##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-Q



---



QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(D) OF

THE SECURITIES EXCHANGE ACT OF 1934.



For the quarterly period ended June 30, 2004



Commission File Number 0-20945



---



ANTARES PHARMA, INC.



---



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



707 Eagleview
Boulevard, Suite 414

Exton, Pennsylvania

19341

(610) 458-6200



---



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.    Yes  x    No ̈



Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



The number of shares outstanding of the Registrants Common Stock, $.01 par value, as of August 10, 2004, was 38,081,796.



---



---

##### Table of Contents

ANTARES PHARMA, INC.



INDEX



|         |  |                                                                                                        |  |   
|-------- |  | ------------------------------------------------------------------------------------------------------ |  | --
|         |  | PAGE                                                                                                  
|PART I.  |  | FINANCIAL INFORMATION                                                                                  |  |   
|         |  |                                                                                                       
|ITEM 1.  |  | Financial Statements (Unaudited)                                                                       |  |   
|         |  |                                                                                                       
|         |  | Consolidated Balance Sheets, as of December 31, 2003 and June 30, 2004                                 |  | 3 
|         |  |                                                                                                       
|         |  | Consolidated Statements of Operations for the three months and six months ended June 30, 2003 and 2004 |  | 4 
|         |  |                                                                                                       
|         |  | Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2004                  |  | 5 
|         |  |                                                                                                       
|         |  | Notes to Consolidated Financial Statements                                                             |  | 6 
|         |  |                                                                                                       
|ITEM 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                  |  | 14
|         |  |                                                                                                       
|ITEM 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                             |  | 19
|         |  |                                                                                                       
|ITEM 4.  |  | Controls and Procedures                                                                                |  | 19
|         |  |                                                                                                       
|PART II. |  | OTHER INFORMATION                                                                                      |  | 21
|         |  |                                                                                                       
|         |  | SIGNATURES                                                                                             |  | 23



2



---

##### Table of Contents

ANTARES PHARMA, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



|                                                                                                                                                                       |  |                   |             |   |               |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ----------- | - | ------------- | - | ----------- | -
|                                                                                                                                                                       |  | December 31, 2003 |             |   | June 30, 2004 |  
|Assets                                                                                                                                                                 |  |                   |             |   |               |   |             |  
|Current Assets:                                                                                                                                                        |  |                   |             |   |               |   |             |  
|Cash                                                                                                                                                                   |  | $                 | 1,928,815   |   |               | $ | 3,170,301   |  
|Short-term investments                                                                                                                                                 |  |                   |            |   |               |   | 9,977,010   |  
|Accounts receivable, net of allowances of $21,500 and $21,400, respectively                                                                                            |  |                   | 481,886     |   |               |   | 221,454     |  
|Other receivables                                                                                                                                                      |  |                   | 7,947       |   |               |   | 96,366      |  
|Inventories                                                                                                                                                            |  |                   | 225,408     |   |               |   | 100,222     |  
|Prepaid expenses and other assets                                                                                                                                      |  |                   | 61,239      |   |               |   | 250,986     |  
|                                                                                                                                                                       |  |                   |             |   |               |   |             |  
|Total current assets                                                                                                                                                   |  |                   | 2,705,295   |   |               |   | 13,816,339  |  
|                                                                                                                                                                       |  |                  
|Equipment, furniture and fixtures, net                                                                                                                                 |  |                   | 801,369     |   |               |   | 648,523     |  
|Patent rights, net                                                                                                                                                     |  |                   | 1,214,356   |   |               |   | 1,249,399   |  
|Goodwill                                                                                                                                                               |  |                   | 1,095,355   |   |               |   | 1,095,355   |  
|Other assets                                                                                                                                                           |  |                   | 138,478     |   |               |   | 182,878     |  
|                                                                                                                                                                       |  |                   |             |   |               |   |             |  
|Total Assets                                                                                                                                                           |  | $                 | 5,954,853   |   |               | $ | 16,992,494  |  
|                                                                                                                                                                       |  |                   |             |   |               |   |             |  
|Liabilities and Shareholders Equity                                                                                                                                   |  |                   |             |   |               |   |             |  
|                                                                                                                                                                       |  |                  
|Current Liabilities:                                                                                                                                                   |  |                   |             |   |               |   |             |  
|Accounts payable                                                                                                                                                       |  | $                 | 253,336     |   |               | $ | 315,201     |  
|Accrued expenses and other liabilities                                                                                                                                 |  |                   | 827,676     |   |               |   | 754,903     |  
|Due to related parties                                                                                                                                                 |  |                   | 162,964     |   |               |   | 19,303      |  
|Capital lease obligations - current maturities                                                                                                                         |  |                   | 36,003      |   |               |   | 9,811       |  
|Deferred revenue - current                                                                                                                                             |  |                   | 809,945     |   |               |   | 825,071     |  
|                                                                                                                                                                       |  |                   |             |   |               |   |             |  
|Total current liabilities                                                                                                                                              |  |                   | 2,089,924   |   |               |   | 1,924,289   |  
|                                                                                                                                                                       |  |                  
|Deferred revenue - long term                                                                                                                                           |  |                   | 3,557,835   |   |               |   | 3,178,504   |  
|                                                                                                                                                                       |  |                   |             |   |               |   |             |  
|Total liabilities                                                                                                                                                      |  |                   | 5,647,759   |   |               |   | 5,102,793   |  
|                                                                                                                                                                       |  |                   |             |   |               |   |             |  
|Shareholders Equity:                                                                                                                                                  |  |                   |             |   |               |   |             |  
|Series A Convertible Preferred Stock: $0.01 par; authorized 10,000 shares; 1,450 and 1,500 issued and outstanding at December 31, 2003 and
June 30, 2004, respectively |  |                   | 15          |   |               |   | 15          |  
|Series D Convertible Preferred Stock: $0.01 par; authorized 245,000 shares; 243,749 issued and outstanding at December 31, 2003 and June 30,
2004                      |  |                   | 2,437       |   |               |   | 2,437       |  
|Common Stock: $0.01 par; authorized 100,000,000 shares; 19,831,296 and 37,976,796 issued and outstanding at December 31, 2003 and June 30,
2004, respectively          |  |                   | 198,313     |   |               |   | 379,768     |  
|Additional paid-in capital                                                                                                                                             |  |                   | 77,771,149  |   |               |   | 92,703,087  |  
|Accumulated deficit                                                                                                                                                    |  |                   | (74,126,619 | ) |               |   | (77,783,061 | )
|Prepaid license discount                                                                                                                                               |  |                   | (2,894,677  | ) |               |   | (2,796,552  | )
|Deferred compensation                                                                                                                                                  |  |                   | (23,688     | ) |               |   |            |  
|Accumulated other comprehensive loss                                                                                                                                   |  |                   | (619,836    | ) |               |   | (615,993    | )
|                                                                                                                                                                       |  |                   |             |   |               |   |             |  
|Total Shareholders Equity                                                                                                                                             |  |                   | 307,094     |   |               |   | 11,889,701  |  
|                                                                                                                                                                       |  |                   |             |   |               |   |             |  
|Total Liabilities and Shareholders Equity                                                                                                                             |  | $                 | 5,954,853   |   |               | $ | 16,992,494  |  
|                                                                                                                                                                       |  |                   |             |   |               |   |             |  



See accompanying notes
to consolidated financial statements.



3



---

##### Table of Contents

ANTARES PHARMA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



|                                                             |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------------------------------ |  | ----------------------------------- | ---------- | - | --------------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                             |  | For the Three Months Ended June 30, |            |   | For the Six Months Ended June 30, |  
|                                                             |  | 2003                                |            |   | 2004                              |   |            | 2003 |  |   | 2004       |  
|Revenue:                                                     |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Product sales                                                |  | $                                   | 696,522    |   |                                   | $ | 434,910    |      |  | $ | 1,375,558  |   |  | $ | 906,356    |  
|Development revenue                                          |  |                                     | 25,639     |   |                                   |   | 69,654     |      |  |   | 50,299     |   |  |   | 144,962    |  
|Licensing fees                                               |  |                                     | 168,388    |   |                                   |   | 168,803    |      |  |   | 329,836    |   |  |   | 329,165    |  
|Royalties                                                    |  |                                     | 17,753     |   |                                   |   | 18,013     |      |  |   | 62,735     |   |  |   | 36,718     |  
|                                                             |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Total revenue                                                |  |                                     | 908,302    |   |                                   |   | 691,380    |      |  |   | 1,818,428  |   |  |   | 1,417,201  |  
|                                                             |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Cost of sales:                                               |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Cost of product sales                                        |  |                                     | 563,560    |   |                                   |   | 359,283    |      |  |   | 1,059,383  |   |  |   | 704,091    |  
|Cost of development revenue                                  |  |                                     | 5,521      |   |                                   |   | 43,517     |      |  |   | 12,174     |   |  |   | 44,192     |  
|                                                             |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Total cost of sales                                          |  |                                     | 569,081    |   |                                   |   | 402,800    |      |  |   | 1,071,557  |   |  |   | 748,283    |  
|                                                             |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Gross margin                                                 |  |                                     | 339,221    |   |                                   |   | 288,580    |      |  |   | 746,871    |   |  |   | 668,918    |  
|                                                             |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Operating expenses:                                          |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Research and development                                     |  |                                     | 687,340    |   |                                   |   | 603,990    |      |  |   | 1,402,115  |   |  |   | 1,267,963  |  
|Sales and marketing                                          |  |                                     | 92,044     |   |                                   |   | 124,281    |      |  |   | 202,909    |   |  |   | 234,333    |  
|General and administrative                                   |  |                                     | 1,319,263  |   |                                   |   | 1,273,263  |      |  |   | 2,817,595  |   |  |   | 2,702,438  |  
|                                                             |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|                                                             |  |                                     | 2,098,647  |   |                                   |   | 2,001,534  |      |  |   | 4,422,619  |   |  |   | 4,204,734  |  
|                                                             |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Net operating loss                                           |  |                                     | (1,759,426 | ) |                                   |   | (1,712,954 | )    |  |   | (3,675,748 | ) |  |   | (3,535,816 | )
|                                                             |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Other income (expense):                                      |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Loss on debt extinguishments                                 |  |                                     |           |   |                                   |   |           |      |  |   | (885,770   | ) |  |   |           |  
|Loss on common stock warrants                                |  |                                     | (1,696,477 | ) |                                   |   |           |      |  |   | (1,580,766 | ) |  |   |           |  
|Interest income                                              |  |                                     | 5,785      |   |                                   |   | 32,943     |      |  |   | 9,667      |   |  |   | 45,612     |  
|Interest expense                                             |  |                                     | (226,823   | ) |                                   |   | (965       | )    |  |   | (537,303   | ) |  |   | (79,084    | )
|Foreign exchange gains (losses)                              |  |                                     | 14,450     |   |                                   |   | (9,273     | )    |  |   | (14,109    | ) |  |   | (10,740    | )
|Other, net                                                   |  |                                     | (7,070     | ) |                                   |   | (337       | )    |  |   | (2,983     | ) |  |   | (4,985     | )
|                                                             |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|                                                             |  |                                     | (1,910,135 | ) |                                   |   | 22,368     |      |  |   | (3,011,264 | ) |  |   | (49,197    | )
|                                                             |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Net loss                                                     |  |                                     | (3,669,561 | ) |                                   |   | (1,690,586 | )    |  |   | (6,687,012 | ) |  |   | (3,585,013 | )
|                                                             |  |                                     |            |  
|Preferred stock dividends                                    |  |                                     | (50,000    | ) |                                   |   | (71,429    | )    |  |   | (50,000    | ) |  |   | (71,429    | )
|                                                             |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Net loss applicable to common shares                         |  | $                                   | (3,719,561 | ) |                                   | $ | (1,762,015 | )    |  | $ | (6,737,012 | ) |  | $ | (3,656,442 | )
|                                                             |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Basic and diluted net loss per common share                  |  | $                                   | (0.31      | ) |                                   | $ | (0.05      | )    |  | $ | (0.57      | ) |  | $ | (0.11      | )
|                                                             |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Basic and diluted weighted average common shares outstanding |  |                                     | 12,026,954 |   |                                   |   | 37,943,664 |      |  |   | 11,882,424 |   |  |   | 33,285,470 |  
|                                                             |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  



See accompanying notes
to consolidated financial statements.



4



---

##### Table of Contents

ANTARES PHARMA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



|                                                                            |  |                                   |            |   |      |   |             |  
|--------------------------------------------------------------------------- |  | --------------------------------- | ---------- | - | ---- | - | ----------- | -
|                                                                            |  | For the Six Months Ended June 30, |           
|                                                                            |  | 2003                              |            |   | 2004 |  
|Cash flows from operating activities:                                       |  |                                   |            |   |      |   |             |  
|Net loss                                                                    |  | $                                 | (6,687,012 | ) |      | $ | (3,585,013  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                   |            |   |      |   |             |  
|Depreciation and amortization                                               |  |                                   | 429,205    |   |      |   | 312,558     |  
|Loss on disposal and abandonment of assets                                  |  |                                   | 5,576      |   |      |   | 5,701       |  
|Stock-based compensation expense                                            |  |                                   | 579,682    |   |      |   | 410,494     |  
|Noncash interest expense                                                    |  |                                   | 277,486    |   |      |   | 75,388      |  
|Provision for doubtful accounts                                             |  |                                   | 34,629     |   |      |   |            |  
|Loss on debt extinguishments                                                |  |                                   | 741,570    |   |      |   |            |  
|Losses on common stock warrants                                             |  |                                   | 1,580,766  |   |      |   |            |  
|Amortization of prepaid license discount                                    |  |                                   |           |   |      |   | 98,125      |  
|Changes in operating assets and liabilities:                                |  |                                   |            |   |      |   |             |  
|Accounts receivable                                                         |  |                                   | (290,585   | ) |      |   | 260,432     |  
|Other receivables                                                           |  |                                   | (76,456    | ) |      |   | (104,043    | )
|Inventories                                                                 |  |                                   | 259,632    |   |      |   | 125,186     |  
|Prepaid expenses and other assets                                           |  |                                   | (91,922    | ) |      |   | (189,747    | )
|Accounts payable                                                            |  |                                   | 238,719    |   |      |   | 61,865      |  
|Accrued expenses and other                                                  |  |                                   | 315,663    |   |      |   | (72,773     | )
|Deferred revenue                                                            |  |                                   | 1,087,172  |   |      |   | (364,205    | )
|Due to related parties                                                      |  |                                   | 110,321    |   |      |   | (143,361    | )
|Other                                                                       |  |                                   | (664       | ) |      |   | (44,400     | )
|                                                                            |  |                                   |            |   |      |   |             |  
|Net cash used in operating activities                                       |  |                                   | (1,486,218 | ) |      |   | (3,153,793  | )
|                                                                            |  |                                   |            |   |      |   |             |  
|Cash flows from investing activities:                                       |  |                                   |            |   |      |   |             |  
|Purchases of equipment, furniture and fixtures                              |  |                                   | (1,160     | ) |      |   | (105,640    | )
|Additions to patent rights                                                  |  |                                   | (105,805   | ) |      |   | (104,170    | )
|Purchase of short-term investments                                          |  |                                   |           |   |      |   | (9,961,386  | )
|                                                                            |  |                                   |            |   |      |   |             |  
|Net cash used in investing activities                                       |  |                                   | (106,965   | ) |      |   | (10,171,196 | )
|                                                                            |  |                                   |            |   |      |   |             |  
|Cash flows from financing activities:                                       |  |                                   |            |   |      |   |             |  
|Proceeds from sales of common stock                                         |  |                                   |           |   |      |   | 13,753,400  |  
|Proceeds from exercise of warrants                                          |  |                                   |           |   |      |   | 847,500     |  
|Proceeds from loans from shareholders                                       |  |                                   | 1,600,000  |   |      |   |            |  
|Proceeds from loans from debenture holder                                   |  |                                   | 621,025    |   |      |   |            |  
|Principal payments on convertible debentures                                |  |                                   | (464,000   | ) |      |   |            |  
|Principal payments on capital lease obligations                             |  |                                   | (66,214    | ) |      |   | (25,502     | )
|Payment of preferred stock dividends                                        |  |                                   |           |   |      |   | (21,429     | )
|                                                                            |  |                                   |            |   |      |   |             |  
|Net cash provided by financing activities                                   |  |                                   | 1,690,811  |   |      |   | 14,553,969  |  
|                                                                            |  |                                   |            |   |      |   |             |  
|Effect of exchange rate changes on cash and cash equivalents                |  |                                   | (60,162    | ) |      |   | 12,506      |  
|                                                                            |  |                                   |            |   |      |   |             |  
|Net increase in cash and cash equivalents                                   |  |                                   | 37,466     |   |      |   | 1,241,486   |  
|Cash and cash equivalents:                                                  |  |                                   |            |   |      |   |             |  
|Beginning of period                                                         |  |                                   | 267,945    |   |      |   | 1,928,815   |  
|                                                                            |  |                                   |            |   |      |   |             |  
|End of period                                                               |  | $                                 | 305,411    |   |      | $ | 3,170,301   |  
|                                                                            |  |                                   |            |   |      |   |             |  
|Supplemental cash flow information:                                         |  |                                   |            |   |      |   |             |  
|Cash paid during the period for interest                                    |  | $                                 | 17,496     |   |      | $ | 3,696       |  



See accompanying notes
to consolidated financial statements.



5



---

##### Table of Contents

ANTARES PHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

June 30, 2003 and 2004



|1. | 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 our Annual Report on Form 10-K for the year ended December 31, 2003. Operating results for the six-month period ended June 30, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31,
2004.



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 they address revenue recognition, foreign currency translation, 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, 2003, as amended. The Company has made no changes to these policies during 2004.



|2. | Short-Term Investments
|-- | ----------------------



All short-term investments are commercial paper or agency discount notes that mature within four to six months 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, 2004 the securities have a fair value of $9,966,697 and a carrying value of
$9,977,010.



|3. | Inventories
|-- | -----------



Inventories consist of the following:



|               |  |                   |         |               |   |        
|-------------- |  | ----------------- | ------- | ------------- | - | -------
|               |  | December 31, 2003 |         | June 30, 2004
|Raw material   |  | $                 | 40,420  |               | $ | 23,225 
|Finished goods |  |                   | 184,988 |               |   | 76,997 
|               |  |                   |         |               |   |        
|               |  | $                 | 225,408 |               | $ | 100,222
|               |  |                   |         |               |   |        



6



---

##### Table of Contents

ANTARES PHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

June 30, 2003 and 2004



|4. | Product Warranty
|-- | ----------------



The Company provides a warranty on its needle-free injector devices. Warranty terms for devices sold to end-users by dealers and distributors are included
in the device instruction manual included with each device sold. Warranty terms for devices sold to corporate customers who provide their own warranty terms to end-users are included in the contracts with the corporate customers. The Company is
obligated to repair or replace, at the Companys option, a device found to be defective due to use of defective materials or faulty workmanship. The warranty does not apply to any product that has been used in violation of instructions as to
the use of the product or to any product that has been neglected, altered, abused or used for a purpose other than the one for which it was manufactured. The warranty also does not apply to any damage or defect caused by unauthorized repair or the
use of unauthorized parts. Warranty periods on devices range from 12 to 30 months from either the date of retail sale of the device by a dealer or distributor or the date of shipment to a customer if specified by contract. The Company recognizes the
estimated cost of warranty obligations at the time the products are shipped based on historical claims incurred by the Company. Actual warranty claim costs could differ from these estimates. Warranty liability activity is as follows:



|     |  |                              |         |                    |   |                 |  |                    |        |  |   |        
|---- |  | ---------------------------- | ------- | ------------------ | - | --------------- |  | ------------------ | ------ |  | - | -------
|     |  | Balance at Beginning of Year |         | WarrantyProvisions |   | Warranty Claims |  | Balance at June 30
|2003 |  | $                            | 179,000 |                    | $ | 6,998           |  | $                  | 59,998 |  | $ | 126,000
|2004 |  | $                            | 50,000  |                    | $ | 1,714           |  | $                  | 1,714  |  | $ | 50,000 



|5. | Convertible Debentures
|-- | ----------------------



On February 7, 2003, the Company completed a restructuring of its 10% debentures previously sold to four primary investors. Specifically, as part of this
restructuring, on January 24, 2003 and January 31, 2003, the Company borrowed an aggregate of $621,025 from Xmark Funds. The Company used the proceeds of these borrowings to repurchase $464,000 principal amount of the 10% debentures previously sold
to the two original 10% debenture holders who had converted $536,000 of principal into common stock, and to pay a repurchase premium of $144,200 and accrued interest of $12,825. As additional repurchase compensation, the Company issued warrants to
one of the two original 10% debenture holders and paid $5,000, in lieu of warrants, to the other. The Company recognized a debt extinguishment loss of $885,770 in 2003 related to these transactions. Thereafter, in exchange for the surrender and
cancellation of the promissory notes, the Company issued to Xmark Funds 8% Senior Secured Convertible Debentures in the same principal amount of the promissory notes. The Company also exchanged Amended and Restated 8% Senior Secured Convertible
Debentures for the remaining outstanding principal and accrued interest of $955,000 and $37,230, respectively, of the original 10% debentures. The aggregate principal amount of the 8% debentures was $1,613,255. The 8% debentures contained terms
similar to the 10% debentures, except that the 8% debentures included a fixed conversion price of $.50 per share and an interest rate of 8% per annum. The 8% debentures were due March 31, 2004. Similar to the 10% debentures, the Company granted a
senior security interest in substantially all of its assets to the holders of the 8% debentures. In connection with this



7



---

##### Table of Contents

ANTARES PHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

June 30, 2003 and 2004



|5. | Convertible Debentures (Continued)
|-- | ----------------------------------



restructuring, the Company also issued to the holders of the 8% debentures five-year warrants to purchase an aggregate of 2,932,500 shares of the
Companys common stock at an exercise price of $0.55 per share. The warrants were subject to defined indemnifications if the underlying common shares were not fully tradable and the warrant holders incurred losses due to their inability to sell
these shares. The Company analyzed the terms and conditions of the warrants and determined that the warrants should be classified as debt under EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Companys Own Stock. As such, the Company was required to mark-to-market these warrants at each reporting period with changes in the warrant values being recorded in the consolidated statement of operations. The warrants were recorded with an
initial fair value on January 31, 2003 of $1,142,442, determined using the Black Scholes option pricing model, and were adjusted to their fair value at June 30, 2003 of $2,723,208, with the difference of $1,580,766 being recorded as a loss on common
stock warrants in the six months ended June 30, 2003. On August 12, 2003, the warrants were adjusted to their fair value of $4,437,269, when certain terms and conditions of the warrant agreements were amended, causing the warrants to be classified
as equity rather than as debt as of the date of the amendment and ending the requirement to adjust the market value of the warrants each reporting period.



The aggregate original principal amount of the 8% debentures of $1,613,255 was held by two debenture holders in the amounts of $469,513 and $1,143,742,
respectively. The Company analyzed each of the restructuring transactions for the two 8% debenture holders to determine the proper accounting treatment. The effective borrowing rate on $469,513 of restructured debentures was determined to be less
than the effective borrowing rate on the original debentures immediately prior to the restructuring. As a result, the Company determined that these debentures should be accounted for as a troubled debt restructuring. The net carrying value of these
debentures at the time of the restructuring was reduced from $140,659 to $97,710 resulting in a debt discount of $371,803 that was being amortized to interest expense through March 31, 2004 using the effective interest method. The transaction
related to the remaining $1,143,742 was accounted for as a debt extinguishment under EITF 96-19. The restructured debentures were determined to be substantially different from the original debentures because the present value of the cash flows under
the terms of the restructured debentures was more than 10 percent different from the present value of the remaining cash flows under the terms of the original debentures. The debentures were recorded at a fair value of $1,276,339, and the premium of
$132,597 was being amortized monthly through March 31, 2004 using the effective interest method. The unamortized discount and premium were written off on September 12, 2003, when the debentures were exchanged for common and preferred stock.



|6. | Shareholders Equity
|-- | --------------------



Common Stock



During the first six months of 2003 the Company issued 881,112 shares of common stock due to conversions of convertible debentures.



8



---

##### Table of Contents

ANTARES PHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

June 30, 2003 and 2004



|6. | Shareholders Equity (Continued)
|-- | --------------------------------



During the three-month and six-month periods ended June 30, 2003, the Company issued to consultants and professional service organizations for services
rendered 290,125 and 519,634 shares of common stock, respectively, and recognized expense of $159,977 and $236,295, respectively. During the three-month and six-month periods ended June 30, 2004 the Company issued to consultants and professional
service organizations for services rendered 15,000 and 30,000 shares of common stock, respectively, and recognized expense of $15,800 and $33,550, respectively. During the three-month period ended June 30, 2004 the Company issued 15,000 shares of
common stock to its new director, Dr. Rajesh Shrotriya, recognizing expense of $13,500.



Common Stock Option and Warrant Grants



During the first six months of 2003 and 2004 the Company issued options and/or warrants to purchase 300,000 and 400,000 shares, respectively, of the Companys common stock at weighted average exercise prices of
$.55 and $1.18 per share, respectively, as compensation to non-employees for professional services. The Company recognized expense of $134,866 and $254,997 in 2003 and 2004, respectively, in connection with the options and warrants.



Private Placements



During the six-month period ended June 30, 2004 the Company received net
proceeds of $13,753,400 in three private placements of its common stock. A total of 15,120,000 shares of common stock were sold to investors at a price of $1.00 per share. The Company also issued to the investors five-year warrants to purchase an
aggregate of 5,039,994 shares of common stock at an exercise price of $1.25 per share. Additionally, warrants for the purchase of 1,612,000 shares of common stock at an exercise price of $1.00 per share were issued to the placement agent as a
commission.



Warrant Exercises



During the six-month period ended June 30, 2004 the Company received
proceeds of $847,500 in connection with the issuance of 2,980,500 shares of common stock from the exercise of warrants. Of the shares issued, 2,932,500 were in connection with warrants exercised after the Company had offered a 30% discount in the
exercise price to holders of warrants with an exercise price of under $1.00. In connection with the exercise of these warrants the Company recognized interest expense of $75,388, which represents the difference between the fair values of the
warrants on the exercise date before and after applying the discount. Fair value was determined using the Black Scholes option pricing model.



Shareholder Loan Warrant Grant



During the six-month period ended June 30, 2003 the Company issued warrants to Jacques Gonella, its largest shareholder, for the purchase of 2,400,000
shares of common stock at an exercise price of $.55 per share in connection with Term Notes totaling $1,600,000.



9



---

##### Table of Contents

ANTARES PHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

June 30, 2003 and 2004



|6. | Shareholders Equity (Continued)
|-- | --------------------------------



Restricted Stock



Roger G. Harrison, Ph.D., was appointed Chief Executive Officer of Antares Pharma, Inc., effective March 12, 2001. The terms of the employment agreement
with Dr. Harrison included the issuance of up to 216,000 restricted shares of common stock upon the achievement of certain time-based and performance-based milestones. The time-based milestones have been achieved and the Company issued Dr. Harrison
48,000 and 40,000 restricted shares in April 2001 and March 2002, respectively. All restricted shares issued under the terms of the employment agreement vested on March 12, 2004. The Company had recorded deferred compensation expense of $341,000,
the aggregate market value of the 88,000 shares at the measurement date. Compensation expense was recognized ratably over the three-year vesting period. Compensation expense of $56,832 and $23,688 was recognized in connection with these shares
during the six-month periods ended June 30, 2003 and 2004, respectively.



|7. | Reconciliation of Loss and Share Amounts Used in EPS Calculation
|-- | ----------------------------------------------------------------



Basic loss per common share is computed by dividing net loss applicable to common shareholders 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 following table discloses the basic and diluted loss per share. In addition, as the Company is in a
loss position, the table discloses the stock options and warrants outstanding at the end of each period which were excluded from the weighted average shares outstanding as their impact is anti-dilutive.



|                                                         |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|-------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                         |  | Three Months Ended June 30, |            |   | Six Months Ended June 30, |  
|                                                         |  | 2003                        |            |   | 2004                      |   |            | 2003 |  |   | 2004       |  
|Net loss applicable to common shares                     |  | $                           | (3,719,561 | ) |                           | $ | (1,762,015 | )    |  | $ | (6,737,012 | ) |  | $ | (3,656,442 | )
|Basic and diluted weighted avg common shares outstanding |  |                             | 12,026,954 |   |                           |   | 37,943,664 |      |  |   | 11,882,424 |   |  |   | 33,285,470 |  
|                                                         |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic and diluted net loss per common share              |  | $                           | (0.31      | ) |                           | $ | (0.05      | )    |  | $ | (0.57      | ) |  | $ | (0.11      | )
|                                                         |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  



Potentially dilutive
securities at June 30, 2003 and 2004, excluded from dilutive loss per share as their effect is anti-dilutive, are as follows:



|                                    |  |                                     |            |      |   |           
|----------------------------------- |  | ----------------------------------- | ---------- | ---- | - | ----------
|                                    |  | Three and Six Months Ended June 30,
|                                    |  | 2003                                |            | 2004
|Stock options and warrants          |  |                                     | 10,281,667 |      |   | 19,737,700
|                                    |  |                                     |            |      |   |           
|Principal of convertible debentures |  | $                                   | 1,666,710  |      | $ |          
|                                    |  |                                     |            |      |   |           



The stock options and
warrants outstanding at June 30, 2004 had a weighted average exercise price of $2.10.



10



---

##### Table of Contents

ANTARES PHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

June 30, 2003 and 2004



|8. | Industry Segment and Operations by Geographic Areas
|-- | ---------------------------------------------------



The Company is primarily engaged in development of drug delivery transdermal and transmucosal pharmaceutical products and drug delivery injection devices
and supplies. These operations are considered to be one segment. The geographic distributions of the Companys identifiable assets and revenues are summarized in the following table:



We have operating assets located in two countries as follows:



|                         |  |                   |           |               |   |           
|------------------------ |  | ----------------- | --------- | ------------- | - | ----------
|                         |  | December 31, 2003 |           | June 30, 2004
|Switzerland              |  | $                 | 1,278,481 |               | $ | 1,152,036 
|United States of America |  |                   | 4,676,372 |               |   | 15,840,458
|                         |  |                   |           |               |   |           
|                         |  | $                 | 5,954,853 |               | $ | 16,992,494
|                         |  |                   |           |               |   |           



Revenues by customer
location are summarized as follows:



|                         |  |                             |         |                           |   |         |  |      |           |  |   |          
|------------------------ |  | --------------------------- | ------- | ------------------------- | - | ------- |  | ---- | --------- |  | - | ---------
|                         |  | Three Months Ended June 30, |         | Six Months Ended June 30,
|                         |  | 2003                        |         | 2004                      |   | 2003    |  | 2004
|United States of America |  | $                           | 180,876 |                           | $ | 112,747 |  | $    | 357,993   |  | $ | 229,071  
|Europe                   |  |                             | 684,285 |                           |   | 462,089 |  |      | 1,378,153 |  |   | 1,033,720
|Other                    |  |                             | 43,141  |                           |   | 116,544 |  |      | 82,282    |  |   | 154,410  
|                         |  |                             |         |                           |   |         |  |      |           |  |   |          
|                         |  | $                           | 908,302 |                           | $ | 691,380 |  | $    | 1,818,428 |  | $ | 1,417,201
|                         |  |                             |         |                           |   |         |  |      |           |  |   |          



The following tables
summarize significant customers comprising 10% or more of total revenue:



|                    |  |                             |         |                           |   |         |  |      |           |  |   |        
|------------------- |  | --------------------------- | ------- | ------------------------- | - | ------- |  | ---- | --------- |  | - | -------
|                    |  | Three Months Ended June 30, |         | Six Months Ended June 30,
|                    |  | 2003                        |         | 2004                      |   | 2003    |  | 2004
|Ferring             |  | $                           | 609,462 |                           | $ | 278,960 |  | $    | 1,214,729 |  | $ | 671,152
|BioSante            |  |                             | 117,913 |                           |   | 65,098  |  |      | 199,018   |  |   | 130,980
|Solvay              |  |                             | 77,787  |                           |   | 81,486  |  |      | 153,740   |  |   | 163,955
|JCR Pharmaceuticals |  |                             | 11,512  |                           |   | 84,314  |  |      | 11,512    |  |   | 86,189 



|9. | Comprehensive Loss
|-- | ------------------



|                                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                            |  | Three Months Ended June 30, |            |   | Six Months Ended June 30, |  
|                                            |  | 2003                        |            |   | 2004                      |   |            | 2003 |  |   | 2004       |  
|Net loss                                    |  | $                           | (3,669,561 | ) |                           | $ | (1,690,586 | )    |  | $ | (6,687,012 | ) |  | $ | (3,585,013 | )
|Change in cumulative translation adjustment |  |                             | (7,532     | ) |                           |   | (10,824    | )    |  |   | (40,375    | ) |  |   | 3,843      |  
|                                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Comprehensive loss                          |  | $                           | (3,677,093 | ) |                           | $ | (1,701,410 | )    |  | $ | (6,727,387 | ) |  | $ | (3,581,170 | )
|                                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  



11



---

##### Table of Contents

ANTARES PHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

June 30, 2003 and 2004



|10. | Stock Based Compensation
|--- | ------------------------



The Company applies Accounting Principles Board, Opinion 25, Accounting for Stock Issued to Employees, and related interpretations in accounting
for stock plans. Accordingly, no compensation expense has been recognized for stock-based compensation plans. Had compensation cost been determined based on the fair value at the grant date for stock options under SFAS No. 123, Accounting and
Disclosure of Stock-Based Compensation, the net loss applicable to common shares and loss per common share would have increased to the pro-forma amounts shown below:



|                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|-------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                             |  | Three Months Ended June 30, |            |   | Six Months Ended June 30, |  
|                                             |  | 2003                        |            |   | 2004                      |   |            | 2003 |  |   | 2004       |  
|Net loss applicable to common shares:        |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|As reported                                  |  | $                           | (3,719,561 | ) |                           | $ | (1,762,015 | )    |  | $ | (6,737,012 | ) |  | $ | (3,656,442 | )
|Intrinsic value of stock options granted     |  |                             |           |   |                           |   | 42,193     |      |  |   |           |   |  |   | 85,058     |  
|Fair-value method compensation expense       |  |                             | (66,395    | ) |                           |   | (278,835   | )    |  |   | (133,570   | ) |  |   | (583,353   | )
|                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Pro forma                                    |  | $                           | (3,785,956 | ) |                           | $ | (1,998,657 | )    |  | $ | (6,870,582 | ) |  | $ | (4,154,737 | )
|                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic and diluted net loss per common share: |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|As reported                                  |  | $                           | (0.31      | ) |                           | $ | (0.05      | )    |  | $ | (0.57      | ) |  | $ | (0.11      | )
|Intrinsic value of stock options granted     |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Fair-value method compensation expense       |  |                             |           |   |                           |   |           |      |  |   | (0.01      | ) |  |   | (0.01      | )
|                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Pro forma                                    |  | $                           | (0.31      | ) |                           | $ | (0.05      | )    |  | $ | (0.58      | ) |  | $ | (0.12      | )
|                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  



The fair value of
stock options granted was calculated using the Black-Scholes option pricing model with the following assumptions:



|                               |  |                                     |   |  |       |  
|------------------------------ |  | ----------------------------------- | - |  | ----- | -
|                               |  | Three and Six Months Ended June 30, |  
|                               |  | 2003                                |   |  | 2004  |  
|Risk-free interest rate        |  | 3.1                                 | % |  | 3.4   | %
|Annualized volatility          |  | 140.0                               | % |  | 143.0 | %
|Weighted average expected life |  | 5.0                                 |   |  | 5.0   |  
|Expected dividend yield        |  | 0.0                                 | % |  | 0.0   | %



|11. | Related Party Transactions
|--- | --------------------------



Effective February 1, 2001, the Company entered into a consulting agreement with JG Consulting AG, a company owned by the Companys largest
shareholder, Dr. Jacques Gonella. This agreement was terminated as of December 31, 2003. In connection with this agreement, the Company recognized expense of $46,500 and $93,000 in the three-month and six-month periods of 2003, respectively. The
Company owed $162,595 to JG Consulting AG at December 31, 2003, which was paid in the first half of 2004.



12



---

##### Table of Contents

ANTARES PHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

June 30, 2003 and 2004



|11. | Related Party Transactions (Continued)
|--- | --------------------------------------



During the six months ended June 30, 2003 the Company recognized expense of $10,500 for consulting services provided by John Gogol, one of the
Companys board members. The Company had a payable to Mr. Gogol at June 30, 2003 of $10,500.



During the first six months of 2003 the Company borrowed from its largest shareholder $1,600,000 under various Term Note agreements. This amount and other
borrowings from this shareholder, along with accrued interest, were converted into common stock on September 12, 2003. At June 30, 2003 notes payable to this shareholder, excluding applicable debt discounts, totaled $2,300,000.



At June 30, 2004 the Company owes $19,303 to various officers and directors
for travel related expenses.



|12. | Litigation
|--- | ----------



On September 25, 2003, Josephberg Grosz & Company (JGC) notified the Company that it intends to commence an arbitration action against the
Company in New York State. The Company and JGC entered into a letter agreement on April 8, 2002. JGC claims that, pursuant to the letter agreement the Company owes it seven percent of the proceeds received by the Company, as well as ten percent of
various shares and securities issued by the Company, in connection with up to $6 million in financing received by the Company since April 5, 2002. The Company disputes that it owes any amounts to JGC and intends to vigorously defend this claim. The
Company has recorded no accrual in connection with this claim.



|13. | Subsequent Event
|--- | ----------------



On July 22, 2004 the Company entered into an employment agreement with Jack E. Stover, who was appointed President and Chief Operating Officer. In
connection with the execution of this agreement, the Company granted to Mr. Stover an option to purchase 500,000 shares of common stock and issued him 50,000 shares of fully vested common stock and 50,000 shares of common stock that will become
fully vested on the first anniversary of his employment.



13



---

##### Table of Contents

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



Overview



The Company develops, produces and markets pharmaceutical delivery solutions, including needle-free and mini-needle injector systems, gel technologies and transdermal products. 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 needle-free and mini-needle injector systems and manufactures and markets needle-free injection
devices and disposables. These operations, including all manufacturing and substantially all administrative activities, are located in Minneapolis, Minnesota and are referred to as Antares/Minnesota. The Company also has operations located in Basel,
Switzerland, which consists of administration and facilities for the research and development of transdermal and oral fast melt tablet products. The Swiss operations, referred to as Antares/Switzerland, have historically focused on research and
development. Antares/Switzerland has signed a number of license agreements with pharmaceutical companies for the application of its drug delivery systems and began generating revenue in 1999 with the recognition of license revenues.



The Company operates in the specialized drug delivery sector of the pharmaceutical industry.
Companies in this sector generally bring technology and know-how in the area of drug formulation and/or delivery devices to pharmaceutical manufacturers through licensing and development agreements. The Company views the pharmaceutical and
biotechnology company as its primary customer. The Company has negotiated and executed licensing relationships in the growth hormone segment (needle-free devices in Europe and Asia) and the transdermal hormone gels segment (several development
programs in place worldwide, including the United States and Europe). In addition, the Company continues to market needle-free devices for the home administration of insulin in the U.S. market though distributors, and has licensed its technology in
the diabetes and obesity fields to Eli Lilly and Company.



The Company has not
historically and does not currently generate enough revenue to provide the cash needed to support its operations, and has continued to operate by raising capital and issuing debt. In order to better position the Company to take advantage of
potential growth opportunities and to fund future operations, the Company raised additional capital in the first quarter of 2004. The Company received net proceeds of $13,753,400 in three private placements of its common stock in which a total of
15,120,000 shares of common stock were sold at a price of $1.00 per share. Additionally, the Company issued five-year warrants to purchase an aggregate of 5,039,994 shares of common stock at an exercise price of $1.25 per share. During the first
half of 2004 the Company has also received proceeds of $847,500 in connection with the exercise of warrants for 2,980,500 shares of common stock.



The Company is reporting a net loss of $3,585,013 for the first half of 2004 and expects to report a net loss for the year ending December 31, 2004, 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, the progress of research and development
programs and the receipt of revenues from sales of products.



14



---

##### Table of Contents

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, foreign currency translation, 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, 2003, as amended. The Company has made no changes to these
policies during 2004.



Three and Six Months Ended June 30, 2003 and 2004



Revenues



Total revenues for the three and six months ended June 30, 2004 were $691,380 and
$1,417,201, respectively, compared to revenues for the same prior-year periods of $908,302 and $1,818,428, respectively. The decrease in the second quarter of $216,922, or 24%, and the decrease in the first half of 2004 of $401,227, or 22%, was
primarily due to a decrease in product sales to the Companys major customer, Ferring, who was building inventory in the first half of 2003 for the launch of the Medi-Ject Vision device into new markets and in anticipation of a temporary supply
interruption as the Company outsourced its assembly operations during the second quarter of 2003.



Development revenue increased by $44,015 or 172% and $94,663 or 188% for the three months and six months ended June 30, 2004 as compared to the prior-year periods. The increases were primarily due to development fees
related to an agreement that originated in the third quarter of 2003. Licensing fees were basically unchanged for the three and six-month periods ended June 30, 2004 compared to the prior-year periods. Licensing fees increases of approximately
$49,000 and $97,000, respectively, for the three and six-month periods ended June 30, 2004 as compared to the prior-year periods were equally offset by prepaid license discount amortization. The prepaid license discount, a contra equity account, was
recorded at the fair value of the warrants issued to Eli Lilly and Company in the third quarter of 2003 in connection with its license agreement and is being amortized against revenue on a straight line basis over the life of the agreement.



Royalty revenue is related to the sale of needle-free injection devices to
Ferring under the License Agreement dated January 22, 2003. Royalty revenue was relatively unchanged in the second quarter of 2004 compared to 2003 due to the sale of a similar number of devices each year. Royalty revenue decreased for the six-month
period of 2004 compared to 2003 by $26,017 due to fewer device sales in the first quarter of 2004 compared to the first quarter of 2003 when Ferring was building device inventory for the launch of the device into new markets.



15



---

##### Table of Contents

Cost of Sales



The cost of product sales are related to injection devices and disposable products. Cost of product sales as a percentage of product sales increased to 83% in the second
quarter of 2004 from 81% for the second quarter of 2003, and increased 1% to 78% for the first six months of 2004 from 77% for the first six months of 2003. The increase in the second quarter and first half of 2004 cost of sales percentage was
primarily due to a $45,000 write-down for excess inventory related to disposable components used with older injector device models. The increases were partially offset by decreases in overhead expenses, due to the outsourcing of assembly operations,
which exceeded the increase in external production costs.



The cost of
development revenue consists of labor costs and an allocation of certain research and development expenses. Cost of development revenue as a percentage of development revenue was 62.5% and 30.5%, respectively, for the three and six-month periods
ended June 30, 2004, and for the same periods of the prior year were 21.5% and 24.2%, respectively. The increase in the second quarter of 2004 as compared to 2003 was primarily due to a year-to-date expense allocation made in the second quarter of
2004.



Research and Development



Research and development expenses totaled $603,990 and $1,267,963 in the three and six-month
periods ended June 30, 2004, respectively, compared to $687,340 and $1,402,115 in the same prior-year periods. The decreases in the second quarter and first half of 2004 compared to the same periods of 2003 were primarily due to decreased rent
resulting from space reductions at both the Minnesota and Swiss facilities and due to compensated development programs in 2004 that utilized a portion of payroll and other expenses. The decreases were partially offset by increases in travel,
prototyping tooling and supplies, clinical expenses and repairs and maintenance.



Sales and Marketing



Sales and marketing expenses totaled
$124,281 and $234,333 in the three and six-month periods ended June 30, 2004, respectively, compared to $92,044 and $202,909 in the same prior-year periods. The increases in the current year three and six-month periods as compared to the prior-year
periods of $32,237 or 35%, and $31,424 or 15%, respectively, are primarily due to increases in travel and legal expenses related to increased business development activities.



General and Administrative



General and administrative expenses totaled $1,273,263 and $2,702,438 in the three and six-month periods ended June 30, 2004, respectively, compared to $1,319,263 and
$2,817,595 in the same periods of the prior year. The decrease of $46,000, or 3%, in the second quarter of 2004 and the decrease of $115,157, or 4%, in the first six months of 2004 as compared to the same periods in 2003 were due primarily to
decreases in payroll and investor relations expenses, partially offset by increases in travel, professional services and insurance expenses. Approximately $300,000 and $400,000 of the total professional services and investor relations expenses in
the first half of 2004 and 2003, respectively, were non-cash expenses as a result of issuing common stock, warrants and options in exchange for services.



16



---

##### Table of Contents

Other Income (Expense)



Net other income (expense) changed from $1,910,135 of net expense in the second quarter of 2003 to income of $22,368 in the second quarter of 2004, and decreased from
net expense of $3,011,264 for the first six months of 2003 to $49,197 in 2004. The change in the second quarter is primarily due to the fact that the second quarter of 2003 included losses on common stock warrants of $1,696,477, while there were
none in 2004, and the 2003 second quarter included interest expense of $226,823, primarily from the convertible debentures, while there was only $965 of interest expense in 2004. In addition, the second quarter of 2004 includes $32,943 of interest
income compared to $5,785 in the same period of 2003, due to a significant increase in cash and short-term investments in 2004 from proceeds of the private placement in the first quarter of 2004. In the first half of 2004 compared to 2003 net other
expense decreased $2,962,067. The first half of 2003 included losses on debt extinguishments and common stock warrants of $885,770 and $1,580,766, respectively, compared to none in 2004, and the first half of 2003 included interest expense of
$537,303 compared to $79,084 in the first half of 2004. Interest expense in the first half of 2003 was due primarily to both amortization of discounts and interest accruals related to the convertible debentures and the term notes with the
Companys largest shareholder. Interest expense in the first half of 2004 was mainly due to expense of $75,388 recognized in connection with warrants originally issued to convertible debenture holders that were exercised at a discounted
exercise price. The increase in interest income of $35,945 in the first half of 2004 compared to 2003 was due to the increase in cash and short-term investments in 2004 compared to 2003.



Net loss per common share



The net loss per common share for the three and six-month periods ended June 30, 2004 of $0.05 and $0.11, respectively, were less than the net loss per common share of
$0.31 and $0.57, respectively, for the same prior-year periods. The decreases were due to smaller losses in 2004 than in 2003 and due to an increase in the number of weighted average shares outstanding in the 2004 periods as a result of the private
placements in the third quarter of 2003 and the first quarter of 2004.



Cash
Flows



Operating Activities



Net cash used in operating activities increased to $3,153,793 for the first six months of
2004 from $1,486,218 for the first six months of 2003, a change of $1,667,575. This increase in cash used was due to an increase in cash used for operating assets and liabilities of $2,022,926 in 2004 compared to 2003, partially offset by a decrease
in net loss net of noncash expenses of $355,351 in 2004 compared to 2003.



Noncash expenses decreased by $2,746,648 to $902,266 in the first six months of 2004 compared to $3,648,914 in the first six months of 2003. The decrease was mainly due to losses on common stock warrants and losses on debt extinguishments
of $1,580,766 and $741,570, respectively, that occurred in 2003 but not in 2004. The noncash expenses in the first half of 2004 were mainly due to stock based compensation expense of $410,494, depreciation and amortization of $312,558, amortization
of prepaid license discount of $98,125 and noncash interest expense of $75,388. The remaining noncash expenses in the first half of 2003 were mainly due to stock based compensation expense of $579,682, noncash interest expense of $277,486 and
depreciation and amortization of $429,205.



The change in operating assets and
liabilities in the first half of 2004 resulted in a net decrease to cash of $471,046, comprised of increases in other receivables and prepaid expenses of $104,043 and $189,747,



17



---

##### Table of Contents

respectively, and decreases in accrued expenses, deferred revenue, due to related parties and other of $72,773, $364,205,
$143,361 and $44,400, respectively, partially offset by decreases in accounts receivable and inventory of $260,432 and $125,186, respectively, and an increase in accounts payable of $61,865. The decrease in deferred revenue of $364,205 is due to
amortization of previously deferred amounts that exceeded new amounts received and deferred under license or development agreements. The decrease in related parties was due mainly to the payment of amounts due to a consulting company owned by the
Companys largest shareholder for services rendered in 2003. The decrease in accounts receivable resulted primarily from the timing of collections versus billings. The decrease in inventory is mainly the result of the timing of purchases of
finished goods from the third-party supplier versus shipments to customers. At the end of 2003 the Company had a large amount of finished goods in inventory that was shipped to a customer in early January 2004, while the same level of finished goods
inventory did not exist at June 30, 2004. The change in operating assets and liabilities in the first half of 2003 resulted in a net increase to cash of $1,551,880, comprised mainly of decreased inventory of $259,632 and increases in accounts
payable, accrued expenses, deferred revenue and due to related parties of $238,719, $315,663, $1,087,172 and $110,321, respectively, offset by increases in accounts receivable, other receivables and prepaid expenses and other assets of $290,585,
$76,456 and $91,922, respectively. The decrease in inventory in 2003 was primarily due to the outsourcing of assembly operations during the second quarter of 2003 to a third-party supplier that carried a large portion of the inventory previously
carried by the Company. Accounts payable and accrued expenses were growing due to a shortage of available cash resources at that time. The increase in deferred revenue in 2003 is mainly due to the receipt of $1,073,449 from Ferring in connection
with the License Agreement dated January 22, 2003. The increase in accounts receivable in 2003 was due to a temporary increase in sales to the Companys largest customer, Ferring, who was building inventory in the first half of 2003 for the
launch of the Medi-Ject Vision device into new markets and in anticipation of a possible supply interruption as the Company outsourced its assembly operations during the second quarter of 2003.



Investing Activities



Net cash used in investing activities increased to $10,171,196 in the first six months of 2004 from $106,965 in the first six months of
2003. Purchases of equipment, furniture and fixtures in the first half of 2004 and 2003 totaled $105,640 and $1,160, respectively, and expenditures for patent acquisition and development totaled $104,170 and $105,805, respectively. The increase in
purchases of equipment, furniture and fixture in 2004 compared to 2003 is primarily due to office equipment and leasehold improvement expenditures related to the Minnesota operations move to a new facility in April of 2004 and to the acquisition of
production tooling. The Company expects to purchase additional production tooling by the end of 2004. In 2004 the Company purchased $9,961,386 of short-term debt securities after receiving proceeds from the private placement of common stock in the
first quarter.



Financing Activities



Net cash provided by financing activities increased to $14,553,969 in the first six months
of 2004 from $1,690,811 in the first six months of 2003, due primarily to net proceeds of $13,753,400 related to private placements of common stock in the first quarter of 2004. Cash was also generated in the first half of 2004 from proceeds from
exercise of warrants of $847,500 and was reduced by principal payments on capital lease obligations of $25,502 and payment of preferred stock dividends of $21,429. In the first half of 2003 cash increased due to proceeds from loans from shareholders
and debenture holders of $1,600,000 and $621,025, respectively, and cash decreased due to principal payments on convertible debentures of $464,000 and principal payments on capital lease obligations of $66,214.



18



---

##### Table of Contents

During the first six months of 2003 the Company borrowed from its largest shareholder $1,600,000 under various Term Note
agreements. The notes accrued interest at the three-month Euribor Rate as of the dates of the notes, plus 5%. In connection with the notes, the Company also issued to its largest shareholder warrants to purchase 2,400,000 shares of the
Companys common stock at an exercise price of $0.55 per share. On September 12, 2003, principal of $2,300,000 and accrued interest of $98,635 on these notes was converted into 2,398,635 shares of common stock. In connection with this
conversion, the Company issued to the shareholder a warrant to purchase 1,798,976 shares of the Companys common stock at an exercise price of $1.25 per share.



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, 2003 and 2004 was not material. Beginning in 2003 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
establishes pricing in Euros for products sold under the existing supply agreement and for all royalties. 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.



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, as of the end of such period, the Companys
disclosure controls and procedures are effective.



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.



The Companys management, including the CEO and CFO, does not expect that its
disclosure controls and procedures will prevent all error and all fraud. 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



19



---

##### Table of Contents

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, 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.



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.



20



---

##### Table of Contents

PART II - OTHER INFORMATION



Item 2. Changes in
Securities and Use of Proceeds



On each of April 15, 2004, May
15, 2004 and June 15, 2004, the Company issued 5,000 shares of its common stock to Mark Wachs and Associates. The shares were issued as compensation pursuant to a public relations letter agreement. The issuance of the shares was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.



On April 15, 2004 the Company granted options to purchase 150,000 shares of its common stock to a professional services organization as compensation for services rendered. The grant of the options was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.



On June 22, 2004
the Company issued warrants to purchase 100,000 shares of its common stock to a professional services organization as compensation for services rendered. The issuance of the warrants was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.



On June 22, 2004, the Company issued
15,000 shares of its common stock to Dr. Rajesh Shrotriya as compensation for joining the Companys board of directors. The issuance of the shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.



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



On June 22, 2004, the Company held an annual meeting of its shareholders. At
the meeting, the shareholders elected Jacques Gonella, Thomas Garrity and Rajesh Shrotriya to the Companys board of directors to serve until the 2007 annual meeting. With respect to the nomination of Dr. Gonella to the board of directors,
there were 21,600,406 votes cast in favor of the proposal, zero votes cast against the proposal, 392,196 abstentions and zero broker non-votes. With respect to the nomination of Mr. Garrity to the board of directors, there were 21,398,678 votes cast
in favor of the proposal, zero votes cast against the proposal, 593,923 abstentions and zero broker non-votes. With respect to the nomination of Dr. Shrotriya to the board of directors, there were 21,599,405 votes cast in favor of the proposal, zero
votes cast against the proposal, 393,196 abstentions and zero broker non-votes.



At the annual meeting, the shareholders also approved the following items:



| |  | an amendment to the Companys 2001 Incentive Stock Option Plan for Employees to increase the number of shares authorized thereunder from 2,000,000 to 4,000,000;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | an amendment to the Companys 2001 Stock Option Plan for Non-Employee Directors and Consultants to increase the number of shares authorized thereunder from 600,000 to
1,600,000; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the ratification of the appointment of KPMG LLP as the Companys registered public accounting firm for the fiscal year ending December 31, 2004.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------



With respect to the proposal to approve the increase in the authorized
shares under the Companys 2001 Incentive Stock Option Plan for Employees, there were 13,933,691 votes cast in favor of the proposal, 590,215 votes cast against the proposal, 318,467 abstentions and zero broker non-votes. With respect to the
proposal to approve the increase in the authorized shares under the Companys 2001 Stock Option Plan for Non-Employee Directors and Consultants, there were 14,058,085 votes cast in favor of the proposal, 458,858 votes cast against the



21



---

##### Table of Contents

proposal, 327,430 abstentions and zero broker non-votes. With respect to the proposal to ratify the
appointment of KPMG LLP as the Companys registered public accounting firm, there were 21,833,250 votes cast in favor of the proposal, 109,405 votes cast against the proposal, 49,946 abstentions and zero broker non-votes.



Item 6. Exhibits and Reports on Form 8-K



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



|            |  |                                                               
|----------- |  | --------------------------------------------------------------
|Exhibit No. |  | Description                                                   
|10.67       |  | Employment Agreement, dated July 22, 2004, with Jack E. Stover
|            | 
|31.1        |  | Section 302 CEO Certification                                 
|            | 
|31.2        |  | Section 302 CFO Certification                                 
|            | 
|32.0        |  | Section 906 CEO and CFO Certification                         



|(b) | Reports on Form 8-K
|--- | -------------------



On April 1, 2004 the Company filed a Current Report on Form 8-K/A reporting under Item 5, Other Events and Required FD Disclosure, that the Company was
amending the 8-K report filed by the Company on March 10, 2004 to disclose the effect of the February and March private placements of its common stock on the Companys shareholders equity.



On June 3, 2004 the Company filed a Current Report on Form 8-K reporting
under Item 9, Regulation FD Disclosure, that the Company made a presentation regarding its operations and business, and furnished as an exhibit the Power Point slide presentation used.



On June 22, 2004 the Company filed a Current Report on Form 8-K reporting under Item 9, Regulation FD Disclosure, that the
Company made a presentation at its Annual Meeting of Shareholders regarding its operations and business, and furnished as an exhibit the Power Point slide presentation used.



On June 29, 2004 the Company filed a Current Report on Form 8-K reporting under Item 5, Other Events, that the Company
adopted a new compensation plan for the Companys directors.



22



---

##### Table of Contents

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, 2004 |  | /s/ Roger G. Harrison, Ph.D.                     
|                |  | Roger G. Harrison, Ph.D.                         
|                |  | Chief Executive Officer and President            
|                | 
|August 13, 2004 |  | /s/ Lawrence M. Christian                        
|                |  | Lawrence M. Christian                            
|                |  | Chief Financial Officer, Vice President  Finance
|                |  | and Secretary                                    



23