This discussion and analysis should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2008 included in the 2008 Form 10-K and the condensed consolidated unaudited financial statements as of September 30, 2009. Operating results are not necessarily indicative of results that may occur in future periods.

Forward Looking Statements

We are including the following cautionary statement in this Quarterly Report on Form 10-Q to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by us or on our behalf. Forward looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical facts. Certain statements contained herein are forward-looking statements and accordingly involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in good faith forward-looking statements. Our expectations, beliefs and projections are expressed in good faith and are believed by us to have a reasonable basis, including, without limitation, management's examination of historical operating trends, data contained in our records and other data available from third parties, but there can be no assurance that management's expectations, beliefs or projections will result or be achieved or accomplished. Any forward-looking statement contained in this document speaks only as of the date on which the statement is made. We undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances that occur after the date on which the statement is made or to reflect the occurrence of unanticipated events.

In addition to other factors and matters discussed elsewhere herein, the following are important factors that in our view could cause actual results to differ materially from those discussed in the forward-looking statements: the rate of acceptance of our product and our product candidates by physicians or patients; the carrying-out of our research and development program for our product candidates, including demonstrating their safety and efficacy at each stage of testing; our ability to attract and/or maintain manufacturing, research, development and/or commercialization partners; the timely receipt of regulatory approvals, including product and patent approvals; the commercialization of our product candidates, at reasonable costs; the ability of our suppliers to continue to provide sufficient supply of products; the ability to compete against products intended for similar use by recognized and well capitalized pharmaceutical companies; our ability to raise capital when needed, and without adverse and highly dilutive consequences to stockholders; and our ability to retain management and attract additional employees as required. We are also subject to numerous risks relating to our product and our product candidates, manufacturing, regulatory, financial resources, competition and personnel as set forth in the section "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Except to the extent required by applicable laws or rules, we disclaim any obligations to update any forward looking statements to reflect events or circumstances after the date hereof.

Overview

We are a specialty pharmaceutical company that applies proprietary technologies to research, develop and in the case of our DylojectTM product (injectable diclofenac), commercialize new products and improved formulations of existing drugs that target current unmet and underserved medical needs primarily in the acute care pain management market. We have three late stage product candidates in clinical development in the United States ("U.S."): Dyloject (diclofenac sodium injectable), EreskaTM (intranasal ketamine, formerly referred to as PMI-150) and RylomineTM (intranasal morphine). On October 31, 2007, we received marketing authorization approval in the United Kingdom ("U.K.") for Dyloject®, our proprietary injectable formulation of diclofenac sodium (75 mg/2 ml). Commercial launch of the product occurred in December of 2007 upon first inclusion in local hospital formularies. We began recording product revenues related to sales of Dyloject in the U.K. in the first quarter of 2008.

We have devoted substantially all of our resources since we began our operations in February 1998 to the development, and during 2008 with respect to Dyloject the commercialization, of proprietary pharmaceutical products for the treatment of acute care pain. Since our inception, we have incurred an accumulated net loss attributable to our common stockholders of approximately $183.4 million through September 30, 2009, excluding approximately $3.6 million of a deemed dividend; although $18.6 million of this amount was related to a non-cash charge we incurred for the issuance of common stock in connection with the acquisition of a license. These losses have resulted principally from costs incurred in research and development activities, including acquisition of technology rights, general and administrative expenses, and most recently, sales and marketing expenses related to the commercialization of Dyloject in the U.K. Research and development activities include salaries, benefits and stock-based compensation for our research, development and manufacturing employees, costs associated with nonclinical and clinical trials, process development and improvement, regulatory and filing fees, and clinical and commercial scale manufacturing. Selling, general and administrative costs include salaries, benefits and stock-based compensation for employees, temporary and consulting expenses, and costs associated with our pre- and post-launch selling and marketing activities in the U.K.

On January 15, 2009, we entered into a License and Commercialization Agreement with Therabel Pharma N.V. under which Therabel was granted an exclusive license under certain of our technology to commercialize Dyloject and will assume all Dyloject commercialization, regulatory, and manufacturing responsibilities and expenses in the U.K. along with those for future market approvals in the E.U. and certain other countries outside of the U.S. In February 2009, we received an upfront payment of $7.0 million. In April 2009 and August 2009, we received approximately $1.7 million and $0.8 million, respectively, for the sale of our existing inventory of Dyloject to Therabel. Additionally, the agreement provides for up to $59.5 million if certain sales and regulatory milestones are met and provides for future royalties on sales of Dyloject. The agreement shall continue in full force and effect on a country-by-country basis as long as any product licensed under the agreement is being developed or commercialized for use in any disease, disorder, or condition in humans. Either party may terminate upon written notice upon the occurrence of certain events, including material breach or bankruptcy, subject to certain cure provisions and restrictions. In addition, Therabel may terminate the agreement following a specified period of prior written notice to us.

Since our inception, we have incurred approximately $124.4 million of research and development costs. The major research projects undertaken by us include the development of Dyloject, Ereska and Rylomine. Total research and development costs incurred to date for each of these products were approximately $54.8 million, $30.4 million and $19.0 million, respectively. In addition, we incurred approximately $1.6 million of research and development costs since inception that do not relate to our major research projects, and we incurred a charge of approximately $18.6 million related to the merger of Innovative Drug Delivery Systems, Inc. (our predecessor corporation) with Pain Management, Inc. and the related acquisition of a licensing agreement in 1998.

For various reasons, many of which are outside our control, including timing and results of our clinical trials, requirements imposed by regulatory agencies, obtaining regulatory approval and our dependence on third parties, we cannot estimate the total remaining costs to be incurred to commercialize our product candidates, nor is it possible to estimate when, if ever, any of our product candidates will be approved by regulatory agencies for commercial sale. In addition, we may experience adverse results in the development of our product candidates, which could result in significant delays in obtaining approval to sell our product candidates, additional costs to be incurred to obtain regulatory approval or failure to obtain regulatory approval. If any of our product candidates were to experience setbacks, it would have a material adverse effect on our financial position and operating results. Even if we successfully complete development and obtain regulatory approval of one or more of our product candidates, difficulties in commercial scale manufacturing, failure to gain favorable pricing from various institutions, and failure of physicians and patients to accept our products as a safe, cost-effective alternative compared to existing products would have a material adverse effect on our business.

Our financial statements have been prepared on a going-concern basis, which assumes realization of assets and settlement of liabilities in the ordinary course of business. We have limited capital resources, significant net operating losses and negative cash flows from operations since inception and expect these conditions to continue for the foreseeable future. Although we believe that our existing cash resources, in addition to those cash resources that we received pursuant to our registered direct offering in November 2009 described below, will be sufficient to support the current operating plan into January 2010, we will need additional financing to support our operating plan thereafter. We may raise additional funds through the private and/or public sale of our equity and/or debt securities. We may also seek to raise capital through collaborative arrangements with corporate sources or other sources of financing. There can be no assurance that such additional financing, if at all available, can be obtained on terms reasonable to us. If sufficient funds are not available, we will need to postpone or discontinue future planned operations and projects.

Results of Operations

Three and Nine Months Ended September 30, 2009 and 2008

Revenues

Product Revenue. We had no product revenue for the three months ended September 30, 2009 compared to $366,050 for the three months ended September 30, 2008. For the nine months ended September 30, 2009 and 2008, we recorded product revenue of $188,172 and $611,352, respectively. Product revenue consists entirely of sales of Dyloject, our proprietary injectable formulation of diclofenac sodium (75 mg/2 ml), to hospitals in the U.K. Commercial launch of the product occurred in December 2007 upon first inclusion in local hospital formularies. Product revenue for 2009 includes only sales to hospitals prior to the Therabel transaction in February 2009. In February 2009, we licensed our U.K. and EU rights to the product to Therabel, under which Therabel was granted an exclusive license under certain of our technology to commercialize Dyloject and will assume all Dyloject commercialization, regulatory, and manufacturing responsibilities and expenses in the U.K. along with those for future market approvals in the European Union ("E.U.") and certain other countries outside of the U.S.

We do not expect to generate any further product revenue in 2009. Any revenue we record in the remainder of 2009 will be related to our agreement with Therabel.

Partner Revenue. Our partner revenue consists of revenue related to our transaction with Therabel, which occurred in February 2009. There was no partner revenue in 2008.

A breakout of our partner revenue is as follows:

                                      Three months ended September 30,       Nine months ended September 30,
                                          2009                 2008             2009                 2008
Product sales to partner              $     829,891         $         -     $   2,553,072         $         -
Amortization of partner milestones          301,075                   -           777,777                   -
Total                                 $   1,130,966         $         -     $   3,330,849         $         -

Product sales to partner. The Agreement provides for the sale of our existing inventory to Therabel upon acceptance of the inventory by Therabel. This particular existing inventory is sold to Therabel on a one-time, royalty-free basis. Through September 30, 2009, Therabel had taken delivery of approximately $2.6 million of inventory, to which we recorded revenue of $1.7 million in the first quarter of 2009 and $0.8 million in the third quarter of 2009. Revenues from product sales are recognized when title and risk of loss have passed to the customer, which in this case was upon delivery to Therabel's third party distributor. Our entire existing inventory at the time of the Therabel agreement has been sold to Therabel.

Amortization of partner milestones. The Agreement with Therabel provided for $7.0 million in an upfront payment, which we received in February 2009. There are future performance obligations on our part under the License Agreement. The upfront payment is being recognized in our results of operations over the estimated term of the Agreement, which we expect will be through November 2014.

Costs and Expenses

Costs of Product Revenues. For the three months ended September 30, 2009 and 2008, our cost of product revenues was approximately $0.9 million and $0.3 million, respectively. For the nine months ended September 30, 2009, our cost of product revenue was approximately $2.9 million compared to $0.5 million for the first nine months of 2008.

For the three and nine months ended September 30, 2009, cost of product sales included costs of approximately $0.8 million and $2.6 million, respectively, for inventory sold to Therabel. For the three and nine months ended September 30, 2009, our cost of product revenue for our portion of royalties payable to third parties for sales recorded by Therabel during the period were approximately $68,000 and $166,000, respectively. Additionally, we recorded charges of $161,000 for the cost of product revenue associated with our third party sales during the January 1 to February 7, 2009 period. The high cost of product revenues was due to the low yields and high per unit costs for production, shipping, labeling, packaging and sampling costs related to our contract manufacturer and early supply chain deployment for a new product launch. Additionally, we incurred significant costs for new product sampling and testing prior to labeling and packaging related to Dyloject. These costs were immediately expensed to cost of goods sold in the period they occurred.

There is the potential for our gross margin on royalties to increase based on sales performances and selling prices. However, whether that potential can be realized and the extent to which such potential can be realized are uncertain.

Research and Development Expenses. Research and development expenses consist primarily of salaries, stock based compensation and related expenses for personnel, materials and supplies used to develop and manufacture our product candidates. Other research and development expenses include compensation paid to consultants and outside service providers to run the non-clinical and clinical trials. We expense research and development costs as incurred. We expect that we will continue to incur significant research and development expenses in the future as our three product candidates proceed with pivotal clinical trials and progress through the later stages of product development towards commercialization. Research and development expenses may fluctuate from period to period due to the timing and nature of non-clinical and clinical trial expenditures and regulatory filings.

Research and development expenses decreased from approximately $6.9 million for the three months ended September 30, 2008 to $4.2 million for the three months ended September 30, 2009. Research and development expenses increased from approximately $17.0 million for the nine months ended September 30, 2008 to $21.3 million for the nine months ended September 30, 2009.

For the three months ended September 30, 2009, the decrease in research and development expenses compared to the same period of 2008 was primarily attributable to lower clinical trial expenses of approximately $1.7 million for Dyloject and Ereska in the third quarter of 2009 over 2008. In the third quarter of 2009, Dyloject expenses related primarily to the remaining expenses associated with our Phase 3 safety study for Dyloject, which began enrolling in September 2008 and completed enrollment in the second quarter of 2009, intended to supplement our summary of integrated patient safety data base, a part of our New Drug Application (NDA) for Dyloject in the United States, planned for submission to the U.S. Food and Drug Administration (the "FDA") in 2009. Additional Dyloject expenses related to the pharmacokinetic (PK) safety study that began in June 2009, as well as consulting, regulatory and other costs associated with our NDA filing process for Dyloject. In the third quarter of 2008, we incurred expenses related to the initiation of our Phase 3 safety study for Dyloject and clinical trial expenses for costs related to Ereska's pivotal Phase 3 efficacy study to support the NDA for Ereska in the US, which began enrollment in June 2008. Additionally, expenses decreased by approximately $0.9 million for manufacturing-related costs for the third quarter of 2009 from the third quarter of 2008. The decrease is primarily due to the scale up and validation of Baxter Healthcare Corporation as a secondary supplier for Dyloject in the UK that occurred in the third quarter of 2008, and lower compensation and benefits for manufacturing employees due to reduced headcount in the third quarter of 2009.

For the nine months ended September 30, 2009, the increase in research and development expenses compared to the same period of 2008 was primarily attributable to higher clinical trial expenses of approximately $7.2 million for Dyloject and to a lesser extent, Ereska, in the first nine months of 2009 over 2008. The increase is directly related to expenses incurred in our Phase 3 safety study, in which a substantial portion of our enrollment occurred in 2009, our PK safety studies that occurred in 2009, as well as consulting, regulatory and other costs associated with our NDA filing process for Dyloject. Our manufacturing-related costs decreased by approximately $3.0 million for the first nine months of 2009 from the first nine months of 2008, primarily because manufacturing costs in the first nine months of 2008 included the scale up and validation of Baxter Healthcare Corporation as a secondary supplier for Dyloject in the UK, as compared to lower manufacturing costs related to stability testing and lower compensation and benefits for manufacturing employees due to reduced headcount in the first nine months of 2009.

We expect our research and development expenses to decrease in the near term. The expenses may fluctuate from period to period due to the time and nature of clinical trial expenditures and regulatory filings.

Selling, General and Administrative Expenses. Selling, general and administrative expenses include salaries, stock-based compensation and other related costs for personnel in executive, finance, accounting, information technology, sales and marketing and human resource functions. Other costs include medical information services, monitoring, sales and marketing costs related to the launch of Dyloject in the U.K., including our contracted sales force, medical education and market research. Additionally, it includes facility costs and professional fees for legal and accounting services. We expect selling, general and administrative expenses to decrease significantly in 2009, primarily due to the outlicensing of Dyloject in the U.K. to Therabel in January 2009, thereby eliminating our sales and marketing costs associated with Dyloject in the U.K and previously planned costs for the commercialization of the product in additional EU countries.

Selling, general and administrative expenses decreased from approximately $4.2 million for the three months ended September 30, 2008 to $2.4 million for the three months ended September 30, 2009. Selling, general and administrative expenses decreased from approximately $13.4 million for the nine months ended September 30, 2008 to $8.2 million for the nine months ended September 30, 2009. The decrease in selling, general and administrative expenses for the three and nine months ended September 30, 2009 over the comparable period of 2008 was primarily the result of $1.4 million and $4.2 million in decreased sales and marketing costs for the three and nine month periods, respectively, as a result of our termination of sales and marketing activities after the Therabel transaction in February 2009. Additionally, our general and administrative costs decreased by approximately $0.4 million and $1.1 million for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008. These decreases were primarily due to overall cost savings initiatives across the company, including legal fees, patent fees, and other third party service fees, as well as reduced compensation and benefits from lower headcount in 2009.

Interest Income. Interest income consists of interest earned on our cash, cash equivalents and marketable securities available for sale. Interest income decreased from approximately $0.2 million for the three months ended September 30, 2008 to approximately $6,000 for the three months ended September 30, 2009. Interest income decreased from approximately $0.8 million for the nine months ended September 30, 2008 to approximately $50,000 for the nine months ended September 30, 2009. The decrease was primarily due to current market conditions providing lower yields on investments, and lower average cash balances.

Other Income (Expense). For the three and nine months ended September 30, 2009, other expenses consisted primarily of $386,855 of realized losses on sales of our marketable securities in the third quarter of 2009, and of net realized losses on foreign exchange transactions. Other income for the nine months ended September 30, 2008 consists primarily of gains on the sales of marketable securities in the first quarter of 2008, offset by foreign exchange transaction losses realized in the third quarter of 2008.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily through the public and private sale of our equity securities, debt financings and grant revenue primarily from the U.S. Department of Defense. We may raise additional funds through the private and/or public sale of our equity and/or debt securities. We may also seek to raise capital through collaborative arrangements with corporate sources or other sources of financing. We intend to continue to use the proceeds from these sources to fund ongoing research and development activities, activities related to potential future commercialization, capital expenditures, working capital requirements and other general purposes. As of September 30, 2009, we had cash and cash equivalents of approximately $3.3 million, compared to cash, cash equivalents and marketable securities of approximately $21.6 million, including $1.6 million of long-term marketable securities, as of December 31, 2008.

On January 15, 2009, we entered into a License and Commercialization Agreement with Therabel Pharma N.V. under which Therabel was granted an exclusive license under certain of our technology to commercialize Dyloject and assumed all Dyloject commercialization, regulatory, and manufacturing responsibilities and expenses in the U.K. along with those for future market approvals in the E.U. and certain other countries outside of the U.S. In February 2009, we received an upfront payment of $7.0 million In April 2009 and August 2009, we received approximately $1.7 million and $0.8 million, respectively, for the sale of our existing inventory of Dyloject to Therabel. Additionally, the agreement provides for up to $59.5 million if certain sales and regulatory milestones are met and provides for future royalties on sales of Dyloject. The agreement shall continue in full force and effect on a country-by-country basis as long as any product licensed under the agreement is being developed or commercialized for use in any disease, disorder, or condition in humans. Either party may terminate upon written notice upon the occurrence of certain events, including material breach or bankruptcy, subject to certain cure provisions and restrictions. In addition, Therabel may terminate the agreement following a specified period of prior written notice to us.

In November 2009, we issued 3,186,700 shares of our common stock to a certain institutional investor in a registered direct offering. The aggregate gross proceeds from the offering were approximately $4.0 million, and the aggregate net proceeds, after deducting the fees of the placement agent and other offering expenses, were approximately $3.7 million. We anticipate using the net proceeds from the offering to fund clinical research and development programs for our product candidates, capital expenditures, and for other general corporate purposes. The common stock that was sold in the offering was registered on a universal shelf registration statement on Form S-3 (No. 333-140481) that was declared effective by the Securities and Exchange Commission (the "SEC") on February 12, 2007, and under which approximately $0.7 million remains available for future issuance after this offering.

Although we believe that our existing cash resources, in addition to the funds we received pursuant to our registered direct offering, will be sufficient to support the current operating plan into January 2010, we will need additional financing to support our operating plan thereafter. We may raise additional funds through the private and/or public sale of our equity and/or debt securities. We may need to raise additional funds to meet long-term planned goals. There can be no assurance that additional financing, if at all available, can be obtained on terms acceptable to us. If we are unable to obtain such additional financing, future operations will need to be scaled back or discontinued.

As a development stage enterprise, our primary efforts, to date, have been devoted to conducting research and development, raising capital, forming collaborations and recruiting staff. We have limited capital resources and revenues, have experienced a $187.0 million net loss attributable to our common stockholders and have had negative cash flows from operations since inception. These losses have resulted principally from costs incurred in research and development activities, including acquisition of technology rights, increasing costs related to potential future commercialization of our product candidates, and selling, general and administrative expenses. As of September 30, 2009, we have paid an aggregate of $5.6 million and $6.0 million in cash since inception to West Pharmaceutical and Shimoda Biotech (Proprietary) Ltd. ("Shimoda"), respectively, pursuant to agreements that we have entered into with these entities. We expect to incur additional operating losses until such time as we generate sufficient revenue to offset expenses, and we may never achieve profitable operations.

We expect that our cash requirements for operating activities will fluctuate due to the following future activities:

. . .