**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-Q**

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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES            EXCHANGE ACT OF 1934.

**For the quarterly period ended June 30, 2007**

Commission File Number 1-32302

**ANTARES PHARMA, INC.**

|   | A Delaware Corporation | IRS Employer ID No. 41-1350192 |
|--------|------------------------|--------------------------------|

250            Phillips Blvd, Suite 290

Ewing, New Jersey

08618

(609) 359-3020

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. Yesx              Noo

 

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

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

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

|   | Yeso | No | x |
|--------|------|----|---|

The            number of shares outstanding of the Registrant’s Common Stock, $.01 par value, as            of August 10, 2007, was65,529,666.

 

 

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**ANTARES PHARMA, INC.**

 

**INDEX**

 

 

|     |     |   |                                                                                                                                          | PAGE   |
|----------|----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|
|     |     |   |                                                                                                                                          |   |
| PART I.  |     |   | FINANCIAL INFORMATION                                                                                                                         |   |
|     |     |   |                                                                                                                                          |   |
|     | Item 1.  |   | Financial Statements                                                                                                                          |   |
|     |     |   |                                                                                                                                          |   |
|     |     |   | Consolidated Balance Sheets, as of June 30, 2007                            (Unaudited) and December 31, 2006                                 | 3      |
|     |     |   |                                                                                                                                          |   |
|     |     |   | Consolidated Statements of Operations (Unaudited) for                            the three months and six months ended June 30, 2007 and 2006 | 4      |
|     |     |   |                                                                                                                                          |   |
|     |     |   | Consolidated Statements of Cash Flows (Unaudited) for                            the six months ended June 30, 2007 and 2006                  | 5      |
|     |     |   |                                                                                                                                          |   |
|     |     |   | Notes to Consolidated Financial Statements                                                                                                    | 6      |
|     |     |   |                                                                                                                                          |   |
|     | Item 2.  |   | Management’s Discussion and Analysis of Financial                            Condition and Results of Operations                        | 13     |
|     |     |   |                                                                                                                                          |   |
|     | Item 3.  |   | Quantitative and Qualitative Disclosures About Market                            Risk                                                         | 18     |
|     |     |   |                                                                                                                                          |   |
|     | Item 4.  |   | Controls and Procedures                                                                                                                       | 19     |
|     |     |   |                                                                                                                                          |   |
|     |     |   |                                                                                                                                          |   |
| PART II. |     |   | OTHER INFORMATION                                                                                                                             |   |
|     |     |   |                                                                                                                                          |   |
|     | Item 1A. |   | Risk Factors                                                                                                                                  | 21     |
|     |     |   |                                                                                                                                          |   |
|     | Item 4.  |   | Submission of Matters to a Vote of Security                            Holders                                                                | 35     |
|     |     |   |                                                                                                                                          |   |
|     | Item 6.  |   | Exhibits                                                                                                                                      | 35     |
|     |     |   |                                                                                                                                          |   |
|     |     |   | SIGNATURES                                                                                                                                    | 36     |
|     |     |   |                                                                                                                                          |   |

 

2

 

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**ANTARES PHARMA, INC.**

**CONSOLIDATED BALANCE SHEETS**

 

 

|                                                                                                      |   | **June 30,**    |         |   |   | **December 31,** |   |
|-----------------------------------------------------------------------------------------------------------|--------|-----------------|--------------|--------|--------|------------------|--------|
|                                                                                                      |   | **2007**        |         |   |   | **2006**         |   |
|                                                                                                      |   | **(Unaudited)** |         |   |   |             |   |
|                                                                                                      |   |            |         |   |   |             |   |   |   |
| **Assets**                                                                                                |   |            |         |   |   |             |   |   |   |
| Current Assets:                                                                                           |   |            |         |   |   |             |   |   |   |
| Cash and cash equivalents                                                                                 |   | $               | 2,762,668    |   |   |             | $      | 2,706,047 |   |
| Short-term investments                                                                                    |   |            | 9,545,569    |   |   |             |   | 4,953,421 |   |
| Accounts receivable, less allowance for doubtful                            accounts of $10,000           |   |            | 716,402      |   |   |             |   | 855,866 |   |
| Other receivables                                                                                         |   |            | 112,213      |   |   |             |   | 55,794 |   |
| Inventories                                                                                               |   |            | 58,977       |   |   |             |   | 84,779 |   |
| Prepaid expenses and other current assets                                                                 |   |            | 404,442      |   |   |             |   | 221,669 |   |
| Total current assets                                                                                      |   |            | 13,600,271   |   |   |             |   | 8,877,576 |   |
|                                                                                                      |   |            |         |   |   |             |   |   |   |
| Equipment, furniture and fixtures, net                                                                    |   |            | 439,947      |   |   |             |   | 382,096 |   |
| Patent rights, net                                                                                        |   |            | 804,517      |   |   |             |   | 813,592 |   |
| Goodwill                                                                                                  |   |            | 1,095,355    |   |   |             |   | 1,095,355 |   |
| Other assets                                                                                              |   |            | 573,923      |   |   |             |   | 365,864 |   |
| Total Assets                                                                                              |   | $               | 16,514,013   |   |   |             | $      | 11,534,483 |   |
|                                                                                                      |   |            |         |   |   |             |   |   |   |
| **Liabilities and Stockholders’                            Equity**                                 |   |            |         |   |   |             |   |   |   |
| Current Liabilities:                                                                                      |   |            |         |   |   |             |   |   |   |
| Accounts payable                                                                                          |   | $               | 1,030,284    |   |   |             | $      | 813,014 |   |
| Accrued expenses and other liabilities                                                                    |   |            | 1,158,351    |   |   |             |   | 1,071,086 |   |
| Notes payable and capital lease – current, net of                            discount of $168,655   |   |            | 707,012      |   |   |             |   | - |   |
| Deferred revenue                                                                                          |   |            | 763,688      |   |   |             |   | 1,014,337 |   |
| Total current liabilities                                                                                 |   |            | 3,659,335    |   |   |             |   | 2,898,437 |   |
|                                                                                                      |   |            |         |   |   |             |   |   |   |
| Notes payable and capital lease – long term, net                            of discount of $171,754 |   |            | 4,065,449    |   |   |             |   | - |   |
| Deferred revenue – long term                                                                        |   |            | 3,113,836    |   |   |             |   | 3,555,601 |   |
| Total liabilities                                                                                         |   |            | 10,838,620   |   |   |             |   | 6,454,038 |   |
|                                                                                                      |   |            |         |   |   |             |   |   |   |
| Stockholders’ Equity:                                                                               |   |            |         |   |   |             |   |   |   |
| Common Stock: $0.01 par; authorized 100,000,000                            shares;                        |   |            |         |   |   |             |   |   |   |
| 55,529,666 and 53,319,622 issued and outstanding                            at                            |   |            |         |   |   |             |   |   |   |
| June 30, 2007 and December 31, 2006,                            respectively                              |   |            | 555,296      |   |   |             |   | 533,196 |   |
| Additional paid-in capital                                                                                |   |            | 110,003,149  |   |   |             |   | 106,792,974 |   |
| Prepaid license discount                                                                                  |   |            | (2,207,804   | )      |   |             |   | (2,305,929 | ) |
| Accumulated deficit                                                                                       |   |            | (102,049,072 | )      |   |             |   | (99,322,453 | ) |
| Accumulated other comprehensive loss                                                                      |   |            | (626,176     | )      |   |             |   | (617,343 | ) |
|                                                                                                      |   |            | 5,675,393    |   |   |             |   | 5,080,445 |   |
| Total Liabilities and Stockholders’                            Equity                               |   | $               | 16,514,013   |   |   |             | $      | 11,534,483 |   |

                                                                                                                                                                       

 

See            accompanying notes to consolidated financial statements.

 

3

 

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**ANTARES PHARMA, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 

 

|                                                        |   | **For the Three Months Ended****June 30,** |       |   |   | **For the Six Months Ended****June 30,** |   |
|-------------------------------------------------------------|--------|--------------------------------------------|------------|--------|--------|------------------------------------------|--------|
|                                                        |   | **2007**                                   |       |   |   | **2006**                                 |   |   |   | **2007** |   |   |   | **2006** |   |
| Revenue:                                                    |   |                                       |       |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Product sales                                               |   | $                                          | 1,068,723  |   |   |                                     | $      | 603,027 |   |   |   | $ | 1,694,810 |   |   |   | $ | 998,111 |   |
| Development revenue                                         |   |                                       | 460,358    |   |   |                                     |   | 199,717 |   |   |   |   | 791,054 |   |   |   |   | 361,411 |   |
| Licensing fees                                              |   |                                       | 145,913    |   |   |                                     |   | 20,463 |   |   |   |   | 1,994,081 |   |   |   |   | 76,282 |   |
| Royalties                                                   |   |                                       | 131,281    |   |   |                                     |   | 35,888 |   |   |   |   | 170,068 |   |   |   |   | 59,951 |   |
| Total revenue                                               |   |                                       | 1,806,275  |   |   |                                     |   | 859,095 |   |   |   |   | 4,650,013 |   |   |   |   | 1,495,755 |   |
|                                                        |   |                                       |       |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenue:                                            |   |                                       |       |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of product sales                                       |   |                                       | 503,475    |   |   |                                     |   | 338,050 |   |   |   |   | 864,524 |   |   |   |   | 598,462 |   |
| Cost of development revenue                                 |   |                                       | 64,256     |   |   |                                     |   | 93,174 |   |   |   |   | 170,759 |   |   |   |   | 154,250 |   |
| Total cost of revenue                                       |   |                                       | 567,731    |   |   |                                     |   | 431,224 |   |   |   |   | 1,035,283 |   |   |   |   | 752,712 |   |
| Gross profit                                                |   |                                       | 1,238,544  |   |   |                                     |   | 427,871 |   |   |   |   | 3,614,730 |   |   |   |   | 743,043 |   |
|                                                        |   |                                       |       |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses:                                         |   |                                       |       |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Research and development                                    |   |                                       | 1,521,657  |   |   |                                     |   | 1,039,607 |   |   |   |   | 2,345,252 |   |   |   |   | 1,969,062 |   |
| Sales, marketing and business development                   |   |                                       | 430,461    |   |   |                                     |   | 347,962 |   |   |   |   | 816,334 |   |   |   |   | 708,309 |   |
| General and administrative                                  |   |                                       | 1,484,882  |   |   |                                     |   | 1,608,084 |   |   |   |   | 3,115,689 |   |   |   |   | 2,959,688 |   |
|                                                        |   |                                       | 3,437,000  |   |   |                                     |   | 2,995,653 |   |   |   |   | 6,277,275 |   |   |   |   | 5,637,059 |   |
|                                                        |   |                                       |       |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating loss                                              |   |                                       | (2,198,456 | )      |   |                                     |   | (2,567,782 | ) |   |   |   | (2,662,545 | ) |   |   |   | (4,894,016 | ) |
|                                                        |   |                                       |       |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other income (expense):                                     |   |                                       |       |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                             |   |                                       | 152,330    |   |   |                                     |   | 111,212 |   |   |   |   | 264,517 |   |   |   |   | 153,419 |   |
| Interest expense                                            |   |                                       | (230,260   | )      |   |                                     |   | ― |   |   |   |   | (310,838 | ) |   |   |   | (1,730 | ) |
| Foreign exchange losses                                     |   |                                       | (12,736    | )      |   |                                     |   | 2,918 |   |   |   |   | (28,847 | ) |   |   |   | (258 | ) |
| Other, net                                                  |   |                                       | (7,916     | )      |   |                                     |   | (3,092 | ) |   |   |   | 11,094 |   |   |   |   | (18,673 | ) |
|                                                        |   |                                       | (98,582    | )      |   |                                     |   | 111,038 |   |   |   |   | (64,074 | ) |   |   |   | 132,758 |   |
|                                                        |   |                                       |       |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                    |   |                                       | (2,297,038 | )      |   |                                     |   | (2,456,744 | ) |   |   |   | (2,726,619 | ) |   |   |   | (4,761,258 | ) |
| Deemed dividend to warrant holders                          |   |                                       | ―    |   |   |                                     |   | ― |   |   |   |   | ― |   |   |   |   | (99,500 | ) |
|                                                        |   |                                       |       |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss applicable to common shares                        |   | $                                          | (2,297,038 | )      |   |                                     | $      | (2,456,744 | ) |   |   | $ | (2,726,619 | ) |   |   | $ | (4,860,758 | ) |
|                                                        |   |                                       |       |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted net loss per common share                 |   | $                                          | (0.04      | )      |   |                                     | $      | (0.05 | ) |   |   | $ | (0.05 | ) |   |   | $ | (0.10 | ) |
|                                                        |   |                                       |       |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted weighted average commonshares outstanding |   |                                       | 54,626,788 |   |   |                                     |   | 52,961,664 |   |   |   |   | 54,023,408 |   |   |   |   | 49,983,621 |   |

 

 

See            accompanying notes to consolidated financial statements.

 

4

 

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**ANTARES PHARMA, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 

 

|                                                                                                                |   | **For the Six Months Ended June 30,** |        |
|---------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|-------------|
|                                                                                                                |   | **2007**                              |        |   |   | **2006** |   |
| Cash flows from operating activities:                                                                               |   |                                  |        |   |   |   |   |   |   |
| Net loss                                                                                                            |   | $                                     | (2,726,619  | ) |   |   | $ | (4,761,258 | ) |
| Adjustments to reconcile net loss to netcash provided by (used in) operating                            activities: |   |                                  |        |   |   |   |   |   |   |
| Depreciation and amortization                                                                                       |   |                                  | 119,483     |   |   |   |   | 144,066 |   |
| Stock-based compensation expense                                                                                    |   |                                  | 608,988     |   |   |   |   | 580,563 |   |
| Amortization of prepaid license discount                                                                            |   |                                  | 98,124      |   |   |   |   | 98,124 |   |
| Amortization of debt discount and issuance                            costs                                         |   |                                  | 86,959      |   |   |   |   | - |   |
| Changes in operating assets and liabilities:                                                                        |   |                                  |        |   |   |   |   |   |   |
| Accounts receivable                                                                                                 |   |                                  | 135,380     |   |   |   |   | (31,088 | ) |
| Other receivables                                                                                                   |   |                                  | (30,313     | ) |   |   |   | (173,550 | ) |
| Inventories                                                                                                         |   |                                  | 25,802      |   |   |   |   | (16,527 | ) |
| Prepaid expenses and other current assets                                                                           |   |                                  | (106,137    | ) |   |   |   | (19,797 | ) |
| Other assets                                                                                                        |   |                                  | (130,808    | ) |   |   |   | (6,788 | ) |
| Accounts payable                                                                                                    |   |                                  | 215,119     |   |   |   |   | 136,122 |   |
| Accrued expenses and other current                            liabilities                                           |   |                                  | 22,394      |   |   |   |   | (204,253 | ) |
| Deferred revenue                                                                                                    |   |                                  | (689,646    | ) |   |   |   | 17,541 |   |
| Net cash used in operating activities                                                                               |   |                                  | (2,371,274  | ) |   |   |   | (4,236,845 | ) |
|                                                                                                                |   |                                  |        |   |   |   |   |   |   |
| Cash flows from investing activities:                                                                               |   |                                  |        |   |   |   |   |   |   |
| Purchases of short-term investments                                                                                 |   |                                  | (10,200,990 | ) |   |   |   | (6,804,081 | ) |
| Proceeds from maturity of short-term                            investments                                         |   |                                  | 5,585,464   |   |   |   |   | - |   |
| Additions to patent rights                                                                                          |   |                                  | (43,106     | ) |   |   |   | (78,735 | ) |
| Purchases of equipment, furniture and                            fixtures                                           |   |                                  | (14,151     | ) |   |   |   | (21,852 | ) |
| Net cash used in investing activities                                                                               |   |                                  | (4,672,783  | ) |   |   |   | (6,904,668 | ) |
|                                                                                                                |   |                                  |        |   |   |   |   |   |   |
| Cash flows from financing activities:                                                                               |   |                                  |        |   |   |   |   |   |   |
| Proceeds from notes payable                                                                                         |   |                                  | 5,000,000   |   |   |   |   | - |   |
| Capitalized debt issuance costs                                                                                     |   |                                  | (181,124    | ) |   |   |   | - |   |
| Proceeds from issuance of common stock, net                                                                         |   |                                  | -           |   |   |   |   | 9,782,055 |   |
| Proceeds from exercise of warrants and stock                            options                                     |   |                                  | 2,292,692   |   |   |   |   | 1,110,086 |   |
| Net cash provided by financing activities                                                                           |   |                                  | 7,111,568   |   |   |   |   | 10,892,141 |   |
|                                                                                                                |   |                                  |        |   |   |   |   |   |   |
| Effect of exchange rate changes on cash and cash                            equivalents                             |   |                                  | (10,890     | ) |   |   |   | 13,100 |   |
|                                                                                                                |   |                                  |        |   |   |   |   |   |   |
| Net increase (decrease) in cash and cash                            equivalents                                     |   |                                  | 56,621      |   |   |   |   | (236,272 | ) |
| Cash and cash equivalents:                                                                                          |   |                                  |        |   |   |   |   |   |   |
| Beginning of period                                                                                                 |   |                                  | 2,706,047   |   |   |   |   | 2,718,472 |   |
| End of period                                                                                                       |   | $                                     | 2,762,668   |   |   |   | $ | 2,482,200 |   |

 

 

 

See            accompanying notes to consolidated financial statements

 

5

 

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**ANTARES PHARMA, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

 

| **1.** | **Description of Business** |
|--------|-----------------------------|

 

Antares Pharma, Inc. (“Antares” or the            “Company”) is a specialty drug delivery/pharmaceutical company utilizing            its experience and expertise in drug delivery systems to enhance the performance of            established and developing pharmaceuticals. The Company currently has three primary            delivery platforms (1) transdermal gels, (2) fast-melt tablets, and (3) injection            devices. The corporate headquarters are located in Ewing, New Jersey, with research and            production facilities for the injection devices in Minneapolis, Minnesota, and            research, development and commercialization facilities for the transdermal gels and            fast-melt tablets in Basel, Switzerland.

             

| **2.** | **Basis of Presentation** |
|--------|---------------------------|

             

The accompanying unaudited financial statements have been prepared in            accordance with generally accepted accounting principles for interim financial            information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.            Accordingly, they do not include all of the information and footnotes required by            accounting principles generally accepted in the United States of America for complete            financial statements. In the opinion of management, all adjustments (consisting of            normal recurring accruals) considered necessary for a fair presentation have been            included. The accompanying financial statements and notes should be read in conjunction            with the Company’s Annual Report on Form 10-K for the year ended December 31,            2006. Operating results for the three and six-month periods ended June 30, 2007, are            not necessarily indicative of the results that may be expected for the year ending            December 31, 2007.

             

*Short-Term Investments*

             

All short-term investments are commercial paper or U.S. government            agency discount notes that mature within one year of purchase and are classified as            held-to-maturity because the Company has the positive intent and ability to hold the            securities to maturity. The securities are carried at their amortized cost. At June 30,            2007 and December 31, 2006 the securities had a fair value of $9,539,690 and            $4,951,654, respectively and a carrying value of $9,545,569 and $4,953,421,            respectively.

             

*Reclassifications*

             

The Company reclassified expenses for quality and regulatory activities            previously reported as general and administrative expenses to research and development            expenses. The amounts of the reclassifications were $80,213 and $148,609 for the three            and six month periods ended June 30, 2006, respectively. This reclassification did not            impact previously reported net loss or net loss per share.

             

| **3.** | **Notes Payable and Capital Lease** |
|--------|-------------------------------------|

 

In February of 2007 the Company received gross proceeds of $5,000,000            upon closing of the first tranche of a $10,000,000 credit facility, to help fund            working capital needs. A second tranche of $5,000,000 is available after September 30,            2007 but before December 31, 2007 upon meeting certain conditions. The per annum            interest rate is equal to the sum of the yield for three-year US treasury bills as            quoted by Bloomberg, plus 800 basis points calculated (i) in the case of the            first

             

6

 

----

             

tranche, on the business day prior to the first funding date and (ii) in            the case of the second

tranche, on the business day prior to the second funding date (as such            term is defined in the Credit Agreement). In addition, once set, the applicable            interest rate for each tranche will be fixed for the applicable term. The stated            interest rate for the first tranche is 12.7%. The maturity date (i) with respect to the            first tranche is forty-two months from the first funding date and (ii) with respect to            the second tranche is thirty-six months from the second funding date. The Company has            pledged certain property as collateral, including all intellectual property.

             

The credit agreement contains certain covenants and provisions that            affect the Company, including, without limitation, covenants and provisions            that:

             

|   | **•** | restrict its ability to create or incur indebtedness                            (subject to enumerated exceptions); |
|--------|------------|---------------------------------------------------------------------------------------------------------------------|

|   | **•** | restrict its ability to create or incur certain liens on                            its property (subject to enumerated exceptions); |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | in certain circumstances, require it to maintain, on a                            consolidated basis, unrestricted cash and cash equivalents of at least                            $2,500,000; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | in certain circumstances, restrict its ability to                            declare or pay any dividends on any shares of its capital stock,                            purchase or redeem any shares of its capital stock, return any capital                            to any holder of its equity securities or payment of certain                            bonuses; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | restrict its ability to make certain                            investments. |
|--------|------------|------------------------------------------------------------------------------|

             

In connection with the credit facility, the Company issued warrants to            purchase a total of 640,000 shares of common stock at an exercise price of $1.25, of            which 400,000 vested upon closing of the first tranche and of which 240,000 will vest            on the occurrence of the drawdown of the second tranche. The fair value of the vested            warrants related to the first tranche was $400,276, calculated using the Black-Scholes            valuation model, and was recorded as debt discount and is being amortized and recorded            as interest expense using the interest method over the forty-two month term.

             

The Company capitalized debt issuance costs totaling approximately            $180,000, which is being amortized and recorded as interest expense using the interest            method over the forty-two month term.

             

Total interest expense in the first six months of 2007 was approximately            $300,000. Cash paid for interest in the first six months was approximately            $215,000.

             

Principal payments of $1,204,576, $1,623,294, $1,841,886 and $330,244            are due in each of the twelve month periods ended June 30, 2008, 2009, 2010 and 2011,            respectively.

             

In the second quarter of 2007 the Company acquired lab equipment under a            three year capital lease. The equipment and capital lease obligation were recorded at a            value of approximately $115,000. Principal payments of approximately $46,000, $38,000            and $31,000 are due in each of the twelve month periods ended June 30, 2008, 2009, and            2010.

             

             

7

 

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| **4.** | **Stock Based Compensation** |
|--------|------------------------------|

 

The Company accounts for employee stock compensation cost using the fair            value method pursuant to SFAS No. 123R, which requires a public entity to measure the            cost of employee services received in exchange for the award of equity instruments            based on the fair value of the award at the date of grant. The cost will be recognized            over the period during which an employee is required to provide services in exchange            for the award. The Company adopted SFAS No. 123R in the first quarter of 2006 using the            modified prospective transition method.

             

The Company’s stock option and equity incentive plans allow for            the grants of options, restricted stock and/or performance awards to officers,            directors, consultants and employees. Under the Company’s 2006 Equity Incentive            Plan, the maximum number of shares of stock that may be granted to any one participant            during a calendar year is 500,000 shares, and no more than 500,000 shares may be issued            as restricted stock grants, restricted stock units and performance awards. Options to            purchase shares of Common Stock are granted at exercise prices not less than 100% of            the fair market value on the dates of grant. The term of the options range from three            to eleven years and they vest in varying periods. As of June 30 2007, these plans had            2,412,610 shares available for grant. Stock option exercises are satisfied through the            issuance of new shares.

             

A summary of stock option activity under the plans as of June 30, 2007            and the changes during the six-month period then ended is as follows:  

|                             |   | **Number of**

**Shares** |   |   |   | **Weighted****Average****Exercise****Price ($)** |   |   |   | **Weighted**

**Average****Remaining****Contractual****Term (Years)** |   |   |   | **Aggregate****Intrinsic****Value ($)** |   |
|----------------------------------|--------|---------------------------|--------|--------|--------|--------------------------------------------------|--------|--------|--------|-----------------------------------------------------------------------|--------|--------|--------|-----------------------------------------|--------|
| Outstanding at December 31, 2006 |   | 4,426,759                 |   |   |   | 1.65                                             |   |   |   |                                                                  |   |   |   |                                    |   |
| Granted                          |   | 1,307,632                 |   |   |   | 1.42                                             |   |   |   |                                                                  |   |   |   |                                    |   |
| Exercised                        |   | (35,000                   | )      |   |   | 1.54                                             |   |   |   |                                                                  |   |   |   |                                    |   |
| Forfeited                        |   | (106,000                  | )      |   |   | 2.26                                             |   |   |   |                                                                  |   |   |   |                                    |   |
| Outstanding at June 30, 2007     |   | 5,593,391                 |   |   |   | 1.58                                             |   |   |   | 7.6                                                                   |   |   |   | 1,117,514                               |   |
| Exercisable at June 30, 2007     |   | 3,445,984                 |   |   |   | 1.70                                             |   |   |   | 6.5                                                                   |   |   |   | 667,138                                 |   |

             

Total recognized compensation expense for stock options was            approximately $520,000 for the first six months of both 2007 and 2006. As of June 30,            2007, there was approximately $2,100,000 of total unrecognized compensation cost            related to nonvested outstanding stock options that is expected to be recognized over a            weighted average period of approximately two years.

             

The per share weighted average fair value of options granted during the            first six months of 2007 and 2006 were estimated as $1.14 and $1.37, respectively, on            the date of grant using the Black-Scholes option pricing model based on the assumptions            noted in the table below. Expected volatilities are based on the historical volatility            of the Company’s stock. The weighted average expected life is based on both            historical and anticipated employee behavior.

             

             

             

 

8

 

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|                                     | **June 30,** |     |
|------------------------------------------|--------------|----------|
|                                     |         | **2007** |   |   | **2006** |   |
| Risk-free interest rate                  |         | 4.7      | % |   | 4.4 | % |
| Annualized volatility                    |         | 109.0    | % |   | 127.0 | % |
| Weighted average expected life, in years |         | 5.0      |   |   | 7.0 |   |
| Expected dividend yield                  |         | 0.0      | % |   | 0.0 | % |

             

The employment agreements with the Chief Executive Officer, Chief            Financial Officer and other members of executive management include stock-based            incentives under which the executives could be awarded up to 1,365,000 restricted            shares of common stock upon the occurrence of various triggering events and            authorization by stockholders, in certain circumstances, of additional shares under            existing or future plans. Approximately 1,010,000 of these shares relate to performance            criteria that were not yet considered probable of achievement. Expense of approximately            $63,000 was recognized in the first half of 2007 in connection with potential            performance based awards totaling approximately 68,000 shares of common stock for the            Chief Financial Officer, of which 22,727 shares were issued in the second quarter of            2007. The Chief Executive Officer was awarded 86,666 shares of common stock in 2006            when one of the triggering events was reached. A total of approximately $61,000 in            compensation expense was recorded in 2006 and 2005 in connection with these shares.The            weighted average grant date fair value of the remaining awards considered probable of            achievement by the Chief Executive Officer was $0.40 per share, which resulted in a            total fair value of $80,000, of which approximately $17,000 was recognized in the first            six months of 2007 and the remaining amount of approximately $6,000 is expected to be            recognized in the third quarter of 2007.

             

| **5.** | **Stockholders’ Equity** |
|--------|--------------------------------|

             

*Common Stock, Options and Warrants*

             

In the first six months of 2006 the Company received proceeds of            $9,782,055, which was net of offering costs of $1,180,445, in a private placement of            its common stock in which a total of 8,770,000 shares of common stock were sold at a            price of $1.25 per share. In connection with the private placement, the Company issued            five-year warrants to purchase an aggregate of 7,454,500 shares of common stock with an            exercise price of $1.50 per share.

             

Warrant and stock option exercises during the first six months of 2007            and 2006 resulted in proceeds of $2,292,692 and $1,110,086, respectively, and in the            issuance of 2,187,317 and 1,292,020 shares of common stock, respectively.

             

During the first six months of 2007 and 2006 the Company granted options            to purchase a total of 1,307,632 and 1,455,000 shares of its common stock,            respectively. The options were granted to employees and members of the Company’s            board of directors at exercise prices ranging from $1.23 to $1.65 per share in 2007 and            at exercise prices ranging from $1.43 to $1.55 in 2006. All options were granted at an            exercise price that equaled the fair value of the Company’s common stock on the            date of the grant.

             

Warrants to purchase a total of 19,341,021 shares of common stock were            outstanding at June 30, 2007. The weighted average exercise price of the warrants was            $1.38.

 

9

 

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*Deemed Dividend to Warrant Holders*

             

In 2006, in connection with the exercise of 210,000 warrants, the            Company agreed to issue new three-year warrants for the purchase of 105,000 shares of            common stock with an exercise price of $1.35. The new warrants were issued in the first            quarter of 2006 and were estimated to have a fair value of $99,500 using the            Black-Scholes option pricing model. The fair value of the new warrants was recorded as            a return to the warrant holders and increased the net loss applicable to common            stockholders in computing net loss per share.

             

| **6.** | **Net Loss Per Share** |
|--------|------------------------|

 

Basic loss per common share is computed by dividing net loss applicable            to common stockholders by the weighted-average number of common shares outstanding for            the period. Diluted loss per common share reflects the potential dilution from the            exercise or conversion of securities into common stock. The table below discloses the            basic and diluted loss per common share.

 

|                                                    |   | **Three Months Ended****June 30,** |       |   |   | **Six Months Ended****June 30,** |   |
|---------------------------------------------------------|--------|------------------------------------|------------|--------|--------|----------------------------------|--------|
|                                                    |   | **2007**                           |       |   |   | **2006**                         |   |   |   | **2007** |   |   |   | **2006** |   |
| Net loss applicable to commonshares                     |   | $                                  | (2,297,038 | )      |   |                             | $      | (2,456,744 | ) |   |   | $ | (2,726,619 | ) |   |   | $ | (4,860,758 | ) |
| Basic and diluted weighted avgcommon shares outstanding |   |                               | 54,626,788 |   |   |                             |   | 52,961,664 |   |   |   |   | 54,023,408 |   |   |   |   | 49,983,621 |   |
| Basic and diluted net loss percommon share              |   | $                                  | (0.04      | )      |   |                             | $      | (0.05 | ) |   |   | $ | (0.05 | ) |   |   | $ | (0.10 | ) |

             

Potentially dilutive stock options and warrants excluded from dilutive            loss per share because their effect was anti-dilutive totaled 24,934,412 and 26,347,042            at June 30, 2007 and 2006, respectively.

             

The weighted average exercise price of the stock options and warrants            outstanding at June 30, 2007 and 2006 was $1.43 and $1.41, respectively.

             

| **7.** | **Industry Segment and Operations by Geographic                            Areas** |
|--------|------------------------------------------------------------------------------------|

             

The Company has one operating segment, drug delivery, which includes the            development of drug delivery transdermal and transmucosal pharmaceutical products and            drug delivery injection devices and supplies.

             

The geographic distributions of the Company’s identifiable assets            and revenues are summarized in the following tables:

             

The Company has operating assets located in two countries as            follows:

 

|                     |   | **June 30,**

**2007** |       | **December 31,**

**2006** |   |
|--------------------------|--------|------------------------|------------|----------------------------|--------|
| Switzerland              |   | $                      | 1,421,730  |                       | $      | 1,655,869 |   |
| United States of America |   |                   | 15,092,283 |                       |   | 9,878,614 |   |
|                     |   | $                      | 16,514,013 |                       | $      | 11,534,483 |   |

 

 

 

 

 

10

 

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Revenues by customer location are summarized as follows:

 

|                     |   | **Three Months Ended****June 30,** |      |   |   | **Six Months Ended****June 30,** |   |    |
|--------------------------|--------|------------------------------------|-----------|--------|--------|----------------------------------|--------|---------|
|                     |   | **2007**                           |      |   |   | **2006**                         |   |    |   | **2007** |   |   |   | **2006** |   |
| United States of America |   | $                                  | 260,866   |   |   |                             | $      | 252,847 |   |   |   | $ | 2,249,615 |   |   |   | $ | 460,611 |   |
| Europe                   |   |                               | 1,430,710 |   |   |                             |   | 555,374 |   |   |   |   | 2,172,545 |   |   |   |   | 828,491 |   |
| Other                    |   |                               | 114,699   |   |   |                             |   | 50,874  |   |   |   |   | 227,853 |   |   |   |   | 206,653 |   |
|                     |   | $                                  | 1,806,275 |   |   |                             | $      | 859,095 |   |   |   | $ | 4,650,013 |   |   |   | $ | 1,495,755 |   |
|                          |        |                                    |           |        |        |                                  |        |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

             

The following summarizes significant customers comprising 10% or more of            total revenue for the three months and six months ended June 30: 

 

|                           |   | **Three Months Ended****June 30,** |      |   |   | **Six Months Ended****June 30,** |   |    |
|--------------------------------|--------|------------------------------------|-----------|--------|--------|----------------------------------|--------|---------|
|                           |   | **2007**                           |      |   |   | **2006**                         |   |    |   | **2007** |   |   |   | **2006** |   |
| Biosante Pharmaceuticals, Inc. |   | $                                  | 44,232    |   |   |                             | $      | 16,322  |   |   |   | $ | 1,838,062 |   |   |   | $ | 43,468 |   |
| Ferring                        |   |                               | 1,015,222 |   |   |                             |   | 538,379 |   |   |   |   | 1,508,415 |   |   |   |   | 795,175 |   |
| Undisclosed                    |   |                               | 324,016   |   |   |                             |   | — |   |   |   |   | 539,283 |   |   |   |   | — |   |
| Jazz Pharmaceuticals           |   |                               | 88,061    |   |   |                             |   | 161,514 |   |   |   |   | 197,762 |   |   |   |   | 284,065 |   |
|                                |        |                                    |           |        |        |                                  |        |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| **8.** | **Comprehensive Loss** |
|--------|------------------------|

 

|                                       |   | **Three Months Ended****June 30,** |       |   |   | **Six Months Ended****June 30,** |   |
|--------------------------------------------|--------|------------------------------------|------------|--------|--------|----------------------------------|--------|
|                                       |   | **2007**                           |       |   |   | **2006**                         |   |   |   | **2007** |   |   |   | **2006** |   |
| Net loss                                   |   | $                                  | (2,297,038 | )      |   |                             | $      | (2,456,744 | ) |   |   | $ | (2,726,619 | ) |   |   | $ | (4,761,258 | ) |
| Change in cumulativetranslation adjustment |   |                               | 1,765      |   |   |                             |   | (1,603 | ) |   |   |   | (8,833 | ) |   |   |   | (15,067 | ) |
| Comprehensive loss                         |   | $                                  | (2,295,273 | )      |   |                             | $      | (2,458,347 | ) |   |   | $ | (2,735,452 | ) |   |   | $ | (4,776,325 | ) |

 

| **9.** | **New Accounting Pronouncements** |
|--------|-----------------------------------|

 

The Company adopted the provisions of FASB Interpretation No. 48,            “Accounting for Uncertainty in Income Taxes—an interpretation of FASB            Statement No. 109” on January 1, 2007. This interpretation clarifies the            accounting for uncertainty in income taxes recognized in an enterprise’s            financial statements in accordance with FASB Statement No. 109, “Accounting for            Income Taxes.” This interpretation prescribes a recognition threshold and            measurement attribute for the financial statement recognition and measurement of a tax            position taken or expected to be taken in a tax return. It also provides guidance on            derecognition, classification, interest and penalties, accounting in interim periods,            disclosure and transition. The adoption of this accounting pronouncement did not have a            material impact on the Company’s consolidated financial statements.

             

11

 

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In September 2006, the FASB issued Statement of Financial Accounting            Standards (“SFAS”) No. 157, “Fair Value Measurements” which is            effective for fiscal years beginning after November 15, 2007 and for interim periods            within those years. This statement defines fair value, establishes a framework for            measuring fair value and expands the related disclosure requirements. The Company            believes this accounting pronouncement will not have a material impact on its            consolidated financial statements.

             

In February 2007, the FASB issued SFAS No. 159, “The Fair Value            Option for Financial Assets and Financial Liabilities—Including an amendment of            FASB Statement No. 115.”  SFAS No. 159 permits entities to choose to measure            many financial instruments and certain warranty and insurance contracts at fair value            on a contract-by-contract basis.  A business entity is required to report            unrealized gains and losses on items for which the fair value option has been elected            in earnings at each subsequent reporting date. SFAS No. 159 includes financial            statement presentation and disclosure requirements for assets and liabilities reported            at fair value as a consequence of the election.  The objective of this Statement            is to improve financial reporting by providing entities with the opportunity to            mitigate volatility in reported earnings caused by measuring related assets and            liabilities differently without having to apply complex hedge accounting            provisions.  The provisions of SFAS No. 159 are effective for the Company            beginning January 1, 2008.   The Company is currently evaluating the impact            of adopting this pronouncement on its consolidated financial statements and related            disclosures.

 

| **10.** | **Subsequent Events** |
|---------|-----------------------|

 

On July 10, 2007 the Company received $16,000,000 in gross proceeds from            a private placement of 10,000,000 newly issued shares of common stock and the            concurrent issuance of 3,800,000 warrants for the purchase of additional shares of            common stock to a group of accredited investors. The warrants have an exercise price of            $2.00 and expire in July 2012.

 

12

 

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| *Item 2.* | *MANAGEMENT’S DISCUSSION AND ANALYSIS OF                            FINANCIAL CONDITION AND RESULTS OF OPERATIONS* |
|-----------|--------------------------------------------------------------------------------------------------------------------------|

             

**Overview**

             

The            Company develops, produces and markets pharmaceutical delivery products, including            transdermal gels, oral fast melting tablets and reusable needle-free and disposable            mini-needle injector systems. In addition, the Company has several products and            compound formulations under development. The Company has operating facilities in the            U.S. and Switzerland. The U.S. operation develops reusable needle-free and disposable            mini-needle injector systems and manufactures and markets reusable needle-free            injection devices and related disposables. These operations, including all            manufacturing and some U.S. administrative activities, are located in Minneapolis,            Minnesota. The Company also has operations located in Basel, Switzerland, which            consists of administration and facilities for the development of transdermal gels and            oral fast melt tablet products. The Swiss operations focus principally on research,            development and commercialization of pharmaceutical products and include a number of            license agreements with pharmaceutical companies for the application of its drug            delivery systems. The Company’s corporate offices are located in Ewing, New            Jersey.

 

The            Company operates as a specialty pharmaceutical company in the broader pharmaceutical            industry. Companies in this sector generally bring technology and know-how in the area            of drug formulation and/or delivery to pharmaceutical product marketers through            licensing and development agreements while actively pursuing development of its own            products. The Company currently views pharmaceutical and biotechnology companies as            primary customers. The Company has negotiated and executed licensing relationships in            the growth hormone segment (reusable needle-free devices in Europe and Asia) and the            transdermal gels segment (several license and development programs in place worldwide,            including the United States and Europe). In addition, the Company continues to market            reusable needle-free devices for the home or alternate site administration of insulin            in the U.S. market through distributors, has granted a development license to its            reusable needle-free technology in the diabetes and obesity fields to Eli Lilly and            Company on a worldwide basis, and has licensed both disposable and reusable injection            devices to Teva Pharmaceuticals for use in undisclosed fields and            territories.

 

The            Company is reporting a net loss of $2,726,619 for the six-month period ended June 30,            2007 and expects to report a net loss for the year ending December 31, 2007, as            marketing and development costs related to bringing future generations of products to            market continue. Long-term capital requirements will depend on numerous factors,            including the status of collaborative arrangements and payments received under such            arrangements, the progress of research and development programs, the receipt of            revenues from sales of products and royalties and the ability to control            costs.

 

 

 

 

 

 

 

13

 

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**Results of Operations**

 

*Critical Accounting Policies*

 

The            Company has identified certain of its significant accounting policies that it considers            particularly important to the portrayal of the Company’s results of operations            and financial position and which may require the application of a higher level of            judgment by the Company’s management, and as a result are subject to an inherent            level of uncertainty. These are characterized as “critical accounting            policies” and address revenue recognition, valuation of long-lived and intangible            assets and goodwill and accounting for debt and equity instruments, each more fully            described under “Management’s Discussion and Analysis of Financial            Condition and Results of Operations” in the Company’s Annual Report on Form            10-K for the year ended December 31, 2006. The Company has made no changes to these            policies during 2007.

 

*Three and Six Months Ended June 30, 2007 and 2006*

 

*Revenues*

 

Total revenues for the three and six months ended June 30, 2007 were            $1,806,275 and $4,650,013, respectively, compared to revenues for the same prior-year            periods of $859,095 and $1,495,755. The increase in revenues in the three month period            was due to increases in all revenue categories, with the most significant increases            coming from product sales and development revenues. The six month period also resulted            in increases in all revenue categories, with the most significant increase recognized            in licensing fees as a result of $1,750,000 received under a sublicense arrangement            related to an existing license agreement with BioSante Pharmaceuticals, Inc. Product            sales were higher in each period mainly due to increased revenue from the            Company’s major European customer, Ferring. The increase in revenue from Ferring            was due to increases in the number of needle-free injector devices and disposable            components sold and due to a renegotiated contract with Ferring in which selling prices            were increased. The increase in development revenue resulted primarily from agreements            related to use of the Company’s proprietary ATDTMgel technology and oral fast melting tablet technology. The royalty            revenue increases were directly related to the increase in the number of injector            devices sold to Ferring, as well as a renogotiated increased royalty rate with            Ferring.

 

*Cost of Revenues*

 

The            cost of product sales are related to injection devices and related products. For the            three and six month periods ended June 30, 2007, cost of product sales were $503,475            and $864,524, respectively, compared to $338,050 and $598,462 for the same periods of            the prior year. The cost of product sales increases were directly related to the            increases in product sales. However, cost of product sales as a percentage of product            sales decreased in the three and six month periods to 47% and 51%, respectively, in            2007 from 56% and 60%, respectively, in 2006. These decreases were due primarily to a            higher sales volume absorbing a similar level of fixed overhead costs along with            increases in selling prices.

 

The            cost of development revenue consists of labor costs, direct external costs and an            allocation of certain overhead expenses. Cost of development revenue as a percentage of            development revenue can fluctuate considerably between periods depending on the            development projects in process. In some cases development projects are substantially            labor based, resulting in relatively high margins, while in other cases development            projects include a significant amount of external cost passed thru to the customer at            little or no markup, resulting in very low margins. Cost of development revenue as a            percentage of

 

14

 

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development revenue was 14% and 47% for the second quarter of 2007 and            2006, respectively and was 22% and 43% for the six-month periods ended June 20, 2007            and 2006, respectively.

 

*Research and Development*

 

Research and development expenses were $1,521,657 and $2,345,252 in the            three and six-month periods ended June 30, 2007, respectively, compared to $1,039,607            and $1,969,062 in the same periods of the prior year. The increases in the second            quarter and first six months of 2007 compared to the same periods of 2006 were due            primarily to costs incurred in connection with activities such as contract research            organization (CRO) initiation, site recruitment, drug supply and database initiation in            anticipation of starting a Phase III study of AnturolTM (oxybutynin gel) for the            treatment of overactive bladder in the third quarter of 2007.

 

*Sales, Marketing and Business Development*

 

Sales, marketing and business development expenses totaled $430,461 and            $816,334 for the three and six-month periods ended June 30, 2007, respectively,            compared to $347,962 and $708,309 in the same prior year periods. The increases in each            period were primarily due to increases in professional services and personnel            relocation costs.

 

*General and Administrative*

 

General and administrative expenses totaled $1,484,882 and $3,115,689 in            the three and six-month periods ended June 30, 2007, respectively, compared to            $1,608,084 and $2,959,688 in the same periods of the prior year. The decrease in the            quarter was due mainly to a decrease in stock based compensation expenses for            professional services. This decrease was partially offset by an increase in patent            related expenses.

 

The            increase in the six month period was due primarily to an increase in patent expenses            related primarily to injection device and gel technologies as the Company continues to            develop and move closer to commercialization of certain products.

 

*Other Income (Expense)*

 

Other (expense) was $(98,582) and $(64,074) in the three and six-month            periods ended June 30, 2007, respectively, compared to income of $111,038 and $132,758            in the same periods of the prior year. The decrease in other income (expense) was due            primarily to the interest expense related to $5,000,000 borrowed under a credit            agreement in the first quarter of 2007 partially offset by interest income resulting            from higher cash and investment balances during the three and six-month periods of 2007            compared to 2006.

 

**Liquidity and Capital Resources**

 

The            Company has not historically generated, and does not currently generate, enough revenue            to provide the cash needed to support its operations, and has continued to operate            primarily by raising capital and incurring debt.

 

On            July 10, 2007 the Company received $16,000,000 in gross proceeds from a private            placement of 10,000,000 newly issued shares of common stock and the concurrent issuance            of 3,800,000 warrants for

 

15

 

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the            purchase of additional shares of common stock to a group of accredited investors. The            warrants have an exercise price of $2.00 and expire in July 2012. The Company intends            to use net proceeds from the financing for the Phase III clinical study of            AnturolTM, continuing the advancement of new products in the pipeline and for            working capital and general corporate purposes.

 

In            the first half of 2007 the Company received proceeds of $2,292,692 from the exercise of            warrants and stock options which resulted in the issuance of 2,187,317 shares of common            stock.

 

In            the second quarter of 2007 the Company acquired equipment under a three year capital            lease. The equipment and capital lease obligation were recorded at a value of            approximately $115,000. Principal payments of approximately $46,000, $38,000 and            $31,000 are due in each of the twelve month periods ended June 30, 2008, 2009, and            2010.

 

In            February of 2007 the Company received gross proceeds of $5,000,000 upon closing of the            first tranche of a $10,000,000 credit facility, to help fund additional working capital            needs. A second tranche of $5,000,000 is available after September 30, 2007 but before            December 31, 2007 upon meeting certain conditions. The per annum interest rate is equal            to the sum of the yield for three-year US treasury bills as quoted by Bloomberg, plus            800 basis points calculated (i) in the case of the first tranche, on the business day            prior to the first funding date and (ii) in the case of the second tranche, on the            business day prior to the second funding date (as such term is defined in the Credit            Agreement). In addition, once set, the applicable interest rate for each tranche will            be fixed for the applicable term. The stated interest rate for the first tranche is            12.7%. The maturity date (i) with respect to the first tranche is forty-two months from            the first funding date and (ii) with respect to the second tranche is thirty-six months            from the second funding date. The credit agreement contains certain covenants and            provisions that affect the Company, including, without limitation, covenants and            provisions that:

             

|   | **•** | restrict its ability to create or incur indebtedness                            (subject to enumerated exceptions); |
|--------|------------|---------------------------------------------------------------------------------------------------------------------|

|   | **•** | restrict its ability to create or incur certain liens on                            its property (subject to enumerated exceptions); |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | in certain circumstances, require it to maintain, on a                            consolidated basis, unrestricted cash and cash equivalents of at least                            $2,500,000; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | in certain circumstances, restrict its ability to                            declare or pay any dividends on any shares of its capital stock,                            purchase or redeem any shares of its capital stock, return any capital                            to any holder of its equity securities or payment of certain                            bonuses; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | restrict its ability to make certain                            investments. |
|--------|------------|------------------------------------------------------------------------------|

             

In            connection with the credit facility, the Company issued warrants to purchase a total of            640,000 shares of common stock at an exercise price of $1.25, of which 400,000 vested            upon closing of the first tranche and of which 240,000 will vest on the occurrence of            the drawdown of the second tranche.

 

In            the first quarter of 2006 the Company received net proceeds of $9,782,055 in a private            placement of its common stock in which a total of 8,770,000 shares of common stock were            sold at a price of $1.25 per share. In connection with the private placement, the            Company issued five-year warrants to purchase an aggregate of 7,454,500 shares of            common stock with an exercise price of $1.50 per share. In the first half of 2006 the            Company also received proceeds of $1,110,086 in connection with warrant and stock            option exercises which resulted in the issuance of 1,292,020 shares of common            stock.

 

The            Company believes that the combination of the recent equity and debt financings and            projected product sales, product development, license revenues, milestone payments and            royalties will provide

 

16

 

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sufficient funds to support operations through 2008. During 2007, the            Company believes capital expenditures may increase to approximately $1.0 million            primarily in connection with tooling and production equipment related to injection            device deals. If the Company does need additional financing and is unable to obtain            such financing when needed, or obtain it on favorable terms, the Company may be            required to curtail development of new drug technologies, limit expansion of operations            or accept financing terms that are not as attractive as the Company may            desire.

 

***Cash Flows***

 

|   | *Operating Activities* |
|--------|------------------------|

 

Net            cash used in operating activities was $2,371,274 and $4,236,845 for the six-month            periods ended June 30, 2007 and 2006, respectively. The difference between 2007 and            2006 was mainly the result of a decrease in the amount of the net loss. The net loss            reduction in the first half of 2007 was primarily due to $1,750,000 received under a            sublicense arrangement related to an existing license agreement with BioSante            Pharmaceuticals, Inc. The difference was also due to changes in noncash expenses and            changes in operating assets and liabilities.

 

Noncash expenses in the first half of 2007 totaled $913,554 compared to            $822,753 in 2006. The increase was due primarily to the amortization of debt discount            and issuance costs related to the $5,000,000 credit facility.

 

The            change in operating assets and liabilities resulted in net decreases in cash of            $558,209 and $298,340 in the first six-months of 2007 and 2006, respectively. The            decrease was primarily due to a decrease in deferred revenue which resulted from the            recognition as revenue of previously deferred amounts. The primary reason for the use            of cash in the first half of 2006 was the increase in other receivables and a decrease            in accrued expenses.

 

|   | *Investing Activities* |
|--------|------------------------|

 

Net            cash used in investing activities was $4,672,783 and $6,904,668 for the six-month            periods ended June 30, 2007 and 2006, respectively. This was primarily due to purchases            of short-term investments of $10,200,990 and $6,804,081 in 2007 and 2006, respectively.            The purchases in 2007 were partially offset by proceeds from the maturity of short-term            investments of $5,585,464.

 

|   | *Financing Activities* |
|--------|------------------------|

 

Net            cash provided by financing activities totaled $7,111,568 in the first half of 2007,            which consisted primarily of proceeds from the note payable of $5,000,000 and proceeds            from the exercise of warrants and stock options of $2,292,692. Net cash provided by            financing activities in the first half of 2006 was $10,892,141, which consisted of net            proceeds from the sale of common stock of $9,782,055 and proceeds from the exercise of            warrants and stock options of $1,110,086.

 

*NEW ACCOUNTING PRONOUNCEMENTS*

 

The            Company adopted the provisions of FASB Interpretation No. 48, “Accounting for            Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” on            January 1, 2007. This interpretation clarifies the accounting for uncertainty in income            taxes recognized in an enterprise’s financial statements in accordance with FASB            Statement No. 109, “Accounting for Income Taxes.” This            interpretation

 

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prescribes a recognition threshold and measurement attribute for the            financial statement recognition and measurement of a tax position taken or expected to            be taken in a tax return. It also provides guidance on derecognition, classification,            interest and penalties, accounting in interim periods, disclosure and transition. The            adoption of this accounting pronouncement did not have a material impact on the            Company’s consolidated financial statements.

 

In            September 2006, the FASB issued Statement of Financial Accounting Standards            (“SFAS”) No. 157, “Fair Value Measurements” which is effective            for fiscal years beginning after November 15, 2007 and for interim periods within those            years. This statement defines fair value, establishes a framework for measuring fair            value and expands the related disclosure requirements. The Company believes this            accounting pronouncement will not have a material impact on its consolidated financial            statements.

 

In            February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial            Assets and Financial Liabilities—Including an amendment of FASB Statement No.            115.”  SFAS No. 159 permits entities to choose to measure many financial            instruments and certain warranty and insurance contracts at fair value on a            contract-by-contract basis.  A business entity is required to report unrealized            gains and losses on items for which the fair value option has been elected in earnings            at each subsequent reporting date. SFAS No. 159 includes financial statement            presentation and disclosure requirements for assets and liabilities reported at fair            value as a consequence of the election.  The objective of this Statement is to            improve financial reporting by providing entities with the opportunity to mitigate            volatility in reported earnings caused by measuring related assets and liabilities            differently without having to apply complex hedge accounting provisions.  The            provisions of SFAS No. 159 are effective for the Company beginning January 1,            2008.   The Company is currently evaluating the impact of adopting this            pronouncement on its consolidated financial statements and related            disclosures.

 

| *Item 3.* | *QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET                            RISK* |
|-----------|-----------------------------------------------------------------------------------------|

 

The            Company's primary market risk exposure is foreign exchange rate fluctuations of the            Swiss Franc to the U.S. dollar as the financial position and operating results of the            Company's subsidiaries in Switzerland are translated into U.S. dollars for            consolidation. The Company's exposure to foreign exchange rate fluctuations also arises            from transferring funds to its Swiss subsidiaries in Swiss Francs. Most of the            Company's sales and licensing fees are denominated in U.S. dollars, thereby            significantly mitigating the risk of exchange rate fluctuations on trade receivables.            The effect of foreign exchange rate fluctuations on the Company's financial results for            the three and six-month periods ended June 30, 2007 and 2006 was not material. The            Company also has exposure to exchange rate fluctuations between the Euro and the U.S.            dollar. The licensing agreement entered into in January 2003 with Ferring established            pricing in Euros for products sold under the supply agreement and for all royalties. In            March 2007 the Company amended the 2003 agreement with Ferring, establishing prices in            U.S. dollars rather than Euros for certain products, reducing the exchange rate risk.            The Company does not currently use derivative financial instruments to hedge against            exchange rate risk. Because exposure increases as intercompany balances grow, the            Company will continue to evaluate the need to initiate hedging programs to mitigate the            impact of foreign exchange rate fluctuations on intercompany balances.

 

Typically, the Company’s short-term investments are commercial            paper or U.S government agency discount notes that mature within one year of purchase.            The market value of such investments fluctuates with current market interest rates. In            general, as rates increase, the market value of a debt instrument is expected to            decrease. The opposite is also true. To minimize such market risk, the Company has in            the past and to the extent possible, will continue in the future, to hold such debt            instruments to maturity at which time the debt instrument will be redeemed at its            stated or face value. Due to the short duration and

 

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nature of these instruments, the Company does not believe there is a            material exposure to interest rate risk related to its investment portfolio.

 

| *Item 4.* | *CONTROLS AND PROCEDURES* |
|-----------|---------------------------|

 

**Disclosure Controls and Procedures.**

 

The            Company's management, with the participation of the Company's Chief Executive Officer            and Chief Financial Officer, has evaluated the effectiveness of the Company's            disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and            15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the            period covered by this report. Based on such evaluation, the Company's Chief Executive            Officer and Chief Financial Officer have concluded that the Company's disclosure            controls and procedures as of the end of the period covered by this report have been            designed and are functioning effectively to provide reasonable assurance that the            information required to be disclosed by the Company in reports filed under the            Securities Exchange Act of 1934 is recorded, processed, summarized and reported within            the time periods specified in the SEC’s rules and is accumulated and communicated            to management, including the Company’s principal executive and principal            financial officers, or person performing similar functions, as appropriate to allow            timely decisions regarding required disclosure.

 

**Internal Control over Financial Reporting.**

 

There have not been any changes in the Company's internal control over            financial reporting during the fiscal quarter to which this report relates that have            materially affected, or are reasonably likely to materially affect, the Company's            internal control over financial reporting.

 

A            control system, no matter how well conceived and operated, can provide only reasonable,            not absolute, assurance that the objectives of the control system are met. Because of            the inherent limitations in all control systems, no evaluation of controls can provide            absolute assurance that all control issues and instances of fraud, if any, within the            Company have been detected. The design of any system of controls also is based in part            upon certain assumptions about the likelihood of future events, and there can be no            assurance that any design will succeed in achieving its stated goals under all            potential future conditions; over time, control may become inadequate because of            changes in conditions, or the degree of compliance with the policies or procedures may            deteriorate. Because of the inherent limitations in a cost-effective control system,            misstatements due to error or fraud may occur and not be detected.

 

**Cautionary Statement for Purposes of the “Safe Harbor”            Provisions of the Private Securities Litigation Reform Act of 1995**

 

Certain statements in this Quarterly Report on Form 10-Q are            “forward-looking statements” within the meaning of the Private Securities            Litigation Reform Act of 1995. When used in this Quarterly Report on Form 10-Q, the            words “may,” “should,” “expects,”            “plans,” “anticipates,” “believes,”            “estimates,” “predicts,” “intends,”            “potential” or “continue” and similar expressions are generally            intended to identify forward-looking statements. Because these forward-looking            statements involve risks and uncertainties, including those described in Item 1A of            this Quarterly Report, actual results could differ materially from those expressed or            implied by these forward-looking statements. These statements are only predictions.            Although the Company believes that the expectations reflected in the forward-looking            statements are reasonable, it cannot guarantee future results, levels of activity,            performance and/or achievements.

 

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Forward-looking statements represent the Company’s expectations or            beliefs concerning future events, including statements regarding the Company’s            current cash situation, need for additional capital, ability to continue operations,            whether the Company will be successful in entering into new strategic relationships,            the Company’s ability to attract and retain customers, the Company’s            ability to adapt to changing technologies, the impact of competition and pricing            pressures from actual and potential competitors with greater financial resources, the            Company’s ability to hire and retain competent employees, the Company’s            ability to protect and reuse its intellectual property, changes in general economic            conditions, and other factors identified in the Company’s filings with the            Securities and Exchange Commission. The Company disclaims any intention or obligation            to update or revise any forward-looking statements, whether as a result of new            information, future events or otherwise.

 

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**PART II - OTHER INFORMATION**

             

| *Item 1A.* | *RISK FACTORS* |
|------------|----------------|

 

*The following "risk factors" contain important information about us            and our business and should be read in their entirety. Additional risks and            uncertainties not known to us or that we now believe to be not material could also            impair our business. If any of the following risks actually occur, our business,            results of operations and financial condition could suffer significantly. As a result,            the market price of our common stock could decline and you could lose part or all of            your investment. In this Section, the terms "we" and "our" refer to Antares Pharma,            Inc.*

 

**Risks Related to Our Operations**

 

*We have incurred significant losses to date, and there is no            guarantee that we will ever become profitable*

 

We incurred a net loss of ($2,726,619) for the six months ended June 30,            2007 and net losses of ($8,099,846) and ($8,497,956) in the fiscal years ended 2006 and            2005, respectively. In addition, we have accumulated aggregate net losses from the            inception of business through June 30, 2007 of ($102,049,072). The costs for research            and product development of our drug delivery technologies along with marketing and            selling expenses and general and administrative expenses have been the principal causes            of our losses. We may not ever become profitable and if we do not become profitable            your investment would be harmed.

 

*We may need additional capital in the future in order to continue our            operations*

 

In July of 2007 we completed a private placement of our common stock and            warrants in which we received aggregate gross proceeds of $16,000,000. In February of            2007 we received gross proceeds of $5,000,000 upon closing of the first tranche of a            $10,000,000 credit facility, to help fund working capital needs. A second tranche of            $5,000,000 is available after September 30, 2007 but before December 31, 2007 under            certain conditions. In March of 2006 we completed a private placement of our common            stock and warrants in which we received aggregate gross proceeds of $10,962,500. We            believe that the combination of the debt and equity financings and projected product            sales, product development, license revenues, milestone payments and royalties will            provide us with sufficient funds to support operations beyond 2008. However, if we need            additional financing and are unable to obtain such financing when needed, or obtain it            on favorable terms, we may be required to curtail development of new drug technologies,            limit expansion of operations, accept financing terms that are not as attractive as we            may desire or be forced to liquidate and close operations.

 

Long-term capital requirements will depend on numerous factors,            including, but not limited to, the status of collaborative arrangements, the progress            of research and development programs and the receipt of revenues from sales of            products. Our ability to achieve and/or sustain profitable operations depends on a            number of factors, many of which are beyond our control. These factors include, but are            not limited to, the following:

 

**•**      the demand for our technologies from current and future biotechnology            and pharmaceutical partners;

| **•** | our ability to manufacture products efficiently, at the                            appropriate commercial scale, and with the required quality; |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|

 

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| **•** | our ability to increase and continue to outsource                            manufacturing capacity to allow for new product                            introductions; |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | the level of product competition and of price                            competition; |
|------------|---------------------------------------------------------------------------------------|

| **•** | our ability to develop, maintain or acquire patent                            positions; |
|------------|------------------------------------------------------------------------------------------|

| **•** | patient acceptance of our current and future                            products; |
|------------|-----------------------------------------------------------------------------------|

| **•** | our ability to develop additional commercial                            applications for our products; |
|------------|--------------------------------------------------------------------------------------------------------|

| **•** | our limited regulatory and commercialization                            experience; |
|------------|-------------------------------------------------------------------------------------|

| **•** | our reliance on outside consultants; |
|------------|--------------------------------------|

| **•** | our ability to obtain regulatory approvals; |
|------------|---------------------------------------------|

| **•** | our ability to attract the right personnel to execute                            our plans; |
|------------|---------------------------------------------------------------------------------------------|

| **•** | our ability to control costs; and |
|------------|-----------------------------------|

| **•** | general economic conditions. |
|------------|------------------------------|

 

*As we changed our business model to be more commercially oriented by            further developing our own products, we may not have sufficient resources to fully            execute our plan.*

 

We must make choices as to the drugs that we will combine with our            transdermal gel, fast-melt tablet, disposable mini-needle and reusable needle-free            technologies to move into the marketplace. We may not make the correct choice of drug            or technologies when combined with a drug, which may not be accepted by the marketplace            as we expected or at all. FDA approval processes for the drugs and drugs with devices            may be longer in time and/or more costly and/or require more extended clinical            evaluation than anticipated. Funds required to bring our own products to market may be            more than anticipated or may not be available at all. We have limited experience in            development of compounds and in regulatory matters and bringing such products to            market; therefore, we may experience difficulties in making this change or not be able            to achieve the change at all.

 

*We currently depend on a limited number of customers for the majority            of our revenue, and the loss of any one of these customers could substantially reduce            our revenue and impact our liquidity*

 

During the first six months of 2007 we derived approximately 37%, 32%            and 12% of our revenue from Biosante Pharmaceuticals, Ferring and an undisclosed            company, respectively, and in 2006, we derived approximately 53% and 19% of our revenue            from Ferring and Jazz Pharmaceuticals, respectively.

 

The loss of any of these customers or partners could cause our revenues            to decrease significantly, increase our continuing losses from operations and,            ultimately, could require us to cease operating. If we cannot broaden our customer            base, we will continue to depend on a few customers for the majority of our revenues.            Additionally, if we are unable to negotiate favorable business terms with these            customers in the future, our revenues and gross profits may be insufficient to allow us            to achieve and/or sustain profitability or continue operations.

 

We have entered into three License, Development and/or Supply agreements            since November of 2005 with Teva Pharmaceutical Industries Ltd. or an affiliate of            Teva. Although certain upfront payments have been received, there have been no            commercial sales and there can be no assurance that there ever will be commercial sales            under these agreements or any other agreements we have with third parties.

 

In July 2007 we entered into a worldwide product development and license            agreement with Jazz Pharmaceuticals. Under the agreement an upfront payment,            development milestones, and royalties on

 

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product sales are due us under certain circumstances. If the development            program conducted by Jazz is not a success we may never receive any compensation other            than the upfront payment earned at agreement execution.

 

*If we or our third-party manufacturer are unable to supply Ferring            with our devices pursuant to our current license agreement with Ferring, Ferring would            own a fully paid up license for certain of our intellectual property*

 

Pursuant to our license agreement with Ferring, we licensed certain of            our intellectual property related to our needle-free injection devices, including a            license that allows Ferring to manufacture our devices on its own under certain            circumstances for use with its human growth hormone product. In accordance with the            license agreement, we entered into a manufacturing agreement with a third party to            manufacture our devices for Ferring. If we or this third party are unable to meet our            obligations to supply Ferring with our devices, Ferring would own a fully paid up            license to manufacture our devices and to use and exploit our intellectual property in            connection with Ferring’s human growth hormone product. In such event, we would            no longer receive manufacturing margins from Ferring.  

 

*If            we do not develop and maintain relationships with manufacturers of our drug candidates,            then we may not successfully manufacture and sell our pharmaceutical            products.*

 

We do not possess the capabilities, resources or facilities to            manufacture AnturolTM, which is currently in development for overactive bladder,            or any other of our future drug candidates. We must contract with manufacturers to            produce AnturolTM according to government regulations. Our future development and            delivery of our product candidates depends on the timely, profitable and competitive            performance of these manufacturers. A limited number of manufacturers exist which are            capable of manufacturing our product candidates. We may fail to contract with the            necessary manufacturers or we may contract with manufactures on terms that may not be            favorable to us. Our manufacturers must obtain FDA approval for their manufacturing            processes, and we have no control over this approval process. Additionally, use of            contract manufacturers exposes us to risks in the manufacturer's business such as their            potential inability to perform from a technical, operational or financial            standpoint.

 

We have not contracted with a commercial supplier of active            pharmaceutical ingredients of oxybutynin for AnturolTM at this time. We are            currently working towards selecting a manufacturer to provide us with oxybutynin in a            manner which meets FDA requirements.

 

We have contracted with Patheon, a manufacturing development company, to            supply clinical quantities of AnturolTM in a manner that meets FDA requirements.            The FDA has not approved the manufacturing processes of Patheon. Any failure by Patheon            to achieve compliance with FDA standards could significantly harm our business since we            do not currently have an approved secondary manufacturer for AnturolTM.

 

*We have limited device manufacturing experience and may experience            manufacturing difficulties related to the use of new device materials and procedures,            which could increase our production costs and, ultimately, decrease our            profits*

 

Our past assembly, testing and device manufacturing experience for            certain of our device technologies has involved the assembly of products from machined            stainless steel and composite components in limited quantities. Our planned future drug            delivery device technologies necessitate significant changes and additions to our            manufacturing and assembly process to accommodate new

 

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components. These systems must be manufactured in compliance with            regulatory requirements, in a timely manner and in sufficient quantities while            maintaining quality and acceptable manufacturing costs. In the course of these changes            and additions to our manufacturing and production methods, we may encounter            difficulties, including problems involving scale-up, yields, quality control and            assurance, product reliability, manufacturing costs, existing and new equipment,            component supplies and shortages of personnel, any of which could result in significant            delays in production. Additionally, we entered into a manufacturing agreement under            which a third party assembles our MJ7 devices and certain related disposable component            parts. There can be no assurance that this third-party manufacturer will be able to            meet these regulatory requirements or our own quality control standards. Therefore,            there can be no assurance that we will be able to successfully produce and manufacture            our products. Any failure to do so would negatively impact our business, financial            condition and results of operations. We continue to outsource manufacturing of our            disposable injection products to third parties. Such products will be price sensitive            and may be required to be manufactured in large quantities, and we have no assurance            that this can be done. Additionally, use of contract manufacturers exposes us to risks            in the manufacturer's business such as their potential inability to perform from a            technical, operational or financial standpoint. We have not entered into any            manufacturing agreement for these products.

 

*Our products have achieved only limited acceptance by patients and            physicians, which continues to restrict marketing penetration and the resulting sales            of more units*

 

Our business ultimately depends on patient and physician acceptance of            our needle-free and mini-needle injectors, transdermal gels, fast-melt tablets and our            other drug delivery technologies as an alternative to more traditional forms of drug            delivery, including injections using a needle, orally ingested drugs and more            traditional transdermal patch products. To date, our device technologies have achieved            only limited acceptance from such parties. The degree of acceptance of our drug            delivery systems depends on a number of factors. These factors include, but are not            limited to, the following:

 

| **•** | advantages over alternative drug delivery systems or                            similar products from other companies; |
|------------|------------------------------------------------------------------------------------------------------------------------|

| **•** | demonstrated clinical efficacy, safety and enhanced                            patient compliance; |
|------------|----------------------------------------------------------------------------------------------------|

| **•** | cost-effectiveness; |
|------------|---------------------|

| **•** | convenience and ease of use of injectors and transdermal                            gels; |
|------------|-------------------------------------------------------------------------------------------|

| **•** | marketing and distribution support; and |
|------------|-----------------------------------------|

| **•** | successful launch of our pharmaceutical partners                            products which utilize our devices. |
|------------|-----------------------------------------------------------------------------------------------------------------|

 

Physicians may refuse to prescribe products incorporating our drug            delivery technologies if they believe that the active ingredient is better administered            to a patient using alternative drug delivery technologies, that the time required to            explain use of the technologies to the patient would not be offset by advantages, or            they believe that the delivery method will result in patient noncompliance. Factors            such as patient perceptions that a gel is inconvenient to apply or that devices do not            deliver the drug at the same rate as conventional drug delivery methods may cause            patients to reject our drug delivery technologies. Because only a limited number of            products incorporating our drug delivery technologies are commercially available, we            cannot yet fully assess the level of market acceptance of our drug delivery            technologies.

 

*A            2002 National Institute of Health (“NIH”) study and the 2003 findings from            the Million Women Study first launched in 1997 in the U.K. questioned the safety of            hormone replacement therapy for menopausal women, and our female hormone replacement            therapy business may suffer as a result*

 

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In July 2002, the NIH halted a long-term study, known as the            Women’s Health Initiative, being conducted on oral female hormone replacement            therapy (“HRT”) using a combination of estradiol and progestin because the            study showed an increased risk of breast cancer, heart disease and blood clots in women            taking the combination therapy. The arm of the study using estrogen alone was stopped            in March 2004 after the NIH concluded that the benefits of estrogen did not outweigh            the stroke risk for women in this trial. The halted study looked at only one brand of            oral combined HRT and of estrogen, and there is no information on whether brands with            different levels of hormones would carry the same risk. In January 2003, the FDA            announced that it would require new warnings on the labels of HRT products, and it            advised patients to consult with their physicians about whether to continue treatment            with continuous combined HRT and to limit the period of use to that required to manage            post-menopausal vasomotor symptoms only. Subsequently, additional analysis from the NIH            study has suggested a slight increase in the risk of cognitive dysfunction developing            in patients on long-term combined HRT. The Million Women Study, conducted in the U.K.,            confirmed that current and recent use of HRT increases a woman’s chance of            developing breast cancer and that the risk increased with duration of use. Other HRT            studies have found potential links between HRT and an increased risk of dementia and            asthma. These results and recommendations impacted the use of HRT, and product sales            have diminished significantly. We cannot yet assess the impact any of the            studies’ results may have on our contracts or on our partners’ perspective            of the market for transdermal gel products designed for HRT. We also cannot predict            whether our alternative route of transdermal administration of HRT products will carry            the same risk as the oral products used in the study. In 2006 the FDA approved            Elestrin®, an estrogen gel developed by our partner BioSante for the treatment of            vasomotor symptoms associated with menopause. The determination by the FDA of            Elestrin’s efficacy and safety may not impact the acceptance by physicians and            patients of this newly approved product.

 

*If transdermal gels do not achieve greater market acceptance, we may            be unable to achieve profitability*

 

Because transdermal gels are a newer, less understood method of drug            delivery, our potential partners and consumers have little experience with such            products. Our assumption of higher value may not be shared by the potential partner and            consumer. To date, transdermal gels have gained successful entry into only a limited            number of markets. There can be no assurance that transdermal gels will ever gain            market acceptance beyond these markets sufficient to allow us to achieve and/or sustain            profitable operations in this product area.

 

We are developing Anturol, our oxybutynin gel for overactive bladder. We            may seek a pharmaceutical partner to assist in the payment for the development and            marketing of this potential product. We may be unsuccessful in partnering Anturol which            may delay or affect the timing of the clinical program due to availability of            resources.

 

*We rely on third parties to supply components for our products, and            any failure to retain relationships with these third parties could negatively impact            our ability to manufacture our products*

 

Certain of our technologies contain a number of customized components            manufactured by various third parties. Regulatory requirements applicable to            manufacturing can make substitution of suppliers costly and time-consuming. In the            event that we could not obtain adequate quantities of these customized components from            our suppliers, there can be no assurance that we would be able to access alternative            sources of such components within a reasonable period of time, on acceptable terms or            at all. The unavailability of adequate quantities, the inability to develop alternative            sources, a reduction or interruption in supply or a significant increase in the price            of components could have a material adverse effect on our ability to manufacture and            market our products.

 

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*We may be unable to successfully expand into new areas of drug            delivery technology, which could negatively impact our business as a            whole*

 

We intend to continue to enhance our current technologies. Even if            enhanced technologies appear promising during various stages of development, we may not            be able to develop commercial applications for them because

 

| **•** | the potential technologies may fail clinical                            studies; |
|------------|----------------------------------------------------------------------------------|

| **•** | we may not find a pharmaceutical company to adopt the                            technologies; |
|------------|------------------------------------------------------------------------------------------------|

| **•** | it may be difficult to apply the technologies on a                            commercial scale; |
|------------|-------------------------------------------------------------------------------------------------|

| **•** | the technologies may not be economical to market;                            or |
|------------|---------------------------------------------------------------------------------|

| **•** | we may not receive necessary regulatory approvals for                            the potential technologies. |
|------------|--------------------------------------------------------------------------------------------------------------|

 

We have not yet completed research and development work or obtained            regulatory approval for any technologies for use with any drugs other than insulin,            human growth hormone and estradiol (Elestrin®). There can be no assurance that any            newly developed technologies will ultimately be successful or that unforeseen            difficulties will not occur in research and development, clinical testing, regulatory            submissions and approval, product manufacturing and commercial scale-up, marketing, or            product distribution related to any such improved technologies or new uses. Any such            occurrence could materially delay the commercialization of such improved technologies            or new uses or prevent their market introduction entirely.

 

*As health insurance companies and other third-party payors            increasingly challenge the products and services for which they will provide coverage,            our individual consumers may not be able to receive adequate reimbursement or may be            unable to afford to use our products, which could substantially reduce our revenues and            negatively impact our business as a whole*

 

Our injector device products are currently sold in the European            Community (“EC”) and elsewhere for use with human growth hormone and in the            United States for use with insulin. In the case of human growth hormone, our products            are generally provided to users at no cost by the drug supplier. In the United States            the injector products are marketed and available for use with insulin.

 

Although it is impossible for us to identify the amount of sales of our            products that our customers will submit for payment to third-party insurers, at least            some of these sales may be dependent in part on the availability of adequate            reimbursement from these third-party healthcare payors. Currently, insurance companies            and other third-party payors reimburse the cost of certain technologies on a            case-by-case basis and may refuse reimbursement if they do not perceive benefits to a            technology’s use in a particular case. Third-party payors are increasingly            challenging the pricing of medical products and services, and there can be no assurance            that such third-party payors will not in the future increasingly reject claims for            coverage of the cost of certain of our technologies. Insurance and third-party payor            practice vary from country to country, and changes in practices could negatively affect            our business if the cost burden for our technologies were shifted more to the patient.            Therefore, there can be no assurance that adequate levels of reimbursement will be            available to enable us to achieve or maintain market acceptance of our technologies or            maintain price levels sufficient to realize profitable operations. There is also a            possibility of increased government control or influence over a broad range of            healthcare expenditures in the future. Any such trend could negatively impact the            market for our drug delivery products and technologies.

 

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Elestrin®, for which we will receive royalties from our partner            based on any commercial sales, has recently been launched. Therefore, we have no way of            knowing at this time if health insurance companies will reimburse patients for the use            of Elestrin® as this typically becomes known in the latter part of the first year            of launch.

 

*The loss of any existing licensing agreements or the failure to enter            into new licensing agreements could substantially affect our revenue*

 

One of our business pathways requires us to enter into license            agreements with pharmaceutical and biotechnology companies covering the development,            manufacture, use and marketing of drug delivery technologies with specific drug            therapies. Under these arrangements, the partner companies typically assist us in the            development of systems for such drug therapies and collect or sponsor the collection of            the appropriate data for submission for regulatory approval of the use of the drug            delivery technology with the licensed drug therapy. Our licensees may also be            responsible for distribution and marketing of the technologies for these drug therapies            either worldwide or in specific territories. We are currently a party to a number of            such agreements, all of which are currently in varying stages of development. We may            not be able to meet future milestones established in our agreements (such milestones            generally being structured around satisfactory completion of certain phases of clinical            development, regulatory approvals and commercialization of our product) and thus, would            not receive the fees expected from such arrangements, related future royalties or            product sales. Moreover, there can be no assurance that we will be successful in            executing additional collaborative agreements or that existing or future agreements            will result in increased sales of our drug delivery technologies. In such event, our            business, results of operations and financial condition could be adversely affected,            and our revenues and gross profits may be insufficient to allow us to achieve and/or            sustain profitability. As a result of our collaborative agreements, we are dependent            upon the development, data collection and marketing efforts of our licensees. The            amount and timing of resources such licensees devote to these efforts are not within            our control, and such licensees could make material decisions regarding these efforts            that could adversely affect our future financial condition and results of operations.            In addition, factors that adversely impact the introduction and level of sales of any            drug or drug device covered by such licensing arrangements, including competition            within the pharmaceutical and medical device industries, the timing of regulatory or            other approvals and intellectual property litigation, may also negatively affect sales            of our drug delivery technology.

 

*The failure of any of our third-party licensees to develop, obtain            regulatory approvals for, market, distribute and sell our products as planned may            result in us not meeting revenue and profit targets*

 

Pharmaceutical company partners help us develop, obtain regulatory            approvals for, manufacture and sell our products. If one or more of these            pharmaceutical company partners fail to pursue the development or marketing of the            products as planned, our revenues and profits may not reach expectations or may            decline. We may not be able to control the timing and other aspects of the development            of products because pharmaceutical company partners may have priorities that differ            from ours. Therefore, commercialization of products under development may be delayed            unexpectedly. Generally speaking, in the near term, we do not intend to have a direct            marketing channel to consumers for our drug delivery products or technologies except            through current distributor agreements in the United States for our insulin delivery            device. Therefore, the success of the marketing organizations of our pharmaceutical            company partners, as well as the level of priority assigned to the marketing of the            products by these entities, which may differ from our priorities, will determine the            success of the products incorporating our technologies. Competition in this market            could also force us to reduce the

 

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prices of our technologies below currently planned levels, which could            adversely affect our revenues and future profitability.

 

*If we cannot develop and market our products as rapidly or            cost-effectively as our competitors, then we may never be able to achieve profitable            operations.*

 

Competitors in the overactive bladder, transdermal gel drug delivery and            needle-free injector and other markets, some with greater resources and experience than            us, may enter these markets, as there is an increasing recognition of a need for less            invasive methods of delivering drugs. Additionally, there is an ever increasing list of            competitors in the oral disintegrating fast-melt tablet business. Our success depends,            in part, upon maintaining a competitive position in the development of products and            technologies in rapidly evolving fields. If we cannot maintain competitive products and            technologies, our current and potential pharmaceutical company partners may choose to            adopt the drug delivery technologies of our competitors. Drug delivery companies that            compete with our technologies include Bioject Medical Technologies, Inc., Bentley            Pharmaceuticals, Inc., Auxillium, BioChemics, Inc., Aradigm, Cellegy Pharmaceuticals,            Inc., Watson Pharmaceuticals, Cardinal Health, CIMA Laboratories, Laboratoires            Besins-Iscovesco, MacroChem Corporation, NexMed, Inc., The Medical House and Novavax,            Inc., along with other companies. We also compete generally with other drug delivery,            biotechnology and pharmaceutical companies engaged in the development of alternative            drug delivery technologies or new drug research and testing. Many of these competitors            have substantially greater financial, technological, manufacturing, marketing,            managerial and research and development resources and experience than we do, and,            therefore, represent significant competition.

 

Additionally, new drug delivery technologies are mostly used only with            drugs for which other drug delivery methods are not possible, in particular with            biopharmaceutical proteins (drugs derived from living organisms, such as insulin and            human growth hormone) that cannot currently be delivered orally or transdermally.            Transdermal patches and gels are also used for drugs that cannot be delivered orally or            where oral delivery has other limitations (such as high first pass drug metabolism,            meaning that the drug dissipates quickly in the digestive system and, therefore,            requires frequent administration). Many companies, both large and small, are engaged in            research and development efforts on less invasive methods of delivering drugs that            cannot be taken orally. The successful development and commercial introduction of such            non-injection techniques could have a material adverse effect on our business,            financial condition, results of operations and general prospects.

 

Competitors may succeed in developing competing technologies or            obtaining governmental approval for products before we do. Competitors’ products            may gain market acceptance more rapidly than our products, or may be priced more            favorably than our products. Developments by competitors may render our products, or            potential products, noncompetitive or obsolete.

 

*Although we have applied for, and have received, several patents, we            may be unable to protect our intellectual property, which would negatively affect our            ability to compete*

 

Our success depends, in part, on our ability to obtain and enforce            patents for our products, processes and technologies and to preserve our trade secrets            and other proprietary information. If we cannot do so, our competitors may exploit our            innovations and deprive us of the ability to realize revenues and profits from our            developments.

 

We currently hold approximately 70 patents and have an additional 98            applications pending in the U.S. and other countries. In early 2007 the U.S. patent            office issued two patents in our ATDTM gel

 

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platform including a patent related to our formulation of Elestrin®,            an estradiol gel product approved by the FDA for hormone replacement therapy and a            patent related to our core gel technology. The patents have expiration dates ranging            from 2015 to 2022. In addition to issued patents and patent applications, we also have            trade secrets in all of our technology platforms.

 

Any patent applications we may have made or may make relating to            inventions for our actual or potential products, processes and technologies may not            result in patents being issued or may result in patents that provide insufficient or            incomplete coverage for our inventions. Our current patents may not be valid or            enforceable and may not protect us against competitors that challenge our patents,            obtain their own patents that may have an adverse effect on our ability to conduct            business, or are able to otherwise circumvent our patents. Further, we may not have the            necessary financial resources to enforce or defend our patents or patent            applications.

 

To protect our trade secrets and proprietary technologies and processes,            we rely, in part, on confidentiality agreements with employees, consultants and            advisors. These agreements may not provide adequate protection for our trade secrets            and other proprietary information in the event of any unauthorized use or disclosure,            or if others lawfully and independently develop the same or similar            information.

 

*Others may bring infringement claims against us, which could be            time-consuming and expensive to defend*

 

Third parties may claim that the manufacture, use or sale of our drug            delivery technologies infringe their patent rights. If such claims are asserted, we may            have to seek licenses, defend infringement actions or challenge the validity of those            patents in court. If we cannot obtain required licenses, or obtain licenses on            acceptable terms, we may not be able to continue to develop and commercialize our            product candidates. Even if we were able to obtain rights to a third party’s            intellectual property, these rights may be non-exclusive, thereby giving our            competitors potential access to the same intellectual property. If we are found liable            for infringement or are not able to have these patents declared invalid, we may be            liable for significant monetary damages, encounter significant delays in bringing            products to market or be precluded from participating in the manufacture, use or sale            of products or methods of drug delivery covered by patents of others. Even if we were            able to prevail, any litigation could be costly and time-consuming and could divert the            attention of our management and key personnel from our business operations. We may not            have identified, or be able to identify in the future, United States or foreign patents            that pose a risk of potential infringement claims. Furthermore, in the event a patent            infringement suit is brought against us, the development, manufacture or potential sale            of product candidates claimed to infringe on a third party’s intellectual            property may have to stop or be delayed. Ultimately, we may be unable to commercialize            some of our product candidates as a result of patent infringement claims, which could            harm our business.

 

We are aware of a US Patent issued to Watson Pharmaceuticals relating to            a gel formulation of oxybutynin. We believe that we do not infringe this patent and            that it should not have been issued. We may seek to invalidate this patent but there            can be no assurance that we will prevail. If the patent is determined to be valid and            if AnturolTM is approved, we may be delayed in our marketing and the potential            market value of AnturolTM may be affected.

             

*If the pharmaceutical companies to which we license our technologies            lose their patent protection or face patent infringement claims for their drugs, we may            not realize our revenue or profit plan*

 

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The drugs to which our drug delivery technologies are applied are            generally the property of the pharmaceutical companies. Those drugs may be the subject            of patents or patent applications and other forms of protection owned by the            pharmaceutical companies or third parties. If those patents or other forms of            protection expire, become ineffective or are subject to the control of third parties,            sales of the drugs by the collaborating pharmaceutical company may be restricted or may            cease. Our expected revenues, in that event, may not materialize or may            decline.

 

*Our business may suffer if we lose certain key officers or employees            or if we are not able to add additional key officers or employees necessary to reach            our goals*

 

The success of our business is materially dependent upon the continued            services of certain of our key officers and employees. The loss of such key personnel            could have a material adverse effect on our business, operating results or financial            condition. There can be no assurance that we will be successful in retaining key            personnel. We consider our employee relations to be good; however, competition for            personnel is intense and we cannot assume that we will continue to be able to attract            and retain personnel of high caliber.

 

 *We are involved in international            markets, and this subjects us to additional business risks*

 

We have offices and a research facility in Basel, Switzerland, and we            also license and distribute our products in the European Community, Asia and the United            States. These geographic localities provide economically and politically stable            environments in which to operate. However, in the future, we intend to introduce            products through partnerships in other countries. As we expand our geographic market,            we will face additional ongoing complexity to our business and may encounter the            following additional risks:

 

| **•** | increased complexity and costs of managing international                            operations; |
|------------|-------------------------------------------------------------------------------------------------|

| **•** | protectionist laws and business practices that favor                            local companies; |
|------------|--------------------------------------------------------------------------------------------------|

| **•** | dependence on local vendors; |
|------------|------------------------------|

| **•** | multiple, conflicting and changing governmental laws and                            regulations; |
|------------|--------------------------------------------------------------------------------------------------|

| **•** | difficulties in enforcing our legal rights; |
|------------|---------------------------------------------|

| **•** | reduced or limited protections of intellectual property                            rights; and |
|------------|------------------------------------------------------------------------------------------------|

| **•** | political and economic instability. |
|------------|-------------------------------------|

A significant portion of our international revenues is denominated in            foreign currencies. An increase in the value of the U.S. dollar relative to these            currencies may make our products more expensive and, thus, less competitive in foreign            markets.

 

*If we make any acquisitions, we will incur a variety of costs and            might never successfully integrate the acquired product or business into            ours.*

 

We might attempt to acquire products or businesses that we believe are a            strategic complement to our business model. We might encounter operating difficulties            and expenditures relating to integrating an acquired product or business. These            acquisitions might require significant management attention that would otherwise be            available for ongoing development of our business. In addition, we might never realize            the anticipated benefits of any acquisition. We might also make dilutive issuances of            equity securities, incur debt or experience a decrease in cash available for our            operations, or incur contingent liabilities and/or amortization expenses relating to            goodwill and other intangible assets, in connection with future            acquisitions.

 

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*If we do not have adequate insurance for product liability claims,            then we may be subject to significant expenses relating to these claims.*

 

Our business entails the risk of product liability claims. Although we            have not experienced any material product liability claims to date, any such claims            could have a material adverse impact on our business. We maintain product liability            insurance with coverage of $5 million per occurrence and an annual aggregate maximum of            $5 million. We evaluate our insurance requirements on an ongoing basis.

 

**Risks Related to Regulatory Matters**

 

*We or our licensees may incur significant costs seeking approval for            our products, which could delay the realization of revenue and, ultimately, decrease            our revenues from such products*

 

The design, development, testing, manufacturing and marketing of            pharmaceutical compounds, medical nutrition and diagnostic products and medical devices            are subject to regulation by governmental authorities, including the FDA and comparable            regulatory authorities in other countries. The approval process is generally lengthy,            expensive and subject to unanticipated delays. Currently we, along with our partners,            are actively pursuing marketing approval for a number of products from regulatory            authorities in other countries and anticipate seeking regulatory approval from the FDA            for products developed internally and pursuant to our license agreements. In the future            we, or our partners, may need to seek approval for newly developed products. Our            revenue and profit will depend, in part, on the successful introduction and marketing            of some or all of such products by our partners or us.

 

Applicants for FDA approval often must submit extensive clinical data            and supporting information to the FDA. Varying interpretations of the data obtained            from pre-clinical and clinical testing could delay, limit or prevent regulatory            approval of a drug product. Changes in FDA approval policy during the development            period, or changes in regulatory review for each submitted new drug application also            may cause delays or rejection of an approval. Even if the FDA approves a product, the            approval may limit the uses or “indications” for which a product may be            marketed, or may require further studies. The FDA also can withdraw product clearances            and approvals for failure to comply with regulatory requirements or if unforeseen            problems follow initial marketing.

 

We are currently evaluating AnturolTM for the treatment of            overactive bladder (OAB). AnturolTM is the anticholinergic oxybutynin delivered by            our proprietary ATDTM gel that is used to achieve therapeutic blood levels of the            active compound that can be sustained over 24 hours after a single, daily            application.

 

In February 2006, we announced the results of our Phase II dose ranging            study for our ATDTM oxybutynin gel product AnturolTM. The study was an open            label, single period, randomized study using 48 healthy subjects and three different            doses of AnturolTM over a 20 day period. Our overall conclusions of the study were            positive. The FDA however, may not concur with our analysis of the data.

 

In July 2007, we completed a Special Protocol Assessment (SPA) with the            FDA for a pivotal trial of Anturol. A SPA documents the FDA's agreement that the design            and planned analysis of the trial adequately addresses objectives, in support of a            regulatory submission such as a New Drug Application (NDA). The completion of the SPA            does not ensure success of the trial or that the FDA will ultimately accept the results            of the trial and we may never receive FDA approval for AnturolTM and without FDA            approval, we cannot market or sell AnturolTM.

 

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Additionally, we are developing, with partners, injection devices for            use with our partner’s drugs. The regulatory path for approval of such            combination products maybe subject to review by several centers within the FDA and            although precedent and guidance exists for the requirements for such combination            products, there is no assurance that the FDA will not change what it requires or how it            reviews such submissions. Additionally, there is no assurance that the FDA will not            require human clinical testing in order to commercialize these devices. Such changes in            review processes or the requirement for clinical studies could delay anticipated launch            dates or be at a cost which makes launching the device cost prohibitive for our            partners. Such delay or failure to launch these devices could adversely affect our            revenues and future profitability.

             

In other jurisdictions, we, and the pharmaceutical companies with whom            we are developing technologies, both drugs and devices must obtain required regulatory            approvals from regulatory agencies and comply with extensive regulations regarding            safety and quality. If approvals to market the products are delayed, if we fail to            receive these approvals, or if we lose previously received approvals, our revenues may            not materialize or may decline. We may not be able to obtain all necessary regulatory            approvals. Additionally, clinical data that we generate or obtain from partners from            FDA regulatory filings may not be sufficient for regulatory filings in other            jurisdictions and we may be required to incur significant costs in obtaining those            regulatory approvals.

 

*The            505(b)(2) regulatory pathway for many of our potential pharmaceutical products is            uncertain and could result in unexpected costs and delays of approvals.*

 

Transdermal and topical products indicated for the treatment of systemic            or local treatments respectively are regulated by the FDA in the U.S. and other similar            regulatory agencies in other countries as drug products. Transdermal and topical            products are considered to be controlled release dosage forms and may not be marketed            in the U.S. until they have been demonstrated to be safe and effective. The regulatory            approval routes for transdermal and topical products include the filing of an NDA for            new drugs, new indications of approved drugs or new dosage forms of approved drugs.            Alternatively, these dosage forms can obtain marketing approval as a generic product by            the filing of an ANDA, providing the new generic product is bioequivalent to and has            the same labeling as a comparable approved product or as a filing under Section            505(b)(2) where there is an acceptable reference product. Other topical products for            local treatment do not require the filing of either an NDA or ANDA, providing that            these products comply with existing OTC monographs. The combination of the drug, its            dosage form and label claims and FDA requirement will ultimately determine which            regulatory approval route will be required.

 

Many of our transdermal product candidates may be developed via the            505(b)(2) route. The 505(b)(2) regulatory pathway is continually evolving and advice            provided in the present is based on current standards, which may or may not be            applicable when we potentially submit an NDA. Additionally, we must reference the most            similar predicate products when submitting a 505(b)(2) application. It is therefore            probable that:

 

| **•** | should a more appropriate reference product(s) be                            approved by the FDA at any time before or during the review of our NDA,                            we would be required to submit a new application referencing the more                            appropriate product; |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | the FDA cannot disclose whether such predicate                            product(s) is under development or has been submitted at any time                            during another company’s review cycle. |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Accordingly, these regulations and the FDA’s interpretation of            them might impair our ability to obtain product approval or effectively market our            products.

 

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*Our business could be harmed if we fail to comply with regulatory            requirements and, as a result, are subject to sanctions*

 

If we, or pharmaceutical companies with whom we are developing            technologies, fail to comply with applicable regulatory requirements, the            pharmaceutical companies, and we, may be subject to sanctions, including the            following:

 

| **•** | warning letters; |
|------------|------------------|

| **•** | fines; |
|------------|--------|

| **•** | product seizures or recalls; |
|------------|------------------------------|

| **•** | injunctions; |
|------------|--------------|

| **•** | refusals to permit products to be imported into or                            exported out of the applicable regulatory jurisdiction; |
|------------|---------------------------------------------------------------------------------------------------------------------------------------|

| **•** | total or partial suspension of production; |
|------------|--------------------------------------------|

| **•** | withdrawals of previously approved marketing                            applications; or |
|------------|------------------------------------------------------------------------------------------|

| **•** | criminal prosecutions. |
|------------|------------------------|

 

*Our revenues may be limited if the marketing claims asserted about            our products are not approved*

 

Once a drug product is approved by the FDA, the Division of Drug            Marketing, Advertising and Communication, the FDA’s marketing surveillance            department within the Center for Drugs, must approve marketing claims asserted by our            pharmaceutical company partners. If we or a pharmaceutical company partner fails to            obtain from the Division of Drug Marketing acceptable marketing claims for a product            incorporating our drug technologies, our revenues from that product may be limited.            Marketing claims are the basis for a product’s labeling, advertising and            promotion. The claims the pharmaceutical company partners are asserting about our drug            delivery technologies, or the drug product itself, may not be approved by the Division            of Drug Marketing.

 

*Product liability claims related to participation in clinical trials            or the use or misuse of our products could prove to be costly to defend and could harm            our business reputation*

 

The testing, manufacturing and marketing of products utilizing our drug            delivery technologies may expose us to potential product liability and other claims            resulting from their use in practice or in clinical development. If any such claims            against us are successful, we may be required to make significant compensation            payments. Any indemnification that we have obtained, or may obtain, from contract            research organizations or pharmaceutical companies conducting human clinical trials on            our behalf may not protect us from product liability claims or from the costs of            related litigation. Similarly, any indemnification we have obtained, or may obtain,            from pharmaceutical companies with whom we are developing drug delivery technologies            may not protect us from product liability claims from the consumers of those products            or from the costs of related litigation. If we are subject to a product liability            claim, our product liability insurance may not reimburse us, or may not be sufficient            to reimburse us, for any expenses or losses that may have been suffered. A successful            product liability claim against us, if not covered by, or if in excess of our product            liability insurance, may require us to make significant compensation payments, which            would be reflected as expenses on our statement of operations. Adverse claim experience            for our products or licensed technologies or medical device, pharmaceutical or            insurance industry trends may make it difficult for us to obtain product liability            insurance or we may be forced to pay very high premiums, and there can be no assurance            that insurance coverage will continue to be available on commercially reasonable terms            or at all.

 

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**Risks Related to our Common Stock**

 

*Together, certain of our stockholders own or have the right to            acquire a significant portion of our stock and could ultimately control decisions            regarding our company and impact stock price*

 

As a result of our reverse business combination with Permatec in January            2001 and subsequent additional debt and equity financings, Permatec Holding AG and its            controlling stockholder, Dr. Jacques Gonella, own a substantial portion (as of July 31,            2007, approximately 14%) of our outstanding shares of common stock. Dr. Gonella, who is            the Chairman of our Board of Directors, also owns warrants to purchase an aggregate of            4,198,976 shares of common stock and options to purchase 144,500 shares of common            stock. Additionally, four investors (Crestview Capital Master Fund, Perceptive Life            Sciences Fund, SCO Capital Group and SDS Funds) own warrants that are, as of July 31,            2007, exercisable into an aggregate of 5,536,588 shares of our common stock. Some of            these investors also directly own shares of our common stock. If Dr. Gonella and all of            the above investors exercised all of the warrants and options owned by them, Dr.            Gonella would own approximately 18%, and the four investors as a group would own, at a            minimum, over 7%, of our common stock.

 

Because the parties described above either currently own or could            potentially own a large portion of our stock, they may be able to generally determine            or they may be able to significantly influence the outcome of corporate actions            requiring stockholder approval. As a result, these parties may be in a position to            control matters affecting our company, including decisions as to our corporate            direction and policies; future issuances of certain securities; our incurrence of debt;            amendments to our certificate of incorporation and bylaws; payment of dividends on our            common stock; and acquisitions, sales of our assets, mergers or similar transactions,            including transactions involving a change of control. As a result, some investors may            be unwilling to purchase our common stock. In addition, if the demand for our common            stock is reduced because of these stockholders’ control of the Company, the price            of our common stock could be adversely affected.  Additionally, future sales of            large blocks of our common stock by any of the above investors could substantially            adversely affect our stock price.

 

*Future conversions or exercises by holders of warrants or options            could substantially dilute our common stock*

 

As of July 31, 2007, we have warrants outstanding that are exercisable,            at prices ranging from $0.55 per share to $5.00 per share, for an aggregate of            approximately 23,140,000 shares of our common stock. We also have options outstanding            that are exercisable, at exercise prices ranging from $0.70 to $15.65 per share, for an            aggregate of approximately 5,600,000 shares of our common stock. Purchasers of common            stock could therefore experience substantial dilution of their investment upon exercise            of the above warrants or options. The majority of the shares of common stock issuable            upon exercise of the warrants or options held by these investors are currently            registered.

 

 *Sales of our common stock by our            officers and directors may lower the market price of our common stock*

 

As of July 31, 2007, our officers and directors beneficially owned an            aggregate of approximately 16,000,000 shares (or approximately 22%) of our common            stock, including stock options exercisable within 60 days. If our officers and            directors, or other stockholders, sell a substantial amount of our common stock, it            could cause the market price of our common stock to decrease and could hamper our            ability to raise capital through the sale of our equity securities.

 

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*We do not expect to pay dividends in the foreseeable            future*

 

We intend to retain any earnings in the foreseeable future for our            continued growth and, thus, do not expect to declare or pay any cash dividends in the            foreseeable future.

 

*Anti-takeover effects of certain certificate of incorporation and            bylaw provisions could discourage, delay or prevent a change in control.*

 

Our certificate of incorporation and bylaws could discourage, delay or            prevent persons from acquiring or attempting to acquire us. Our certificates of            incorporation authorizes our board of directors, without action of our stockholders, to            designate and issue preferred stock in one or more series, with such rights,            preferences and privileges as the board of directors shall determine. In addition, our            bylaws grant our board of directors the authority to adopt, amend or repeal all or any            of our bylaws, subject to the power of the stockholders to change or repeal the bylaws.            In addition, our bylaws limit who may call meetings of our stockholders.

 

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

             

On May 10, 2007, the Company held an annual meeting of its stockholders.            The following items were voted on at the meeting:

             

|   | **•** | Dr. Jacques Gonella, Thomas Garrity and Dr. Rajesh                            Shrotriya were elected to the Company's board of directors to serve                            until the 2010 annual meeting. With respect to the nomination of Dr.                            Gonella to the board of directors, there were 44,455,225 votes cast in                            favor of the nomination and 393,813 votes withheld. With respect to the                            nomination of Mr. Garrity to the board of directors, there were                            44,452,925 votes cast in favor of the nomination and 396,113 votes                            withheld. With respect to the nomination of Dr. Shrotriya to the board                            of directors, there were 44,328,540 votes cast in favor of the                            nomination and 520,498 votes withheld. The terms of office of each of                            Jack Stover, Anton Gueth, Dr. Leonard Jacob and Dr. Paul Wotton also                            continued after the meeting. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | The stockholders ratified the appointment of KPMG LLP as                            the Company’s independent registered public accounting firm for                            the fiscal year ending December 31, 2007. There were 44,755,516 votes                            for the proposal, 30,187 votes against the proposal, 63,335 abstentions                            and zero broker non-votes. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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

             

| (a) | Exhibits |
|-----|----------|

 

|   | Exhibit No. | Description |
|--------|-------------|-------------|

|   | 3.1 | Amended and Restated Bylaws of the Company (Filed as                            Exhibit 3.1 to the Current Report on Form 8-K filed on May 15, 2007 and                            incorporated herein by reference.) |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4.1 | Common Stock and Warrant Purchase Agreement, dated June                            29, 2007 by and among the Company and the parties listed therein (Filed                            as Exhibit 4.1 to the Current Report on Form 8-K filed on July 2, 2007                            and incorporated herein by reference.) |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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|   | 4.2 | Form of Investor Rights Agreement, by and among the                            Company and the parties listed therein (Filed as Exhibit 4.2 to the                            Current Report on Form 8-K filed on July 2, 2007 and incorporated                            herein by reference.) |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4.3 | Form of Common Stock Purchase Warrant, issued by the                            Registrant (Filed as Exhibit 4.3 to the Current Report on Form 8-K                            filed on July 2, 2007 and incorporated herein by reference.) |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 31.1 | Section 302 CEO Certification |
|--------|------|-------------------------------|

|   | 31.2 | Section 302 CFO Certification |
|--------|------|-------------------------------|

|   | 32.1 | Section 906 CEO Certification |
|--------|------|-------------------------------|

|   | 32.2 | Section 906 CFO Certification |
|--------|------|-------------------------------|

 

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SIGNATURES

             

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

 

**ANTARES PHARMA, INC.**

             

             

| August 13, 2007 |   | /s/ Jack E. Stover |
|-----------------|--------|--------------------|

Jack E. Stover

President and Chief Executive Officer

             

             

| August 13, 2007 |   | /s/ Robert F. Apple |
|-----------------|--------|---------------------|

Robert F. Apple

Senior Vice President and Chief Financial Officer

             

 

 

 

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