**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-Q**

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

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

Commission File Number 1-32302

**ANTARES PHARMA, INC.**

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

250            Phillips Blvd, Suite 290

Ewing, New Jersey 08618

(609) 359-3020

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

 

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

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

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

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

The            number of shares outstanding of the Registrant’s Common Stock, $.01 par value, as            of November 9, 2007, was 65,529,666.

 

 

 

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**ANTARES PHARMA, INC.**

 

**INDEX**

 

 

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

 

2

 

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**PART I – FINANCIAL INFORMATION**

 

*Item 1. FINANCIAL STATEMENTS*

 

**ANTARES PHARMA, INC.**

**CONSOLIDATED BALANCE SHEETS**

 

 

|                                                                                                          |   | **September 30,** |         |   |   | **December 31,** |   |
|---------------------------------------------------------------------------------------------------------------|--------|-------------------|--------------|--------|--------|------------------|--------|
|                                                                                                          |   | **2007**          |         |   |   | **2006**         |   |
|                                                                                                          |   | **(Unaudited)**   |         |   |   |             |   |
| **Assets**                                                                                                    |   |              |         |   |   |             |   |   |   |
| Current Assets:                                                                                               |   |              |         |   |   |             |   |   |   |
| Cash and cash equivalents                                                                                     |   | $                 | 9,634,948    |   |   |             | $      | 2,706,047 |   |
| Short-term investments                                                                                        |   |              | 15,708,873   |   |   |             |   | 4,953,421 |   |
| Accounts receivable, less allowance for doubtful                                accounts of $10,000           |   |              | 881,421      |   |   |             |   | 855,866 |   |
| Other receivables                                                                                             |   |              | 66,086       |   |   |             |   | 55,794 |   |
| Inventories                                                                                                   |   |              | 117,178      |   |   |             |   | 84,779 |   |
| Prepaid expenses and other current assets                                                                     |   |              | 504,255      |   |   |             |   | 221,669 |   |
| Total current assets                                                                                          |   |              | 26,912,761   |   |   |             |   | 8,877,576 |   |
|                                                                                                          |   |              |         |   |   |             |   |   |   |
| Equipment, furniture and fixtures, net                                                                        |   |              | 428,443      |   |   |             |   | 382,096 |   |
| Patent rights, net                                                                                            |   |              | 848,508      |   |   |             |   | 813,592 |   |
| Goodwill                                                                                                      |   |              | 1,095,355    |   |   |             |   | 1,095,355 |   |
| Other assets                                                                                                  |   |              | 634,110      |   |   |             |   | 365,864 |   |
| Total Assets                                                                                                  |   | $                 | 29,919,177   |   |   |             | $      | 11,534,483 |   |
|                                                                                                          |   |              |         |   |   |             |   |   |   |
| **Liabilities and Stockholders’                                Equity**                                 |   |              |         |   |   |             |   |   |   |
| Current Liabilities:                                                                                          |   |              |         |   |   |             |   |   |   |
| Accounts payable                                                                                              |   | $                 | 1,320,858    |   |   |             | $      | 813,014 |   |
| Accrued expenses and other liabilities                                                                        |   |              | 1,300,552    |   |   |             |   | 1,071,086 |   |
| Notes payable and capital lease – current, net                                of discount of $157,634   |   |              | 1,357,944    |   |   |             |   | - |   |
| Deferred revenue                                                                                              |   |              | 1,056,970    |   |   |             |   | 1,014,337 |   |
| Total current liabilities                                                                                     |   |              | 5,036,324    |   |   |             |   | 2,898,437 |   |
|                                                                                                          |   |              |         |   |   |             |   |   |   |
| Notes payable and capital lease – long term,                                net of discount of $137,103 |   |              | 3,334,093    |   |   |             |   | - |   |
| Deferred revenue – long term                                                                            |   |              | 3,366,019    |   |   |             |   | 3,555,601 |   |
| Total liabilities                                                                                             |   |              | 11,736,436   |   |   |             |   | 6,454,038 |   |
|                                                                                                          |   |              |         |   |   |             |   |   |   |
| Stockholders’ Equity:                                                                                   |   |              |         |   |   |             |   |   |   |
| Common Stock: $0.01 par; authorized 100,000,000                                shares;                        |   |              |         |   |   |             |   |   |   |
| 65,529,666 and 53,319,622 issued and outstanding                                at                            |   |              |         |   |   |             |   |   |   |
| September 30, 2007 and December 31, 2006,                                respectively                         |   |              | 655,296      |   |   |             |   | 533,196 |   |
| Additional paid-in capital                                                                                    |   |              | 125,003,062  |   |   |             |   | 106,792,974 |   |
| Prepaid license discount                                                                                      |   |              | (2,158,743   | )      |   |             |   | (2,305,929 | ) |
| Accumulated deficit                                                                                           |   |              | (104,659,804 | )      |   |             |   | (99,322,453 | ) |
| Accumulated other comprehensive loss                                                                          |   |              | (657,070     | )      |   |             |   | (617,343 | ) |
|                                                                                                          |   |              | 18,182,741   |   |   |             |   | 5,080,445 |   |
| Total Liabilities and Stockholders’                                Equity                               |   | $                 | 29,919,177   |   |   |             | $      | 11,534,483 |   |

                                                                                                                                                                                   

See accompanying notes to consolidated financial                statements.

 

3

 

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**ANTARES PHARMA, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 

 

|                                                                       |   | **For the Three Months Ended****September 30,** |       |   |   | **For the Nine Months Ended****September 30,** |   |
|----------------------------------------------------------------------------|--------|-------------------------------------------------|------------|--------|--------|------------------------------------------------|--------|
|                                                                       |   | **2007**                                        |       |   |   | **2006**                                       |   |   |   | **2007** |   |   |   | **2006** |   |
| Revenue:                                                                   |   |                                            |       |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Product sales                                                              |   | $                                               | 904,495    |   |   |                                           | $      | 477,176 |   |   |   | $ | 2,599,305 |   |   |   | $ | 1,475,287 |   |
| Development revenue                                                        |   |                                            | 115,527    |   |   |                                           |   | 69,910 |   |   |   |   | 906,581 |   |   |   |   | 431,321 |   |
| Licensing fees                                                             |   |                                            | 104,210    |   |   |                                           |   | 170,616 |   |   |   |   | 2,098,291 |   |   |   |   | 246,898 |   |
| Royalties                                                                  |   |                                            | 106,442    |   |   |                                           |   | 38,922 |   |   |   |   | 276,510 |   |   |   |   | 98,873 |   |
| Total revenue                                                              |   |                                            | 1,230,674  |   |   |                                           |   | 756,624 |   |   |   |   | 5,880,687 |   |   |   |   | 2,252,379 |   |
|                                                                       |   |                                            |       |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenue:                                                           |   |                                            |       |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of product sales                                                      |   |                                            | 513,308    |   |   |                                           |   | 273,127 |   |   |   |   | 1,377,832 |   |   |   |   | 871,590 |   |
| Cost of development revenue                                                |   |                                            | 38,332     |   |   |                                           |   | 46,571 |   |   |   |   | 209,091 |   |   |   |   | 200,821 |   |
| Total cost of revenue                                                      |   |                                            | 551,640    |   |   |                                           |   | 319,698 |   |   |   |   | 1,586,923 |   |   |   |   | 1,072,411 |   |
| Gross profit                                                               |   |                                            | 679,034    |   |   |                                           |   | 436,926 |   |   |   |   | 4,293,764 |   |   |   |   | 1,179,968 |   |
|                                                                       |   |                                            |       |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses:                                                        |   |                                            |       |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Research and development                                                   |   |                                            | 1,652,129  |   |   |                                           |   | 893,279 |   |   |   |   | 3,997,381 |   |   |   |   | 2,862,340 |   |
| Sales, marketing and business development                                  |   |                                            | 369,625    |   |   |                                           |   | 278,805 |   |   |   |   | 1,185,959 |   |   |   |   | 987,114 |   |
| General and administrative                                                 |   |                                            | 1,346,657  |   |   |                                           |   | 1,260,173 |   |   |   |   | 4,462,346 |   |   |   |   | 4,219,862 |   |
|                                                                       |   |                                            | 3,368,411  |   |   |                                           |   | 2,432,257 |   |   |   |   | 9,645,686 |   |   |   |   | 8,069,316 |   |
|                                                                       |   |                                            |       |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating loss                                                             |   |                                            | (2,689,377 | )      |   |                                           |   | (1,995,331 | ) |   |   |   | (5,351,922 | ) |   |   |   | (6,889,348 | ) |
|                                                                       |   |                                            |       |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other income (expense):                                                    |   |                                            |       |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                                            |   |                                            | 310,285    |   |   |                                           |   | 103,698 |   |   |   |   | 574,803 |   |   |   |   | 257,117 |   |
| Interest expense                                                           |   |                                            | (228,997   | )      |   |                                           |   | (36 | ) |   |   |   | (539,835 | ) |   |   |   | (1,766 | ) |
| Foreign exchange losses                                                    |   |                                            | (9,605     | )      |   |                                           |   | (9,700 | ) |   |   |   | (38,452 | ) |   |   |   | (9,958 | ) |
| Other, net                                                                 |   |                                            | 6,962      |   |   |                                           |   | (23,498 | ) |   |   |   | 18,055 |   |   |   |   | (42,171 | ) |
|                                                                       |   |                                            | 78,645     |   |   |                                           |   | 70,464 |   |   |   |   | 14,571 |   |   |   |   | 203,222 |   |
|                                                                       |   |                                            |       |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                   |   |                                            | (2,610,732 | )      |   |                                           |   | (1,924,867 | ) |   |   |   | (5,337,351 | ) |   |   |   | (6,686,126 | ) |
| Deemed dividend to warrant holders                                         |   |                                            | ―    |   |   |                                           |   | ― |   |   |   |   | ― |   |   |   |   | (99,500 | ) |
|                                                                       |   |                                            |       |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss applicable to common shares                                       |   | $                                               | (2,610,732 | )      |   |                                           | $      | (1,924,867 | ) |   |   | $ | (5,337,351 | ) |   |   | $ | (6,785,626 | ) |
|                                                                       |   |                                            |       |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted net loss per common                                share |   | $                                               | (0.04      | )      |   |                                           | $      | (0.04 | ) |   |   | $ | (0.09 | ) |   |   | $ | (0.13 | ) |
|                                                                       |   |                                            |       |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted weighted average commonshares outstanding                |   |                                            | 64,660,101 |   |   |                                           |   | 53,094,622 |   |   |   |   | 57,607,935 |   |   |   |   | 51,032,017 |   |

 

 

See accompanying notes to consolidated financial                statements.

 

4

 

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**ANTARES PHARMA, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 

|                                                                                                                    |   | **For the Nine Months Ended September                                30,** |        |
|-------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------|-------------|
|                                                                                                                    |   | **2007**                                                                   |        |   |   | **2006** |   |
| Cash flows from operating activities:                                                                                   |   |                                                                       |        |   |   |   |   |   |   |
| Net loss                                                                                                                |   | $                                                                          | (5,337,351  | ) |   |   | $ | (6,686,126 | ) |
| Adjustments to reconcile net loss to netcash provided by (used in) operating                                activities: |   |                                                                       |        |   |   |   |   |   |   |
| Depreciation and amortization                                                                                           |   |                                                                       | 185,956     |   |   |   |   | 230,027 |   |
| Stock-based compensation expense                                                                                        |   |                                                                       | 930,377     |   |   |   |   | 728,089 |   |
| Amortization of prepaid license discount                                                                                |   |                                                                       | 147,186     |   |   |   |   | 147,186 |   |
| Amortization of debt discount and issuance                                costs                                         |   |                                                                       | 153,297     |   |   |   |   | - |   |
| Changes in operating assets and                                liabilities:                                             |   |                                                                       |        |   |   |   |   |   |   |
| Accounts receivable                                                                                                     |   |                                                                       | (12,969     | ) |   |   |   | (9,211 | ) |
| Other receivables                                                                                                       |   |                                                                       | (105,434    | ) |   |   |   | (142,469 | ) |
| Inventories                                                                                                             |   |                                                                       | (32,399     | ) |   |   |   | (52,316 | ) |
| Prepaid expenses and other current assets                                                                               |   |                                                                       | (201,538    | ) |   |   |   | (30,507 | ) |
| Other assets                                                                                                            |   |                                                                       | (200,520    | ) |   |   |   | (20,401 | ) |
| Accounts payable                                                                                                        |   |                                                                       | 505,094     |   |   |   |   | (202,092 | ) |
| Accrued expenses and other current                                liabilities                                           |   |                                                                       | 161,892     |   |   |   |   | 18,370 |   |
| Deferred revenue                                                                                                        |   |                                                                       | (191,304    | ) |   |   |   | 396,712 |   |
| Net cash used in operating activities                                                                                   |   |                                                                       | (3,997,713  | ) |   |   |   | (5,622,738 | ) |
|                                                                                                                    |   |                                                                       |        |   |   |   |   |   |   |
| Cash flows from investing activities:                                                                                   |   |                                                                       |        |   |   |   |   |   |   |
| Purchases of short-term investments                                                                                     |   |                                                                       | (18,929,240 | ) |   |   |   | (8,743,848 | ) |
| Proceeds from maturity of short-term                                investments                                         |   |                                                                       | 8,275,674   |   |   |   |   | 2,939,036 |   |
| Additions to patent rights                                                                                              |   |                                                                       | (104,690    | ) |   |   |   | (83,033 | ) |
| Purchases of equipment, furniture and                                fixtures                                           |   |                                                                       | (27,684     | ) |   |   |   | (28,161 | ) |
| Net cash used in investing activities                                                                                   |   |                                                                       | (10,785,940 | ) |   |   |   | (5,916,006 | ) |
|                                                                                                                    |   |                                                                       |        |   |   |   |   |   |   |
| Cash flows from financing activities:                                                                                   |   |                                                                       |        |   |   |   |   |   |   |
| Proceeds from issuance of common stock,                                net                                              |   |                                                                       | 14,742,671  |   |   |   |   | 9,782,055 |   |
| Proceeds from exercise of warrants and stock                                options                                     |   |                                                                       | 2,292,692   |   |   |   |   | 1,110,086 |   |
| Proceeds from notes payable                                                                                             |   |                                                                       | 5,000,000   |   |   |   |   | - |   |
| Principal payments on long-term debt                                                                                    |   |                                                                       | (131,956    | ) |   |   |   | - |   |
| Capitalized debt issuance costs                                                                                         |   |                                                                       | (181,125    | ) |   |   |   | - |   |
| Net cash provided by financing activities                                                                               |   |                                                                       | 21,722,282  |   |   |   |   | 10,892,141 |   |
|                                                                                                                    |   |                                                                       |        |   |   |   |   |   |   |
| Effect of exchange rate changes on cash and cash                                equivalents                             |   |                                                                       | (9,728      | ) |   |   |   | 1,611 |   |
|                                                                                                                    |   |                                                                       |        |   |   |   |   |   |   |
| Net increase (decrease) in cash and cash                                equivalents                                     |   |                                                                       | 6,928,901   |   |   |   |   | (644,992 | ) |
| Cash and cash equivalents:                                                                                              |   |                                                                       |        |   |   |   |   |   |   |
| Beginning of period                                                                                                     |   |                                                                       | 2,706,047   |   |   |   |   | 2,718,472 |   |
| End of period                                                                                                           |   | $                                                                          | 9,634,948   |   |   |   | $ | 2,073,480 |   |

 

 

 

See accompanying notes to consolidated financial                statements

5

 

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**ANTARES PHARMA, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

 

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

 

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

                 

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

                 

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

                 

*Short-Term Investments*

                 

All short-term investments are commercial paper or U.S. government                agency discount notes that mature within one year of purchase and are classified as                held-to-maturity because the Company has the positive intent and ability to hold                the securities to maturity. The securities are carried at their amortized cost. At                September 30, 2007 and December 31, 2006 the securities had a fair value of                $15,730,516 and $4,951,654, respectively, and a carrying value of $15,708,873 and                $4,953,421, respectively.

                 

*Reclassifications*

                 

The Company reclassified expenses for quality and regulatory                activities previously reported as general and administrative expenses to research                and development expenses. The amounts of the reclassifications were $60,782 and                $209,390 for the three and nine month periods ended September 30, 2006,                respectively. This reclassification did not impact previously reported operating                loss, net loss or net loss per share.

                 

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

 

In February of 2007, the Company received gross proceeds of                $5,000,000 upon closing of the first tranche of a $10,000,000 credit facility, to                help fund working capital needs. A second tranche of $5,000,000 is available after                September 30, 2007 but before December 31, 2007 upon meeting certain conditions.                The per annum interest rate is equal to the sum of the yield for three-

                 

6

 

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year U.S. treasury bills as quoted by Bloomberg, plus 800 basis                points calculated (i) in the case of the first tranche, on the business day prior                to the first funding date and (ii) in the case of the second tranche, on the                business day prior to the second funding date (as such term is defined in the                Credit Agreement). In addition, once set, the applicable interest rate for each                tranche will be fixed for the applicable term. The stated interest rate for the                first tranche is 12.7%. The maturity date (i) with respect to the first tranche is                forty-two months from the first funding date and (ii) with respect to the second                tranche is thirty-six months from the second funding date. The Company has pledged                certain property as collateral, including all intellectual property.

                 

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

                 

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

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

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

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

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

                 

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

                 

The Company capitalized debt issuance costs totaling $181,125, which                is being amortized and recorded as interest expense using the interest method over                the forty-two month term.

                 

Total interest expense related to the credit facility in the first                nine months of 2007 was $527,191. Cash paid for interest in the first nine months                was $372,156.

                 

Principal payments of $1,476,549, $1,675,381 and $1,733,239 are due                in each of the twelve month periods ended September 30, 2008, 2009 and 2010,                respectively.

                 

In the second quarter of 2007 the Company acquired lab equipment                under a three year capital lease. The equipment and capital lease obligation were                recorded at a value of approximately $115,000. Principal payments of approximately                $39,000, $41,000 and $21,000 are due in each of the twelve month periods ended                September 30, 2008, 2009, and 2010.

                 

                 

 

7

 

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

 

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

                 

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

                 

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

                 

|                              |   | **Number of**

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

**Average****Remaining****Contractual****Term (Years)** |   |   |   | **Aggregate****Intrinsic****Value ($)** |   |
|-----------------------------------|--------|---------------------------|--------|--------|--------|--------------------------------------------------|--------|--------|--------|-----------------------------------------------------------------------|--------|--------|--------|-----------------------------------------|--------|
| Outstanding at December 31, 2006  |   | 4,426,759                 |   |   |   | 1.65                                             |   |   |   |                                                                  |   |   |   |                                    |   |
| Granted                           |   | 1,307,632                 |   |   |   | 1.42                                             |   |   |   |                                                                  |   |   |   |                                    |   |
| Exercised                         |   | (35,000                   | )      |   |   | 1.54                                             |   |   |   |                                                                  |   |   |   |                                    |   |
| Forfeited                         |   | (106,000                  | )      |   |   | 2.26                                             |   |   |   |                                                                  |   |   |   |                                    |   |
| Outstanding at September 30, 2007 |   | 5,593,391                 |   |   |   | 1.58                                             |   |   |   | 7.2                                                                   |   |   |   | 636,858                                 |   |
| Exercisable at September 30, 2007 |   | 3,930,695                 |   |   |   | 1.67                                             |   |   |   | 6.5                                                                   |   |   |   | 435,486                                 |   |

                 

Total recognized compensation expense for stock options was                approximately $823,000 and $583,000 for the first nine months of 2007 and 2006,                respectively. As of September 30, 2007, there was approximately $1,763,000 of total                unrecognized compensation cost related to nonvested outstanding stock options that                is expected to be recognized over a weighted average period of approximately two                years.

                 

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

                 

                 

                 

 

8

 

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

                 

The employment agreements with the Chief Executive Officer, Chief                Financial Officer and other members of executive management include stock-based                incentives under which the executives could be awarded up to 1,365,000 restricted                shares of common stock upon the occurrence of various triggering events and                authorization by stockholders, in certain circumstances, of additional shares under                existing or future plans. Approximately 1,033,000 of these shares relate to                performance criteria that were not yet considered probable of achievement. Expense                of approximately $71,000 was recognized in the first nine months of 2007 in                connection with potential performance based awards totaling approximately 68,000                shares of common stock for the Chief Financial Officer, of which 22,727 shares were                issued in the second quarter of 2007. The Chief Executive Officer was awarded                86,666 shares of common stock in 2006 upon a triggering event being attained. A                total of approximately $61,000 in compensation expense was recorded in 2006 and                2005 in connection with these shares.The weighted average grant date fair value of                the remaining awards considered probable of achievement by the Chief Executive                Officer was $0.40 per share, which resulted in a total fair value of $80,000, of                which approximately $23,000 was recognized in the first nine months of                2007.

                 

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

                 

*Common Stock, Options and Warrants*

                 

In July of 2007, the Company received proceeds of $14,742,671, net                of offering costs of $1,257,329, in a private placement of its common stock in                which a total of 10,000,000 shares of common stock were sold at a price of $1.60                per share. In connection with the private placement, the Company issued five-year                warrants to purchase an aggregate of 3,800,000 shares of common stock with an                exercise price of $2.00 per share.

                 

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

                 

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

                 

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

                 

9

                 

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Warrants to purchase a total of 23,141,021 shares of common stock                were outstanding at September 30, 2007. The weighted average exercise price of the                warrants was $1.49.

                 

*Deemed Dividend to Warrant Holders*

                 

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

                 

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

 

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

 

|                                                    |   | **Three Months Ended****September 30,** |       |   |   | **Nine Months Ended****September 30,** |   |
|---------------------------------------------------------|--------|-----------------------------------------|------------|--------|--------|----------------------------------------|--------|
|                                                    |   | **2007**                                |       |   |   | **2006**                               |   |   |   | **2007** |   |   |   | **2006** |   |
| Net loss applicable to commonshares                     |   | $                                       | (2,610,732 | )      |   |                                   | $      | (1,924,867 | ) |   |   | $ | (5,337,351 | ) |   |   | $ | (6,785,626 | ) |
| Basic and diluted weighted avgcommon shares outstanding |   |                                    | 64,660,101 |   |   |                                   |   | 53,094,622 |   |   |   |   | 57,607,935 |   |   |   |   | 51,032,017 |   |
| Basic and diluted net loss percommon share              |   | $                                       | (0.04      | )      |   |                                   | $      | (0.04 | ) |   |   | $ | (0.09 | ) |   |   | $ | (0.13 | ) |

                 

Potentially dilutive stock options and warrants excluded from                dilutive loss per share because their effect was anti-dilutive totaled 28,734,412                and 26,029,542 at September 30, 2007 and 2006, respectively.

                 

The weighted average exercise price of the stock options and                warrants outstanding at September 30, 2007 and 2006 was $1.50 and $1.41,                respectively.

                 

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

                 

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

                 

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

                 

                 

10

 

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

 

|                     |   | **September 30,**

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

**2006** |   |
|--------------------------|--------|-----------------------------|------------|----------------------------|--------|
| Switzerland              |   | $                           | 1,677,897  |                       | $      | 1,655,869 |   |
| United States of America |   |                        | 28,241,280 |                       |   | 9,878,614 |   |
|                     |   | $                           | 29,919,177 |                       | $      | 11,534,483 |   |

                 

Revenues by customer location are summarized as follows:

 

|                     |   | **Three Months Ended****September 30,** |      |   |   | **Nine Months Ended****September 30,** |   |    |
|--------------------------|--------|-----------------------------------------|-----------|--------|--------|----------------------------------------|--------|---------|
|                     |   | **2007**                                |      |   |   | **2006**                               |   |    |   | **2007** |   |   |   | **2006** |   |
| United States of America |   | $                                       | 187,103   |   |   |                                   | $      | 196,750 |   |   |   | $ | 2,436,718 |   |   |   | $ | 657,361 |   |
| Europe                   |   |                                    | 987,672   |   |   |                                   |   | 467,740 |   |   |   |   | 3,160,216 |   |   |   |   | 1,296,231 |   |
| Other                    |   |                                    | 55,899    |   |   |                                   |   | 92,134  |   |   |   |   | 283,753 |   |   |   |   | 298,787 |   |
|                     |   | $                                       | 1,230,674 |   |   |                                   | $      | 756,624 |   |   |   | $ | 5,880,687 |   |   |   | $ | 2,252,379 |   |
|                          |        |                                         |           |        |        |                                        |        |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

                 

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

 

|                           |   | **Three Months Ended****September 30,** |    |   |   | **Nine Months Ended****September 30,** |   |    |
|--------------------------------|--------|-----------------------------------------|---------|--------|--------|----------------------------------------|--------|---------|
|                           |   | **2007**                                |    |   |   | **2006**                               |   |    |   | **2007** |   |   |   | **2006** |   |
| Ferring                        |   | $                                       | 910,688 |   |   |                                   | $      | 323,872 |   |   |   | $ | 2,419,103 |   |   |   | $ | 1,119,047 |   |
| BioSante Pharmaceuticals, Inc. |   |                                    | 69,277  |   |   |                                   |   | 41,761  |   |   |   |   | 1,907,339 |   |   |   |   | 85,229 |   |
| Undisclosed                    |   |                                    | 86,953  |   |   |                                   |   | -       |   |   |   |   | 626,236 |   |   |   |   | - |   |
| Jazz Pharmaceuticals           |   |                                    | 27,102  |   |   |                                   |   | 18,228  |   |   |   |   | 224,864 |   |   |   |   | 302,293 |   |
| Undisclosed                    |   |                                    | -       |   |   |                                   |   | 124,601 |   |   |   |   | - |   |   |   |   | 124,601 |   |
|                                |        |                                         |         |        |        |                                        |        |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

|                                       |   | **Three Months Ended****September 30,** |       |   |   | **Nine Months Ended****September 30,** |   |
|--------------------------------------------|--------|-----------------------------------------|------------|--------|--------|----------------------------------------|--------|
|                                       |   | **2007**                                |       |   |   | **2006**                               |   |   |   | **2007** |   |   |   | **2006** |   |
| Net loss                                   |   | $                                       | (2,610,732 | )      |   |                                   | $      | (1,924,867 | ) |   |   | $ | (5,337,351 | ) |   |   | $ | (6,686,126 | ) |
| Change in cumulativetranslation adjustment |   |                                    | (30,894    | )      |   |                                   |   | 5,779 |   |   |   |   | (39,727 | ) |   |   |   | (9,288 | ) |
| Comprehensive loss                         |   | $                                       | (2,641,626 | )      |   |                                   | $      | (1,919,088 | ) |   |   | $ | (5,377,078 | ) |   |   | $ | (6,695,414 | ) |

 

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

 

The Company adopted the provisions of FASB Interpretation No. 48,                “Accounting for Uncertainty in Income Taxes—an interpretation of FASB                Statement No. 109” on January 1, 2007. This interpretation clarifies the                accounting for uncertainty in income taxes recognized in an enterprise’s                financial statements in accordance with FASB Statement No. 109, “Accounting                for Income Taxes.” This interpretation prescribes a recognition threshold and                measurement attribute for the financial statement recognition and measurement of a                tax position taken or expected to be taken in a tax return. It also provides                guidance on derecognition, classification,

                 

11

                 

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interest and penalties, accounting in interim periods, disclosure                and transition. The adoption of this accounting pronouncement did not have a                material impact on the Company’s consolidated financial                statements.

                 

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

                 

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

 

| **10.** | **License Agreements** |
|---------|------------------------|

 

In September 2007, the Company entered into a worldwide product                development and license agreement with an undisclosed company for a product that                will utilize the Company’s oral disintegrating tablet delivery technology.                Under the agreement, an upfront payment, development milestones, and royalties on                product sales are to be received by the Company under certain                circumstances.

                 

In July 2007, the Company entered into a worldwide product                development and license agreement with Jazz Pharmaceuticals for a product that will                utilize the Company’s transdermal gel delivery technology. Under the                agreement, an upfront payment, development milestones, and royalties on product                sales are to be received by the Company under certain circumstances.

                 

The upfront payments due under these two agreements totaled                approximately $625,000, nearly all of which has been deferred and will be                recognized over the development periods.

 

12

 

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

                 

**Overview**

                 

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

 

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

 

The Company is reporting a net loss of $5,337,351 for the nine-month                period ended September 30, 2007 and expects to report a net loss for the year                ending December 31, 2007, as marketing and development costs related to bringing                future generations of products to market continue. Long-term capital requirements                will depend on numerous factors, including the status of collaborative arrangements                and payments received under such arrangements, the progress of research and                development programs, the receipt of revenues from sales of products and royalties                and the ability to control costs.

 

 

 

 

 

 

13

 

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**Results of Operations**

 

*Critical Accounting Policies*

 

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

 

*Three and Nine Months Ended September 30, 2007 and                2006*

 

*Revenues*

 

Total revenues for the three and nine months ended September 30,                2007 were $1,230,674 and $5,880,687, respectively, compared to revenues for the                same prior-year periods of $756,624 and $2,252,379. The increase in revenues in the                three month period was primarily due to increases in product sales and royalties.                The nine month period resulted in increases in all revenue categories, with the                most significant increase recognized in licensing fees as a result of $1,750,000                received under a sublicense arrangement related to an existing license agreement                with BioSante Pharmaceuticals, Inc. Product sales were higher in each period mainly                due to increased revenue from the Company’s major European customer, Ferring.                The increase in revenue from Ferring was due to increases in the number of                needle-free injector devices and disposable components sold and a renegotiated                contract with Ferring in which selling prices were increased. The increase in                development revenue resulted primarily from agreements related to use of the                Company’s proprietary ATDTMgel technology                and oral fast-melting tablet technology. The royalty revenue increases were                directly related to the increase in the number of injector devices sold to Ferring,                as well as a renegotiated increased royalty rate with Ferring.

 

*Cost of Revenues*

 

The cost of product sales are related to injection devices and                related products. For the three and nine month periods ended September 30, 2007,                cost of product sales were $513,308 and $1,377,832, respectively, compared to                $273,127 and $871,590 for the same periods of the prior year. The cost of product                sales increases were directly related to the increases in product sales. Cost of                product sales as a percentage of product sales decreased in the nine month period                to 53% in 2007 from 59% in 2006, and was unchanged at 57% for the three months                ended September 30, 2007 and 2006. The decrease in the nine-month period was due                primarily to a higher sales volume absorbing a similar level of fixed overhead                costs along with increases in selling prices.

 

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

 

14

 

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development revenue was 33% and 67% for the third quarter of 2007                and 2006, respectively and was 23% and 47% for the nine-month periods ended                September 30, 2007 and 2006, respectively.

 

*Research and Development*

 

Research and development expenses were $1,652,129 and $3,997,381 in                the three and nine-month periods ended September 30, 2007, respectively, compared                to $893,279 and $2,862,340 in the same periods of the prior year. The increases in                the third quarter and first nine months of 2007 compared to the same periods of                2006 were due primarily to costs incurred in connection with activities such as                contract research organization (CRO) initiation, site recruitment, drug supply and                database initiation in anticipation of starting a Phase III study of AnturolTM                (oxybutynin gel) for the treatment of overactive bladder in the fourth quarter of                2007.

 

*Sales, Marketing and Business Development*

 

Sales, marketing and business development expenses totaled $369,625                and $1,185,959 for the three and nine-month periods ended September 30, 2007,                respectively, compared to $278,805 and $987,114 in the same prior year periods. The                increase in the three-month period was primarily due to increases in payroll, legal                fees and professional services. The increase in the nine-month period was primarily                due to increases in payroll and legal fees. The payroll increases were partially                due to additional personnel and the legal fees increases were due to increased                activity as a result of new licenses/agreements being completed or in                progress.

 

*General and Administrative*

 

General and administrative expenses totaled $1,346,657 and                $4,462,346 in the three and nine-month periods ended September 30, 2007,                respectively, compared to $1,260,173 and $4,219,862 in the same periods of the                prior year. The increases in each period were due mainly to increases in travel,                stock based compensation and patent related expenses. These increases were                partially offset by decreases in various professional service expenses.

 

*Other Income (Expense)*

 

Other income was $78,645 and $14,571 in the three and nine-month                periods ended September 30, 2007, respectively, compared to income of $70,464 and                $203,222 in the same periods of the prior year. The increase in the three-month                period was due primarily to an increase in interest income partially offset by an                increase in interest expense. The decrease in the nine-month period was due                primarily to an increase in interest expense partially offset by an increase in                interest income. Interest income increased in each period due to higher cash and                investment balances resulting from the debt and equity financings in the first and                third quarters of 2007, respectively. Interest expense increased due to the                $5,000,000 borrowed under a credit agreement in the first quarter of                2007.

 

**Liquidity and Capital Resources**

 

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

 

15

 

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In July of 2007 the Company received proceeds of $14,742,670, net of                offering costs of $1,257,330, in a private placement of its common stock in which a                total of 10,000,000 shares of common stock were sold at a price of $1.60 per share.                In connection with the private placement, the Company issued five-year warrants to                purchase an aggregate of 3,800,000 shares of common stock with an exercise price of                $2.00 per share. The Company intends to use net proceeds from the financing for the                Phase III clinical study of AnturolTM, continuing the advancement of new                products in the pipeline and for working capital and general corporate                purposes.

 

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

 

In the second quarter of 2007 the Company acquired equipment under a                three year capital lease. The equipment and capital lease obligation were recorded                at a value of approximately $115,000. Principal payments of approximately $39,000,                $41,000 and $21,000 are due in each of the twelve month periods ended September 30,                2008, 2009, and 2010.

 

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

                 

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

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

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

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

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

                 

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

 

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

 

16

 

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The Company believes that the combination of the recent equity and                debt financings and projected product sales, product development, license revenues,                milestone payments and royalties will provide sufficient funds to support                operations beyond 2008. During 2007, the Company believes capital expenditures may                increase to approximately $1,000,000 primarily in connection with tooling and                production equipment related to the commercial launch of certain devices associated                with injection device deals. If the Company does need additional financing and is                unable to obtain such financing when needed, or obtain it on favorable terms, the                Company may be required to curtail development of new drug technologies, limit                expansion of operations or accept financing terms that are not as attractive as the                Company may desire.

 

***Cash Flows***

 

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

 

Net cash used in operating activities was $3,997,713 and $5,622,738                for the nine-month periods ended September 30, 2007 and 2006, respectively. The                difference between 2007 and 2006 was mainly the result of a decrease in the amount                of the net loss and an increase in noncash expenses. The net loss reduction in the                first nine months of 2007 was primarily due to $1,750,000 received under a                sublicense arrangement related to an existing license agreement with BioSante                Pharmaceuticals, Inc.

 

Noncash expenses in the first nine months of 2007 totaled $1,416,816                compared to $1,105,302 in 2006. The increase was due primarily to the amortization                of debt discount and issuance costs related to the $5,000,000 credit facility and                an increase in stock-based compensation expense.

 

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

 

Net cash used in investing activities was $10,785,940 and $5,916,006                for the nine-month periods ended September 30, 2007 and 2006, respectively. This                was primarily due to purchases of short-term investments of $18,929,240 and                $8,743,848 in 2007 and 2006, respectively. The purchases were partially offset by                proceeds from the maturity of short-term investments of $8,275,674 and $2,939,036                in 2007 and 2006, respectively. The increase in short-term investment purchases in                2007 was the result of an increase in available cash from the debt and equity                financings in the first and third quarters of 2007, respectively.

 

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

 

Net cash provided by financing activities totaled $21,722,282 in the                first nine-months of 2007, which consisted primarily of proceeds from the issuance                of common stock related to the private placement of $14,742,671, proceeds from the                note payable of $5,000,000 and proceeds from the exercise of warrants and stock                options of $2,292,692. Net cash provided by financing activities in the first                nine-months of 2006 was $10,892,141, which consisted of net proceeds from the sale                of common stock of $9,782,055 and proceeds from the exercise of warrants and stock                options of $1,110,086.

 

***New Accounting Pronouncements***

 

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

 

17

 

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

 

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

 

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

 

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

 

The Company's primary market risk exposure is foreign exchange rate                fluctuations of the Swiss Franc to the U.S. dollar as the financial position and                operating results of the Company's subsidiaries in Switzerland are translated into                U.S. dollars for consolidation. The Company's exposure to foreign exchange rate                fluctuations also arises from transferring funds to its Swiss subsidiaries in Swiss                Francs. In addition, the Company has exposure to exchange rate fluctuations between                the Euro and the U.S. dollar in connection with the licensing agreement entered                into in January 2003 with Ferring, which established pricing in Euros for products                sold under the supply agreement and for all royalties. In March 2007 the Company                amended the 2003 agreement with Ferring, establishing prices in U.S. dollars rather                than Euros for certain products, reducing the exchange rate risk. 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 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. The effect of foreign exchange rate fluctuations on the                Company's financial results for the three and nine-month periods ended September                30, 2007 and 2006 was not material.

 

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

 

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18

which time the debt instrument will be redeemed at its stated or                face value. Due to the short duration and nature of these instruments, the Company                does not believe there is a material exposure to interest rate risk related to its                investment portfolio.

 

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

 

**Disclosure Controls and Procedures.**

 

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

 

**Internal Control over Financial Reporting.**

 

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

 

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

 

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

 

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

 

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

 

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**PART II - OTHER INFORMATION**

                 

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

 

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

 

**Risks Related to Our Operations**

 

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

 

We incurred a net loss of ($5,337,351) for the nine months ended                September 30, 2007 and net losses of ($8,099,846) and ($8,497,956) in the fiscal                years ended 2006 and 2005, respectively. In addition, we have accumulated aggregate                net losses from the inception of business through September 30, 2007 of                ($104,659,804). The costs for research and product development of our drug delivery                technologies along with marketing and selling expenses and general and                administrative expenses have been the principal causes of our losses. We may not                ever become profitable and if we do not become profitable your investment would be                harmed.

 

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

 

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

 

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

 

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

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

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

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

 

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

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

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

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

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

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

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

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

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

 

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

 

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

 

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

 

During the first nine months of 2007 we derived approximately 41%,                32% and 11% of our revenue from Ferring, BioSante Pharmaceuticals and an                undisclosed company, respectively, and in 2006, we derived approximately 50% and                13% of our revenue from Ferring and Jazz Pharmaceuticals, respectively.

 

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

 

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

 

In July 2007, we entered into a worldwide product development and                license agreement with Jazz Pharmaceuticals. Under the agreement an upfront                payment, development milestones, and royalties on product sales are due us under                certain circumstances. If the development program conducted by Jazz is not a                success we may never receive any compensation other than the upfront payment earned                at agreement execution.

 

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In September 2007, we entered into a worldwide product development                and license agreement with an undisclosed company. Under the agreement an upfront                payment, development milestones, and royalties on product sales are due us under                certain circumstances. If the development program conducted by this company is not                a success we may never receive any compensation other than the upfront payment                earned at agreement execution.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Our past assembly, testing and device manufacturing experience for                our needle-free device has involved the assembly of products from machined                stainless steel and composite components in limited

 

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

 

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

 

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

 

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

 

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

 

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

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

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

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

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

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

 

Physicians may refuse to prescribe products incorporating our drug                delivery technologies if they believe that the active ingredient is better                administered to a patient using alternative drug delivery

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

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

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

 

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

 

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

 

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

 

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

 

Elestrin®, for which we will receive royalties from our partner                based on any commercial sales, was launched in June 2007. Therefore, we have no way                of knowing at this time if health insurance companies

 

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will reimburse patients for the use of Elestrin® as this                typically becomes known in the latter part of the first year of launch.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We currently hold approximately 70 patents and have an additional 98                applications pending in the U.S. and other countries. In early 2007 the U.S. patent                office issued two patents in our ATDTM gel platform including a patent related                to our formulation of Elestrin®, an estradiol gel product approved by the FDA                for hormone replacement therapy and a patent related to our core gel technology.                The patents

 

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have expiration dates ranging from 2015 to 2022. In addition to                issued patents and patent applications, we also have trade secrets in all of our                technology platforms.

 

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

 

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

 

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

 

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

 

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

                 

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

 

The drugs to which our drug delivery technologies are applied are                generally the property of the pharmaceutical companies. Those drugs may be the                subject of patents or patent applications and other

 

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forms of protection owned by the pharmaceutical companies or third                parties. If those patents or other forms of protection expire, become ineffective                or are subject to the control of third parties, sales of the drugs by the                collaborating pharmaceutical company may be restricted or may cease. Our expected                revenues, in that event, may not materialize or may decline.

 

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

 

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

 

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

 

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

 

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

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

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

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

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

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

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

                 

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

 

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

 

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

 

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

 

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

 

**Risks Related to Regulatory Matters**

 

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

 

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

 

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

 

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

 

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

 

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

 

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In August 2007, we initiated a pivotal safety and efficacy trial of                AnturolTM for OAB. The three arm study will enroll approximately 600 patients                for a 12-week clinical trial. The randomized, double-blind, placebo controlled,                multi-center trial will principally evaluate the efficacy of AnturolTM when                administered topically once daily for 12 weeks. The primary end point of the trial                will be efficacy against the placebo defined as the reduction in the number of                urinary incontinence episodes experienced. Secondary end points include changes                from baseline in urinary urgency, average daily urinary frequency, patient                perceptions as well as safety and tolerability. The initiation of the trial does                not ensure success of the trial. We may not have the resources to complete the                trial, AnturolTM may prove to not be efficacious, may not beat placebo or may                have undesired side effects not previously experienced. Additionally, the FDA may                require further studies for approval. Any of these potential outcomes could have a                negative impact on the value of our stock price.

 

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

                 

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

 

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

 

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

 

Many of our transdermal product candidates may be developed via the                505(b)(2) route. The 505(b)(2) regulatory pathway is continually evolving and                advice provided in the present is based on

 

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current standards, which may or may not be applicable when we                potentially submit an NDA. Additionally, we must reference the most similar                predicate products when submitting a 505(b)(2) application. It is therefore                probable that:

 

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

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

 

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

 

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

 

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

 

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

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

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

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

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

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

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

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

 

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

 

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

 

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

 

The testing, manufacturing and marketing of products utilizing our                drug delivery technologies may expose us to potential product liability and other                claims resulting from their use in practice or in clinical development. If any such                claims against us are successful, we may be required to make significant                compensation payments. Any indemnification that we have obtained, or may obtain,                from contract research organizations or pharmaceutical companies conducting human                clinical trials on our behalf may

 

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

 

**Risks Related to our Common Stock**

 

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

 

As a result of our reverse business combination with Permatec in                January 2001 and subsequent additional debt and equity financings, Permatec Holding                AG and its controlling stockholder, Dr. Jacques Gonella, own a substantial portion                (as of October 31, 2007, approximately 14%) of our outstanding shares of common                stock. Dr. Gonella, who is the Chairman of our Board of Directors, also owns                warrants to purchase an aggregate of 4,198,976 shares of common stock and options                to purchase 144,500 shares of common stock. Additionally, three investors                (Perceptive Life Sciences Fund, SCO Capital Group and SDS Funds) own warrants that                are, as of October 31, 2007, exercisable into an aggregate of 5,286,588 shares of                our common stock. Some of these investors also directly own shares of our common                stock. If Dr. Gonella and all of the above investors exercised all of the warrants                and options owned by them, Dr. Gonella would own approximately 18%, and the four                investors as a group would own, at a minimum, over 7%, of our common                stock.

 

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

 

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

 

As of October 31, 2007, we have warrants outstanding that are                exercisable, at prices ranging from $0.55 per share to $5.00 per share, for an                aggregate of approximately 23,140,000 shares of our common stock. We also have                options outstanding that are exercisable, at exercise prices ranging from $0.70 to                $14.70 per share, for an aggregate of approximately 5,600,000 shares of our common                stock. Purchasers

 

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of common stock could therefore experience substantial dilution of                their investment upon exercise of the above warrants or options. The majority of                the shares of common stock issuable upon exercise of the warrants or options held                by these investors are currently registered.

 

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

 

As of October 31, 2007, our officers and directors beneficially                owned an aggregate of approximately 19,400,000 shares (or approximately 27%) of our                common stock, including stock options exercisable within 60 days. If our officers                and directors, or other stockholders, sell a substantial amount of our common                stock, it could cause the market price of our common stock to decrease and could                hamper our ability to raise capital through the sale of our equity                securities.

 

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

 

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

 

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

 

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

 

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

                 

| (a) | Exhibit Index |
|-----|---------------|

 

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

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

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

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

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

 

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SIGNATURES

                 

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

 

**         ANTARES PHARMA,                INC.**

                 

                 

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

          Jack E.                Stover

          President and                Chief Executive Officer

                 

                 

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

          Robert F.                Apple

          Senior Vice                President and Chief Financial Officer

                 

 

 

 

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