher costs associated with external consultants.

 

Total        costs and expenses for the five months ended December 31, 2006 were $6,519,000 as compared        to $5,429,000 for the five months ended December 31, 2005 primarily due to the increase in        research and development expenses, partially offset by the decrease in selling general and        administrative expenses noted above.

 

Interest        income for the five months ended December 31, 2006 was $180,000 as compared to $67,000 for        the five months ended December 31, 2005 due to higher average cash and short-term        investment balances and a general increase in interest rates.

 

Income        tax benefit for the five months ended December 31, 2006 was $467,000 as compared to        $256,000 for the five months ended December 31, 2005. These increased income tax benefits        resulted from the sale of our New Jersey Net Operating Losses.

 

The        resulting net loss for the five months ended December 31, 2006 was $3,805,000 as compared        to $4,429,000 for the five months ended December 31, 2005.

 

**FISCAL        YEARS ENDED JULY 31, 2006 AND 2005**

 

License        fees and milestone fees earned from related parties for the fiscal year ended July 31, 2006        were $1,622,000, as compared to $141,000 for the fiscal year ended July 31, 2005. The        increase is primarily due to milestone payments received in connection with our license and        development agreement for ondansetron with Hana Biosciences.

 

Consulting revenues from related parties for the fiscal year ended July 31,        2006 were $228,000 as compared to $298,000 for the fiscal year ended July 31, 2005. The        decrease is primarily attributable to lower levels of revenue from Velcera and Manhattan        Pharmaceuticals, related to veterinary products and propofol, respectively.

 

64

 

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Research        and development expenses for the fiscal year ended July 31, 2006 were $5,275,000, as        compared to $3,826,000 for the fiscal year ended July 31, 2005. Research and development        costs consist primarily of salaries and benefits, contractor and consulting fees, clinical        drug supplies of preclinical and clinical development programs, consumable research        supplies and allocated facility and administrative costs. Below is a summary of our        research and development expenses for the fiscal years ended July 31, 2006 and        2005.

 

 

|                                    |   | **2006** |      | **2005** |   |
|-----------------------------------------|--------|----------|-----------|----------|--------|
| NitroMistTM                        |   | $        | 1,084,000 |     | $      | 689,000 |   |
| Zolpidem                                |   |     | 883,000   |     |   | 116,000 |   |
| Sumatriptan                             |   |     | 403,000   |     |   | 186,000 |   |
| ZensanaTM                          |   |     | 221,000   |     |   | 99,000 |   |
| Propofol                                |   |     | —   |     |   | — |   |
| Alprazolam                              |   |     | —   |     |   | 238,000 |   |
| Tizanidine                              |   |     | —   |     |   | — |   |
| Ropinirole                              |   |     | 15,000    |     |   | — |   |
| Other research and development costs    |   |     | 926,000   |     |   | 385,000 |   |
| Internal costs                          |   |     | 1,743,000 |     |   | 2,113,000 |   |
| Total research and development expenses |   | $        | 5,275,000 |     | $      | 3,826,000 |   |

 

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

 

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

         

|   | **•** | ZensanaTM and Propofol - third-party direct project                        expenses relating to the development of ZensanaTM. As our partners,                        Hana Biosciences and Manhattan Pharmaceuticals, are overseeing all clinical                        development and regulatory approval activities for these product                        candidates, we do not expect to devote a significant amount of resources to                        these product candidates; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Alprazolam – third-party direct project expenses                        relating to the development of our alprazolam oral spray product candidate.                        We have determined that, in order to devote sufficient resources to other                        product candidates, it is appropriate to defer further efforts on                        alprazolam; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Other research and development costs – direct expenses                        not attributable to a specific product candidate; and |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Internal costs – costs related primarily to personnel                        and overhead. We do not allocate these expenses to specific product                        candidates as these costs relate to all research and development                        activities. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Research        and development expenses in the fiscal year ended July 31, 2006 increased primarily as a        result of the following items:

 

|   | **•** | $395,000 increase related to process validation and method                        transfer activities for our NitroMistTM product candidate; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|

         

|   | **•** | $767,000 increase primarily related to product development                        costs for our zolpidem product candidate; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | $217,000 increase primarily related to product development                        costs for our sumatriptan product candidate; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | $541,000 increase related to other research and development                        costs primarily as a result of higher lab supplies expense; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | $238,000 decrease related to our alprazolam product                        candidate as we have decided to defer further efforts on this product                        candidate; and |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

65

 

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|   | **•** | $370,000 decrease related to internal costs primarily as a                        result of lower headcount in the fiscal year ended July 31, 2006, as                        compared to the fiscal year ended July 31, 2005. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Consulting, selling, general and administrative expenses for the fiscal year        ended July 31, 2006 were $7,179,000 as compared to $6,391,000 for the fiscal year ended        July 31, 2005. Consulting, selling, general and administrative expenses consist primarily        of salaries and related expenses for executive, finance, legal and other administrative        personnel, recruitment expenses, professional fees and other corporate expenses. The        increase in consulting, selling, general and administrative costs is primarily related to        the following items:

 

|   | **•** | $1,038,000 non-cash charge in the fiscal year ended July 31,                        2006 for stock-compensation expense; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------|

         

|   | **•** | $440,000 decrease in outside legal costs; and |
|--------|------------|-----------------------------------------------|

 

|   | **•** | $307,000 decrease attributable to a non-cash charge recorded                        in the fiscal year ended July 31, 2005 for restricted shares of our common                        stock awarded to a consultant. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Total        costs and expenses for the fiscal year ended July 31, 2006 were $12,454,000 as compared to        $10,217,000 for the fiscal year ended July 31, 2005 primarily due to the net increases in        research and development and selling general and administrative expenses noted        above.

 

Interest        income for the fiscal year ended July 31, 2006 was $224,000 as compared to $87,000 for        fiscal year ended July 31, 2005 due to a general increase in interest rates.

 

Income        tax benefit for the fiscal year ended July 31, 2006 was $256,000 as compared to $241,000        for the fiscal year ended July 31, 2005. These benefits resulted from the sale of our New        Jersey Net Operating Losses.

 

The        resulting net loss for the fiscal year ended July 31, 2006 was $10,084,000 as compared to        $9,450,000 for the fiscal year ended July 31, 2005.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

From our        inception, our principal sources of capital have been consulting revenues, private        placements and public offerings of our securities, as well as loans and capital        contributions from our principal stockholders. We have had a history of recurring losses,        giving rise to an accumulated deficit as of December 31, 2007 of $65,243,000, as compared        to $48,280,000 as of December 31, 2006. We have had negative cash flow from operating        activities of $15,240,000 for the year ended December 31, 2007, $1,782,000 for the        five-months ended December 31, 2006, $8,855,000 for the fiscal year ended July 31, 2006,        and $6,258,000 for the fiscal year ended July 31, 2005. As of December 31, 2007, we had        working capital of $3,811,000, as compared to $18,686,000 as of December 31, 2006,        representing a net decrease in working capital of approximately $14,875,000. As explained        further below, such decrease is primarily attributable to a net decrease in cash,        short-term investments and investment in marketable equity security and an increase in        accounts payable.

 

Net cash        used in operating activities was $15,240,000 for the year ended December 31, 2007, as        compared to $6,764,000 for the year ended December 31, 2006. The $8,476,000 increase is        primarily due to the following:

 

|   | **•** | $7,503,000 increase in net loss in the year ended December                        31, 2007 compared with the year ended December 31, 2006. As more fully                        described above, the increase in the net loss is primarily due to a                        decrease in revenues and an increase in total expenses; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

|   | **•** | $628,000 decrease in deferred revenue for the year ended                        December 31, 2007, as compared to a $162,000 decrease for the year ended                        December 31, 2006. Such fluctuation is attributable to the write-off and                        recognition in the statement of operations of deferred revenue associated                        with the Hana Biosciences’ shares and upfront license payments from                        Par during the fiscal year ended December 30, 2007; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | $574,000 increase in prepaid expenses and other current                        assets for the year ended December 31, 2007, as compared to a $66,000                        increase for the year ended December 31, 2006. Such fluctuation is                        attributable to an increase in prepaid supplies associated with increased                        clinical and manufacturing activities for our key products, zolpidem and                        sumatriptan; and |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | $500,000 non-cash charge in the year ended December 31, 2007                        related to the write-down and subsequent return to issuer of an investment                        in Hana Biosciences, offset by a $551,000 non-cash charge in the year ended                        December 31, 2006 for an increase to the reserve for inventory. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

66

 

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Net cash        provided by investing activities was approximately $3,612,000 for the year ended December        31, 2007, as compared to $2,710,000 used in investing activities for the year ended        December 31, 2006. The difference is primarily a result of higher net maturities of        short-term investments in the year ended December 31, 2007.

 

Cash        provided by financing activities was approximately $1,426,000 for the year ended December        31, 2007, as compared to $22,821,000 for the year ended December 31, 2006. The $21,395,000        decrease is primarily attributable to the year ended December 31, 2006 including        $22,342,000 of net proceeds from private placements we completed in April 2006 and December        2006, as compared to the year ended December 31, 2007 including the remaining $1,395,000 of        net proceeds received in January 2007 from the private placement we completed in December        2006.

Until        and unless our operations generate significant revenues and cash flow, we will attempt to        continue to fund operations from cash on hand and through the sources of capital described        below. Our long-term liquidity is contingent upon achieving sales and positive cash flows        from operating activities, and/or obtaining additional financing. The most likely sources        of financing include private placements of our equity or debt securities or bridge loans to        us from third-party lenders, license payments from current and future partners, and royalty        payments from sales of approved drugs by partners. We can give no assurances that any        additional capital that we are able to obtain will be sufficient to meet our needs. On        December 27, 2006, we completed a private placement of our common stock and warrants to        purchase shares of common stock in which we received gross proceeds of $14.2 million and        approximate net proceeds of $13.1 million, of which $11.7 million was received in December        2006 and $1.4 million was received in January 2007.

 

During        the fourth quarter 2007, we significantly reduced clinical development activities on our        product candidate pipeline, as we did not believe that we had sufficient cash to sustain        such activities. Despite this reduction in expenditures for clinical activities, we require        capital to sustain our existing organization until such time as clinical activities can be        resumed. Given the current level of spending, we estimate that we will have sufficient cash        on hand to fund operations through the middle of the second calendar quarter, 2008. Funding        for the Company’s future development activities could be secured through new        strategic partnerships and/or the sale of our common stock or other securities. There can        be no assurance that such capital will be available to us in a timely manner or on        favorable terms, if at all. There are a number of risks and uncertainties related to our        attempt to complete a financing or strategic partnering arrangement that are outside our        control. We may not be able to obtain additional financing on terms acceptable to us, or at        all. If we are unsuccessful at obtaining additional financing as needed, we may be required        to significantly curtail or cease operations. We will need additional financing thereafter        until we achieve profitability, if ever.

Our        audited financial statements for the fiscal year ended December 31, 2007, were prepared        under the assumption that we will continue our operations as a going concern. We were        incorporated in 1982, and do not have a history of earnings. As a result, our independent        registered public accounting firm in their audit report has expressed substantial doubt        about our ability to continue as a going concern. Continued operations are dependent on our        ability to complete equity or debt formation activities or to generate profitable        operations. Such capital formation activities may not be available or may not be available        on reasonable terms. Our financial statements do not include any adjustments that may        result from the outcome of this uncertainty. If we cannot continue as a viable entity, our        stockholders may lose some or all of their investment in the Company.

 

**OFF-BALANCE SHEET ARRANGEMENTS**

 

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

 

67

 

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**CONTRACTUAL OBLIGATIONS**

 

The        following table sets forth our aggregate contractual cash obligations as of December 31,        2007.

 

|                               |   |      |   |   | **Payments Due By Period** |   |   |          |   |   |          |
|------------------------------------|--------|-----------|--------|--------|----------------------------|--------|--------|---------------|--------|--------|---------------|
|                               |   | **Total** |   |   | **<1 year**             |   |   | **1-3 years** |   |   | **3-5 years** |   |   | **5 years +** |   |
| Capital leases                     | $      | 312,000   |   | $      | 164,000                    |   | $      | 144,000       |   | $      | 4,000         |   | $ | — |   |
| Operating leases                   |   | 2,049,000 |   |   | 343,000                    |   |   | 732,000       |   |   | 731,000       |   |   | 243,000 |   |
| Consulting agreement               |   | 223,000   |   |   | 223,000                    |   |   | —       |   |   | —       |   |   | — |   |
| Employment agreements              |   | 1,417,000 |   |   | 824,000                    |   |   | 593,000       |   |   | —       |   |   | — |   |
| Total contractual cash obligations | $      | 4,001,000 |   | $      | 1,554,000                  |   | $      | 1,469,000     |   | $      | 735,000       |   | $ | 243,000 |   |

 

We        expect to continue to incur substantial additional operating losses from costs related to        the continued development of our product candidates, clinical trials, and administrative        activities. For a full discussion of risks and uncertainties regarding our need for        additional financing, see Item 1A. “Risk Factors-We will Require Significant Capital        for Product Development and Commercialization.”

 

On        September 13, 2007, in connection with his resignation, Dr. Egberts and the Company entered        into a Separation, Consulting and General Release Agreement (the “Agreement”).        Under the terms of the Agreement, Dr. Egberts will provide the Company with certain        consulting services, not to exceed forty (40) hours in any calendar month, for a period of        twelve (12) months, ending July 25, 2008 (the “Term”). Dr. Egberts shall        receive fees for such services at a rate of $363,000 per annum, payable in equal bi-weekly        installments during the Term. In addition, options previously granted to Dr. Egberts which        were outstanding as of July 25, 2007 but not otherwise vested and exercisable, immediately        vested and became exercisable under the Agreement and shall remain outstanding until the        expiration of the Term. The Agreement contains customary provisions concerning        confidentiality and non-competition.

 

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

 

We        invest primarily in short-term, highly-rated investments, including U.S. government        securities and certificates of deposit guaranteed by banks. Our market risk exposure        consists principally of exposure to changes in interest rates. Because of the short-term        maturities of our investments, however, we do not believe that a decrease in interest rates        would have a significant negative impact on the value of our investment        portfolio.

 

**ITEM        8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.**

 

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

 

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

 

None.

 

**ITEM        9A(T). CONTROLS AND PROCEDURES.**

 

Evaluation of Disclosure Controls and Procedures

 

We        maintain disclosure controls and procedures or controls and other procedures that are        designed to ensure that the information required to be disclosed by us in the reports that        we file or submit under the Securities Exchange Act of 1934, or Exchange Act, is recorded,        processed, summarized and reported, within the time periods specified in the Securities and        Exchange Commission’s, or SEC, 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 our management, including our Chief Executive        Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding        required disclosure.

 

68

 

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We        carried out an evaluation, under the supervision and with the participation of our Chief        Executive and Chief Financial Officers, of the effectiveness of the design and operation of        our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of        the Exchange Act) as of December 31, 2007. Based on this evaluation, our Chief Executive        Officer and our Chief Financial Officer concluded that as of December 31, 2007, our        disclosure controls and procedures were effective at providing reasonable assurance that        the information required to be disclosed by us in reports filed under the Exchange Act is        (i) recorded, processed, summarized and reported within the time periods specified in the        SEC’s rules and forms; and (ii) accumulated and communicated to our management,        including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow        timely decisions regarding disclosure.

 

**Management’s Report on Internal Control Over Financial        Reporting**

 

Our        management is responsible for establishing and maintaining adequate internal control over        financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f)        or 15d-15(f) promulgated under the Exchange Act and is a process designed by, or under the        supervision of, our principal executive and principal financial officers and effected by        our board of directors, management and other personnel, to provide reasonable assurance        regarding the reliability of financial reporting and the preparation of financial        statements for external purposes in accordance with generally accepted accounting        principles and includes those policies and procedures that:

         

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

 

|   | **•** | Provide reasonable assurance that transactions are recorded                        as necessary to permit preparation of financial statements in accordance                        with generally accepted accounting principles, and that receipts and                        expenditures of the company are being made only in accordance with                        authorizations of our management and directors; and |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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

 

Because        of its inherent limitations, internal control over financial reporting may not prevent or        detect misstatements. Projections of any evaluation of effectiveness to future periods are        subject to the risk that controls may become inadequate because of changes in conditions,        or that the degree of compliance with the policies or procedures may        deteriorate.

 

Our        management assessed the effectiveness of the company’s internal control over        financial reporting as of December 31, 2007. In making this assessment, the        company’s management used the criteria set forth by the Committee of Sponsoring        Organizations of the Treadway Commission (COSO) in*Internal        Control-Integrated Framework.*

 

Based on        its evaluation, our management has concluded that, as of December 31, 2007, our        internal control over financial reporting was effective. This annual report does not        include an attestation report of our registered public accounting firm regarding internal        control over financial reporting. Management’s report was not subject to attestation        by our registered public accounting firm pursuant to temporary rules of the Securities and        Exchange Commission that permit us to provide only management’s report in this annual        report.

 

Changes        in Internal Controls over Financial Reporting

 

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

 

**ITEM 9B.        OTHER INFORMATION.**

 

None.

 

69

 

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**PART        III**

 

**ITEM 10.        DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.**

 

Certain        of the information required to be disclosed by this Item with respect to our executive        officers is set forth under the caption “Executive Officers and Directors”        contained in Part I, Item 1 of this Annual Report on Form 10-K.

 

Certain        information required to be disclosed by this Item about our board of directors is        incorporated in this Annual Report on Form 10-K by reference from the section entitled        “Election of Directors,” and “Board of Directors and Committees”        contained in our definitive proxy statement for our annual meeting of stockholders        scheduled to be held in June 2008, which we intend to file within 120 days of the end of        our fiscal year (December 31, 2007).

 

Information required to be disclosed by this Item about the Section 16(a)        compliance of our directors and executive officers is incorporated in this Annual Report on        Form 10-K by reference from the section entitled “Section 16(a) Beneficial Ownership        Reporting Compliance” contained in our definitive proxy statement for our annual        meeting of stockholders scheduled to be held in June 2008, which we intend to file within        120 days of the end of our fiscal year (December 31, 2007).

 

Information required to be disclosed by this Item about our board of        directors, the audit committee of our board of directors, our audit committee financial        expert, our Business Conduct Policy, and other corporate governance matters is incorporated        in this Annual Report on Form 10-K by reference from the section entitled “Meetings        and Committees of our Board” contained in our definitive proxy statement related to        our annual meeting of stockholders scheduled to be held in June 2008, which we intend to        file within 120 days of the end of our fiscal year (December 31, 2007).

 

The text        of our Business Conduct Policy, which applies to all of our directors, officers and        employees is posted in the “Corporate Governance” section of our        website,www.novadel.com. A        copy of the Business Conduct Policy can be obtained free of charge on our website or can be        obtained and will be provided to any person without charge upon written request to our        Corporate Secretary at our executive offices, 25 Minneakoning Road, Flemington, New Jersey        08822. We intend to disclose on our website any amendments to, or waivers from, our        Business Conduct Policy that are required to be disclosed pursuant to the rules of the        Securities and Exchange Commission and American Stock Exchange.

 

**ITEM 11.        EXECUTIVE COMPENSATION.**

 

Incorporated by reference to “Compensation Discussion and        Analysis,” “Compensation Committee Report,” “Summary Compensation        Table,” “Grants of Plan-Based Awards,” “Outstanding Equity        Awards,” “Option Exercises and Stock Vested,” “Potential Payments        Upon Termination” and “Directors Compensation” and “Compensation        Committee Interlocks and Insider Participants” contained in our definitive proxy        statement related to our annual meeting of stockholders scheduled to be held in June 2008,        which we intend to file within 120 days of the end of our fiscal year (December 31,        2007).

 

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

 

Incorporated by reference to “Stock Ownership of Directors, Management        and Certain Beneficial Owners” contained in our definitive proxy statement related to        our annual meeting of stockholders scheduled to be held in June 2008, which we intend to        file within 120 days of the end of our fiscal year (December 31, 2007).

 

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

 

Incorporated by reference to “Certain Relationships and Related        Transactions” and “Independence of Directors” contained in our definitive        proxy statement related to our annual meeting of stockholders scheduled to be held in June        2008, which we intend to file within 120 days of the end of our fiscal year (December 31,        2007).

 

70

 

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**ITEM        14. PRINCIPAL ACCOUNTING FEES AND SERVICES.**

 

Incorporated by reference to “Independent Registered Public Accounting        Firm’s Fee Summary” contained in our definitive proxy statement related to our        annual meeting of stockholders scheduled to be held in June 2008, which we intend to file        within 120 days of the end of our fiscal year (December 31, 2007).

 

**PART IV**

 

**ITEM 15.        EXHIBITS, FINANCIAL STATEMENT SCHEDULES.**

 

 

| (a) | Financial Statements and Schedules: |
|-----|-------------------------------------|

 

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

 

 

The following financial statements and report of independent registered        public accounting firm are included herein:

         

| Report of Independent                        Registered Public Accounting Firm |   | F-1 |
|--------------------------------------------------------------------------------|--------|-----|
| Balance Sheets                                                                 |   | F-2 |
| Statements of                        Operations                                |   | F-3 |
| Statements of Changes in                        Stockholders’ Equity     |   | F-4 |
| Statements of Cash                        Flows                                |   | F-5 |
| Notes to Financial                        Statements                           |   | F-6 |

         

 

|   | 2. | Financial Statement Schedules |
|--------|----|-------------------------------|

Not applicable.

 

|   | 3. | List of Exhibits |
|--------|----|------------------|

 

 

71

 

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**INDEX        TO EXHIBITS**

 

The        following exhibits are included with this Annual Report on Form 10-K. All management        contracts or compensatory plans or arrangements are marked with an asterisk.

 

| EXHIBIT NO. |   | DESCRIPTION                                                                                           |   | METHOD OF FILING                                                                                                                                                                                                 |
|-------------|--------|-------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1         |   | Restated Certificate of Incorporation of the                        Company                           |   | Incorporated by reference to Exhibit 3.1 of the                        Company’s Quarterly Report on Form 10-QSB, as filed with the SEC on                        June 14, 2004                            |
|        |   |                                                                                                  |   |                                                                                                                                                                                                             |
| 3.2         |   | Certificate of Amendment to the Certificate of Incorporation                        of the Company    |   | Incorporated by reference to Exhibit 3.1 of the                        Company’s Annual Report on Form 10-K, as filed with the SEC on March                        26, 2007                                |
|        |   |                                                                                                  |   |                                                                                                                                                                                                             |
| 3.3         |   | Amended and Restated By-laws of the Company                                                           |   | Incorporated by reference to Exhibit 3.1 of the                        Company’s Form 8-K, as filed with the SEC on September 9,                        2005                                               |
|        |   |                                                                                                  |   |                                                                                                                                                                                                             |
| 4.1         |   | Form of Class C Warrant for the Purchase of Shares of Common                        Stock             |   | Incorporated by reference to Exhibit 4.1 to the                        Company’s Current Report on Form 8-K, as filed with the SEC on                        January 12, 2004                              |
|        |   |                                                                                                  |   |                                                                                                                                                                                                             |
| 4.2         |   | Form of Warrant issued to certain accredited investors and                        placement agents    |   | Incorporated by reference to Exhibit 4.1 of the                        Company’s Form 8-K, as filed with the SEC on April 17,                        2006                                                  |
|        |   |                                                                                                  |   |                                                                                                                                                                                                             |
| 4.3         |   | Form of Warrant issued to certain accredited investors and                        the placement agent |   | Incorporated by reference to Exhibit 4.1 of the                        Company’s Current Report on Form 8-K filed with the SEC on January 4,                        2007                                   |
|        |   |                                                                                                  |   |                                                                                                                                                                                                             |
| 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 under the 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)                 |
|        |   |                                                                                                  |   |                                                                                                                                                                                                             |
| 10.3*       |   | 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 the 1997 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)                 |
|        |   |                                                                                                  |   |                                                                                                                                                                                                             |
| 10.5*       |   | 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 1998 Stock Option                        Plan                |   | Incorporated by reference to Exhibit 4.2 to the                        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 Non-Qualified 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)   |

 

72

 

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|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.8   |   | Common Stock and Warrant Purchase Agreement, dated December                        12, 2001, by and among the Company and certain purchasers                                                                                                         |   | Incorporated by reference to Exhibit A to the Schedule 13D                        as filed by Lindsay A. Rosenwald with the SEC on December 21,                        2001                                                  |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.9   |   | Amendment No. 1, dated January 6, 2002, to the Common Stock                        and Warrant Purchase Agreement dated December 12, 2001 between the Company                        and certain purchasers                                          |   | Incorporated by reference to Exhibit 10.25 to the                        Company’s Registration Statement of Form SB-2, as filed with the SEC                        on April 15, 2002 (File No. 333-86262)            |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.10  |   | Lease Agreement, dated March 19, 2003, by and between the                        Company and Macedo Business Park, II, L.L.C.                                                                                                                        |   | Incorporated by reference to Exhibit 10.28 to the                        Company’s Quarterly Report on Form 10-QSB for the period ended April                        30, 2003, as filed with the SEC on June 19, 2003  |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.11  |   | Amendment Number 1 to Lease Agreement dated March 19, 2003                        between Macedo Business Park, II, L.L.C. and the Company, dated as of March                        19, 2003                                                        |   | Incorporated by reference to Exhibit 10.29 to the                        Company’s Quarterly Report on Form 10-QSB for the period ended April                        30, 2003, as filed with the SEC on June 19, 2003  |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.12  |   | License and Development Agreement, effective as of April 4,                        2003, by and between the Company and Manhattan Pharmaceuticals,                        Inc.                                                                       |   | Incorporated by reference to Exhibit 10.31 to the                        Company’s Annual Report on Form 10-KSB, as filed with the SEC on                        March 11, 2004                                        |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.13  |   | Development, Manufacturing and Supply Agreement, dated July                        28, 2004, by and between the Company and Par Pharmaceutical,                        Inc.                                                                          |   | Incorporated by reference to Exhibit 10.13 to the                        Company’s Annual Report on Form 10-KSB, as filed with the SEC on                        November 15, 2004                                     |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.14  |   | Second Amendment to License and Development Agreement, dated                        as of June 22, 2004, by and between the Company and the Veterinary Company,                        Inc.                                                          |   | Incorporated by reference to Exhibit 10.14 to the                        Company’s Annual Report on Form 10-KSB, as filed with the SEC on                        November 15, 2004                                     |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.15* |   | Employment Agreement, dated as of May 23, 2003, by and                        between the Company and Barry Cohen                                                                                                                                    |   | Incorporated by reference to Exhibit 10.30 to the                        Company’s Quarterly Report on Form 10-QSB for the period ending April                        30, 2003, as filed with the SEC on June 19, 2003 |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.16* |   | Disclosure and Release Agreement Related to the Exchange of                        Non-Plan Options for Stock Options under the NovaDel Pharma Inc. 1998 Stock                        Option Plan by and between the Company and Thomas E. Bonney    |   | Incorporated by reference to Exhibit 10.3 of the                        Company’s Form 8-K, as filed with the SEC on August 2,                        2005                                                             |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.17* |   | Disclosure and Release Agreement Related to the Exchange of                        Non-Plan Options for Stock Options under the NovaDel Pharma Inc. 1998 Stock                        Option Plan by and between the Company and William F. Hamilton |   | Incorporated by reference to Exhibit 10.2 of the                        Company’s Form 8-K, as filed with the SEC on August 2,                        2005                                                             |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.18* |   | Disclosure and Release Agreement Related to the Exchange of                        Non-Plan Options for Stock Options under the NovaDel Pharma Inc. 1998 Stock                        Option Plan by and between the Company and Charles Nemeroff    |   | Incorporated by reference to Exhibit 10.4 of the                        Company’s Form 8-K, as filed with the SEC on August 2,                        2005                                                             |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.19* |   | Employment Agreement, dated as of December 20, 2004, by and                        between the Company and Michael Spicer                                                                                                                            |   | Incorporated by reference to Exhibit 10.35 of the                        Company’s Form 8-K, as filed with the SEC on December 23,                        2004                                                         |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.20* |   | Amendment to Employment Agreement dated September 2, 2005,                        by and between the Company and Michael E.B. Spicer                                                                                                                 |   | Incorporated by reference to Exhibit 10.2 of the                        Company’s Form 8-K, as filed with the SEC on September 9,                        2005                                                          |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.21* |   | 1998 Stock Option Plan Nonqualified Stock Option Agreement                        dated July 28, 2005, by and between the Company and Thomas E.                        Bonney                                                                        |   | Incorporated by reference to Exhibit 10.25 of the                        Company’s Annual Report on Form 10-KSB for the period ended July 31,                        2005, as filed with the SEC on October 31, 2005   |

 

 

73

 

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|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.22* |   | 1998 Stock Option Plan Nonqualified Stock Option Agreement                        dated July 28, 2005, by and between the Company and William F.                        Hamilton                      |   | Incorporated by reference to Exhibit 10.27 to the                        Company’s Annual Report on Form 10-KSB for the period ended July 31,                        2005, as filed with the SEC on October 31, 2005 |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.23* |   | 1998 Stock Option Plan Nonqualified Stock Option Agreement                        dated July 28, 2005, by and between the Company and Charles                        Nemeroff                         |   | Incorporated by reference to Exhibit 10.29 of the                        Company’s Annual Report on Form 10-KSB for the period ended July 31,                        2005, as filed with the SEC on October 31, 2005 |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.24  |   | Amendment No. 1 to License and Development Agreement dated                        as of August 8, 2005, by and between the Company and Hana Biosciences                        Inc.                   |   | Incorporated by reference to Exhibit 99.1 of the                        Company’s Form 8-K, as filed with the SEC on August 12,                        2005                                                          |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.25  |   | Separation, Consulting and General Release Agreement                        effective as of July 25, 2007, by and between NovaDel Pharma Inc. and Jan                        H. Egberts, M.D.         |   | Incorporated by reference to Exhibit 10.1 of the                        Company’s Form 8-K, as filed with the SEC on September 20,                        2007                                                       |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.26* |   | Nonqualified Stock Option Agreement dated September 26,                        2005, by and between the Company and Jan H. Egberts, M.D.                                                              |   | Incorporated by reference to Exhibit 10.2 of the                        Company’s Form 8-K, as filed with the SEC on September 28,                        2005                                                       |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.27* |   | NovaDel Pharma Inc. 2006 Equity Incentive Plan                                                                                                                                                        |   | Incorporated by reference to Exhibit 10.1 of the                        Company’s Form 8-K, as filed with the SEC on January 23,                        2006                                                         |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.28* |   | 1998 Stock Option Plan Nonqualified Stock Option Agreement                        dated December 14, 2005, by and between the Company and J. Jay                        Lobell                        |   | Incorporated by reference to Exhibit 10.4 of the                        Company’s Quarterly Report on Form 10-Q, as filed with the SEC on                        March 15, 2006                                      |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.29* |   | 1998 Stock Option Plan Nonqualified Stock Option Agreement                        dated January 17, 2006, by and between the Company and Thomas                        Bonney                         |   | Incorporated by reference to Exhibit 10.2 of the                        Company’s Quarterly Report on Form 10-Q, as filed with the SEC on                        March 15, 2006                                      |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.30* |   | 1998 Stock Option Plan Nonqualified Stock Option Agreement                        dated January 17, 2006, by and between the Company and William                        Hamilton                      |   | Incorporated by reference to Exhibit 10.3 of the                        Company’s Quarterly Report on Form 10-Q, as filed with the SEC on                        March 15, 2006                                      |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.31* |   | 1998 Stock Option Plan Nonqualified Stock Option Agreement                        dated January 17, 2006, by and between the Company and Charles                        Nemeroff                      |   | Incorporated by reference to Exhibit 10.5 of the                        Company’s Quarterly Report on Form 10-Q, as filed with the SEC on                        March 15, 2006                                      |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.32* |   | 1998 Stock Option Plan Nonqualified Stock Option Agreement                        dated January 17, 2006, by and between the Company and Steven                        Ratoff                         |   | Incorporated by reference to Exhibit 10.6 of the                        Company’s Quarterly Report on Form 10-Q, as filed with the SEC on                        March 15, 2006                                      |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.33  |   | Form of Securities Purchase Agreement by and between the                        Company and certain accredited investors (with attached schedule of parties                        and terms thereto) |   | Incorporated by reference to Exhibit 10.1 of the                        Company’s Form 8-K, as filed with the SEC on April 17,                        2006                                                           |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.34  |   | Registration Rights Agreement by and between the Company and                        certain accredited investors (with attached schedule of parties and terms                        thereto)         |   | Incorporated by reference to Exhibit 10.2 of the                        Company’s Form 8-K, as filed with the SEC on April 17,                        2006                                                           |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.35  |   | Placement Agent Agreement, dated March 15, 2006, by and                        between the Company, Griffin Securities, Inc. and Paramount BioCapital,                        Inc.                    |   | Incorporated by reference to Exhibit 10.1 of the                        Company’s Form 8-K, as filed with the SEC on April 20,                        2006                                                           |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |

 

74

 

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| 10.36* |   | Employment Agreement dated December 4, 2006 by and between                        the Company and David H. Bergstrom, Ph.D.                                                                                               |   | Incorporated by reference to Exhibit 10.1 of the                        Company’s Current Report on Form 8-K, as filed with the SEC on                        December 8, 2006      |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.37* |   | Incentive Stock Option Award between the Company and David                        H. Bergstrom dated December 4, 2006                                                                                                     |   | Incorporated by reference to Exhibit 10.2 of the                        Company’s Current Report on Form 8-K, as filed with the SEC on                        December 8, 2006      |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.38* |   | Nonqualified Stock Option Award between the Company and                        David H. Bergstrom, dated December 4, 2006                                                                                                 |   | Incorporated by reference to Exhibit 10.3 of the                        Company’s Current Report on Form 8-K, as filed with the SEC on                        December 8, 2006      |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.39  |   | Securities Purchase Agreement by and between the Company and                        certain accredited investors (with attached schedule of parties and terms                        thereto)                             |   | Incorporated by reference to Exhibit 10.1 of the                        Company’s Current Report on Form 8-K, as filed with the SEC on                        January 4, 2007       |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.40  |   | Placement Agent Agreement, dated as of November 21, 2006, by                        and between the Company and Oppenheimer & Co., Inc.                                                                               |   | Incorporated by reference to Exhibit 10.2 of the                        Company’s Current Report on Form 8-K, as filed with the SEC on                        January 4, 2007       |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.41* |   | Employment Agreement dated February 22, 2007 by and between                        the Company and Deni M. Zodda, Ph.D.                                                                                                   |   | Incorporated by reference to Exhibit 10.1 of the                        Company’s Current Report on form 8-K, as filed with the SEC on                        February 28, 2007     |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.42* |   | Incentive Stock Option Award between the Company and Deni M.                        Zodda dated February 22, 2007                                                                                                         |   | Incorporated by reference to Exhibit 10.2 of the                        Company’s Current Report on Form 8-K, as filed with the SEC on                        February 28, 2007     |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.43* |   | Nonqualified Stock Option Award between the Company and Deni                        M. Zodda dated February 22, 2007                                                                                                      |   | Incorporated by reference to Exhibit 10.3 of the                        Company’s Current Report on Form 8-K, as filed with the SEC on                        February 28, 2007     |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.44* |   | Amendment No. 2 to Employment Agreement dated March 12, 2007                        by and between the Company and Michael E. Spicer                                                                                      |   | Incorporated by reference to Exhibit 10.44 of the                        Company’s Annual Report on Form 10-K, as filed with the SEC on March                        26, 2007       |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.45* |   | Amendment 2007-1 to the NovaDel Pharma Inc. 1998 Stock                        Option Plan dated March 2, 2007                                                                                                             |   | Incorporated by reference to Exhibit 10.45 of the                        Company’s Annual Report on Form 10-K, as filed with the SEC on March                        26, 2007       |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.46* |   | Amendment 2007-1 to the NovaDel Pharma Inc. 2006 Equity                        Incentive Plan dated March 2, 2007                                                                                                         |   | Incorporated by reference to Exhibit 10.46 of the                        Company’s Annual Report on Form 10-K, as filed with the SEC on March                        26, 2007       |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.47  |   | Amended and Restated License and Development Agreement,                        dated as of July 31, 2007, by and between NovaDel Pharma Inc. and HANA                        Biosciences, Inc.                            |   | Incorporated by reference to Exhibit 10.1 of the                        Company’s Quarterly Report on Form 10-Q, as filed with the SEC on                        November 14, 2007. |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.48  |   | Product Development and Commercialization Sublicense                        Agreement, dated as of July 31, 2007, by and among NovaDel Pharma Inc.,                        HANA Biosciences and PAR Pharmaceuticals, Inc. |   | Incorporated by reference to Exhibit 10.2 of the                        Company’s Quarterly Report on Form 10-Q, as filed with SEC on                        November 14, 2007.     |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.49  |   | Termination Agreement, dated as of July 31, 2007, by and                        between NovaDel Pharma Inc. and PAR Pharmaceuticals, Inc.                                                                                 |   | Incorporated by reference to Exhibit 10.3 of the                        Company’s Quarterly Report on Form 10-Q, as filed with the SEC on                        November 14, 2007. |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.50* |   | Employment Agreement dated January 22, 2008, by and between                        the Company and Michael E. Spicer.                                                                                                     |   | Filed herewith                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 21.1   |   | Subsidiaries of the Registrant                                                                                                                                                                                            |   | The registrant has no subsidiaries                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 23.1   |   | Consent of J.H. Cohn LLP                                                                                                                                                                                                  |   | Filed herewith                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 31.1   |   | Certification of Chief Executive Officer under Rule                        13a-14(a)                                                                                                                                      |   | Furnished herewith                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |

 

 

75

 

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| 31.2   |   | Certification of Principal Financial Officer under Rule                        13a-14(a)                           |   | Furnished herewith |
|--------|--------|--------------------------------------------------------------------------------------------------------------------|--------|--------------------|
|   |   |                                                                                                               |   |               |
| 32.1   |   | Certifications of the Chief Executive Officer and Chief                        Financial Officer under 18 USC 1350 |   | Furnished herewith |

 

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

See Item 15(a)(3) above.

 

| (c) | Financial Statement Schedules. |
|-----|--------------------------------|

See Item 15(a)(2) above.

 

76

 

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**SIGNATURES**

 

In        accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant        caused this report to be signed on its behalf by the undersigned, thereunto duly        authorized.

 

 

|                 | **NovaDel Pharma Inc.**

                          |
|----------------------|---------------------------------------------------------|
| Date: March 31, 2008 | By:                                                     | /s/ STEVEN B. RATOFF |
|                 |                                                    | Steven B. Ratoff |
|                 |                                                    | Chairman, Interim President and Chief Executive                        Officer |

 

 

77

 

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

 

| SIGNATURES

                                             | TITLE                                                                                                                 | DATE                                                   |
|---------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------|
|  

                         

/s/ STEVEN B. RATOFF  |  

Chairman, Interim President and Chief Executive                        Officer

(Principal Executive Officer) |  

March 31, 2008                                 |
| Steven B. Ratoff                                              |                                                                                                                  |                                                   |
|                                                          |                                                                                                                  |                                                   |
|  

                         

/S/ MICHAEL E. SPICER |  

Chief Financial Officer

(Principal Financial and Accounting Officer)                                         |  

March 31, 2008                                 |
| Michael E. Spicer                                             |                                                                                                                  |                                                   |
| /S/ MARK J. BARIC                                             | Director                                                                                                              | March 31, 2008                                         |
| Mark J. Baric                                                 |                                                                                                                  |                                                   |
|  

/S/ THOMAS E. BONNEY                                  |  

Director                                                                                                      |  

                         

March 31, 2008 |
| Thomas E. Bonney                                              |                                                                                                                  |                                                   |
|                                                          |                                                                                                                  |                                                   |
|  

/S/ WILLIAM F. HAMILTON                               |  

Director                                                                                                      |  

March 31, 2008                                 |
| William F. Hamilton, Ph.D.                                    |                                                                                                                  |                                                   |
|                                                          |                                                                                                                  |                                                   |
|  

/S/ J. JAY LOBELL                                     |  

Director                                                                                                      |  

March 31, 2008                                 |
| J. Jay Lobell                                                 |                                                                                                                  |                                                   |
|                                                          |                                                                                                                  |                                                   |
|  

/S/ CHARLES NEMEROFF                                  |  

Director                                                                                                      |  

March 31, 2008                                 |
| Charles Nemeroff                                              |                                                                                                                  |                                                   |
|                                                          |                                                                                                                  |                                                   |

 

 

78

 

----

**INDEX        TO FINANCIAL STATEMENTS**

 

The        following financial statements are included in Part II, Item 8:

 

| Report of Independent Registered Public Accounting                        Firm | F-1    |
|--------------------------------------------------------------------------------|--------|
|                                                                           |   |
| Balance Sheets                                                                 | F-2    |
|                                                                           |   |
| Statements of Operations                                                       | F-3    |
|                                                                           |   |
| Statements of Changes in Stockholders’                        Equity     | F-4    |
|                                                                           |   |
| Statements of Cash Flows                                                       | F-5    |
|                                                                           |   |
| Notes to Financial Statements                                                  | F-6    |

 

 

79

 

----

**REPORT        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The        Stockholders and

Board of        Directors

NovaDel        Pharma Inc.

 

We have        audited the accompanying balance sheets of NovaDel Pharma Inc. as of December 31, 2007 and        December 31, 2006, and the related statements of operations, changes in stockholders’        equity and cash flows for the year ended December 31, 2007, the five months ended December        31, 2006 and for the fiscal years ended July 31, 2006 and 2005. 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. as of December 31, 2007 and        December 31, 2006, and its results of operations and cash flows for the year ended December        31, 2007, the five months ended December 31, 2006 and for the fiscal years ended July 31,        2006 and 2005, in conformity with accounting principles generally accepted in the United        States of America.

 

The        accompanying financial statements have been prepared assuming that the Company will        continue as a going concern. As discussed in Note 2 to the financial statements, the        Company has suffered recurring losses from operations and negative cash flows from        operating activities that raise substantial doubt about its ability to continue as a going        concern. Management’s plans in regard to these matters are also described in Note 2.        The financial statements do not include any adjustments that might result from the outcome        of this uncertainty.

 

As        discussed in Note 3 to the financial statements, the Company changed the manner in which it        accounts for share-based compensation in the fiscal year ended July 31, 2006.

 

|  

                         

/s/ J.H. COHN LLP

                         

Roseland, New Jersey

March 28, 2008

                          |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

F-1

 

----

**NOVADEL PHARMA INC.**

**BALANCE SHEETS**

**AS OF        DECEMBER 31, 2007 and DECEMBER 31, 2006**

 

| ASSETS                                                                                                                                                                 |   |   | **December 31, 2007** |   |   | **December 31, 2006** |   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------------------|--------|--------|-----------------------|--------|--------|
| Current Assets:                                                                                                                                                        |   |   |                  |   |   |                  |   |   |
| Cash and cash equivalents                                                                                                                                              |   | $      | 6,384,000             |   | $      | 16,586,000            |   |   |
| Short-term investments                                                                                                                                                 |   |   | —               |   |   | 3,690,000             |   |   |
| Investment in marketable equity security available for                        sale                                                                                     |   |   | —               |   |   | 466,000               |   |   |
| Assets held for sale                                                                                                                                                   |   |   | 492,000               |   |   | 518,000               |   |   |
| Prepaid expenses and other current assets                                                                                                                              |   |   | 1,146,000             |   |   | 572,000               |   |   |
|                                                                                                                                                                   |   |   |                  |   |   |                  |   |   |
| Total Current Assets                                                                                                                                                   |   |   | 8,022,000             |   |   | 21,832,000            |   |   |
| Property and equipment, net                                                                                                                                            |   |   | 1,972,000             |   |   | 2,125,000             |   |   |
| Other assets                                                                                                                                                           |   |   | 369,000               |   |   | 359,000               |   |   |
|                                                                                                                                                                   |   |   |                  |   |   |                  |   |   |
| TOTAL ASSETS                                                                                                                                                           |   | $      | 10,363,000            |   | $      | 24,316,000            |   |   |
|                                                                                                                                                                   |   |   |                  |   |   |                  |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                             |   |   |                  |   |   |                  |   |   |
| Current Liabilities:                                                                                                                                                   |   |   |                  |   |   |                  |   |   |
| Accounts payable                                                                                                                                                       |   |   | 1,632,000             |   |   | 798,000               |   |   |
| Accrued expenses and other current liabilities                                                                                                                         |   |   | 2,267,000             |   |   | 2,061,000             |   |   |
| Current portion of deferred revenue                                                                                                                                    |   |   | 148,000               |   |   | 162,000               |   |   |
| Current portion of capitalized lease obligation                                                                                                                        |   |   | 164,000               |   |   | 125,000               |   |   |
| Total Current Liabilities                                                                                                                                              |   |   | 4,211,000             |   |   | 3,146,000             |   |   |
|                                                                                                                                                                   |   |   |                  |   |   |                  |   |   |
| Non-current portion of deferred revenue                                                                                                                                |   |   | 1,830,000             |   |   | 2,444,000             |   |   |
| Non-current portion of capitalized lease                        obligation                                                                                             |   |   | 148,000               |   |   | 128,000               |   |   |
|                                                                                                                                                                   |   |   |                  |   |   |                  |   |   |
| Total Liabilities                                                                                                                                                      |   |   | 6,189,000             |   |   | 5,718,000             |   |   |
|                                                                                                                                                                   |   |   |                  |   |   |                  |   |   |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                          |   |   |                  |   |   |                  |   |   |
|                                                                                                                                                                   |   |   |                  |   |   |                  |   |   |
| STOCKHOLDERS’ EQUITY                                                                                                                                             |   |   |                  |   |   |                  |   |   |
| Preferred stock, $.001 par value:                                                                                                                                      |   |   |                  |   |   |                  |   |   |
| Authorized 1,000,000 shares, none issued                                                                                                                               |   |   | —               |   |   | —               |   |   |
| Common stock, $.001 par value:                                                                                                                                         |   |   |                  |   |   |                  |   |   |
| Authorized 200,000,000 shares, Issued 59,592,260 and                        58,358,818 at December 31, 2007 and December 31, 2006,                        respectively |   |   | 59,000                |   |   | 58,000                |   |   |
| Additional paid-in capital                                                                                                                                             |   |   | 69,364,000            |   |   | 66,860,000            |   |   |
| Accumulated deficit                                                                                                                                                    |   |   | (65,243,000           | )      |   | (48,280,000           | )      |   |
| Accumulated other comprehensive income (loss)                                                                                                                          |   |   | —               |   |   | (34,000               | )      |   |
| Less: Treasury stock, at cost, 3,012 shares                                                                                                                            |   |   | (6,000                | )      |   | (6,000                | )      |   |
|                                                                                                                                                                   |   |   |                  |   |   |                  |   |   |
| Total Stockholders’ Equity                                                                                                                                       |   |   | 4,174,000             |   |   | 18,598,000            |   |   |
|                                                                                                                                                                   |   |   |                  |   |   |                  |   |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                       |   | $      | 10,363,000            |   | $      | 24,316,000            |   |   |
|                                                                                                                                                                   |   |   |                  |   |   |                  |   |   |

 

See        accompanying notes to financial statements.

 

F-2

 

----

**NOVADEL PHARMA INC.**

**STATEMENTS OF OPERATIONS**

**FOR        THE YEAR ENDED DECEMBER 31, 2007, THE FIVE MONTHS ENDED DECEMBER 31, 2006, AND THE FISCAL        YEARS ENDED JULY 31, 2006 AND 2005**

 

 

|                                                                                                                           |   |    | **Year Ended**

**December 31,** |   |   |   | **Five Months**

**Ended December 31,** |            | **Year Ended**

**July 31,** |   |
|--------------------------------------------------------------------------------------------------------------------------------|--------|---------|----------------------------------|--------|--------|--------|-----------------------------------------|-----------------|------------------------------|--------|
|                                                                                                                           |   |    | **2007**                         |   |   |   |                                    | **2006**        |                         |   |   | **2006** |   |   | **2005** |   |   | **2006** |   |   |   | **2005** |   |
|                                                                                                                           |   |    |                             |   |   |   |                                    | **(unaudited)** |                         |   |   |   |   |   | **(unaudited)** |   |   |   |   |   |   |   |   |
| License Fees and Milestone Payments Earned from Related                        Parties                                         |   | $       | 469,000                          |   |   |   | $                                       | 3,162,000       |                         |   | $ | 2,067,000 |   | $ | 568,000 |   | $ | 1,662,000 |   |   | $ | 141,000 |   |
|                                                                                                                           |   |    |                             |   |   |   |                                    |            |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consulting Revenues from Related Parties                                                                                       |   |    | —                          |   |   |   |                                    | 118,000         |                         |   |   | — |   |   | 109,000 |   |   | 228,000 |   |   |   | 298,000 |   |
|                                                                                                                           |   |    |                             |   |   |   |                                    |            |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Revenues                                                                                                                 |   |    | 469,000                          |   |   |   |                                    | 3,280,000       |                         |   |   | 2,067,000 |   |   | 677,000 |   |   | 1,890,000 |   |   |   | 439,000 |   |
|                                                                                                                           |   |    |                             |   |   |   |                                    |            |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Research and Development Expenses                                                                                              |   |    | 11,940,000                       |   |   |   |                                    | 6,589,000       |                         |   |   | 3,396,000 |   |   | 2,082,000 |   |   | 5,275,000 |   |   |   | 3,826,000 |   |
|                                                                                                                           |   |    |                             |   |   |   |                                    |            |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consulting, Selling, General and Administrative                        Expenses                                                |   |    | 6,716,000                        |   |   |   |                                    | 6,955,000       |                         |   |   | 3,123,000 |   |   | 3,347,000 |   |   | 7,179,000 |   |   |   | 6,391,000 |   |
|                                                                                                                           |   |    |                             |   |   |   |                                    |            |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Expenses                                                                                                                 |   |    | 18,656,000                       |   |   |   |                                    | 13,544,000      |                         |   |   | 6,519,000 |   |   | 5,429,000 |   |   | 12,454,000 |   |   |   | 10,217,000 |   |
|                                                                                                                           |   |    |                             |   |   |   |                                    |            |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss From Operations                                                                                                           |   |    | (18,187,000                      | )      |   |   |                                    | (10,264,000     | )                            |   |   | (4,452,000 | ) |   | (4,752,000 |  

) |   | (10,564,000 | ) |   |   | (9,778,000 | ) |
|                                                                                                                           |   |    |                             |   |   |   |                                    |            |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Loss, net                                                                                                                |   |    | (66,000                          | )      |   |   |                                    | —         |                         |   |   | — |   |   | — |   |   | — |   |   |   | — |   |
| Interest Income                                                                                                                |   |    | 632,000                          |   |   |   |                                    | 337,000         |                         |   |   | 180,000 |   |   | 67,000 |   |   | 224,000 |   |   |   | 87,000 |   |
|                                                                                                                           |   |    |                             |   |   |   |                                    |            |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss Before Income Tax Benefit                                                                                                 |   |    | (17,621,000                      | )      |   |   |                                    | (9,927,000      | )                            |   |   | (4,272,000 | ) |   | (4,685,000 |  

) |   | (10,340,000 | ) |   |   | (9,691,000 | ) |
|                                                                                                                           |   |    |                             |   |   |   |                                    |            |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income Tax Benefit                                                                                                             |   |    | (658,000                         | )      |   |   |                                    | (467,000        | )                            |   |   | (467,000 | ) |   | (256,000 | ) |   | (256,000 | ) |   |   | (241,000 | ) |
|                                                                                                                           |   |    |                             |   |   |   |                                    |            |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Loss                                                                                                                       |   | $       | (16,963,000                      | )      |   |   | $                                  | (9,460,000      | )                            |   | $  | (3,805,000 | ) | $  | (4,429,000 |  

) | $ | (10,084,000 | ) |   | $  | (9,450,000 | ) |
|                                                                                                                           |   |    |                             |   |   |   |                                    |            |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and Diluted Loss Per Common Share                                                                                        |   | $  | (.29                             | )      |   |   | $                                  | (.20            | )                            |   | $  | (.08 |  

                         

) | $  | (.11 |  

                         

) | $ | (.23 | ) |   | $  | (.27 | ) |
|                                                                                                                           |   |    |                             |   |   |   |                                    |            |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted Average Number of Common Shares Used in Computation                        of Basic and Diluted Loss Per Common Share |   |    | 59,497,000                       |   |   |   |                                    | 46,732,000      |                         |   |   | 49,522,000 |   |   | 40,619,000 |   |   | 43,000,000 |   |   |   | 34,808,000 |   |
|                                                                                                                                |        |         |                                  |        |        |        |                                         |                 |                              |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

See accompanying notes to financial statements.

 

F-3

 

----

**NOVADEL PHARMA INC.**

**STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**FOR        THE YEAR ENDED DECEMBER 31, 2007, THE FIVE MONTHS ENDED DECEMBER 31, 2006, AND THE FISCAL        YEARS ENDED JULY 31, 2006 AND 2005**

 

|                                                                                                             |   | **Common Stock** |   |   |   |       |    |   |                           |   |       |                    |   |   |                                                                     |   |   |   |               |
|------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|--------|--------|------------|---------|--------|--------------------------------|--------|------------|-------------------------|--------|--------|--------------------------------------------------------------------------|--------|--------|--------|--------------------|
|                                                                                                             |   | **Shares**       |   |   |   | **Amount** |    |   | **Additional Paid-In Capital** |   |       | **Accumulated Deficit** |   |   | **Accumulated Other Comprehensive Income                        (Loss)** |   |   |   | **Treasury Stock** |   |   | **Total****Stockholders’ Equity** |   |
| BALANCE, August 1, 2004                                                                                          |   | 33,091,437       |   |   |   | $          | 33,000  |   |                           | $      | 34,937,000 |                    |   | $      | (24,941,000                                                              | )      |   | $      | —            |   |   |   | $ | (6,000 | ) |   | $ | 10,023,000 |   |
| Stock issued in connection with private placements, net of                        costs                          |   | 6,733,024        |   |   |   |       | 7,000   |   |                           |   | 6,302,000  |                    |   |   | —                                                                  |   |   |   | —            |   |   |   |   | — |   |   |   | 6,309,000 |   |
| Stock issued Hana Biosciences Inc. per license                        agreement                                  |   | 400,000          |   |   |   |       | — |   |                           |   | 636,000    |                    |   |   | —                                                                  |   |   |   | —            |   |   |   |   | — |   |   |   | 636,000 |   |
| Stock issued for options and warrants exercised                                                                  |   | 172,857          |   |   |   |       | — |   |                           |   | 219,000    |                    |   |   | —                                                                  |   |   |   | —            |   |   |   |   | — |   |   |   | 219,000 |   |
| Stock issued for services                                                                                        |   | 200,000          |   |   |   |       | 1,000   |   |                           |   | 306,000    |                    |   |   | —                                                                  |   |   |   | —            |   |   |   |   | — |   |   |   | 306,000 |   |
| Warrants issued for services                                                                                     |   | —          |   |   |   |       | — |   |                           |   | 11,000     |                    |   |   | —                                                                  |   |   |   | —            |   |   |   |   | — |   |   |   | 11,000 |   |
| Impact of variable plan accounting                                                                               |   | —          |   |   |   |       | — |   |                           |   | (106,000   | )                       |   |   | —                                                                  |   |   |   | —            |   |   |   |   | — |   |   |   | (106,000 | ) |
| Net Loss                                                                                                         |   | —          |   |   |   |       | — |   |                           |   | —    |                    |   |   | (9,450,000                                                               | )      |   |   | —            |   |   |   |   | — |   |   |   | (9,450,000 | ) |
|                                                                                                             |   |             |   |   |   |       |    |   |                           |   |       |                    |   |   |                                                                     |   |   |   |               |   |   |   |   |   |   |   |   |   |   |
| BALANCE, July 31, 2005                                                                                           |   | 40,597,318       |   |   |   |       | 41,000  |   |                           |   | 42,305,000 |                    |   |   | (34,391,000                                                              | )      |   |   | —            |   |   |   |   | (6,000 | ) |   |   | 7,949,000 |   |
| Share-based compensation expense                                                                                 |   | —          |   |   |   |       | — |   |                           |   | 1,201,000  |                    |   |   | —                                                                  |   |   |   | —            |   |   |   |   | — |   |   |   | 1,201,000 |   |
| Stock issued in connection with private placements, net of                        costs                          |   | 8,092,796        |   |   |   |       | 8,000   |   |                           |   | 10,585,000 |                    |   |   | —                                                                  |   |   |   | —            |   |   |   |   | — |   |   |   | 10,593,000 |   |
| Stock issued for options and warrants exercised                                                                  |   | 433,755          |   |   |   |       | — |   |                           |   | 326,000    |                    |   |   | —                                                                  |   |   |   | —            |   |   |   |   | — |   |   |   | 326,000 |   |
| Comprehensive income (loss):                                                                                     |   |             |   |   |   |       |    |   |                           |   |       |                    |   |   |                                                                     |   |   |   |               |   |   |   |   |   |   |   |   |   |   |
| Unrealized gain on investment                                                                                    |   | —          |   |   |   |       | — |   |                           |   | —    |                    |   |   | —                                                                  |   |   |   | 60,000             |   |   |   |   | — |   |   |   | 60,000 |   |
| Net loss                                                                                                         |   | —          |   |   |   |       | — |   |                           |   | —    |                    |   |   | (10,084,000                                                              | )      |   |   | —            |   |   |   |   | — |   |   |   | (10,084,000 | ) |
| Total comprehensive loss                                                                                         |   | —          |   |   |   |       | — |   |                           |   | —    |                    |   |   | —                                                                  |   |   |   | —            |   |   |   |   | — |   |   |   | (10,024,000 | ) |
|                                                                                                             |   |             |   |   |   |       |    |   |                           |   |       |                    |   |   |                                                                     |   |   |   |               |   |   |   |   |   |   |   |   |   |   |
| BALANCE, July 31, 2006                                                                                           |   | 49,123,869       |   |   |   |       | 49,000  |   |                           |   | 54,417,000 |                    |   |   | (44,475,000                                                              | )      |   |   | 60,000             |   |   |   |   | (6,000 | ) |   |   | 10,045,000 |   |
| Share-based compensation expense                                                                                 |   | 100,000          |   |   |   |       | — |   |                           |   | 498,000    |                    |   |   | —                                                                  |   |   |   | —            |   |   |   |   | — |   |   |   | 498,000 |   |
| Stock issued in connection with private placement, net of                        costs                           |   | 8,862,069        |   |   |   |       | 9,000   |   |                           |   | 11,740,000 |                    |   |   | —                                                                  |   |   |   | —            |   |   |   |   | — |   |   |   | 11,749,000 |   |
| Stock issued for options and warrants exercised                                                                  |   | 272,880          |   |   |   |       | — |   |                           |   | 205,000    |                    |   |   | —                                                                  |   |   |   | —            |   |   |   |   | — |   |   |   | 205,000 |   |
| Comprehensive income (loss):                                                                                     |   |             |   |   |   |       |    |   |                           |   |       |                    |   |   |                                                                     |   |   |   |               |   |   |   |   |   |   |   |   |   |   |
| Unrealized loss on investment in marketable equity                        security                               |   | —          |   |   |   |       | — |   |                           |   | —    |                    |   |   | —                                                                  |   |   |   | (94,000            | ) |   |   |   | — |   |   |   | (94,000 | ) |
| Net loss                                                                                                         |   | —          |   |   |   |       | — |   |                           |   | —    |                    |   |   | (3,805,000                                                               | )      |   |   | —            |   |   |   |   | — |   |   |   | (3,805,000 | ) |
| Total comprehensive loss                                                                                         |   | —          |   |   |   |       | — |   |                           |   | —    |                    |   |   | —                                                                  |   |   |   | —            |   |   |   |   | — |   |   |   | (3,899,000 | ) |
|                                                                                                             |   |             |   |   |   |       |    |   |                           |   |       |                    |   |   |                                                                     |   |   |   |               |   |   |   |   |   |   |   |   |   |   |
| BALANCE, December 31, 2006                                                                                       |   | 58,358,818       |   |   |   |       | 58,000  |   |                           |   | 66,860,000 |                    |   |   | (48,280,000                                                              | )      |   |   | (34,000            | ) |   |   |   | (6,000 | ) |   |   | 18,598,000 |   |
| Share-based compensation expense                                                                                 |   | —          |   |   |   |       | — |   |                           |   | 910,000    |                    |   |   | —                                                                  |   |   |   | —            |   |   |   |   | — |   |   |   | 910,000 |   |
| Stock issued in connection with private placement, net of                        costs                           |   | 961,914          |   |   |   |       | 1,000   |   |                           |   | 1,394,000  |                    |   |   | —                                                                  |   |   |   | —            |   |   |   |   | — |   |   |   | 1,395,000 |   |
| Stock issued for options and warrants exercised                                                                  |   | 271,528          |   |   |   |       | — |   |                           |   | 200,000    |                    |   |   | —                                                                  |   |   |   | —            |   |   |   |   | — |   |   |   | 200,000 |   |
| Reclassification of unrealized loss on investment in                        marketable security to realized loss |   | —          |   |   |   |       | — |   |                           |   | —    |                    |   |   | —                                                                  |   |   |   | 34,000             |   |   |   |   | — |   |   |   | 34,000 |   |
| Net loss                                                                                                         |   | —          |   |   |   |       | — |   |                           |   | —    |                    |   |   | (16,963,000                                                              | )      |   |   | —            |   |   |   |   | — |   |   |   | (16,963,000 | ) |
|                                                                                                             |   |             |   |   |   |       |    |   |                           |   |       |                    |   |   |                                                                     |   |   |   |               |   |   |   |   |   |   |   |   |   |   |
| BALANCE, December 31, 2007                                                                                       |   | 59,592,260       |   |   |   | $          | 59,000  |   |                           | $      | 69,364,000 |                    |   | $      | (65,243,000                                                              | )      |   | $      | —            |   |   |   | $ | (6,000 | ) |   | $ | 4,174,000 |   |

  

See        accompanying notes to financial statements.

 

F-4

 

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**NOVADEL PHARMA INC.**

**STATEMENTS OF CASH FLOWS**

**FOR        THE YEAR ENDED DECEMBER 31, 2007, THE FIVE MONTHS ENDED DECEMBER 31, 2006, AND THE FISCAL        YEARS ENDED JULY 31, 2006 AND 2005**

 

 

|                                                                                                                   |   | **Year Ended December 31,** |        | **Five Months Ended**

**December 31,** |   | **Year Ended July 31,** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|-----------------------------------------|--------|-------------------------|--------|
|                                                                                                                   |   |                        | **2007**    |                                    |   |                    |   | **2006** |   |   |   | **2006** |   |   | **2005** |   |   | **2006** |   |   |   | **2005** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                                                   |   |                        |        |                                    |   |                    |   | **(unaudited)** |   |   |   |   |   |   | **(unaudited)** |   |   |   |   |   |   |   |   |
| Net loss                                                                                                               |   | $                           | (16,963,000 | )                                       |   | $                       |   | (9,460,000 | ) | $ |   | (3,805,000 | ) | $ | (4,429,000 | ) | $ | (10,084,000 | ) |   | $ | (9,450,000 | ) |
| Adjustments to reconcile net loss to net cash used in                        operating activities:                     |   |                        |        |                                    |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock and warrants issued for services                                                                                 |   |                        | —     |                                    |   |                    |   | — |   |   |   | — |   |   | — |   |   | — |   |   |   | 318,000 |   |
| Amortization of discount on short-term                        investments                                              |   |                        | (101,000    | )                                       |   |                    |   | (53,000 | ) |   |   | (53,000 | ) |   | — |   |   | — |   |   |   | — |   |
| Share-based compensation expense                                                                                       |   |                        | 910,000     |                                    |   |                    |   | 1,179,000 |   |   |   | 498,000 |   |   | 520,000 |   |   | 1,201,000 |   |   |   | — |   |
| Impact of variable plan accounting                                                                                     |   |                        | —     |                                    |   |                    |   |   |   |   |   |   |   |   | — |   |   | — |   |   |   | (106,000 | ) |
| Loss from return of investment in marketable security                        available for sale to issuer              |   |                        | 140,000     |                                    |   |                    |   | — |   |   |   | — |   |   | — |   |   | — |   |   |   | — |   |
| Other than temporary impairment of investment in marketable                        equity security available for sale  |   |                        | 360,000     |                                    |   |                    |   | — |   |   |   | — |   |   | — |   |   | — |   |   |   | — |   |
| Inventory reserve                                                                                                      |   |                        | —     |                                    |   |                    |   | 551,000 |   |   |   | 551,000 |   |   | — |   |   | 55,000 |   |   |   | — |   |
| Depreciation and amortization                                                                                          |   |                        | 685,000     |                                    |   |                    |   | 667,000 |   |   |   | 286,000 |   |   | 202,000 |   |   | 583,000 |   |   |   | 380,000 |   |
| Changes in operating assets and liabilities:                                                                           |   |                        |        |                                    |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accounts receivable from related parties                                                                               |   |                        | —     |                                    |   |                    |   | 76,000 |   |   |   | — |   |   | 32,000 |   |   | 108,000 |   |   |   | 22,000 |   |
| Inventories                                                                                                            |   |                        | (99,000     | )                                       |   |                    |   | (40,000 | ) |   |   | 2,000 |   |   | 6,000 |   |   | (91,000 | ) |   |   | (549,000 | ) |
| Prepaid expenses and other current assets                                                                              |   |                        | (574,000    | )                                       |   |                    |   | (66,000 | ) |   |   | (81,000 | ) |   | (200,000 |  

) |   | (185,000 | ) |   |   | (51,000 | ) |
| Other assets                                                                                                           |   |                        | (10,000     | )                                       |   |                    |   | (8,000 | ) |   |   | (15,000 | ) |   | — |   |   | 7,000 |   |   |   | — |   |
| Accounts payable                                                                                                       |   |                        | 834,000     |                                    |   |                    |   | 340,000 |   |   |   | (47,000 | ) |   | (721,000 | ) |   | (334,000 | ) |   |   | 938,000 |   |
| Accrued expenses and other current liabilities                                                                         |   |                        | 206,000     |                                    |   |                    |   | 212,000 |   |   |   | 950,000 |   |   | 785,000 |   |   | 47,000 |   |   |   | 266,000 |   |
| Deferred revenue                                                                                                       |   |                        | (628,000    | )                                       |   |                    |   | (162,000 | ) |   |   | (68,000 | ) |   | (68,000 | ) |   | (162,000 | ) |   |   | 1,974,000 |   |
| Net cash used in operating activities                                                                                  |   |                        | (15,240,000 | )                                       |   |                    |   | (6,764,000 | ) |   |   | (1,782,000 | ) |   | (3,873,000 |  

) |   | (8,855,000 | ) |   |   | (6,258,000 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                  |   |                        |        |                                    |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Purchases of property and equipment                                                                                    |   |                        | (179,000    | )                                       |   |                    |   | (68,000 | ) |   |   | (54,000 | ) |   | (116,000 | ) |   | (130,000 | ) |   |   | (2,305,000 | ) |
| Purchases of short-term and long-term investments                                                                      |   |                        | (9,737,000  | )                                       |   |                    |   | (5,761,000 | ) |   |   | (1,310,000 | ) |   | 1,300,000 |  

) |   | (5,751,000 | ) |   |   | (5,180,000 | ) |
| Maturities of short-term and long-term                        investments                                              |   |                        | 13,528,000  |                                    |   |                    |   | 3,119,000 |   |   |   | 2,124,000 |   |   | 3,848,000 |   |   | 4,843,000 |   |   |   | 9,155,000 |   |
| Net cash provided by (used in) investing                        activities                                             |   |                        | 3,612,000   |                                    |   |                    |   | (2,710,000 | ) |   |   | 760,000 |   |   | 2,432,000 |   |   | (1,038,000 | ) |   |   | 1,670,000 |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                  |   |                        |        |                                    |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Proceeds from issuance of common stock through private                        placements                               |   |                        | 1,395,000   |                                    |   |                    |   | 22,342,000 |   |   |   | 11,749,000 |   |   | — |   |   | 10,593,000 |   |   |   | 6,309,000 |   |
| Proceeds from options and warrants exercised                                                                           |   |                        | 200,000     |                                    |   |                    |   | 531,000 |   |   |   | 205,000 |   |   | — |   |   | 326,000 |   |   |   | 219,000 |   |
| Proceeds from shares of common stock issued to Hana                        Biosciences, Inc.                           |   |                        | —     |                                    |   |                    |   | — |   |   |   | — |   |   | — |   |   | — |   |   |   | 636,000 |   |
| Payments of capitalized lease obligations                                                                              |   |                        | (169,000    | )                                       |   |                    |   | (52,000 | ) |   |   | (33,000 | ) |   | — |   |   | (19,000 | ) |   |   | (62,000 | ) |
| Net cash provided by financing activities                                                                              |   |                        | 1,426,000   |                                    |   |                    |   | 22,821,000 |   |   |   | 11,921,000 |   |   | — |   |   | 10,900,000 |   |   |   | 7,102,000 |   |
| NET INCREASE (DECREASE) IN CASH AND CASH                        EQUIVALENTS                                            |   |                        | (10,202,000 | )                                       |   |                    |   | 13,347,000 |   |   |   | 10,899,000 |   |   | (1,441,000 |  

) |   | 1,007,000 |   |   |   | 2,514,000 |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                                         |   |                        | 16,586,000  |                                    |   |                    |   | 3,239,000 |   |   |   | 5,687,000 |   |   | 4,680,000 |   |   | 4,680,000 |   |   |   | 2,166,000 |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                                                               |   | $                           | 6,384,000   |                                    |   |                    | $      | 16,586,000 |   |   | $ | 16,586,000 |   | $ | 3,239,000 |   | $ | 5,687,000 |   |   | $ | 4,680,000 |   |
|                                                                                                                   |   |                        |        |                                    |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING                        ACTIVITIES:                          |   |                        |        |                                    |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment in Hana Biosciences, Inc. common stock received                        in connection with license agreement |   | $                           | —     |                                    |   | $                       |   | — |   |   | $ | — |   | $ | — |   | $ | — |   |   | $ | 500,000 |   |
| Equipment acquired under capitalized lease                        obligation                                           |   | $                           | 228,000     |                                    |   | $                       |   | 305,000 |   |   | $ | 139,000 |   | $ | — |   | $ | 166,000 |   |   | $ | — |   |
|                                                                                                                        |        |                             |             |                                         |        |                         |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See        accompanying notes to financial statements.

 

F-5

 

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**NOVADEL PHARMA INC.**

**NOTES        TO FINANCIAL STATEMENTS**

 

**NOTE 1 -        NATURE OF THE BUSINESS**

 

NovaDel        Pharma Inc. (the “Company”) is a specialty pharmaceutical company developing        oral spray formulations of a broad range of marketed pharmaceuticals. The Company’s        proprietary technology offers, in comparison to conventional oral dosage forms, the        potential for faster absorption of drugs into the bloodstream leading to quicker onset of        therapeutic effects and possibly reduced first pass liver metabolism, which may result in        lower doses. Oral sprays eliminate the requirement for water or the need to swallow,        potentially improving patient convenience and compliance. The Company’s oral spray        technology is focused on addressing unmet medical needs for a broad array of existing and        future pharmaceutical products, with the most advanced oral spray candidates target angina,        nausea, insomnia, migraine headaches and disorders of the central nervous        system.

 

Through        December 31, 2006, the Company has entered into strategic license agreements with (i) Hana        Biosciences Inc. (“Hana Biosciences”), for the marketing rights in the U.S. and        Canada for the Company’s ondansetron oral spray, (ii) Par Pharmaceutical, Inc.        (“Par”), for the marketing rights in the U.S. and Canada for the        Company’s nitroglycerin oral spray, (iii) Manhattan Pharmaceuticals, Inc.        (“Manhattan Pharmaceuticals”), in connection with propofol, and (iv) Velcera        Pharmaceuticals, Inc. (“Velcera”), in connection with veterinary applications        for currently marketed veterinary drugs. In July 2007, the Company entered into a        sublicense agreement with Hana Biosciences and Par, pursuant to which Hana Biosciences        granted a non-transferable, non-sublicenseable, royalty-bearing, exclusive sublicense to        Par to develop and commercialize ZensanaTM. In connection therewith, the Company and        Hana Biosciences amended and restated their existing license agreement, as amended,        relating to the development and commercialization of ZensanaTM to coordinate certain        of the terms of the sublicense agreement. Under the terms of the sublicense agreement, Par        is responsible for all development, regulatory, manufacturing and commercialization        activities of ZensanaTM in the United States and Canada. The Company retains its        rights to ZensanaTM outside of the United States and Canada. In addition, under the        terms of the Amended and Restated License Agreement, Hana Biosciences relinquished its        right to pay reduced royalty rates to the Company until such time as Hana Biosciences had        recovered one-half of its costs and expenses incurred in developing ZensanaTM from        sales of ZensanaTM and the Company agreed to surrender for cancellation all 73,121        shares of the Hana Biosciences common stock acquired by the Company in connection with        execution of the original License Agreement.

 

In July        2007, the Company and Par agreed to terminate the agreement relating to NitroMistTM.        The Company is currently investigating strategic partners for the commercialization of        NitroMistTM.

 

On        November 18, 2004, the Company entered into a manufacturing and supply agreement with INyX        USA, Ltd. (“INyX”), whereby INyX manufactures and supplies the Company’s        nitroglycerin lingual spray. For a five-year period that began November 18, 2004, INyX is        the exclusive provider substantially worldwide of the nitroglycerin lingual spray to the        Company. In July 2007, INyX announced it filed for protection under the Chapter 11        bankruptcy laws. The Company is taking all necessary steps to ensure that any limited        assets of the Company at INyX are protected.

 

On June        28, 2006, the Company’s Board of Directors approved a change of the Company’s        fiscal year end from July 31 to December 31. Accordingly, the new fiscal year began on        January 1 and ended on December 31. Results of operations and the statement of cash flows        presented for the year ended December 31, 2006 and the five months ended December 31, 2005        are unaudited.

 

 

F-6

 

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**NOTE 2 -        LIQUIDITY AND BASIS OF PRESENTATION**

The        Company has reported a net loss of $16,963,000, $3,805,000, $10,084,000 and $9,450,000 and        negative cash flows from operating activities of $15,240,000, $1,782,000, $8,855,000, and        $6,258,000 for the year ended December 31, 2007, the five months ended December 31, 2006        and for the fiscal years ended July 31, 2006, and 2005, respectively. As of December 31,        2007, the Company had working capital of $3,811,000, and cash and cash equivalents of        $6,384,000. Until and unless the Company’s operations generate significant revenues        and cash flow, we will attempt to continue to fund operations from cash on hand and through        the sources of capital described below. The Company’s long-term liquidity is        contingent upon achieving sales and positive cash flows from operating activities, and/or        obtaining additional financing. The most likely sources of financing include private        placements of the Company’s equity or debt securities or bridge loans to the Company        from third-party lenders, license payments from current and future partners, and royalty        payments from sales of approved product candidates by partners. The Company can give no        assurances that any additional capital that it is able to obtain will be sufficient to meet        its needs, or on terms favorable to it. During the fourth quarter 2007, the Company        significantly reduced clinical development activities on its product candidate pipeline, as        it did not believe that it had sufficient cash to sustain such activities. Despite this        reduction in expenditures for clinical activities, the Company requires capital to sustain        its existing organization until such time as clinical activities can be resumed. Given the        current level of spending, the Company estimates that it will have sufficient cash on hand        to fund operations through the middle of the second calendar quarter 2008. The Company may,        however, choose to raise additional capital before December 31, 2008 to fund future        development activities or to take advantage of other strategic opportunities. This could        include the securing of funds through new strategic partnerships and/or the sale of common        stock or other securities. There can be no assurance that such capital will be available to        the Company on favorable terms, or at all. There are a number of risks and uncertainties        related to the Company’s attempt to complete a financing or strategic partnering        arrangement that are outside its control. The Company may not be able to obtain additional        financing on terms acceptable to it, or at all. If the Company is unsuccessful at obtaining        additional financing as needed, it may be required to significantly curtail or cease        operations. The Company will need additional financing thereafter until it achieves        profitability, if ever.

Our        audited financial statements for the fiscal year ended December 31, 2007, were prepared        under the assumption that we will continue our operations as a going concern. We were        incorporated in 1982, and have a history of losses. As a result, our independent registered        public accounting firm in their audit report has expressed substantial doubt about our        ability to continue as a going concern. Continued operations are dependent on our ability        to complete equity or debt formation activities or to generate profitable operations. Such        capital formation activities may not be available or may not be available on reasonable        terms. Our financial statements do not include any adjustments that may result from the        outcome of this uncertainty.

 

**NOTE        3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

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

 

CASH        EQUIVALENTS AND INVESTMENTS - Cash equivalents include certificates of deposit and money        market instruments with original maturities of three months or less when purchased.        Investments include short-term investments and an investment in marketable common stock        received from a licensee (See Notes 8 and 9). Short-term investments are carried at        amortized cost, which approximates fair market value, and consist of certificates of        deposit and US treasury securities with maturities when purchased greater than three months        and less than one year. At times, such investments may be in excess of the Federal Deposit        Insurance Corporation (FDIC) insurance limit.

 

FINANCIAL INSTRUMENTS - Financial instruments include cash and cash        equivalents, short-term investments, and accounts payable. 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 ten years or the lease term, if        shorter.

 

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

 

F-7

 

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INCOME        TAXES - 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. 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 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 it is considered more likely than not that some portion or all of the deferred tax        asset will not be realized.

 

DEFINED        CONTRIBUTION RETIREMENT PLANS - During January 2004, the Company established a 401(k)        retirement plan that is available to all employees and requires matching contributions by        the Company. During the years ended December 31, 2007 and 2006, the five months ended        December 31, 2006 and 2005, and the fiscal years ended July 31, 2006 and 2005, the Company        contributed approximately $95,000, $96,000, $34,000, $39,000, $101,000, and $101,000,        respectively, to this plan. Prior to January 2004, the Company had a Simple IRA retirement        plan, available to all employees that provided for contributions at management’s        discretion.

 

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

RECLASSIFICATION – Certain prior year amounts have been reclassified        to conform to the current period’s presentation.

IMPAIRMENT        OF LONG-LIVED ASSETS – In accordance with FAS No. 144,*Accounting for the Impairment or Disposal of Long-Lived Assets*(FAS 144), the Company reviews long-lived assets for impairment whenever        events or changes in circumstances indicate that the carrying amount of an asset may not be        recoverable. An asset is considered to be impaired when the sum of the undiscounted future        net cash flows expected to result from the use of the asset and its eventual disposition is        less than its carrying amount. The amount of impairment loss, if any, is measured as the        difference between the carrying amount of the asset and its estimated fair value. The        Company has reviewed its long-lived property and equipment as of December 31, 2007, and has        determined that their estimated fair value exceeds the carrying amount of such assets;        therefore, the Company has not recognized an impairment loss for its long-lived property        and equipment.

 

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

 

LOSS PER        SHARE – Loss per common share is computed pursuant to SFAS No. 128, “Earnings        Per Share.” Basic loss per common share is computed as net loss divided by the        weighted average number of common shares outstanding for the period. Diluted net loss per        common share is the same as basic net loss per common share, since potentially dilutive        securities from the assumed exercise of all outstanding options and warrants would have an        antidilutive effect because the Company incurred a net loss during each period presented.        As of December 31, 2007, December 31, 2006, July 31, 2006 and July 31, 2005, there were        35.1 million, 38.4 million, 30.7 million and 26.2 million common shares, respectively,        issuable upon exercise of options and warrants which were excluded from the diluted loss        per common share computation. Subsequent to December 31, 2007, in accordance with its        remuneration practices, the Company issued an additional 1.1 million restricted shares,        including (i) 750,000 to existing executive officers and directors; and (ii) 350,000 to        existing and new employees.

 

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

 

F-8

 

----

The        Company adopted the provisions of SFAS 123R effective August 1, 2005 and selected the        Black-Scholes method of valuation for share-based compensation. The Company adopted the        modified prospective transition method which does not require restatement of prior periods.        Instead, it requires that compensation cost be recorded as earned for all unvested stock        options outstanding at the beginning of the first quarter of adoption of SFAS 123R. The        charge is being recognized in research and development and consulting, selling, general and        administrative expenses over the remaining service period after the adoption date based on        the original estimate of fair value of the options as of the grant date. Prior to the        adoption of SFAS 123R, the Company applied the intrinsic-value-based method of accounting        prescribed by APB 25 and related interpretations, to account for its stock options granted        to employees. Under this method, compensation cost was recorded only if the market price of        the underlying common stock on the date of grant exceeded the exercise price. SFAS 123        established accounting and disclosure requirements using a fair-value-based method of        accounting for share-based employee compensation plans. As permitted by SFAS 123, the        Company elected to continue to apply the intrinsic-value-based method of accounting        described above, and adopted only the disclosure requirements of SFAS 123, as amended. The        Company recorded share-based compensation of approximately $910,000 or $.02 per share, and        $1,179,000 or $0.03 per share, for the years ended December 31, 2007 and 2006, $498,000 or        $0.01 per share, and $520,000 or $0.01 per share, for the five months ended December 31,        2006 and 2005, and $1,201,000, or $0.03 per share, for the fiscal year ended July 31, 2006.        The Company will continue to incur share-based compensation charges in future periods. As        of December 31, 2007, unamortized stock-based compensation expense of $2.0 million remains        to be recognized, which is comprised of $1.2 million to be recognized over a weighted        average period of 1.4 years, $0.1 million related to restricted stock to be recognized over        a weighted average period of 1.9 years, and $0.7 million related to performance-based stock        options which vest upon reaching certain milestones. Expenses related to the        performance-based stock options will be recognized if and when the Company determines that        it is probable that the milestone will be reached. 

 

As a        result of cashless exercise provisions in our employee stock option agreements, the Company        used variable accounting treatment under the Financial Accounting Standards Board’s        Interpretation 44, for issued and outstanding stock options from January 2002 through July        2005. On October 20, 2004, the Company’s Board of Directors rescinded the cashless        exercise provision for all of the Company’s outstanding option grants. Through July        31, 2005, variable plan accounting continued to be applied for approximately 310,000        outstanding options, for which option exercise prices were modified from the original        agreement.

 

The        following table illustrates the pro forma effect on the Company’s net loss and net        loss per common share as if the Company had adopted the fair-value-based method of        accounting for share-based compensation under SFAS 123 for the fiscal year ended July 31,        2005:

 

  

|                                                                                                                    |   |   |   | **July 31, 2005** |        |   |   |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|-------------------|-------------|--------|--------|--------|
| Net loss – as reported                                                                                            |   |   |   | $                 | (9,450,000  | )      |   |   |   |
| Compensation credit resulting from variable plan                        accounting                                      |   |   |   |              | (106,000    | )      |   |   |   |
| Total share-based employee compensation expense using the                        fair value based method for all awards |   |   |   |              | (854,000    | )      |   |   |   |
|                                                                                                                    |   |   |   |              |        |   |   |   |   |
| Pro forma net loss                                                                                                      |   |   |   | $                 | (10,410,000 | )      |   |   |   |
|                                                                                                                    |   |   |   |              |        |   |   |   |   |
| Basic and diluted net loss per common share:                                                                            |   |   |   |              |        |   |   |   |   |
| As reported                                                                                                             |   |   |   | $                 | (0.27       | )      |   |   |   |
|                                                                                                                    |   |   |   |              |        |   |   |   |   |
| Pro forma net loss                                                                                                      |   |   |   |              | (0.30       | )      |   |   |   |

 

The fair        values of options granted during the fiscal year ended July 31, 2005 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 66%, and an expected life of the options of five to ten years.

 

NEW        ACCOUNTING PRONOUNCEMENTS - In December 2007, the FASB issued SFAS No. 141R        “*Business Combinations.”*(“SFAS 141R”) SFAS 141R applies to all transactions or other        events in which an entity obtains control of one or more businesses. SFAS 141R is effective        for fiscal years beginning after December 15, 2008. The Company does not expect the        adoption of SFAS 141R to have a material impact on its results of operations or financial        condition.

 

F-9

 

----

 

In        December 2007, the FASB issued SFAS No. 160 “*Noncontrolling        Interests in Consolidated Financial Statements.”*(“SFAS 160”) SFAS No. 160 applies to all entities that prepare        consolidated financial statements, but will affect only those entities that have an        outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a        subsidiary. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The        Company does not expect the adoption of SFAS 160 to have a material impact on its results        of operations or on its financial condition.

 

In        September 2006, the FASB issued SFAS No. 157, “*Fair Value        Measurements.”*(“SFAS 157”) SFAS 157        establishes a common definition for fair value to be applied to U.S. GAAP guidance        requiring use of fair value, establishes a framework for measuring fair value, and expands        disclosure about such fair value measurements. SFAS 157 is effective for fiscal years        beginning after November 15, 2007. The Company does not expect the adoption of SFAS 157 to        have a material impact on its results of operations or financial condition.

 

In        February 2007, the FASB issued SFAS No. 159, “*The Fair Value        Option for Financial Assets and Financial Liabilities.”*(“SFAS 159”) SFAS 159 permits entities to choose to measure many        financial assets and financial liabilities at fair value. Unrealized gains and losses on        items for which the fair value option has been elected are reported in earnings. SFAS 159        is effective for fiscal years beginning after November 15, 2007. The Company does not        expect the adoption of SFAS 159 to have a material impact on its results of operations or        financial condition.

 

In        December 2007, FASB affirmed the conclusions of the Emerging Issues Task Force (EITF) on        EITF Issue 07-1, “*Accounting for Collaborative        Arrangements*” (EITF 07-1). EITF 07-1 requires collaborators        to present the results of activities, for which they act as the principal, on a gross basis        and report any payments received from or made to other collaborators based on other        applicable accounting principles generally accepted in the United States (GAAP) or, in the        absence of GAAP, based on analogy to authoritative accounting literature or a reasonable,        rational and consistently applied accounting policy election. Further, EITF 07-1 clarified        that the determination of whether transactions within a collaborative arrangement are part        of a vendor-customer relationship subject to EITF 01-9        “*Accounting for Consideration Given by a Vendor to a        Customer (Including a Reseller of the Vendor’s        Products*)”.

EITF        07-1 is effective for fiscal years beginning after December 15, 2008 and will be effective        for the Company on January 1, 2009. The Company currently believes that the adoption of        EITF 07-1 will have no material impact on its consolidated financial position or results of        operations.

 

In June        2007, the FASB affirmed the conclusions of the EITF with respect to EITF Issue 07-3        “*Accounting for Advance Payments for Goods or Services to be        Used in Future Research and Development Activities*” (EITF        07-3). EITF 07-3 concluded that non-refundable advance payments for future research and        development activities pursuant to an executory contractual arrangement should be        capitalized until the goods have been delivered or the related services performed. EITF        07-3 is effective for fiscal years beginning after December 15, 2008 and will be effective        for the Company on January 1, 2009. The Company currently believes that the adoption of        EITF 07-3 will have no material impact on its consolidated financial position or results of        operations.

 

**NOTE 4        – ASSETS HELD FOR SALE**

 

The        Company owns inventory with a net book value of $131,000 and fixed assets with a net book        value of $361,000, which are used in the production of its NitroMistTM product line.        As of the balance sheet date of December 31, 2007, the Company was in discussions with        several potential buyers for these assets. In accordance with SFAS No. 144,        “*Accounting for the Impairment or Disposal of Long-Lived        Assets” (“SFAS 144”),*the Company has        classified these assets as assets held for sale on the balance sheet. The prior period        balance sheet has been reclassified.

 

The assets        held for sale are summarized as follows:

 

 

|                               |   |   | **December 31, 2007** |   |   | **December 31, 2006** |   |
|------------------------------------|--------|--------|-----------------------|--------|--------|-----------------------|--------|
| Inventory                          |   | $      | 131,000               |   | $      | 32,000                |   |
| Property, plant and equipment, net |   |   | 361,000               |   |   | 486,000               |   |
| Total assets held for sale         |   | $      | 492,000               |   | $      | 518,000               |   |
|                               |   |   |                  |   |   |                  |   |

 

 

F-10

 

----

**NOTE 5 -        PROPERTY AND EQUIPMENT**

 

Property        and equipment are summarized as follows:

 

 

|                                           |   |   | **December 31, 2007** |   |   | **December 31, 2006** |   |
|------------------------------------------------|--------|--------|-----------------------|--------|--------|-----------------------|--------|
| Equipment                                      |   | $      | 2,183,000             |   | $      | 1,783,000             |   |
| Furniture and fixtures                         |   |   | 455,000               |   |   | 455,000               |   |
| Leasehold improvements                         |   |   | 1,432,000             |   |   | 1,432,000             |   |
|                                           |   |   | 4,070,000             |   |   | 3,670,000             |   |
| Less: Accumulated depreciationand amortization |   |   | 2,098,000             |   |   | 1,545,000             |   |
|                                           |   | $      | 1,972,000             |   | $      | 2,125,000             |   |
|                                           |   |   |                  |   |   |                  |   |

 

 

Property        and equipment as of December 31, 2007 and 2006 excludes gross fixed assets of $624,000 at        the facilities of INyX. Accumulated depreciation as of December 31, 2007 and 2006 excludes        accumulated depreciation of $263,000 and $138,000, respectively, on fixed assets at the        facilities of INyX. Such assets are the property of the Company and cannot be used by INyX        for any other business. In the event that the Company’s contract with INyX is        terminated for any reason, such assets are to be returned to the Company. These assets have        been reclassified as “Assets Held for Sale” on the balance sheets as of        December 31, 2007 and December 31, 2006. See Note 4 for further information.

 

As of        December 31, 2007, the Company had total gross fixed assets of $627,000, with an        accumulated depreciation of $80,000, recorded under a capital lease.

 

The        Company reviews long-lived assets for impairment whenever events or changes in        circumstances indicate that the carrying amount of an asset may not be recoverable. An        asset is considered to be impaired when the sum of the undiscounted future net cash flows        expected to result from the use of the asset and its eventual disposition is less than its        carrying amount. The amount of impairment loss, if any, is measured as the difference        between the carrying amount of the asset and its estimated fair value. The Company has        reviewed its long-lived property and equipment as of December 31, 2007, and has determined        that their estimated fair value exceeds the carrying amount of such assets; therefore, the        Company has not recognized an impairment loss for its long-lived property and        equipment.

 

**NOTE 6 -        RELATED PARTY TRANSACTIONS**

 

PLACEMENT AGENT AGREEMENTS (see Note 7) – In January 2004, May 2005        and April 2006, the Company completed private placements for which it utilized Paramount        BioCapital, Inc., or Paramount, as its placement agent or co-placement agent. Paramount and        its affiliates are beneficial owners of a significant amount of shares of common stock and        options and warrants for the purchase of shares of common stock of the Company and,        accordingly, Paramount is a related party to the Company.

 

COMPENSATION AND CONSULTING AGREEMENTS - In November 2005, the Company        entered into a Confidential Separation Agreement and General Release (the “Separation        Agreement”) and a Consulting Agreement (the “Consulting Agreement”) with        Gary Shangold, M.D. Dr. Shangold is the former President and Chief Executive Officer of the        Company. In December 2005, pursuant to the Separation Agreement, the Company paid Dr.        Shangold a separation payment of $150,000. Pursuant to the Consulting Agreement, the        Company paid Dr. Shangold $300,000 for the year ended December 31, 2006; $125,000 for the        five months ended December 31, 2006; and $175,000 for the fiscal year ended July 31,        2006.

 

In        September 2006, the Company’s Board of Directors appointed Steven B. Ratoff as        Chairman of the Board. In connection with Mr. Ratoff’s appointment as Chairman of the        Board, the Board entered into a consulting arrangement to compensate Mr. Ratoff for his        efforts. This arrangement is on a month-to-month basis and compensates Mr. Ratoff at a rate        of $17,500 per month. Pursuant to this consulting arrangement, the Company paid Mr. Ratoff        approximately $207,000 and $61,000 for the years ended December 31, 2007 and 2006;, and        approximately $61,000 for the five months ended December 31, 2006. In March 2007, Mr.        Ratoff’s monthly compensation was reduced to $10,000 to reflect his decreased        day-to-day time involvement at the Company, and in June, 2007, Mr. Ratoff’s monthly        compensation was increased to $17,500 per month to reflect his appointment as the        Company’s Interim President and Chief Executive Officer.

 

F-11

 

----

 

In        September 2007, in connection with his resignation, Dr. Egberts and the Company entered        into a Separation, Consulting and General Release Agreement (the “Agreement”).        Pursuant to the Consulting Agreement, the Company paid Dr. Egberts $140,000 for the year        ended December 31, 2007.

 

LICENSE        AND DEVELOPMENT AGREEMENTS WITH RELATED PARTIES - In April 2003, the Company entered into a        license and development agreement with Manhattan Pharmaceuticals for the worldwide,        exclusive rights to the Company’s proprietary oral spray technology to deliver        propofol for pre-procedural sedation.

 

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 proprietary oral spray technology in animals.

 

In        October 2004, the Company entered into a license and development agreement (as amended in        August 2005) with Hana Biosciences to develop and market the Company’s oral spray        version of ondansetron. The agreement is an exclusive license for the U.S. and Canada. In        July 2007, the Company entered into a sublicense agreement with Hana Biosciences and Par,        pursuant to which Hana Biosciences granted a non-transferable, non-sublicenseable,        royalty-bearing, exclusive sublicense to Par to develop and commercialize        ZensanaTM.

 

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

 

**NOTE        7 - STOCKHOLDERS’ EQUITY**

 

PRIVATE        PLACEMENTS – In December 2006, the Company completed a private placement of 9,823,983        shares of common stock, at a purchase price of $1.45 per share and warrants to purchase up        to approximately 3,929,593 shares of common stock at an exercise price of $1.70 per share.        The Company received proceeds, net of offering costs, of $13,144,000 of which $11,749,000        was received in December 2006 and $1,395,000 was received in January 2007. As such, the        Company issued 8,862,069 shares in December 2006 and 961,914 shares in January 2007 for        this private placement.

 

Oppenheimer & Co. Inc. acted as the lead placement agent for this        private placement, with Griffin Securities, Inc. acting as co-placement agent.  The        placement agents received compensation for acting as placement agents made up of cash        compensation equal to 7% of the proceeds from the sale of the common stock, or $997,000,        and warrants to purchase shares of common stock equal to 5%of the        shares of common stock purchased, subject to certain exclusions, or warrants to purchase        491,199 shares (such warrants have the same terms as those issued to the investors), plus        expenses. On the date of grant, the warrants had an approximate fair value of $0.89 per        warrant. The Company agreed to indemnify the placement agents against certain liabilities,        including liabilities under the Securities Act of 1933, incurred in connection with the        offering.

 

In April        2006, the Company closed a private placement of 8,092,796 shares of common stock and        warrants to purchase a total of 2,427,839 shares of common stock with an exercise price of        $1.60 per share of common stock. The Company received proceeds, net of offering costs, of        approximately $10,593,000. Griffin Securities, Inc. and Paramount, a NASD broker-dealer,        acted as the placement agents for this private placement. The placement agents were paid an        aggregate fee for acting as placement agents of cash equal to 7% of the gross proceeds from        the sale of the common stock, or $792,400, and warrants equal to 6% of the shares of common        stock purchased, subject to certain exclusions, or warrants to purchase 468,329 shares of        common stock. Such warrants have the same terms as those issued to the investors. On the        date of grant, the warrants had an approximate fair value of $0.92 per warrant. The        placement agents were also entitled to a non-accountable expense allowance of up to $55,000        as reimbursement for out of pocket expenses incurred in connection with the offering. The        Company agreed to indemnify the placement agents against certain liabilities, including        liabilities under the Securities Act of 1933, incurred in connection with the        offering.

 

F-12

 

----

In May        2005, the Company closed a private placement of 6,733,024 shares of common stock and        warrants to purchase a total of 2,356,559 shares of common stock, with an initial exercise        price equal to $1.30 per share of common stock, subject to adjustment. The Company received        net proceeds of approximately $6,309,000. In connection with the private placement, the        Company paid a cash commission equal to 7% of the gross proceeds from the private        placement, or approximately $495,000, to Paramount, who acted as its placement agent, and        issued to Paramount a warrant to purchase 336,651 shares of common stock (the        “Placement Warrant”). The Placement Warrant is exercisable at an initial        exercise price equal to $1.30 per share (subject to adjustment). On the date of grant, the        warrants had an approximate fair value of $0.66 per warrant. Paramount was also entitled to        a non-accountable expense allowance of up to $50,000 to reimburse it for out-of-pocket        expenses incurred in connection with the private placement. The Company agreed to indemnify        Paramount against certain liabilities, including liabilities under the Securities Act of        1933, incurred in connection with the offering.

 

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, 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 per share through January 2009. 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. For its services as placement agent, the Company paid        Paramount a commission of 7% of the aggregate amount raised, or approximately $1,000,000,        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. On the date of grant, the warrants had an approximate fair value of $0.88 per        warrant. The Company also paid Paramount a non-accountable expense allowance of $25,000 to        reimburse Paramount for its out-of- pocket expenses.

 

The        Company has entered into registration rights agreements with certain holders of our common        stock that require us to continuously maintain an effective registration statement covering        the underlying shares of common stock. Such registration statements have been declared        effective and must continuously remain effective for a specified term. If we fail to        continuously maintain such registration statements as effective throughout the specified        terms, the Company may be subject to liability to pay liquidated damages.

 

PREFERRED STOCK - The Company’s Certificate of Incorporation        authorizes the issuance of up to 1,000,000 shares of Preferred Stock. None of the Preferred        Stock has been designated or issued through December 31, 2007. 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        and voting rights, and terms of redemption and liquidation.

 

**NOTE 8 -        COMMITMENTS AND CONTINGENCIES**

 

EMPLOYMENT AGREEMENTS - At December 31, 2007, the Company had employment        agreements with three officers of the Company providing for an aggregate salary of        $824,000, $553,000, and $40,000 in the years ending December 31, 2008, 2009 and 2010,        respectively, excluding potential Company matching contributions to the officers’        401(k) plan. The remaining terms of the officers’ employment agreements are outlined        below. Generally, in the event an officer is terminated prior to the end of such agreement,        the officer is entitled to severance payments equal to the officer’s salary for the        shorter of six months or the remaining term of the officer’s employment        agreement.

 

The        employment agreements with the Company’s officers are due to expire on the following        schedule: Mr. Spicer’s agreement in December 2008, Dr. Bergstrom’s        agreement in December 2009, and Mr. Zodda’s agreement in February        2010.

 

In        September 2007, in connection with his resignation, Dr. Egberts and the Company entered        into a Separation, Consulting and General Release Agreement, pursuant to which the Company        must pay Dr. Egberts fees for services at a rate of $363,000 per annum through July 25,        2008. At December 31, 2007, the Company had obligations to Dr. Egberts under the Agreement        of $223,000.

 

All of        the foregoing employment agreements provide for the potential issuance of bonuses based on        certain factors. Such agreements also provide for the grant of options to purchase shares        of the Company’s common stock.

 

F-13

 

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LICENSE        AND DEVELOPMENT AGREEMENTS - In April 2003, the Company entered into a license and        development agreement with Manhattan Pharmaceuticals for the worldwide, exclusive rights to        the Company’s proprietary oral spray technology to deliver propofol for        pre-procedural sedation. The terms of the agreement call for certain milestone and other        payments, the first $125,000 of which was partially received during June 2003. In November        2003, the Company received $375,000 from Manhattan Pharmaceuticals for license fees. The        Company has included these license fees in deferred revenue and is recognizing these        license fees over the 20-year term of the license. During the fiscal year ended July 31,        2005, the Company invoiced Manhattan Pharmaceuticals approximately $65,000 for the        Company’s reimbursable expenses.

 

In June        2004, the Company entered into a 20-year worldwide exclusive license agreement with        Velcera, a veterinary company. The license agreement is for the exclusive rights to the        Company’s propriety oral spray technology in animals. In September 2004, the Company        received $1,500,000 from Velcera as an upfront payment in connection with the        commercialization agreement. The upfront payment has been included in deferred revenue and        will be recognized in income over the 20-year term of the agreement. In addition, the        Company received an equity stake of 529,500 shares of common stock, approximately 15% at        the time the shares were issued, in Velcera which did not have a material value. The        Company may receive additional milestone payments and royalty payments over the 20-year        term of the agreement. During the fiscal years ended December 31, 2006, the five months        ended December 31, 2005, and for the fiscal years ended July 31, 2006 and 2005, the Company        invoiced Velcera approximately $119,000, $109,000, $228,000 and $183,000, respectively, for        reimbursable expenses. Additionally, during the year ended December 31, 2007, and the        fiscal year ended July 31, 2005, the Company invoiced Velcera $125,000 and $50,000,        respectively, for contractual milestones that were reached.

 

In July        2004, the Company entered into a licensing agreement with Par for the exclusive right to        market, sell and distribute nitroglycerin lingual spray in the U.S. and Canada. The Company        has received $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 July 2007, the Company and Par agreed to terminate the agreement relating to        NitroMistTM. The Company is currently investigating strategic partners for the        commercialization of NitroMistTM.

 

In        October 2004, the Company entered into a license and development agreement pursuant to        which the Company granted to Hana Biosciences an exclusive license to develop and market        the Company’s oral spray version of ondansetron in the U.S. and Canada. Pursuant to        the terms of the agreement, in exchange for $1,000,000, Hana Biosciences purchased 400,000        shares of the Company’s common stock at a per share price equal to $2.50, a premium        of $.91 per share or $364,000 over the then market value of the Company’s common        stock. The Company accounted for this premium as deferred revenue related to the license.        In connection with the agreement, Hana Biosciences issued to the Company $500,000 worth of        common stock of Hana Biosciences (73,121 shares based on a market value of $6.84 per        share). The proceeds received from Hana Biosciences attributable to the premium are        included in deferred revenue and are being recognized over the 20-year term of the        agreement. The Company may receive additional license fees and royalties over the 20-year        term of the agreement. During the five months ended December 31, 2006 and the fiscal year        ended July 31, 2006, the Company received $1,000,000 and $1,500,000, respectively, in        milestone payments from Hana Biosciences. During the year ended December 31, 2006, and for        the fiscal years ended July 31, 2006 and 2005, the Company invoiced Hana Biosciences        approximately $13,000, $13,000 and $84,000, respectively, for pass-through expenses        incurred by the Company on behalf of Hana Biosciences.

 

In July        2007, the Company entered into a sublicense agreement with Hana Biosciences and Par,        pursuant to which Hana Biosciences granted a non-transferable, non-sublicenseable,        royalty-bearing, exclusive sublicense to Par to develop and commercialize ZensanaTM.        In connection therewith, the Company and Hana Biosciences amended and restated their        existing license agreement, as amended, relating to the development and commercialization        of ZensanaTM to coordinate certain of the terms of the sublicense agreement. Under the        terms of the sublicense agreement, Par is responsible for all development, regulatory,        manufacturing and commercialization activities of ZensanaTM in the United States and        Canada. The Company retains its rights to ZensanaTM outside of the United States and        Canada. In addition, under the terms of the Amended and Restated License Agreement, Hana        Biosciences relinquished its right to pay reduced royalty rates to the Company until such        time as Hana Biosciences had recovered one-half of its costs and expenses incurred in        developing ZensanaTM from sales of ZensanaTM and the Company agreed to surrender        for cancellation all 73,121 shares of the Hana Biosciences common stock acquired by the        Company in connection with execution of the original License Agreement.

 

F-14

 

----

On        November 18, 2004, the Company entered into a manufacturing and supply agreement with INyX        whereby INyX manufactures and supplies the Company’s nitroglycerin lingual spray. For        a five-year period that began November 18, 2004, INyX is the exclusive provider of the        nitroglycerin lingual spray to the Company substantially worldwide. Pursuant to the terms        and conditions of the agreement, it will be INyX’s responsibility to manufacture,        package and supply the nitroglycerin lingual spray in such territories. Thereafter, INyX        will have a non-exclusive right to manufacture such spray for an additional five years. In        July 2007, INyX announced it filed for protection under the Chapter 11 bankruptcy laws. The        Company is taking all necessary steps to ensure that any limited assets of the Company at        INyX are protected.

 

CAPITAL        LEASE OBLIGATIONS – As of December 31, 2007, the Company has aggregate capital lease        obligations of $312,000, of which $164,000, $122,000, $22,000 and $4,000 are scheduled to        be paid in the years ending December 31, 2008, 2009, 2010, and 2011,        respectively.

 

OPERATING LEASES - In March 2003, the Company entered into a 10-year lease        for 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 area charges. Beginning in the sixth year and continuing through        the tenth year of the lease, the annual rent will be approximately $366,000 plus a        proportionate share of real estate taxes and common areas. Through December 31, 2005, the        Company occupied office and laboratory space at a second location. During the years ended        December 31, 2007 and 2006, the five months ended December 31, 2006 and 2005, and for the        fiscal years ended July 31, 2006 and 2005, the Company paid rent of approximately $443,000,        $456,000, $184,000, $223,000, $495,000 and $521,000, respectively.

 

Future        minimum rental payments subsequent to December 31, 2007 are as follows:

 

| Years Ending December 31, |       |
|---------------------------|------------|
|                      |       |
| 2008                      | $343,000   |
| 2009                      | $366,000   |
| 2010                      | $366,000   |
| 2011                      | $366,000   |
| 2012                      | $365,000   |
| Thereafter                | $243,000   |
|                      | $2,049,000 |

 

**NOTE 9        – INVESTMENT IN MARKETABLE EQUITY SECURITY**

 

As        explained in Note 8, in October 2004, as part of the license agreement with Hana        Biosciences, the Company received $500,000 of common stock of Hana Biosciences (73,121        shares based on a market value of $6.84 per share at the date of the agreement). As a        result of restrictions on its ability to sell the shares, the Company was required by SFAS        No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” to        account for those shares using the cost method through October 2005 and thereafter as        marketable equity securities. At December 31, 2006, the Company had classified the shares        as available for sale and recorded changes in their value as part of its comprehensive        loss. Such shares had a market value of $466,000 at December 31, 2006 and, accordingly, the        Company has included its $34,000 unrealized loss in accumulated comprehensive loss, a        separate component of stockholders’ equity, as of December 31, 2006.

 

As of        March 31, 2007, such shares had a market value of $140,000, as compared to their original        cost basis of $500,000. At such time, the Company determined that the decline in value of        this investment was other than temporary and recorded a $360,000 impairment charge to the        statement of operations, the only component of other loss, for the three months ended March        31, 2007 to establish a new cost basis of $140,000 for the investment as of March 31, 2007.        During the three months ended September 30, 2007, as a result of the Amended and Restated        License Agreement with Hana Biosciences as described in Note 8, the Company recorded a        $140,000 charge to expense that is included in other loss, net, to account for the return        of Hana Biosciences’ shares.

 

F-15

 

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**NOTE 10        – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES**

 

Accrued        expenses and other current liabilities are comprised of the following at December 31, 2007        and December 31, 2006:

 

|                       |   |   | **December 31, 2007** |   | **December 31, 2006** |      |   |
|----------------------------|--------|--------|-----------------------|--------|-----------------------|-----------|--------|
|                       |   |   |                  |   |                  |      |   |   |
| Accrued compensation       |   | $      | 397,000               |   | $                     | 503,000   |   |   |
| Professional fees          |   |   | 131,000               |   |                  | 229,000   |   |   |
| Accrued milestone payments |   |   | —               |   |                  | 312,000   |   |   |
| Product development costs  |   |   | 1,558,000             |   |                  | 782,000   |   |   |
| Insurance premiums         |   |   | 167,000               |   |                  | 178,000   |   |   |
| Other                      |   |   | 14,000                |   |                  | 57,000    |   |   |
|                       |   | $      | 2,267,000             |   | $                     | 2,061,000 |   |   |
|                            |        |        |                       |        |                       |           |        |  |  |

 

**NOTE 11        - INCOME TAXES**

 

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

 

 

|                             |   |   | **December 31, 2007** |   |   | **December 31, 2006** |        |   |
|----------------------------------|--------|--------|-----------------------|--------|--------|-----------------------|-------------|--------|
|                             |   |   |                  |   |   |                  |        |   |
| Stock-based compensation         |   | $      | 813,000               |   |   | $                     | 560,000     |   |
| Net operating loss carryforwards |   |   | 21,365,000            |   |   |                  | 14,828,000  |   |
| Deferred revenue                 |   |   | 791,000               |   |   |                  | 1,043,000   |   |
| Property and equipment           |   |   | (147,000              | )      |   |                  | (157,000    | )      |
| R & D credit                 |   |   | 1,134,000             |   |   |                  | —     |   |
| Other                            |   |   | 439,000               |   |   |                  | 424,000     |   |
| Total gross deferred tax assets  |   |   | 24,395,000            |   |   |                  | 16,698,000  |   |
| Valuation allowance              |   |   | (24,395,000           | )      |   |                  | (16,698,000 | )      |
| Net deferred tax assets          |   | $      | —               |   |   | $                     | —     |   |
|                             |   |   |                  |   |   |                  |        |   |

 

 

At        December 31, 2007, the Company had federal and state net operating loss carryforwards for        financial reporting and income tax purposes of approximately $57.5 million and $30.5        million, respectively, which can be used to offset current and future federal and state        taxable income, if any, through 2027 and 2014, respectively. In addition, the Company has        Federal and State research and development tax credit of $0.8 million and $0.3 million        respectively, which will expire beginning 2020 and 2012 respectively. A valuation allowance        is provided when it is more likely than not that some portion or all of the deferred tax        assets will not be realized. 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. The net increases in the total valuation allowance for the year        ended December 31, 2007, for the five-months ended December 31, 2006 and for fiscal years        ended July 31, 2006 and 2005 were $7.7 million, $0.8 million, $4.0 million and $3.8        million, respectively.

 

The tax        benefits expected based on the Company’s pre-tax loss for the years ended December        31, 2007 and 2006, for the five-months ended December 31, 2006 and 2005, and for fiscal        years ended July 31, 2006 and 2005, utilizing the applicable statutory rates, have been        reduced to an actual benefit of $658,000, $467,000, $467,000, $256,000, $256,000 and        $241,000, respectively, due principally to the aforementioned increases in the valuation        allowance. The benefit recognized in such fiscal years relates solely to the sale of        certain of the Company’s state net operating loss carryforwards.

 

F-16

 

----

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

 

 

|                            |   | Year Ended        |   | Five Months Ended |   | Year Ended July 31, |
|---------------------------------|--------|-------------------|--------|-------------------|--------|---------------------|
|                            |   | December 31, 2007 |   | December 31, 2006 |   | 2006                |   | 2005 |
| Federal tax at statutory rate   |   | ( 34.0%)          |   | ( 34.0%)          |   | (34.0%)             |   | (34.0%) |
| State income tax                |   | ( 6.0% )          |   | ( 6.0% )          |   | (6.0%)              |   | (6.0%) |
| Other                           |   | 0.2%              |   | ( .3%)            |   | —             |   | 0.3% |
| Sale of net operating losses    |   | (3.7%)            |   | (10.9%)           |   | (2.5%)              |   | (2.5%) |
| Increase in valuation allowance |   | 39.8%             |   | 40.3%             |   | 40.0%               |   | 39.7% |
|                            |   | (3.7)%            |   | (10.9)%           |   | (2.5%)              |   | (2.5%) |

 

The Tax        Reform Act of 1986 (the Act) provides for a limitation on the annual use of NOL        carryforwards (following certain ownership changes, as defined by the Act), which could        significantly limit the Company’s ability to utilize these carryforwards. The Company        has experienced various ownership changes, as defined by the Act, as a result of past        financings and may experience others in connection with future financings. Accordingly, the        Company’s ability to utilize the aforementioned federal operating loss carryforwards        will be limited. The Company is in the process of determining the impact of ownership        changes that have occurred, as defined by the Act. Additionally, because U.S. tax laws        limit the time during which these carryforwards may be applied against future taxes, the        Company may not be able to take full advantage of these attributes for federal income tax        purposes.

 

SALE OF        NET OPERATING LOSS CARRYFORWARDS: The State of New Jersey has enacted legislation        permitting certain corporations located in New Jersey to sell state tax loss carryforwards        and state research and development credits, or net operating loss carryforwards, in order        to obtain tax benefits. The Company recorded an income tax benefit of $658,000, $467,000,        $467,000, $256,000, $256,000 and $241,000 for the years ended December, 31, 2007 and 2006,        for the five months ended December 31, 2006 and 2005, and for the fiscal years ended July        31, 2006 and 2005, respectively, from the sale of its New Jersey net operating loss        carryforwards. If still available under New Jersey law, the Company may attempt to sell its        remaining New Jersey net operating loss carryforwards of $30.5 million as of December 31,        2007. The Company cannot estimate, however, what percentage of its saleable net operating        loss carryforwards New Jersey will permit it to sell, how much money will be received in        connection with the sale, if the Company will be able to find a buyer for its net operating        loss carryforwards or if such funds will be available in a timely manner or at        all.

 

The        Company files income tax returns in the U.S. Federal jurisdiction and in the State of New        Jersey. With certain exceptions, the Company is no longer subject to U.S. federal and state        income tax examinations by tax authorities for years prior to 2004. The Company adopted the        provisions of FIN 48, “Accounting for Uncertainty in Income Taxes – an        interpretation of FASB Statement No. 109” on January 1, 2007 with no material impact        to the financial statements.

 

The Company        had no unrecognized tax benefits at December 31, 2007 that would affect the annual        effective tax rate. Further, the Company is unaware of any positions for which it is        reasonably possible that the total amounts of unrecognized tax benefits will significantly        increase or decrease within the next twelve months.

 

F-17

 

----

**NOTE 12        - STOCK OPTIONS AND WARRANTS**

 

At        December 31, 2007, the Company had two plans which allow for the issuance of stock options        and other awards: the 1998 Stock Option Plan and the 2006 Equity Incentive Plan (the        “Plans”). On January 17, 2006, the stockholders of the Company, upon        recommendation of the Board of Directors of the Company, approved the NovaDel Pharma Inc.        2006 Equity Incentive Plan (the “2006 Plan”). The 2006 Plan authorizes the        grant of several types of stock-based awards, including stock options, stock appreciation        rights and stock (including restricted stock). The number of shares of common stock        originally reserved for issuance under the 2006 Plan was 6 million shares. These Plans are        administered by the Compensation Committee of the Board of Directors. Incentive Stock        Options (“ISOs”) may be granted to employees and officers of the Company and        non-qualified options may be granted to consultants, directors, employees and officers of        the Company. Options to purchase the Company’s common stock may not be granted at a        price less than the fair market value of the common stock at the date of grant and will        expire not more than 10 years from the date of grant, and vesting is determined by the        Compensation Committee of the Board of Directors. ISOs granted to a 10% or more stockholder        may not be for less than 110% of fair market value or for a term of more than five years.        As of December 31, 2007, there were approximately 3.3 million shares available for issuance        under the Plans. Subsequent to December 31, 2007, in accordance with its remuneration        practices, the Company issued an additional 1.1 million restricted shares, including (i)        750,000 to existing executive officers and directors; and (ii) 350,000 to existing and new        employees (see Note 13).

 

Information with respect to stock option activity for the year ended        December 31, 2007, five months ended December 31, 2006 and for the fiscal year ended July        31, 2006 is as follows:

 

 

| **Options**                      |   | **Shares (000)** |   |   | **Weighted-Average Exercise Price** |   | **Weighted-Average Remaining Contractual Terms                        (Years)** |   |   | **Aggregate Intrinsic Value ($000)** |   |
|----------------------------------|--------|------------------|--------|--------|-------------------------------------|--------|---------------------------------------------------------------------------------|--------|--------|--------------------------------------|--------|
| Outstanding at August 1, 2005    |   | 6,474            |   | $      | 1.64                                |   | —                                                                         |   | $      | —                              |   |
| Grants                           |   | 3,280            |   |   | 1.58                                |   | —                                                                         |   |   | —                              |   |
| Exercises                        |   | (360             | )      |   | .75                                 |   | —                                                                         |   |   | —                              |   |
| Cancellations                    |   | (1,217           | )      |   | 1.66                                |   | —                                                                         |   |   | —                              |   |
|                             |   |             |   |   |                                |   |                                                                            |   |   |                                 |   |
| Outstanding at July 31, 2006     |   | 8,177            |   | $      | 1.65                                |   | 4.4                                                                             |   | $      | 492                                  |   |
|                             |   |             |   |   |                                |   |                                                                            |   |   |                                 |   |
| Exercisable at July 31, 2006     |   | 4,710            |   | $      | 1.69                                |   | 3.3                                                                             |   | $      | 492                                  |   |
|                             |   |             |   |   |                                |   |                                                                            |   |   |                                 |   |
| Outstanding at August 1, 2006    |   | 8,177            |   | $      | 1.64                                |   | —                                                                         |   |   | —                              |   |
| Grants                           |   | 900              |   |   | 1.71                                |   | —                                                                         |   |   | —                              |   |
| Exercises                        |   | (242             | )      |   | .75                                 |   | —                                                                         |   |   | —                              |   |
| Cancellations                    |   | (60              | )      |   | 1.56                                |   | —                                                                         |   |   | —                              |   |
|                             |   |             |   |   |                                |   |                                                                            |   |   |                                 |   |
| Outstanding at December 31, 2006 |   | 8,775            |   | $      | 1.68                                |   | 4.5                                                                             |   | $      | 1,203                                |   |
|                             |   |             |   |   |                                |   |                                                                            |   |   |                                 |   |
| Exercisable at December 31, 2006 |   | 5,313            |   | $      | 1.73                                |   | 3.1                                                                             |   | $      | 973                                  |   |
|                             |   |             |   |   |                                |   |                                                                            |   |   |                                 |   |
| Outstanding at January 1, 2007   |   | 8,775            |   | $      | 1.68                                |   | —                                                                         |   |   | —                              |   |
| Grants                           |   | 3,239            |   |   | 1.67                                |   | —                                                                         |   |   | —                              |   |
| Exercises                        |   | (268             | )      |   | .75                                 |   | —                                                                         |   |   | —                              |   |
| Cancellations                    |   | (3,317           | )      |   | 1.72                                |   | —                                                                         |   |   | —                              |   |
|                             |   |             |   |   |                                |   |                                                                            |   |   |                                 |   |
| Outstanding at December 31, 2007 |   | 8,429            |   | $      | 1.69                                |   | 5.9                                                                             |   | $      | —                              |   |
|                             |   |             |   |   |                                |   |                                                                            |   |   |                                 |   |
| Exercisable at December 31, 2007 |   | 5,549            |   | $      | 1.75                                |   | 5.0                                                                             |   | $      | —                              |   |

 

 

F-18

 

----

The        Company recorded share-based compensation for options using the fair value method required        by SFAS 123R of approximately $910,000, or $.02 per share, for the year ended December 31,        2007; $1,179,000, or $0.03 per share, for the year ended December 31, 2006; $498,000 or        $0.01 per share, for the five months ended December 31, 2006; $520,000, or $0.01 per share,        for the five months ended December 31, 2005; and $1,201,000 or $0.03 per share, for the        fiscal year ended July 31, 2006, which amounts are included in the Company’s net loss        for each period.

 

| **•** | During the year ended December 31, 2007, the Company granted                        3.2 million additional stock options, including 0.7 million options which                        vest upon reaching certain milestones. During the year ended December 31,                        2007, the Company granted to an executive of the Company incentive stock                        options to purchase 68,027 shares of common stock of the Company and                        non-qualified stock options to purchase 598,973 shares of common stock of                        the Company. Such option grants have a term of ten (10) years. The stock                        options vest upon achievement of performance milestones; so that 22,676                        incentive stock options and 200,324 non-qualified stock options will vest                        on the signing of a Board approved third party agreement for U.S. or                        worldwide rights of sumatriptan; 22,676 incentive stock options and 199,324                        non-qualified stock options will vest on the signing of a Board approved                        third party agreement for U.S. or worldwide rights of zolpidem; and 22,675                        incentive stock options and 199,325 non-qualified stock options will vest                        upon approval by the Board of any third party agreement whereby the Company                        obtains the right to develop a product incorporating an active                        pharmaceutical ingredient that is the subject of a then valid U.S. Patent                        (or in-process U.S. Patent Application) and already approved for sale by                        the U.S. Food and Drug Administration with sales in the U.S. of at least                        $100 million. Such options will expire on February 21, 2017. The exercise                        price of each option is $1.47 (the closing price of the Company’s                        common stock on February 22, 2007, as listed on the American Stock                        Exchange). |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | During the five months ended December 31, 2006, the Company                        did not grant any additional stock options other than the December 2006                        grant of 900,000 performance-based stock options which vest upon reaching                        certain milestones. Previously, the Company had not granted                        performance-based stock options. In addition, during the five months ended                        December 31, 2006, the Company granted 100,000 shares of restricted stock                        to an executive of the Company with a grant price equal to the fair market                        value on the date of grant, or $1.71 per share. The restricted stock vests                        ratably over a three-year period ending on the third anniversary of the                        grant, or December 4, 2009. Such performance-based stock options and                        restricted stock had a deminimus impact on the Company’s net loss for                        the five months ended December 31, 2006, and resulted in recognition of                        $180,000 in share-based compensation expense for the year ended December                        31, 2007. As of December 31, 2007, unamortized stock-based compensation                        expense of $2.0 million remains to be recognized, which is comprised of                        $1.2 million to be recognized over a weighted average period of 1.4 years,                        $0.1 million related to restricted stock to be recognized over a weighted                        average period of 1.9 years, and $0.7 million related to performance-based                        stock options which vest upon reaching certain milestones. Expenses related                        to the performance-based stock options will be recognized if and when the                        Company determines that it is probable that the milestone will be                        reached.  |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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

 

|                                 |   |   | **Year Ended December 31,** |   |            | **Five Months Ended**

**December 31,** |   |     |   | **Year Ended**

**July 31,** |            |
|--------------------------------------|--------|--------|-----------------------------|--------|-----------------|-----------------------------------------|--------|----------|--------|------------------------------|-----------------|
|                                 |   |   | **2007**                    |   | **2006**        |                                    |   | **2006** |   |                         | **2005**        |   |   |   | **2006** |   |
|                                 |   |   |                        |   | **(unaudited)** |                                    |   |     |   |                         | **(unaudited)** |   |   |   |   |   |
| Expected volatility                  |   |   | 63%                         |   | 65%             |                                    |   | 60%      |   |                         |            | 64% |   |   |   | 64% |   |
| Dividend yield                       |   |   | 0%                          |   | 0%              |                                    |   | 0%       |   |                         |            | 0% |   |   |   | 0% |   |
| Expected term until exercise (years) |   |   | 4.9                         |   | 3.9             |                                    |   | 2.5      |   |                         |            | 4.3 |   |   |   | 4.5 |   |
| Risk-free interest rate              |   |   | 4.8%                        |   | 4.5%            |                                    |   | 4.4%     |   |                         |            | 4.1% |   |   |   | 4.3% |   |
|                                 |   |   |                        |   |            |                                    |   |     |   |                         |            |   |   |   |   |   |   |

 

 

F-19

 

----

Expected        volatility is based on historical volatility of the Company’s common stock. The        expected term of options is estimated based on the average of the vesting period and        contractual term of the option. The risk-free rate is based on U.S. Treasury yields for        securities in effect at the time of grant with terms approximating the expected term until        exercise of the option. In addition, under SFAS 123R, the fair value of stock options        granted is recognized as expense over the service period, net of estimated forfeitures. The        Company is utilizing a 5% forfeiture rate, which it believes is a reasonable assumption to        estimate forfeitures. However, the estimation of forfeitures requires significant judgment,        and to the extent actual results or updated estimates differ from our current estimates,        the effects of such resulting adjustment will be recorded in the period estimates are        revised. The weighted average grant date fair value of options granted was $0.93 and $0.84        during the years ended December 31, 2007 and 2006; $0.63 and $0.86 during the five months        ended December 31, 2006 and 2005; and $0.86 during the fiscal year ended July 31, 2006. The        total intrinsic value of options exercised was $172,000 and $398,000 during the years ended        December 31, 2007 and 2006, $137,000 and $0 during the five months ended December 31, 2006        and 2005, and $261,000 for the fiscal year ended July 31, 2006.

 

At December        31, 2007, there were approximately 2.6 million non-plan options reserved for        issuance.

 

The        following table summarizes information related to warrants outstanding at December 31,        2007:

 

 

| Price Range        |   | Number of Warrants Outstanding and Exercisable                        000’s |   | Remaining Contractual Life (Years) |   |
|--------------------|--------|-----------------------------------------------------------------------------------|--------|------------------------------------|--------|
|               |   |                                                                              |   |                               |   |
| $0.01 – 0.99 |   | 10,078                                                                            |   | 1.1                                |   |
| $1.00 – 1.99 |   | 15,775                                                                            |   | 2.6                                |   |
| $2.00              |   | 840                                                                               |   | 0.3                                |   |
| Totals             |   | 26,693                                                                            |   |                               |   |

 

 

**NOTE 13        – SUBSEQUENT EVENTS**

 

On        February 6, 2008, the Company’s Board of Directors, upon the recommendation of the        Compensation Committee, approved grants of 750,000 shares of restricted common stock to the        executive officers of the Company and an additional 350,000 shares of restricted stock to        other employees of the Company. The restricted stock was awarded from the Company’s        1998 Stock Option Plan.

 

The        restrictions on the restricted stock shall lapse over a three-year period, subject to        reduction as follows: (1) in the event of a $5 million non-dilutive financing by the        Company on or before December 31, 2008, the three-year restriction shall be accelerated        such that the restrictions on the restricted stock shall lapse over a two-and-one-half year        period; (2) in the event of an additional $5 million (or $10 million in the aggregate)        non-dilutive financing by the Company on or before December 31, 2008, the three-year        restriction shall be accelerated such that the restrictions on the restricted stock shall        lapse over a two-year period; and (3) in the event of a $20 million (or $20 million in the        aggregate) non-dilutive financing by the Company, the restrictions shall immediately        lapse.

 

Additionally, the Board, upon the recommendation of the Compensation        Committee, agreed that, in the case of Mr. Ratoff, an additional 200,000 shares of        restricted stock shall be granted as follows: (1) upon achieving a $5 million non-dilutive        financing by the Company on or before December 31, 2008, an additional 100,000 shares of        restricted stock shall be granted; and (2) upon achieving an additional $5 million (or $10        million in the aggregate) in non-dilutive financing by the Company on or before December        31, 2008, an additional 100,000 shares of restricted stock shall be granted. The        restrictions on such additional shares of restricted stock shall lapse over a three-year        period.

 

F-20

 

----

**NOTE        14 – QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)**

 

Unaudited        quarterly financial data for the year ended December 31, 2007, the five months ended        December 31, 2006 and for the fiscal year ended July 31, 2006 follows:

 

 

|                                                                                                                                    | **Three Months Ended** |           |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------------------|----------------|
|                                                                                                                                    |                   | March 31, 2007 |   |   | June 30, 2007 |   |   | September 30, 2007 |   |   | December 31, 2007 |   |   | Year Ended December 31, 2007 |   |
|                                                                                                                                    |                   |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Revenues                                                                                                                          | $                      | 40,000         |   | $ | 165,000 |   | $ | 206,000 |   | $ | 58,000 |   | $ | 469,000 |   |
| Total Expenses                                                                                                                          |                   | 5,334,000      |   |   | 5,676,000 |   |   | 3,037,000 |   |   | 4,609,000 |   |   | 18,656,000 |   |
| Loss from Operations                                                                                                                    |                   | (5,294,000     | ) |   | (5.511,000 | ) |   | (2,831,000 | ) |   | (4,551,000 | ) |   | (18,187,000 | ) |
| Other Income/(Loss)                                                                                                                     |                   | (360,000       | ) |   | — |   |   | 294,000 |   |   |   |   |   | (66,000 | ) |
| Interest Income                                                                                                                         |                   | 230,000        |   |   | 187,000 |   |   | 127,000 |   |   | 88,000 |   |   | 632,000 |   |
| Income Tax Benefit                                                                                                                      |                   | —        |   |   | — |   |   | — |   |   | 658,000 |   |   | 658,000 |   |
|                                                                                                                                    |                   |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Loss                                                                                                                                | $                      | (5,424,000     | ) | $ | (5,324,000 | ) | $ | (2,410,000 | ) | $ | (3,805,000 | ) | $ | (16,963,000 | ) |
|                                                                                                                                    |                   |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and Diluted Loss Per Common Share                                                                                                 | $                      | (0.09          | ) | $ | (0.09 | ) | $ | (0.04 | ) | $ | (0.06 | ) | $ | (0.29 | ) |
|                                                                                                                                    |                   |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted Average Number of Shares of Common Stock Used in                        Computation of Basic and Diluted Loss Per Common Share |                   | 59,264,000     |   |   | 59,537,000 |   |   | 59,591,000 |   |   | 59,592,000 |   |   | 59,497,000 |   |

 

 

 

|                                                                                                                                    |   | Three Months Ended October

31, 2006 |   |   | Two Months Ended December

31, 2006 |   |   | Five

Months Ended December

31, 2006 |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|--------|-------------------------------------|--------|--------|---------------------------------------|--------|
|                                                                                                                                    |   |                                 |   |   |                                |   |   |                                  |   |
| Total Revenues                                                                                                                          | $      | 1,041,000                            |   | $      | 1,026,000                           |   | $      | 2,067,000                             |   |
| Total Expenses                                                                                                                          |   | 3,656,000                            |   |   | 2,863,000                           |   |   | 6,519,000                             |   |
| Loss from Operations                                                                                                                    |   | (2,615,000                           | )      |   | (1,837,000                          | )      |   | (4,452,000                            | )      |
| Interest Income                                                                                                                         |   | 106,000                              |   |   | 74,000                              |   |   | 180,000                               |   |
| Income Tax Benefit                                                                                                                      |   | —                              |   |   | (467,000                            | )      |   | (467,000                              | )      |
|                                                                                                                                    |   |                                 |   |   |                                |   |   |                                  |   |
| Net Loss                                                                                                                                | $      | (2,509,000                           | )      | $      | (1,296,000                          | )      | $      | (3,805,000                            | )      |
|                                                                                                                                    |   |                                 |   |   |                                |   |   |                                  |   |
| Basic and Diluted Loss Per Common Share                                                                                                 | $      | (.05                                 | )      | $      | (.03                                | )      | $      | (.08                                  | )      |
|                                                                                                                                    |   |                                 |   |   |                                |   |   |                                  |   |
| Weighted Average Number of Shares of Common Stock Used in                        Computation of Basic and Diluted Loss Per Common Share |   | 49,213,000                           |   |   | 49,987,000                          |   |   | 49,522,000                            |   |
|                                                                                                                                    |   |                                 |   |   |                                |   |   |                                  |   |

 

 

F-21

 

----

 

 

 

|                                                                                                                                    | **Three Months Ended** |             |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------------------|------------------|
|                                                                                                                                    |                   | October 31, 2005 |   |   | January 31, 2006 |   |   | April 30, 2006 |   |   |  

July 31,

2006 |   |   | Fiscal Year Ended

July 31, 2006 |   |
|                                                                                                                                    |                   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Revenues                                                                                                                          | $                      | 150,000          |   | $ | 541,000 |   | $ | 1,159,000 |   | $ | 40,000 |   | $ | 1,890,000 |   |
| Total Expenses                                                                                                                          |                   | 2,768,000        |   |   | 3,658,000 |   |   | 3,307,000 |   |   | 2,721,000 |   |   | 12,454,000 |   |
| Loss from Operations                                                                                                                    |                   | (2,618,000       | ) |   | (3,117,000 | ) |   | (2,148,000 | ) |   | (2,681,000 | ) |   | (10,564,000 | ) |
| Interest Income                                                                                                                         |                   | 43,000           |   |   | 30,000 |   |   | 19,000 |   |   | 132,000 |   |   | 224,000 |   |
| Income Tax Benefit                                                                                                                      |                   | —          |   |   | (256,000 | ) |   | — |   |   | — |   |   | (256,000 | ) |
|                                                                                                                                    |                   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Loss                                                                                                                                | $                      | (2,575,000       | ) | $ | (2,831,000 | ) | $ | (2,129,000 | ) | $ | (2,549,000 | ) | $ | (10,084,000 | ) |
|                                                                                                                                    |                   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and Diluted Loss Per Common Share                                                                                                 | $                      | (0.06            | ) | $ | (0.07 | ) | $ | (0.05 | ) | $ | (0.05 | ) | $ | (0.23 | ) |
|                                                                                                                                    |                   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted Average Number of Shares of Common Stock Used in                        Computation of Basic and Diluted Loss Per Common Share |                   | 40,606,000       |   |   | 40,648,000 |   |   | 41,715,000 |   |   | 48,991,000 |   |   | 43,000,000 |   |
|                                                                                                                                    |                   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

 

The sum of the quarters may not equal the full year basic and diluted loss        per share since each period is calculated separately.

 

F-22

 

----

**INDEX        TO EXHIBITS**

 

The        following exhibits are included with this Annual Report on Form 10-K. All management        contracts or compensatory plans or arrangements are marked with an asterisk.

 

| EXHIBIT NO. |   | DESCRIPTION                                                                                           |   | METHOD OF FILING                                                                                                                                                                                                 |
|-------------|--------|-------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1         |   | Restated Certificate of Incorporation of the                        Company                           |   | Incorporated by reference to Exhibit 3.1 of the                        Company’s Quarterly Report on Form 10-QSB, as filed with the SEC on                        June 14, 2004                            |
|        |   |                                                                                                  |   |                                                                                                                                                                                                             |
| 3.2         |   | Certificate of Amendment to the Certificate of Incorporation                        of the Company    |   | Incorporated by reference to Exhibit 3.1 of the                        Company’s Annual Report on Form 10-K, as filed with the SEC on March                        26, 2007                                |
|        |   |                                                                                                  |   |                                                                                                                                                                                                             |
| 3.3         |   | Amended and Restated By-laws of the Company                                                           |   | Incorporated by reference to Exhibit 3.1 of the                        Company’s Form 8-K, as filed with the SEC on September 9,                        2005                                               |
|        |   |                                                                                                  |   |                                                                                                                                                                                                             |
| 4.1         |   | Form of Class C Warrant for the Purchase of Shares of Common                        Stock             |   | Incorporated by reference to Exhibit 4.1 to the                        Company’s Current Report on Form 8-K, as filed with the SEC on                        January 12, 2004                              |
|        |   |                                                                                                  |   |                                                                                                                                                                                                             |
| 4.2         |   | Form of Warrant issued to certain accredited investors and                        placement agents    |   | Incorporated by reference to Exhibit 4.1 of the                        Company’s Form 8-K, as filed with the SEC on April 17,                        2006                                                  |
|        |   |                                                                                                  |   |                                                                                                                                                                                                             |
| 4.3         |   | Form of Warrant issued to certain accredited investors and                        the placement agent |   | Incorporated by reference to Exhibit 4.1 of the                        Company’s Current Report on Form 8-K filed with the SEC on January 4,                        2007                                   |
|        |   |                                                                                                  |   |                                                                                                                                                                                                             |
| 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 under the 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)                 |
|        |   |                                                                                                  |   |                                                                                                                                                                                                             |
| 10.3*       |   | 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 the 1997 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)                 |
|        |   |                                                                                                  |   |                                                                                                                                                                                                             |
| 10.5*       |   | 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 1998 Stock Option                        Plan                |   | Incorporated by reference to Exhibit 4.2 to the                        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 Non-Qualified 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)   |

 

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|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.8   |   | Common Stock and Warrant Purchase Agreement, dated December                        12, 2001, by and among the Company and certain purchasers                                                                                                         |   | Incorporated by reference to Exhibit A to the Schedule 13D                        as filed by Lindsay A. Rosenwald with the SEC on December 21,                        2001                                                  |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.9   |   | Amendment No. 1, dated January 6, 2002, to the Common Stock                        and Warrant Purchase Agreement dated December 12, 2001 between the Company                        and certain purchasers                                          |   | Incorporated by reference to Exhibit 10.25 to the                        Company’s Registration Statement of Form SB-2, as filed with the SEC                        on April 15, 2002 (File No. 333-86262)            |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.10  |   | Lease Agreement, dated March 19, 2003, by and between the                        Company and Macedo Business Park, II, L.L.C.                                                                                                                        |   | Incorporated by reference to Exhibit 10.28 to the                        Company’s Quarterly Report on Form 10-QSB for the period ended April                        30, 2003, as filed with the SEC on June 19, 2003  |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.11  |   | Amendment Number 1 to Lease Agreement dated March 19, 2003                        between Macedo Business Park, II, L.L.C. and the Company, dated as of March                        19, 2003                                                        |   | Incorporated by reference to Exhibit 10.29 to the                        Company’s Quarterly Report on Form 10-QSB for the period ended April                        30, 2003, as filed with the SEC on June 19, 2003  |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.12  |   | License and Development Agreement, effective as of April 4,                        2003, by and between the Company and Manhattan Pharmaceuticals,                        Inc.                                                                       |   | Incorporated by reference to Exhibit 10.31 to the                        Company’s Annual Report on Form 10-KSB, as filed with the SEC on                        March 11, 2004                                        |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.13  |   | Development, Manufacturing and Supply Agreement, dated July                        28, 2004, by and between the Company and Par Pharmaceutical,                        Inc.                                                                          |   | Incorporated by reference to Exhibit 10.13 to the                        Company’s Annual Report on Form 10-KSB, as filed with the SEC on                        November 15, 2004                                     |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.14  |   | Second Amendment to License and Development Agreement, dated                        as of June 22, 2004, by and between the Company and the Veterinary Company,                        Inc.                                                          |   | Incorporated by reference to Exhibit 10.14 to the                        Company’s Annual Report on Form 10-KSB, as filed with the SEC on                        November 15, 2004                                     |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.15* |   | Employment Agreement, dated as of May 23, 2003, by and                        between the Company and Barry Cohen                                                                                                                                    |   | Incorporated by reference to Exhibit 10.30 to the                        Company’s Quarterly Report on Form 10-QSB for the period ending April                        30, 2003, as filed with the SEC on June 19, 2003 |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.16* |   | Disclosure and Release Agreement Related to the Exchange of                        Non-Plan Options for Stock Options under the NovaDel Pharma Inc. 1998 Stock                        Option Plan by and between the Company and Thomas E. Bonney    |   | Incorporated by reference to Exhibit 10.3 of the                        Company’s Form 8-K, as filed with the SEC on August 2,                        2005                                                             |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.17* |   | Disclosure and Release Agreement Related to the Exchange of                        Non-Plan Options for Stock Options under the NovaDel Pharma Inc. 1998 Stock                        Option Plan by and between the Company and William F. Hamilton |   | Incorporated by reference to Exhibit 10.2 of the                        Company’s Form 8-K, as filed with the SEC on August 2,                        2005                                                             |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.18* |   | Disclosure and Release Agreement Related to the Exchange of                        Non-Plan Options for Stock Options under the NovaDel Pharma Inc. 1998 Stock                        Option Plan by and between the Company and Charles Nemeroff    |   | Incorporated by reference to Exhibit 10.4 of the                        Company’s Form 8-K, as filed with the SEC on August 2,                        2005                                                             |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.19* |   | Employment Agreement, dated as of December 20, 2004, by and                        between the Company and Michael Spicer                                                                                                                            |   | Incorporated by reference to Exhibit 10.35 of the                        Company’s Form 8-K, as filed with the SEC on December 23,                        2004                                                         |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.20* |   | Amendment to Employment Agreement dated September 2, 2005,                        by and between the Company and Michael E.B. Spicer                                                                                                                 |   | Incorporated by reference to Exhibit 10.2 of the                        Company’s Form 8-K, as filed with the SEC on September 9,                        2005                                                          |
|   |   |                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                         |
| 10.21* |   | 1998 Stock Option Plan Nonqualified Stock Option Agreement                        dated July 28, 2005, by and between the Company and Thomas E.                        Bonney                                                                        |   | Incorporated by reference to Exhibit 10.25 of the                        Company’s Annual Report on Form 10-KSB for the period ended July 31,                        2005, as filed with the SEC on October 31, 2005   |

 

 

----

 

|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.22* |   | 1998 Stock Option Plan Nonqualified Stock Option Agreement                        dated July 28, 2005, by and between the Company and William F.                        Hamilton                      |   | Incorporated by reference to Exhibit 10.27 to the                        Company’s Annual Report on Form 10-KSB for the period ended July 31,                        2005, as filed with the SEC on October 31, 2005 |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.23* |   | 1998 Stock Option Plan Nonqualified Stock Option Agreement                        dated July 28, 2005, by and between the Company and Charles                        Nemeroff                         |   | Incorporated by reference to Exhibit 10.29 of the                        Company’s Annual Report on Form 10-KSB for the period ended July 31,                        2005, as filed with the SEC on October 31, 2005 |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.24  |   | Amendment No. 1 to License and Development Agreement dated                        as of August 8, 2005, by and between the Company and Hana Biosciences                        Inc.                   |   | Incorporated by reference to Exhibit 99.1 of the                        Company’s Form 8-K, as filed with the SEC on August 12,                        2005                                                          |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.25  |   | Separation, Consulting and General Release Agreement                        effective as of July 25, 2007, by and between NovaDel Pharma Inc. and Jan                        H. Egberts, M.D.         |   | Incorporated by reference to Exhibit 10.1 of the                        Company’s Form 8-K, as filed with the SEC on September 20,                        2007                                                       |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.26* |   | Nonqualified Stock Option Agreement dated September 26,                        2005, by and between the Company and Jan H. Egberts, M.D.                                                              |   | Incorporated by reference to Exhibit 10.2 of the                        Company’s Form 8-K, as filed with the SEC on September 28,                        2005                                                       |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.27* |   | NovaDel Pharma Inc. 2006 Equity Incentive Plan                                                                                                                                                        |   | Incorporated by reference to Exhibit 10.1 of the                        Company’s Form 8-K, as filed with the SEC on January 23,                        2006                                                         |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.28* |   | 1998 Stock Option Plan Nonqualified Stock Option Agreement                        dated December 14, 2005, by and between the Company and J. Jay                        Lobell                        |   | Incorporated by reference to Exhibit 10.4 of the                        Company’s Quarterly Report on Form 10-Q, as filed with the SEC on                        March 15, 2006                                      |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.29* |   | 1998 Stock Option Plan Nonqualified Stock Option Agreement                        dated January 17, 2006, by and between the Company and Thomas                        Bonney                         |   | Incorporated by reference to Exhibit 10.2 of the                        Company’s Quarterly Report on Form 10-Q, as filed with the SEC on                        March 15, 2006                                      |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.30* |   | 1998 Stock Option Plan Nonqualified Stock Option Agreement                        dated January 17, 2006, by and between the Company and William                        Hamilton                      |   | Incorporated by reference to Exhibit 10.3 of the                        Company’s Quarterly Report on Form 10-Q, as filed with the SEC on                        March 15, 2006                                      |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.31* |   | 1998 Stock Option Plan Nonqualified Stock Option Agreement                        dated January 17, 2006, by and between the Company and Charles                        Nemeroff                      |   | Incorporated by reference to Exhibit 10.5 of the                        Company’s Quarterly Report on Form 10-Q, as filed with the SEC on                        March 15, 2006                                      |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.32* |   | 1998 Stock Option Plan Nonqualified Stock Option Agreement                        dated January 17, 2006, by and between the Company and Steven                        Ratoff                         |   | Incorporated by reference to Exhibit 10.6 of the                        Company’s Quarterly Report on Form 10-Q, as filed with the SEC on                        March 15, 2006                                      |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.33  |   | Form of Securities Purchase Agreement by and between the                        Company and certain accredited investors (with attached schedule of parties                        and terms thereto) |   | Incorporated by reference to Exhibit 10.1 of the                        Company’s Form 8-K, as filed with the SEC on April 17,                        2006                                                           |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.34  |   | Registration Rights Agreement by and between the Company and                        certain accredited investors (with attached schedule of parties and terms                        thereto)         |   | Incorporated by reference to Exhibit 10.2 of the                        Company’s Form 8-K, as filed with the SEC on April 17,                        2006                                                           |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |
| 10.35  |   | Placement Agent Agreement, dated March 15, 2006, by and                        between the Company, Griffin Securities, Inc. and Paramount BioCapital,                        Inc.                    |   | Incorporated by reference to Exhibit 10.1 of the                        Company’s Form 8-K, as filed with the SEC on April 20,                        2006                                                           |
|   |   |                                                                                                                                                                                                  |   |                                                                                                                                                                                                                       |

 

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| 10.36* |   | Employment Agreement dated December 4, 2006 by and between                        the Company and David H. Bergstrom, Ph.D.                                                                                               |   | Incorporated by reference to Exhibit 10.1 of the                        Company’s Current Report on Form 8-K, as filed with the SEC on                        December 8, 2006      |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.37* |   | Incentive Stock Option Award between the Company and David                        H. Bergstrom dated December 4, 2006                                                                                                     |   | Incorporated by reference to Exhibit 10.2 of the                        Company’s Current Report on Form 8-K, as filed with the SEC on                        December 8, 2006      |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.38* |   | Nonqualified Stock Option Award between the Company and                        David H. Bergstrom, dated December 4, 2006                                                                                                 |   | Incorporated by reference to Exhibit 10.3 of the                        Company’s Current Report on Form 8-K, as filed with the SEC on                        December 8, 2006      |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.39  |   | Securities Purchase Agreement by and between the Company and                        certain accredited investors (with attached schedule of parties and terms                        thereto)                             |   | Incorporated by reference to Exhibit 10.1 of the                        Company’s Current Report on Form 8-K, as filed with the SEC on                        January 4, 2007       |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.40  |   | Placement Agent Agreement, dated as of November 21, 2006, by                        and between the Company and Oppenheimer & Co., Inc.                                                                               |   | Incorporated by reference to Exhibit 10.2 of the                        Company’s Current Report on Form 8-K, as filed with the SEC on                        January 4, 2007       |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.41* |   | Employment Agreement dated February 22, 2007 by and between                        the Company and Deni M. Zodda, Ph.D.                                                                                                   |   | Incorporated by reference to Exhibit 10.1 of the                        Company’s Current Report on form 8-K, as filed with the SEC on                        February 28, 2007     |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.42* |   | Incentive Stock Option Award between the Company and Deni M.                        Zodda dated February 22, 2007                                                                                                         |   | Incorporated by reference to Exhibit 10.2 of the                        Company’s Current Report on Form 8-K, as filed with the SEC on                        February 28, 2007     |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.43* |   | Nonqualified Stock Option Award between the Company and Deni                        M. Zodda dated February 22, 2007                                                                                                      |   | Incorporated by reference to Exhibit 10.3 of the                        Company’s Current Report on Form 8-K, as filed with the SEC on                        February 28, 2007     |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.44* |   | Amendment No. 2 to Employment Agreement dated March 12, 2007                        by and between the Company and Michael E. Spicer                                                                                      |   | Incorporated by reference to Exhibit 10.44 of the                        Company’s Annual Report on Form 10-K, as filed with the SEC on March                        26, 2007       |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.45* |   | Amendment 2007-1 to the NovaDel Pharma Inc. 1998 Stock                        Option Plan dated March 2, 2007                                                                                                             |   | Incorporated by reference to Exhibit 10.45 of the                        Company’s Annual Report on Form 10-K, as filed with the SEC on March                        26, 2007       |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.46* |   | Amendment 2007-1 to the NovaDel Pharma Inc. 2006 Equity                        Incentive Plan dated March 2, 2007                                                                                                         |   | Incorporated by reference to Exhibit 10.46 of the                        Company’s Annual Report on Form 10-K, as filed with the SEC on March                        26, 2007       |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.47  |   | Amended and Restated License and Development Agreement,                        dated as of July 31, 2007, by and between NovaDel Pharma Inc. and HANA                        Biosciences, Inc.                            |   | Incorporated by reference to Exhibit 10.1 of the                        Company’s Quarterly Report on Form 10-Q, as filed with the SEC on                        November 14, 2007. |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.48  |   | Product Development and Commercialization Sublicense                        Agreement, dated as of July 31, 2007, by and among NovaDel Pharma Inc.,                        HANA Biosciences and PAR Pharmaceuticals, Inc. |   | Incorporated by reference to Exhibit 10.2 of the                        Company’s Quarterly Report on Form 10-Q, as filed with SEC on                        November 14, 2007.     |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.49  |   | Termination Agreement, dated as of July 31, 2007, by and                        between NovaDel Pharma Inc. and PAR Pharmaceuticals, Inc.                                                                                 |   | Incorporated by reference to Exhibit 10.3 of the                        Company’s Quarterly Report on Form 10-Q, as filed with the SEC on                        November 14, 2007. |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 10.50* |   | Employment Agreement dated January 22, 2008 by and between                        the Company and Michael E. Spicer.                                                                                                      |   | Filed herewith                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 21.1   |   | Subsidiaries of the Registrant                                                                                                                                                                                            |   | The registrant has no subsidiaries                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 23.1   |   | Consent of J.H. Cohn LLP                                                                                                                                                                                                  |   | Filed herewith                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |
| 31.1   |   | Certification of Chief Executive Officer under Rule                        13a-14(a)                                                                                                                                      |   | Furnished herewith                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                      |

 

 

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| 31.2   |   | Certification of Principal Financial Officer under Rule                        13a-14(a)                           |   | Furnished herewith |
|--------|--------|--------------------------------------------------------------------------------------------------------------------|--------|--------------------|
|   |   |                                                                                                               |   |               |
| 32.1   |   | Certifications of the Chief Executive Officer and Chief                        Financial Officer under 18 USC 1350 |   | Furnished herewith |