You should read the following discussion together with our financial statements and the notes appearing elsewhere in this Form 10-K. The following discussion contains forward-looking statements. Our actual results may differ materially from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include those discussed in "Risk Factors" and elsewhere in this Form 10-K.

RESULTS OF OPERATIONS - Years ended December 31, 2008, 2007 and 2006

Introduction

We are a biopharmaceutical company engaged in the research, production and delivery of small proteins, referred to as peptides, for medical use. We have a patented manufacturing technology for producing many peptides cost-effectively. We also have patented oral and nasal delivery technologies that have been shown to deliver medically useful amounts of various peptides into the bloodstream. We currently have three operating locations: administrative and regulatory offices in Boonton, New Jersey, a laboratory research facility in Fairfield, New Jersey and a pharmaceutical production facility in Boonton, New Jersey.

Our primary focus has been on the development of calcitonin and other peptide products for the treatment of osteoporosis and other indications. Our revenue for the past three years has primarily been derived from domestic sources. We have licensed worldwide rights to our manufacturing and delivery technologies for oral PTH for the treatment of osteoporosis to GSK. We have also licensed in the U.S. our nasal calcitonin product for the treatment of osteoporosis, which we have trademarked as Fortical, to USL. Fortical was approved by the FDA in 2005. This is our first product approval in the United States. We have also licensed worldwide rights to our patented manufacturing technology for the production of calcitonin to Novartis. We have licensed to our Chinese joint venture certain proprietary technologies and know-how to support the research, development and manufacturing of recombinant salmon calcitonin and non-oral PTH, as well as other possible products, in the People's Republic of China.

To expand our product pipeline: we are developing our SDBG technology in conjunction with Yale University; we have in-licensed technology from Queen Mary, University of London relating to potential therapies for inflammation and cardiovascular disease; and we periodically perform feasibility studies for third parties. Our products, other than Fortical in the United States, will require clinical trials and/or approvals from regulatory agencies and all of our products will require acceptance in the marketplace. There are risks that these clinical trials will not be successful and that we will not receive regulatory approval or significant revenue for these products.

We compete with specialized biotechnology and biopharmaceutical companies, major pharmaceutical and chemical companies and universities and research institutions. Most of these competitors have substantially greater resources than we do. In December 2008, Apotex and Sandoz launched nasal calcitonin products which are generic to Novartis' nasal calcitonin product, but not to Fortical. We do not yet know the effect on Fortical sales and royalties of the launch of these competing products. It is reasonable to assume that certain providers may substitute these products for Fortical and, in that event, Fortical sales and royalties would decrease. In addition, Apotex has a pending ANDA for a nasal calcitonin product that we claim infringes on our Fortical patent. If we do not prevail in that litigation, then Apotex could be in a position to market its nasal calcitonin product if and when its pending ANDA receives FDA approval.

We generate revenue through licensing and supply agreements with pharmaceutical companies and by achieving milestones, product sales and royalties under these agreements. Those agreements, to date, have not been sufficient to generate all of the cash necessary to meet our needs. In addition, there are risks that current collaborations will not be successful and that future collaborations will not be consummated. We have tried to mitigate these risks by developing additional proprietary technologies and by pursuing additional licensing opportunities but there is no guarantee that these efforts will be successful.

We have also generated cash from loans, including officer loans, as well as from stock offerings. The loans have added debt to our balance sheet and, the officer loans, after being restructured in 2007, require repayment over a five-year period beginning in May 2010. The Victory Park loan is due in full in 2011. Our various stock offerings have provided needed cash but it is uncertain whether we can obtain future financing under favorable terms, or at all.

The current need of major pharmaceutical companies to add products to their pipeline is a favorable sign for us and for other small biopharmaceutical companies. However, this need is subject to rapid change and it is uncertain whether any additional pharmaceutical companies will have interest in licensing our products or technologies.

Revenue

Our revenue is summarized as follows for the years ended December 31, 2008, 2007
and 2006:



                                              2008           2007          2006
     Product Sales                        $ 10,057,938   $ 12,758,640   $ 2,829,678
     Royalty Revenue                         6,519,942      5,572,349     2,450,531
     Licensing Revenue                       1,256,760      1,173,429       756,759
     Development Fees and Other Revenue      1,394,793        918,411        21,964


                                          $ 19,229,433   $ 20,422,829   $ 6,058,932

Revenue for the year ended December 31, 2008 decreased $1,194,000, or 6%, to $19,229,000 from $20,423,000 in the comparable period in 2007. The decrease was primarily due to the $2,500,000 supply agreement signed with Novartis in 2007, under which we recognized $2,200,000 in product sales and $300,000 in development service fees for the year ended December 31, 2007. Fortical royalties increased 17% to $6,520,000 in 2008 from $5,572,000 in 2007 due to USL's increased selling price per vial. Fortical sales decreased 5% to $10,058,000 in 2008 from $10,559,000 in 2007 due to a 5% reduction in vials ordered by USL. Revenue for the year ended December 31, 2007 increased $14,364,000, or 237%, to $20,423,000 from $6,059,000 in the comparable period in 2006. This increase was primarily due to an increase in market share for Fortical during 2007 resulting in an increase of Fortical sales to USL of $7,737,000 for the year ended December 31, 2007 compared to the comparable period in 2006. In addition, there was an increase in Fortical royalties of $3,122,000 for the year ended December 31, 2007 compared to the comparable period in 2006, primarily related to the increase in Fortical market share. In the first half of 2006, because distributors' inventories at that time were sufficient to meet demand, we did not have any sales of Fortical to USL. Sales recommenced in the third quarter of 2006. Royalties for the year ended December 31, 2007 included an extra month of royalty revenue (see below). Fortical royalties fluctuate each quarter based upon the timing of USL's shipment to its customers. Royalty revenue is earned on sales of Fortical by USL and is recognized in the period Fortical is sold by USL. USL's royalty reports are based on their manufacturing quarters which prior to 2007 differed from calendar quarters by one month. Starting in the first quarter of 2007, USL began providing royalty information for the last month of the calendar quarter. Therefore, our March 31, 2007 quarter (and only that quarter) included royalty revenue for four months, from December 2006 through March 2007. Subsequent quarters have reported three months of royalty revenue corresponding to our calendar quarters. The effect of the inclusion of the fourth month of royalty revenue in the year ended December 31, 2007 was an additional $873,000 of royalty revenue.

Licensing revenue represents the partial recognition of milestones and up-front payments received in prior years. Licensing revenue increased 7% to $1,257,000 in 2008 from $1,173,000 in 2007 and increased 55% in 2007 from $757,000 in 2006. These increases were due to the $5,500,000 milestone received in 2007 from Novartis. This milestone has been deferred and is being recognized over an eleven year period, representing the estimated remaining term of the agreement.

Development fees and other revenue increased 52% to $1,395,000 in 2008 from $918,000 in 2007 primarily due to an increase in development work and feasibility studies for various pharmaceutical and biotechnology companies. Development fees and other revenue of $918,000 for the year ended December 31, 2007 primarily represents reimbursements under a government grant, which totaled $505,000 in 2007 and increased $896,000 in 2007 from 2006.

Future sales and royalties are contingent upon many factors including competition, pricing, marketing and acceptance in the marketplace and, therefore, are difficult to predict. Milestone revenue is based upon one-time events and is generally correlated with the development strategy of our licensees and is therefore subject to uncertain timing and not predictive of future revenue. Bulk peptide sales to our partners under license or supply agreements prior to product approval are typically of limited quantity and duration and also not necessarily predictive of future revenue. Additional peptide sales are dependent upon the future needs of our partners, which we cannot currently estimate. Sales revenue from Fortical in future years will depend on Fortical's continued acceptance in the marketplace, as well as competition and other factors. In December 2008, Apotex and Sandoz launched nasal calcitonin products which are generic to Novartis' nasal calcitonin product, but not to Fortical. We do not yet know the effect on Fortical sales and royalties of the launch of these competing products. It is reasonable to assume that certain providers may substitute these products for Fortical and, in that event, Fortical sales and royalties would decrease. Therefore, it is unlikely that Fortical alone will generate sufficient revenue for us to achieve profitability. In addition, Apotex has a pending ANDA for a nasal calcitonin product that we claim infringes on our Fortical patent. If we do not prevail in that litigation, then Apotex could be in a position to market its nasal calcitonin product if and when its pending ANDA receives FDA approval.

Cost of Goods Sold

Cost of goods sold varies by product and consists primarily of material costs, personnel costs, manufacturing supplies and overhead costs such as depreciation and maintenance. Cost of goods sold decreased 22% in 2008 to $5,622,000 from $7,223,000 in 2007. The decrease was due to reduced product sales in 2008 due to the non-recurring peptide sales to Novartis in 2007 as well as to the slight reduction in Fortical sales. Cost of goods sold increased 312% in 2007 to $7,223,000 from $1,753,000 in 2006 due to significantly increased sales of 351%. Cost of goods sold for 2008 represented our costs associated with Fortical production for USL, whose purchases from us fluctuate each quarter. Cost of goods sold for 2007 represented costs associated with our Fortical production for USL and our peptide production for Novartis. Future production related expenses for 2009 and later years will be dependent upon the level of future Fortical sales, as well as possible peptide production to meet our partners' needs. Cost of goods sold, as a percentage of sales was 56%, 57% and 62%, respectively, for 2008, 2007 and 2006 and should decline in 2009 due to the utilization of calcitonin produced by a more efficient manufacturing process.

Research, Development and Facility Expenses

Research, development and facility expenses primarily consist of personnel costs, supplies, outside testing and consultants primarily related to our research and development efforts or activities related to our license agreements, as well as depreciation and amortization expense. All of our production and a portion of our research, development and facility costs are associated with our manufacturing facility in Boonton, New Jersey, where costs are relatively fixed month-to-month. We allocate such costs to the manufacture of production batches for inventory purposes, to cost of goods sold or to research, development and facility activities, based upon the activities undertaken by the personnel in Boonton each period.

Research, development and facility expense, our largest expense, increased 23% in 2008 to $10,445,000 from $8,485,000 in 2007 and decreased 1% in 2007 from $8,567,000 in 2006. The 2008 increase was primarily due to increased expenses including costs for clinical trials for our oral calcitonin and oral PTH products. Our expenses increased $1,304,000 for our oral calcitonin program and expenses increased $444,000 for our oral PTH program.

The 2007 decrease was due to the increase in our production activities which resulted in a redeployment of Boonton resources which reduced certain Boonton expense allocations to research and development. This was mostly offset by an increase in expenditures for certain product development programs, including oral calcitonin. Cost of materials and supplies decreased $1,436,000, as more of these costs were allocated to cost of goods sold due to increased Fortical sales. Expenses for our oral calcitonin development program increased $383,000 primarily due to preclinical and clinical trials; contractual research increased $521,000 primarily due to expenses related to the in-licensing of technology from the University of London, as well as for expenses incurred for certain preclinical studies. In addition, laboratory salaries increased $403,000 due primarily to the hiring of additional personnel, as well as an increase in non-cash stock option compensation.

Research and development expenses could fluctuate in future years depending on the timing of expenses, including clinical trials, and extent of reimbursement of expenditures to further develop our products and technologies and to perform feasibility studies on behalf of third parties. Expenditures for the sponsorship of collaborative research programs were $702,000, $497,000, and $246,000 in 2008, 2007 and 2006, respectively, which are included as research and development expenses. The 2008 and 2007 increases were due to expenses related to our collaboration with Queen Mary, University of London.

Research and Development Projects

GSK: In April 2002, we signed a licensing agreement with GSK for a value before royalties, PTH sales and reimbursement for development expenses, of up to $150,000,000 to develop an oral formulation of an analog of PTH currently in clinical development for the treatment of osteoporosis, as described in Part I, Item 1 "Business" of this report. During 2008, 2007 and 2006, and since inception, direct and indirect costs associated with this project were approximately $801,000, $335,000, $1,147,000 and $8,741,000, respectively.

Novartis: In April 2004, we signed a worldwide licensing agreement with Novartis for a value before royalties of up to $18,700,000 to allow Novartis to manufacture calcitonin using our patented peptide production process, as described in Part I, Item I "Business" of this report. Most future costs will be borne by our licensee. Novartis will be conducting all future product development and clinical trials for its oral calcitonin product in conjunction with its partner, a competitor of ours. Therefore, the anticipated completion date is outside our control and unknown to us. During 2008, 2007 and 2006, and since inception, direct and indirect costs associated with this project were approximately $124,000, $3,000, $0, and $4,067,000 respectively.

Other research and development projects include oral calcitonin, SDBG, new peptide discovery including a possible novel obesity peptide, various feasibility studies for peptide delivery and manufacturing, as well as improvements to our delivery and manufacturing technologies.

Inventory Reserve

Inventory reserve charges in 2008 were $223,000, representing potential second source material components for Fortical which may not be usable. Inventory reserve charges in 2006 were $296,000, representing excess peptide production under our 2007 supply agreement with Novartis.

General and Administrative Expenses

General and administrative expenses increased 1% to $7,889,000 in 2008 from $7,812,000 in 2007 and increased 22% in 2007 from $6,423,000 in 2006. The 2008 increase was primarily attributable to increased depreciation, amortization and impairment expenses of $263,000 due to the construction of our new administrative offices and the impairment of certain patents and patent applications; increased personnel expenses of $197,000 primarily due to higher salaries and health insurance costs; and increased travel expenses of $85,000. These increases were mostly offset by a decrease in legal and accounting fees of $508,000 primarily due to a reduction in legal costs associated with our patent infringement litigation. The 2007 increase was primarily attributable to an increase of $1,109,000 in professional fees, mainly due to patent infringement litigation fees; an increase of $305,000 in officers' compensation, due to salary increases, the hiring of a new officer, as well as an increase of $111,000 in non-cash stock option compensation; and an increase of $194,000 in consultant fees, mainly due to increases in office construction consultant fees, as well as increased directors' fees including non-cash stock option compensation. These were partially offset by a decrease in deferred compensation expense of $284,000, due to the initial charge in 2006 associated with the adoption of our deferred compensation plan in the first quarter of 2006. We expect that general and administrative expenses may continue to increase in future years due to possible additional non-cash stock option compensation expense and to anticipated escalation of legal, personnel, insurance and other costs.

Interest Income

Interest income decreased $184,000 or 60% in 2008 to $121,000 from $305,000 in 2007. This decrease was due to fewer funds available for investment during the first nine months of 2008, as well as reduced interest rates earned in 2008. Interest income increased 15% in 2007 to $305,000 from $265,000 in 2006. This increase was primarily due to higher interest rates earned on investments in 2007.

Interest Expense

Interest expense increased 53% in 2008 to $2,102,000 from $1,378,000 in 2007. The increase was primarily due to the $15,000,000 note issued to Victory Park on September 30, 2008. This note bears interest at the prime rate plus 7%, subject to a floor of 14% per annum and a cap of 18% per annum. During 2008 we recognized $700,000 in cash and non-cash interest expense under this note. Interest expense under this note in future years should approximate $700,000 per quarter depending on principal repayments and prevailing interest rates thereby increasing future interest expense. Interest expense decreased 14% in 2007 to $1,378,000 from $1,598,000 in 2006 due to the loan restructuring described below. On May 10, 2007, the outstanding principal and interest on all Levy loans totaled $15,737,517 after an aggregate of $1,010,000 in repayments during 2007. On that date, interest rates ranged from 8.5% to 14.2% with certain loans accruing compound interest. The total of $15,737,517 in principal and interest was restructured as eight-year term notes with a fixed simple interest rate of 9% per annum. Interest expense is calculated using an effective interest method, at a rate of 7.6%, over the life of the restructured loans due to the deferred payment schedule contained in the notes. Required quarterly payments of principal and interest under these new notes begin in May 2010 over a five-year period.

Loss from Investment in Joint Venture

This expense represents our 45% ownership percentage of our China joint venture's profits and losses. Our share of the 2008 loss of the joint venture was $139,000, an increase of $136,000 from 2007. Joint venture activities accelerated in 2008 due to the joint venture receiving its certificate of incorporation. The joint venture hired additional personnel and began construction and other activities for its future manufacturing and research facilities.

Gain on Technology Transfer to Joint Venture

This gain represents the difference between the fair value of the technology and licenses transferred to the joint venture and the book value of these assets. The joint venture valued these assets at $4,500,000; their book value was $0 representing a gain of $4,500,000. This gain will be recognized over 17 years, the estimated life of the transferred assets, at approximately $265,000 per year. Due to the significant transfer of know-how and technology during the fourth quarter, we recognized a gain of $66,000 in 2008, one-fourth of the annual gain to be recognized.

Income Tax Benefit

The income tax benefit in 2008, 2007 and 2006 of $926,000, $724,000 and $529,000, respectively, consists primarily of proceeds received for sales of a portion of our state tax net operating loss carry forwards and research credits under a New Jersey Economic Development Authority program, which allows certain New Jersey taxpayers to sell their state tax benefits to third parties. The purpose of the New Jersey program is to provide financial assistance to high-technology and biotechnology companies in order to facilitate future growth and job creation.

Net Loss

Net loss for 2008 increased 76% to $6,078,000 from $3,448,000 in 2007 primarily due to a decrease in revenue of $1,193,000, principally from the $2,500,000 of non-recurring revenue from Novartis in 2007. In addition, operating expenses in 2008 increased $660,000 primarily due to increased research, development and facility expenses partially offset by a decline in cost of goods sold. In addition, interest expense increased $724,000 primarily due to our note payable to Victory Park. Net loss for 2007 decreased approximately $8,336,000, or 71%, to $3,448,000 from $11,784,000 in 2006. This was due to increased revenue of $14,364,000, primarily from USL and Novartis, partially offset by an increase in operating expenses of $6,483,000 mainly from an increase in cost of goods sold of $5,470,000 due to the increased sales of Fortical to USL and peptide to Novartis. Net losses are likely to continue unless we achieve non-deferred revenue from milestones under our GSK and Novartis agreements, sign new revenue generating research, licensing or distribution agreements or generate sufficient sales and royalties from Fortical.

Summary of Critical Accounting Policies

The SEC defines "critical accounting policies" as those that are both important to the portrayal of a company's financial condition and results, and require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

The following discussion of critical accounting policies represents our attempt to bring to the attention of the readers of this report those accounting policies which we believe are critical to our financial statements and other financial disclosure. It is not intended to be a comprehensive list of all of our significant accounting policies, which are more fully described in Note 3 of the Notes to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2008. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles ("GAAP"), with no need for management's judgment in the application of GAAP.

Revenue Recognition: We recognize revenue from the sale of products and from royalties, licensing agreements, research services and grants. Revenue from the sale of product is recognized when title to product and risk of loss are transferred, collection is reasonably assured and we have no further obligations. If there are elements of the revenue recognition requirements that are not met at the time of shipment, the revenue is deferred and the corresponding cost of the product is included on our balance sheet as a deferred asset. Revenue from research services is recognized when services are rendered. We occasionally apply to various government agencies for research grants. Revenue from such research grants is recognized when work is conducted under the grant. Sales and grant revenues generally do not involve difficult, subjective or complex judgments. We recognize royalty revenue on an accrual basis in accordance with the terms of individual agreements. If the receipt of royalty revenue is contingent on a future event, revenue would be recognized when that event has occurred. Typically, royalties are recognized when third party results can be reliably measured and collectability is reasonably assured. In the case of USL, we recognize royalty revenue based upon the quarterly USL royalty report. This enables a reliable measure, as well as reasonable assurances of collectability. Royalty revenue is earned on sales of Fortical by USL and is recognized in the period Fortical is sold by USL. USL's royalty reports are based on their manufacturing quarters which prior to 2007 differed from calendar quarters by one month. Starting in the first quarter of 2007, USL began providing royalty information for the last month of the calendar quarter. Therefore, our March 31, 2007 quarter (and only that quarter) includes royalty revenue for four months, from December 2006 through March 2007. All subsequent quarters have reported three months of royalty revenue corresponding to our calendar quarters. The effect of the inclusion of the extra month of royalty revenue in the year ended December 31, 2007 is an additional $873,000 of revenue.

Licensing agreements typically include several elements of revenue, such as up-front payments, milestones, royalties upon sales of product and the delivery of product and/or research services to the licensee. We follow the accounting guidance of SEC Staff Accounting Bulletin No. 104 (which superseded SEC Staff Accounting Bulletin No. 101) ("SAB 104"), an analogy to EITF No. 91-6 and EITF No. 00-21 (which became effective for contracts entered into after June 2003). Non-refundable license fees received upon execution of license agreements where we have continuing involvement are deferred and recognized as revenue over the estimated performance period of the agreement. This requires management to estimate the expected term of the agreement or, if applicable, the estimated life of its licensed patents. For our USL and GSK agreements, the following describes our revenue recognition accounting policy. Non-refundable milestone payments that represent the completion of a separate earnings process and a substantive step in the research and development process are recognized as revenue when earned at the lesser of 1) the non-refundable cash received or 2) the proportionate level of effort expended to date during the development stage multiplied by the development stage revenue. This sometimes requires management to judge whether or not a milestone has been met and when it should be recognized in the financial statements. Typically, this would involve discussions between management and our licensing partner. Payments for milestones for which the completion of the earnings process is not yet complete . . .