Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements concerning payments to be received under agreements with strategic partners, capital expenditures and cash requirements. Such forward looking statements (often, but not always, using words or phrases such as "expects" or "does not expect," "is expected," "anticipates" or "does not anticipate," "plans," "estimates" or "intends," or stating that certain actions, events or results "may," "could," "would," "should," "might" or "will" be taken, occur or be achieved) involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward looking statements. Such risks, uncertainties and other factors include, without limitation, the risk that we may not enter into anticipated licensing, development or supply agreements, the risk that we may not achieve the milestones necessary for us to receive payments under our development agreements, the risk that our products will not be accepted by the market, the risk that we will be unable to obtain needed debt or equity financing on satisfactory terms, or at all, the risk that we may default on our outstanding debt obligations, risks related to the general economic environment and uncertainties in the financial markets, uncertainties related to our dependence on the continued performance of strategic partners and technology and uncertainties related to the time required for us or our strategic partners to complete research and

development and obtain necessary clinical data and government clearances. See also Part II, Item 1A, Risk Factors.

Forward-looking statements are based on the estimates and opinions of management on the date the statements are made. We assume no obligation to update forward-looking statements if conditions or management's estimates or opinions should change, even if new information becomes available or other events occur in the future.

OVERVIEW

We are an innovative developer and manufacturer of needle-free injection therapy systems ("NFITS").

Our long-term goal is to become the leading supplier of needle-free injection systems to the pharmaceutical and biotechnology industries. During 2007 and the first three quarters of 2008, we focused our business development efforts on new and existing licensing and supply agreements with leading pharmaceutical and biotechnology companies, as well as numerous research agreements that could lead to long-term agreements. Our pipeline of prospective new partnerships remains active. We are also actively pursuing additional opportunities both domestically and overseas as we expand our current product line.

Our NFITS work by forcing liquid medication at high speed through a tiny orifice held against the skin. This creates a fine stream of high-pressure medication that penetrates the skin, depositing the medication in the tissue beneath. By bundling customized needle-free delivery systems with partners' injectable medications and vaccines, we can enhance demand for these products in the healthcare provider and end-user markets.

We began a strategic realignment of our company during 2007 with the singular goal of increasing shareholder value. The realignment has two concurrent phases. Phase One was to focus on our fixed operating expenses, primarily by reducing headcount and related expenses. Along this line, on January 16, 2008, we eliminated an additional 13 positions, incurring approximately $0.1 million of severance and related costs in the first quarter of 2008. Phase Two of our realignment campaign is to increase our revenue by increasing product sales and adding license and development agreements. For example, in October 2007, we entered into a new three-year supply agreement with Serono for the delivery of the cool.click™ and Serojet™ spring-powered needle-free device for use with its recombinant human growth hormone drugs. In addition, in June 2008, we signed a new long-term exclusive license, development and supply agreement with Merial, a global animal health company, for a next generation companion animal device, which allows for the delivery of injectables. We have also initiated new discussions with a number of potential new partners, as well as with past partners.

We recently completed a business assessment for strategic targeting and focusing on the most promising potential partnership opportunities, including opportunities to secure injectable indications allowing us to create our own drug+device combinations for the market. We are committed to working with our current partners and assessing ways to ensure continued beneficial long-term partner relationships. We continue to initiate discussions with new potential partners within the large pharmaceutical market, the biotechnology market, the specialty pharmaceutical market and others.

Revenues and results of operations have fluctuated and can be expected to continue to fluctuate significantly from quarter to quarter and from year to year. Various factors may affect quarterly and yearly operating results including: i) the length of time to close product sales; ii) customer budget cycles; iii) the implementation of cost reduction measures; iv) uncertainties and changes in product sales due to third party payer policies and proposals relating to healthcare cost containment; v) the timing and amount of payments under licensing and technology development agreements; vi) our ability to enter into new agreements with partners; and vii) the timing of new product introductions by us and our competitors.

We do not expect to report net income in 2008.

GOING CONCERN AND CASH REQUIREMENTS FOR THE NEXT TWELVE-MONTH PERIOD

See Note 1 of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

CONTRACTUAL PAYMENT OBLIGATIONS

A summary of our contractual commitments and obligations as of September 30,
2008 was as follows:



                                                                 Payments Due By Period
                                                                         2009 and     2011 and    2013 and
Contractual Obligation                           Total        2008         2010         2012       beyond
December 2007 $600,000 LOF convertible note   $   600,000   $      -    $   600,000   $      -    $      -
$1.25 million PFG term loan(1)                  1,112,500     302,500       810,000          -           -
Interest on all debt facilities                   131,949      16,213       104,756      10,980          -
Operating leases                                2,533,986     104,697       770,148     809,141     850,000
Capital leases                                     67,222      11,175        49,674       6,373          -
Purchase order commitments                        340,625     340,625            -           -           -

                                              $ 4,786,282   $ 775,210   $ 2,334,578   $ 826,494   $ 850,000

(1) The unamortized value of $968,488 of our $1.25 million term loan is classified as current on our consolidated balance sheet as of September 30, 2008 due to the fact that the agreement contains subjective acceleration clauses, which could result in the debt becoming due at any time. However, since none of the subjective acceleration clauses have been triggered to date, it is included in this table according to its contractual maturity.

Purchase order commitments relate to future raw material inventory purchases, research and development projects and other operating expenses.

FORBEARANCE AGREEMENTS AND AMENDMENT TO $1.25 MILLION CONVERTIBLE LOAN

See Note 2 of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

NASDAQ DELISTING

See Note 3 of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

CONVERSION OF $615,000 CONVERTIBLE NOTE

See Note 11 of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

OUTSTANDING DEBT

$1.25 Million Convertible Loan

We have outstanding a term loan agreement with PFG for $1.25 million of convertible debt financing (the "Debt Financing"). This loan is due in March 2010, with principal payments of $55,000 due per month, at PFG's option, beginning October 1, 2008. If PFG elects to forgo any of the principal payments, the latest this loan will be due is March 2011. However, due to certain subjective acceleration clauses contained in the Debt Financing agreement, the accreted value of the Debt Financing is reflected as current on our balance sheet. The loan bears interest at the Prime Rate plus 3% per annum and is convertible at any time by PFG into our common stock at $0.90 per share. In addition, if our common stock trades at a price of $4.11 per share or higher for 20 consecutive trading days, we can force PFG to convert the debt to common stock, subject to certain limitations on trading volume. If we prepay this loan, we will issue PFG a warrant to purchase a number of shares of common stock equal to what it would have received upon conversion of the remaining outstanding principal balance that was prepaid at a price of $0.90 per share. As a result of the derivative accounting prescribed by EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Common Stock," at September 30, 2008, this debt was recorded on our balance sheet at $968,000 and is being accreted on the effective interest method to its face value of $1.11 million over the 18-month contractual term of the debt. See also Note 2 of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

$600,000 Convertible Notes

On December 5, 2007, we entered into Convertible Note Purchase and Warrant Agreements with each of Life Science Opportunities Fund II, L.P. ("LOF II") and Life Sciences Opportunities Fund II (Institutional) L.P. ("LOF Institutional" and, together with LOF II, the "Purchasers") pursuant to which we issued Convertible Promissory Notes and warrants to purchase our common stock. Pursuant to the agreements, we sold a note in the principal amount of $91,104 to LOF II and a note in the principal amount of $508,896 to LOF Institutional. The notes bear interest at the rate of 8% per annum with all principal and interest due May 15, 2009 and may not be prepaid without the written consent of the purchaser holding a given note. The notes are convertible at any time by the purchasers into our common stock at the rate of $0.75 per share. The notes will be automatically converted upon a qualified financing, as defined in the purchase agreement, at a price equal to the financing price.

The warrants are exercisable for an aggregate of 80,000 shares of our common stock at an exercise price of $0.75 per share. Each warrant is immediately exercisable and expires four years from the date of issuance.

RESULTS OF OPERATIONS

The consolidated financial data for the three and nine-month periods ended
September 30, 2008 and 2007 are presented in the following table:



                                              Three Months Ended                 Nine Months Ended
                                                 September 30,                     September 30,
                                             2008             2007             2008             2007
Revenue:
Net sales of products                    $  1,512,036     $  1,713,883     $  4,569,496     $  5,300,792
Licensing and technology fees                 138,490           83,612          545,190        1,377,126

                                            1,650,526        1,797,495        5,114,686        6,677,918
Operating expenses:
Manufacturing                               1,082,349        1,556,183        3,372,407        4,787,249
Research and development                      493,293          677,869        1,631,449        2,429,885
Selling, general and administrative           600,292          453,084        2,124,745        2,383,636

Total operating expenses                    2,175,934        2,687,136        7,128,601        9,600,770

Operating loss                               (525,408 )       (889,641 )     (2,013,915 )     (2,922,852 )
Interest income                                10,192           27,649           33,752           92,742
Interest expense                             (125,936 )       (175,184 )       (454,516 )       (472,180 )
Loss on extinguishment of debt               (597,525 )             -          (597,525 )             -
Change in fair value of derivative
liabilities                                   199,126          413,706          423,709         (413,508 )

Net loss                                   (1,039,551 )       (623,470 )     (2,608,495 )     (3,715,798 )
Preferred stock dividend                      (12,481 )       (101,475 )       (196,709 )       (292,398 )

Net loss allocable to common
shareholders                             $ (1,052,032 )   $   (724,945 )   $ (2,805,204 )   $ (4,008,196 )

Basic and diluted net loss per common
share allocable to common shareholders   $      (0.07 )   $      (0.05 )   $      (0.18 )   $      (0.27 )

Shares used in per share calculations      15,955,877       15,149,821       15,700,463       14,962,750

Revenue

The $0.2 million, or 11.8%, decrease and the $0.7 million, or 13.8%, decrease in product sales in the three and nine-month periods ended September 30, 2008, respectively, compared to the same periods of 2007, were due primarily to the following:

• B2000 sales to BioScrip and Roche/Trimeris decreased from $128,000 to $20,000, or 84%, and from $554,000 to $117,000, or 79%, in the three and nine-month periods ended September 30, 2008, respectively, compared to the same periods of 2007. These decreases were primarily a result of the October 2007 announcement from Hoffmann-La Roche Inc. and Trimeris Inc. that they were not going to continue with their FDA submission for Fuzeon® to be administered with the B2000. However, patients currently utilizing the B2000 for administering Fuzeon ® and those in clinical trials may continue using the device under a doctor's supervision;

• there were no sales to Amgen in either the three or nine-month periods ended September 30, 2008 compared to sales of $209,000 and $837,000, respectively, in the comparable periods of 2007. We do not anticipate any significant sales to Amgen in future periods; and

These factors were partially offset by the following:

• an increase in sales to Merial from $1.7 million to $2.6 million, or 58%, in the nine-month period ended September 30, 2008 compared to the same period of 2007 due to increased volume of product sales primarily related to the feline leukemia products;

• an increase in sales to Serono from $42,000 to $668,000, or 1489%, and from $1.1 million to $1.6 million, or 55%, in the three and nine-month periods ended September 30, 2008, respectively, compared to the same periods of 2007 due to the timing of orders from Serono; and

• an increase in sales to Ferring from $130,000 to $144,000, or 10%, in the three-month period ended September 30, 2008 compared to the same period of 2007.

We currently have significant supply agreements or commitments with Serono, Merial and Ferring Pharmaceuticals Inc.

License and technology fees increased $55,000, or 66%, and decreased $0.8 million, or 60%, in the three and nine-month periods ended September 30, 2008, respectively, compared to the same periods of 2007, in accordance with the terms of our current agreements. The three and nine-month periods ended September 30, 2007 included the recognition of $0 and $1.0 million, respectively, related to former partnerships. The three and nine-month periods ended September 30, 2008 included a $42,000 and a $110,000 increase, respectively, in payments from Serono compared to the same periods of 2007 in connection with their October 2007 supply agreement, and a $28,000 and a $173,000 increase, respectively, in payments from Merial compared to the same periods of 2007 in connection with their June 2008 agreement.

We currently have active licensing and/or development agreements, which often include commercial product supply provisions, with Merial, the Centers for Disease Control and Prevention and Vical.

Manufacturing Expense

Manufacturing expense is made up of the cost of products sold and manufacturing overhead expense related to excess manufacturing capacity.

The $0.5 million, or 30.4%, decrease and the $1.4 million, or 29.6%, decrease in manufacturing expense in the three and nine-month periods ended September 30, 2008, respectively, compared to the same periods of 2007 were primarily due to product volume and mix and reduced indirect manufacturing headcount. The nine-month period ended September 30, 2008 included a $94,000 non-cash charge to fully write-off our goodwill balance. See Note 15 of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for additional information.

Research and Development Expense

Research and development costs include labor, materials and costs associated with clinical studies incurred in the research and development of new products and modifications to existing products.

The $0.2 million, or 27.2%, decrease and the $0.8 million, or 32.6%, decrease in research and development expense in the three and nine-month periods ended September 30, 2008, respectively, compared to the same periods of 2007 were primarily due to the timing of expenses related to on-going projects and reduced headcount. These factors were partially offset in the nine-month period by $92,000 of restructuring and severance expense included in the nine-month period ended September 30, 2008 compared to $38,000 in the comparable period of 2007.

Current significant projects include the next generation spring-powered device with an auto disable feature.

Selling, General and Administrative Expense

Selling, general and administrative costs include labor, travel, outside services and overhead incurred in our sales, marketing, management and administrative support functions.

The $0.1 million, or 32.5%, increase and the $0.3 million, or 10.9%, decrease, in selling, general and administrative expense in the three and nine-month periods ended September 30, 2008 compared to the same periods of 2007 were due primarily to the hiring of our CEO in October 2007. The increase resulting from the hiring of our CEO in the nine-month period was offset by a decrease in restructuring and severance expense. Restructuring and severance expense totaled $1,000 in the nine-month period ended September 30, 2008 compared to $576,000 in the comparable period of 2007.

Restructuring and Severance

Restructuring and severance charges were included as a component of operating
expenses as follows:



                                           Three Months Ended         Nine Months Ended
                                              September 30,             September 30,
                                           2008           2007        2008        2007
  Manufacturing                         $       -      $       -    $  12,330   $  55,229
  Research and development                      -              -       92,135      38,277
  Selling, general and administrative           -              -          764     576,020

  Total                                 $       -      $       -    $ 105,229   $ 669,526

Our accrued liability for past restructuring and severance activities totaled zero and $129,000 at September 30, 2008 and December 31, 2007, respectively.

Interest Expense

Interest expense included the following:



                                               Three Months Ended       Nine Months Ended
                                                 September 30,            September 30,
                                                2008        2007        2008        2007
 Contractual interest expense                $   20,000   $  96,000   $  82,000   $ 234,000
 Amortization of debt issuance costs             44,000      17,000     187,000      51,000
 Accretion of PFG and LOF convertible debt       62,000      62,000     186,000     187,000

                                             $  126,000   $ 175,000   $ 455,000   $ 472,000

Loss on Extinguishment of Debt

The amendment of the Convertible Loan, as described in Note 2 of Notes to Consolidated Financial Statements, was accounted for as an extinguishment of debt in accordance with EITF 96-19 "Debtor's Accounting for a Modification or Exchange of Debt Instruments." We determined that the net present value of the cash flows under the terms of the amendment was more than 10% different from the present value of the remaining cash flows under the terms of the original Convertible Loan. Due to the substantial difference, we determined an extinguishment of debt had occurred with the amendment, and, as such, it was necessary to reflect the Convertible Loan at its fair market value and record a loss on extinguishment of debt of approximately $0.6 million in the three and nine-month periods ended September 30, 2008. The amount of the loss was determined based on the following:

• The difference between the Black-Scholes value of the Convertible Loan on September 15, 2008 and the unaccreted value on that date, which totaled $470,175; plus

• The difference between the fair value of the derivative liability for the conversion feature, which totaled $17,212; plus

• $110,138 of unamortized debt issuance costs.

Change in Fair Value of Derivative Liabilities

Our derivative liabilities are recorded at fair value and are marked to market each period. The fair value of each of these instruments is determined using the Black-Scholes valuation model.

LIQUIDITY AND CAPITAL RESOURCES

Since our inception in 1985, we have financed our operations, working capital needs and capital expenditures primarily from private placements of securities, the exercise of warrants, loans, proceeds received from our initial public offering in 1986, proceeds received from a public offering of common stock in 1993, licensing and technology revenues and revenues from sales of products.

Total cash, cash equivalents and short-term marketable securities at September 30, 2008 were $1.6 million compared to $2.4 million at December 31, 2007. We had a working capital deficit of $0.4 million at September 30, 2008 compared to working capital of $0.4 million at December 31, 2007. Going forward, we anticipate debt retirement costs to be approximately $300,000 in the fourth quarter of 2008 and $165,000 per quarter thereafter, and, unless converted into common stock, our outstanding $600,000 convertible debt will be due in May 2009. Given our current cash, cash equivalents and marketable securities, our debt repayment obligations and our current rate of cash usage, if no new licensing, development or supply agreements with up-front payments are entered into or we do not raise debt or equity financing, we anticipate needing additional cash by the second quarter of 2009 to continue operations. We are addressing this issue by engaging the services of Ferghana Partners to assist us as we pursue various strategic alternatives.

The overall decrease in cash, cash equivalents and short-term marketable securities during the first nine months of 2008 resulted from $18,000 of net purchases of marketable securities, $33,000 used for capital expenditures, $146,000 used for other investing activities, primarily patent applications, and $0.7 million used for principal payments on short and long-term debt and capital leases, partially offset by $88,000 provided by operations.

Net accounts receivable decreased $0.3 million to $0.5 million at September 30, 2008 compared to $0.8 million at December 31, 2007. Receivables from three different customers accounted for 35%, 26% and 16%, respectively, of our gross accounts receivable balance at September 30, 2008. Of the accounts receivable due at September 30, 2008, $395,000 was collected prior to the filing of this Form 10-Q. Historically, we have not had collection problems related to our accounts receivable.

Inventories increased $0.2 million to $1.0 million at September 30, 2008 compared to $0.8 million at December 31, 2007, primarily due to prepaid inventory purchases for Serono.

Capital expenditures of $33,000 in the first nine months of 2008 were primarily for the purchase of manufacturing tooling. We anticipate spending up to a total of $50,000 in 2008 for production molds for current research and development projects. We anticipate that we will be reimbursed by our partners for these expenditures.

Accounts payable decreased $0.4 million to $0.7 million at September 30, 2008 compared to $1.1 million at December 31, 2007 primarily due to payments to vendors for prepaid Serono inventory.

Derivative liabilities of $0.1 million at September 30, 2008 reflect the fair value of the derivative liabilities associated with certain of our debt and equity transactions. The fair value of the derivative liabilities is adjusted on a quarterly basis using the Black-Scholes valuation model, with changes in fair value being recorded as a component of earnings.

Deferred revenue totaled $1.5 million and $0.4 million at September 30, 2008 and December 31, 2007, respectively. The balance at September 30, 2008 included $1.3 million received from Merial, $226,000 received from Serono and $5,000 received from Vical. See Note 14 of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for a discussion of our new agreement with Merial.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We reaffirm the critical accounting policies and estimates as reported in our Form 10-K for the year ended December 31, 2007, which was filed with the Securities and Exchange Commission on March 28, 2008.

OFF-BALANCE SHEET ARRANGEMENTS

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

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