Forward-looking Statements

This Form 10-Q contains "forward-looking statements" as defined by the Private Securities Reform Act of 1995. These forward-looking statements involve risks and uncertainties including uncertainties associated with timely development, approval, launch and acceptance of new products, satisfactory completion of clinical studies, establishment of new corporate alliances, progress in research and development programs, reliance on third parties, including contract manufacturers and other risks and uncertainties identified in the Company's filings with the Securities and Exchange Commission. We caution investors that forward-looking statements reflect our analysis only on their stated date. We do not intend to update them except as required by law.

Results of Operations for the Three and Nine Months Ended September 30, 2008 and 2007 (in thousands unless otherwise indicated)

Contract revenue, which is derived from work performed under collaborative research and development arrangements, was $64, $121, $348 and $280 for the three months ended September 30, 2008 and 2007 and the nine months ended September 30, 2008 and 2007, respectively. The amount of contract revenue varies from period to period depending on the level of activity requested of us by our collaborators. Therefore, we cannot predict the amount of contract revenue in future periods.

Research and development expense for the three months ended September 30, 2008 increased by $474 from $4,595 for the three months ended September 30, 2007 to $5,069. The increase was primarily as a result of higher salaries and other payroll related expenses, including increased stock-based compensation expense and, to a lesser extent, outside consultants. Research and development expense for the nine months ended September 30, 2008 increased by $3,403 from $13,344 for the nine months ended September 30, 2007 to $16,747. The increase was primarily due to increased clinical and related expenses representing increased expenses for our undisclosed opiate pain product and our post-operative pain product, offset by a decrease in expenses related to APF530 due to the winding down of our Phase 3 clinical trial. Additionally, research and development expenses increased due to salaries and other payroll related expenses, including stock-based compensation expense and, to a lesser extent, increased consulting and other outside services.

General and administrative expense increased for the three months ended September 30, 2008 by $510 from $762 for the three months ended September 30, 2007, to $1,272. General and administrative expense increased by $462 for the nine months ended September 30, 2008 from $2,753 for the nine months ended September 30, 2007 to $3,215. The increases were primarily a result of higher professional fees and consulting expenses and stock-based compensation for the three months ended September 30, 2008 and stock-based compensation and outside consultants for the nine months ending September 30, 2008.

Interest income, net, decreased for the three months ended September 30, 2008 by $450 from $561 to $111 for the three months ended September 30, 2007. Interest income, net decreased for the nine months ended September 30, 2008 by $318 to $547 from $865 for the nine months ended September 30, 2007. These decreases were primarily due to lower average balance of cash, cash equivalents and marketable securities.

In January 2006, we completed the sale of our rights to royalties on sales of Retin-A Micro® and Carac® for up to $30 million. We received proceeds of $25 million upon the closing of the transaction and received a $2.5 million milestone payment in June 2007, which was recorded as gain on sale of interest in royalties. We may receive up to an additional $2.5 million based on the satisfaction of certain other predetermined milestones.

Loss from discontinued operations represents the net income/loss attributable to the Analytical Standards division which was sold to GFS Chemicals, Inc. in February 2003 and the cosmeceutical and toiletries business which was sold to RP Scherer Corporation in July 2000. Net loss from discontinued operations totaled $40 for the three months ended September 30, 2008, compared to net income of $1 in the three

months ended September 30, 2007. Net loss from discontinued operations totaled $120 for the nine months ended September 30, 2008 compared to net income of $33 for the nine months ended September 30, 2007. The loss from discontinued operations for the three and nine months ended September 30, 2008 reflects our expectation that the Gross Profit Guaranty payment for fiscal 2008 will be in the range of $100 to $200 for 2008. The company that now owns the rights to the cosmeceutical and toiletries business has indicated that its costs differ from those it charged historically to the RP Scherer successor company to produce the product; we have requested documentation of the actual costs.

Capital Resources and Liquidity

Cash, cash equivalents and marketable securities decreased by $18.5 million to $16.5 million at September 30, 2008 from $ 35.1 million at December 31, 2007 due primarily to our net loss for the nine months ended September 30, 2008.

Net cash used in continuing operating activities for the nine months ended September 30, 2008 was $18.3 million, compared to net cash used of $12.7 million for the nine months ended September 30, 2007. The increase in net cash used by continuing operating activities from 2008 to 2007 was mainly due to the increased loss in 2008, as compared to the same period in 2007.

Net cash provided by investing activities for the nine months ended September 30, 2008 was $377, compared to net cash provided of $11.2 million from investing activities for the nine months ended September 30, 2007. The decrease in cash provided by investing activities was primarily due to lower sales and maturities of marketable securities in the nine months ended September 30, 2008, as compared to the same period in 2007.

In the nine months ended September 30, 2007 $37.2 million cash was provided by proceeds from issuance of common stock, net of issuance costs.

To date, we have financed our operations including technology and product research and development through the sale of common stock, royalties received on sales of Retin-A Micro ® and Carac®, income from collaborative research and development fees, the proceeds received from the sales of our Analytical Standards division and our cosmeceutical and toiletry business, interest earned on short-term investments and the sale of our interest in the royalty income from Retin-A Micro® and Carac ®. We anticipate expenditures to decrease as activities associated with our Phase III APF530 trial wind down, we have placed earlier development stage programs on hold, have implemented a significant headcount reduction and imposed operating expense constraints. We believe our existing cash, cash equivalents and marketable securities, together with interest income will be sufficient to meet our cash needs into the third quarter of 2009.

Our capital requirements going forward will depend on numerous factors including, among others, our ability to enter into collaborative research and development and licensing agreements; progress of product candidates in preclinical and clinical trials; investment in new research and development programs; time required to gain regulatory approvals; resources that we devote to self-funded products; resources required for gross margin guarantees, potential acquisitions of technology, product candidates or businesses; and the costs of defending or prosecuting any patent opposition or litigation necessary to protect our proprietary technology.

We may not be able to raise sufficient additional capital when we need it or to raise capital on favorable terms. The sale of additional equity or convertible debt securities in the future may be dilutive to our stockholders, and debt financing arrangements may require us to pledge certain assets and enter into covenants that could restrict certain business activities or our ability to incur further indebtedness and may contain other terms that are not favorable to us or our stockholders. If we are unable to obtain adequate funds on reasonable terms, we may be required to curtail operations significantly or to obtain funds by entering into financing, supply or collaboration agreements on unattractive terms.

Below is a summary of fixed payments related to certain contractual obligations (in thousands). This table excludes amounts already recorded on our condensed balance sheet as current liabilities at September 30, 2008.

                                       Less than   2 to 3   4 to 5   More than
                               Total    1 year     years    Years     5 years
            Operating Leases   1,412         553      841       18          -

Off- Balance Sheet Arrangements

As of September 30, 2008 we did not have any off-balance sheet arrangements.