FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K 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.

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. See also Item 1A. Risk Factors.

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 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. However, given the current difficult global economic conditions, it will likely take longer to finalize agreements.

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 2006 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, in March 2007 and 2006, we reduced the size of our workforce. In addition, 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 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. In addition, in January 2009, we extended our supply agreement with Ferring Pharmaceuticals to deliver the vial adapter for Ferring's proprietary products. We have also initiated new discussions with a number of potential new partners, as well as with past partners.

We 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 partner with a pharmaceutical or biotech company or 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 other markets.

We do not expect to report net income in 2009.

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

See Note 1 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.

CONTRACTUAL PAYMENT OBLIGATIONS

A summary of our contractual commitments and obligations as of December 31, 2008
was as follows:



                                                                 Payments Due By Period
                                                                          2010 and    2012 and    2014 and
Contractual Obligation                           Total         2009         2011        2013       beyond
December 2007 $600,000 LOF convertible note   $   600,000   $   600,000   $      -    $      -    $      -
$1.25 million PFG term loan(1)                    810,000       660,000     150,000          -           -
Interest on all debt facilities                    38,088        36,063       2,025          -           -
Operating leases                                2,381,163       388,348     805,459     829,364     357,992
Capital leases                                     56,047        32,239      23,808          -           -
Purchase order commitments                        452,992       452,992          -           -           -

                                              $ 4,338,290   $ 2,169,642   $ 981,292   $ 829,364   $ 357,992

(1) The entire accreted value of $633,782 of our $1.25 million term loan is classified as current on our consolidated balance sheet as of December 31, 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. The unpaid principal amount of the $1.25 million term loan was $810,000 at December 31, 2008.

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

See Note 16 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.

NASDAQ DELISTING

See Note 3 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.

CONVERSION OF $615,000 CONVERTIBLE NOTE

See Note 13 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.

OUTSTANDING DEBT

$1.25 Million Convertible Loan

We have outstanding a term loan agreement with PFG for convertible debt financing (the "Debt Financing"). At December 31, 2008, $0.8 million was outstanding under this loan. 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 December 31, 2008, this debt was recorded on our balance sheet at $634,000 and is being accreted on the effective interest method to its face value of $0.8 million over the 18-month contractual term of the debt. See also Note 11 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.

$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 years ended December 31, 2008 and 2007 are presented in the following table:

                                                              Year Ended December 31,
                                                              2008               2007
Revenue:
Net sales of products                                     $  5,805,928       $  6,772,325
Licensing and technology fees                                  666,846          1,575,465

                                                             6,472,774          8,347,790
Operating expenses:
Manufacturing                                                4,195,318          5,857,016
Research and development                                     2,173,229          3,180,454
Selling, general and administrative                          2,601,648          3,185,204

Total operating expenses                                     8,970,195         12,222,674

Operating loss                                              (2,497,421 )       (3,874,884 )
Interest income                                                 39,771            116,917
Interest expense                                              (510,575 )         (632,840 )
Loss on extinguishment of debt                                (597,525 )               -
Change in fair value of derivative liabilities                 522,084            352,468

                                                              (546,245 )         (163,455 )

Net loss                                                    (3,043,666 )       (4,038,339 )
Preferred stock dividend                                      (209,180 )         (393,873 )

Net loss allocable to common shareholders                 $ (3,252,846 )     $ (4,432,212 )

Basic and diluted net loss per common share allocable
to common shareholders                                    $      (0.20 )     $      (0.29 )

Shares used in per share calculations                       15,933,486         15,025,255

Revenue

The $1.0 million, or 14.3%, decrease in product sales in 2008 compared to 2007 was due primarily to the following:

• B2000 sales to BioScrip and Roche/Trimeris decreased from $684,000 to $131,000, or 81%, primarily as a result of the October 2007 announcement from Hoffmann-La Roche Inc. and Trimeris Inc. that they were discontinuing their FDA submission for Fuzeon® to be administered with the B2000;

• there were no sales to Amgen in 2008 compared to sales of $990,000 in 2007. Since our agreement with Amgen has expired, we do not anticipate any significant sales to Amgen in future periods; and

• a decrease in sales to Merial from $2.4 million to $2.2 million, or 8%, in 2008 compared to 2007, primarily due to the timing of orders.

These factors were partially offset by the following:

• an increase in sales to Serono from $1.1 million to $1.9 million, or 76%, in 2008 compared to 2007 due to the timing of orders from Serono; and

• an increase in sales to Ferring from $421,000 to $467,000, or 11%, in 2008 compared to 2007.

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

License and technology fees decreased $909,000, or 57.7%, in 2008 compared to 2007, in accordance with the terms of our current agreements. Revenue from agreements that existed in 2007 but did not exist in 2008 totaled $902,000 in 2007. Payments from Serono increased $104,000 in 2008 compared to 2007 in connection with their October 2007 supply agreement. Payments from Merial increased $107,000 in 2008 compared to 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 $1.7 million, or 28.4%, decrease in manufacturing expense in 2008 compared to 2007 was primarily due to product volume and mix and reduced indirect manufacturing headcount. The 2008 expense included a $94,000 non-cash charge to fully write-off our goodwill balance. See Notes 2 and 7 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K 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 $1.0 million, or 31.7%, decrease in research and development expense in 2008 compared to 2007 was primarily due to the timing of expenses related to on-going projects and reduced headcount. These factors were partially offset in 2008 by $92,000 of restructuring and severance expense compared to $38,000 of restructuring and severance expense in 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 $0.6 million, or 18.3%, decrease in selling, general and administrative expense in 2008 compared to 2007 was due primarily to a decrease in restructuring and severance expense, partially offset by the hiring of our CEO in October 2007. Restructuring and severance expense included in selling, general and administrative expense totaled $1,000 in 2008 compared to $576,000 in 2007.

Restructuring and Severance

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



                                                  Year Ended December 31,
                                                    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 $0 and $129,000 at December 31, 2008 and 2007, respectively.

Interest Expense

Interest expense included the following:



                                                     Year Ended December 31,
                                                       2008            2007
       Contractual interest expense                $     149,091    $  282,069
       Amortization of debt issuance costs               144,690       102,099
       Accretion of PFG and LOF convertible debt         216,794       248,672

                                                   $     510,575    $  632,840

In addition to contractual interest expense, in future periods, interest expense will include the following:

• amortization of unamortized debt issuance costs, which totaled $7,000 at December 31, 2008 and are being amortized at the rate of $4,000 per quarter; and

• accretion of the $0.8 million outstanding convertible debt at the rate of approximately $24,000 per quarter.

Loss on Extinguishment of Debt

The amendment of the Convertible Loan, as described in Note 11 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K, 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 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 December 31, 2008 were $1.4 million compared to $2.4 million at December 31, 2007. We had a working capital deficit of $0.3 million at December 31, 2008 compared to working capital of $0.4 million at December 31, 2007. Going forward, we anticipate debt retirement costs to be approximately $165,000 per quarter in 2009 for our Convertible Loan, and, unless converted into common stock or deferred, our outstanding $600,000 convertible debt plus accrued interest will be due in May 2009. Given our current cash and cash equivalents, 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 or restructure our existing debt obligations during the second quarter of 2009, we anticipate that we will be unable to continue operations. We are addressing this issue by engaging the services of Ferghana Partners to assist us as we pursue various strategic alternatives, as well as by pursuing additional debt financing options.

The overall decrease in cash, cash equivalents and short-term marketable securities during 2008 resulted from $47,000 used for capital expenditures, $154,000 used for other investing activities, primarily patent applications, and $1.0 million used for principal payments on short and long-term debt and capital leases, partially offset by $161,000 provided by operations, as discussed in more detail below.

Net accounts receivable decreased $0.3 million to $0.5 million at December 31, 2008 compared to $0.8 million at December 31, 2007. Receivables from five different customers accounted for a total of 97% of our net accounts receivable balance at December 31, 2008, with individual accounts totaling 45%, 13%,

10%, 10% and 9%, respectively. Of the accounts receivable due at December 31, 2008, $489,000 was collected prior to the filing of this Form 10-K. Historically, we have not had collection problems related to our accounts receivable.

Inventories increased $0.2 million to $1.0 million at December 31, 2008 compared to $0.8 million at December 31, 2007, primarily due to a build-up of inventory based on forecasted sales for the first quarter of 2009.

Capital expenditures of $47,000 in 2008 were primarily for the purchase of manufacturing tooling. We anticipate spending up to a total of $50,000 in 2009 for production molds for current research and development projects.

Accounts payable decreased $0.4 million to $0.7 million at December 31, 2008 compared to $1.1 million at December 31, 2007 primarily due to payments to vendors for first quarter forecasted sales.

Derivative liabilities of $23,000 at December 31, 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 $1.8 million at December 31, 2008 compared to $0.4 million at December 31, 2007. The balance at December 31, 2008 included $1.6 million received from Merial, $217,000 received from Serono and $17,000 received from Vical. See Note 2 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for a discussion of our 2008 agreement with Merial.

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.

NEW ACCOUNTING PRONOUNCEMENTS

See Note 19 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Our critical accounting policies and estimates include the following:

• revenue recognition for product development and license fee revenues;

• inventory valuation;

• goodwill and other long-lived asset impairment;

• stock-based compensation; and

• fair value of derivative liabilities.

Revenue Recognition for Product Development and License Fee Revenues

In accordance with Staff Accounting Bulletin ("SAB") 104, "Revenue Recognition," product development revenue is recognized, to the extent of cash received, on a percentage of completion basis as qualifying expenditures are incurred. Licensing revenues, if separable, are recognized over the term of the license agreement. The FASB's Emerging Issues Task Force ("EITF") 00-21 "Accounting for Multiple Element

Arrangements" requires arrangements with multiple elements to be broken out as separate units of accounting based on their relative fair values. Revenue for a separate unit of accounting should be recognized only if the amount due can be reliably measured and the earnings process is substantially complete. Any units that can not be separated must be accounted for as a combined unit. Our accounting policy is consistent with EITF 00-21. Should agreements be terminated prior to completion, or our estimates of percentage of completion be incorrect, we could have unanticipated fluctuations in our revenue on a quarterly basis. Amounts received prior to meeting recognition criteria are recorded on our balance sheet as deferred revenues and are recognized according to the terms of the associated agreements. At December 31, 2008, deferred revenues totaled approximately $1.8 million and included amounts received from Merial, Serono and Vical.

Inventory Valuation

We evaluate the realizability of inventory values based on a combination of factors, including the following: historical and forecasted sales and usage . . .