2.	Liquidity and management's plans:

Since inception, the Company has financed its operations principally from the sale of equity securities, proceeds from short-term borrowings or convertible notes, funded research arrangements and revenue generated as a result of its agreements with MEDA regarding ONSOLIS^®. The Company intends to finance its research and development and commercialization efforts and its working capital needs from existing cash, royalty revenue, new sources of financing, licensing and commercial partnership agreements and, potentially, through the exercise of outstanding Common Stock options and warrants to purchase Common Stock.

Significant financing and revenue through December 31, 2011 consisted of:

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approximately $14 million in net proceeds from a private placement offering of Common Stock in March 2011;

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approximately $1 million in net royalties;

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approximately $1.7 million from the exercise of Common Stock warrants;

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approximately $0.3 million in contract revenue from licensing and supply agreement (see note 6);

•

approximately $0.2 million in research revenues from various contractor agreements; and

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approximately $0.3 million from the exercise of Common Stock options.

Significant financing and revenue through December 31, 2010 consisted of:

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approximately $9.7 million in net proceeds from registered direct offering of Common Stock and warrants in April 2010;

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approximately $1 million in net royalties;

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approximately $0.7 million in research revenues from various contractor agreements;

•

approximately $0.5 million in contract revenue from licensing and supply agreement (see note 6);

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approximately $0.2 million in sponsored research revenue from the U.S. Government's Qualifying Therapeutic Discovery Project (see note 8); and

•

approximately $0.1 million from the exercise of Common Stock options.

Significant financing and revenue through December 31, 2009 consisted of:

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$26.8 million payment received in July 2009 for the approval milestone for ONSOLIS^® (See Note 5).

•

$6.0 million payment received in January 2009 which included a $3.0 million advance against the $15 million approval milestone for ONSOLIS^® and $3.0 million related to expansion of the territory covered by the Company's European agreement with Meda.

•

approximately $5.1 million from the exercise of warrants and approximately $0.7 million from the exercise of Common Stock options.

•

approximately $0.8 million in net royalties related to ONSOLIS^® sales in the U.S; and

•

completion of universal shelf registration in January 2009 for up to $50 million of the Company's securities which can potentially be drawn over a three year period based on certain terms and conditions. Such shelf registration was utilized in connection with the Company's April 2010 financing.

In addition, on January 5, 2012, the Company entered into a definitive License and Development Agreement with Endo Pharmaceuticals, Inc. ("Endo") to grant to Endo an exclusive commercial world-wide license to develop, manufacture, market and sell the Company's BEMA^® Buprenorphine product and to complete U.S. development of the Product for purposes of seeking FDA approval. Pursuant to its agreement with Endo, the Company has received and will receive certain material payments (some portion(s) of which will be utilized by the Company to support its development obligations under the License Agreement with respect to BEMA^® Buprenorphine). See Note 14.

At December 31, 2011, the Company had cash and cash equivalents of approximately $10.8 million. The Company used $23.3 million of cash in operations during the twelve months ended December 31, 2011. As of December 31, 2011, the Company had stockholders' equity of $4.1 million, versus $9.8 million at December 31, 2010. In January 2012, the Company received a $30 million, upfront non-refundable milestone payment related to the Company's definitive license and development agreement with Endo to license, develop, manufacture, market and sell its BEMA^® Buprenorphine product. In addition, the Company expects to receive an additional $15 million milestone payment from Endo due its achievement of a certain intellectual property related milestone. However, this $45 million in cash is expected to primarily be used to fund the Company's clinical research obligations under its agreement with Endo. As such, the Company's existing cash, even with the aforementioned $45 million milestone payments, together with other expected cash inflows from other milestones and royalties, are anticipated by management to be sufficient to fully fund the Company's operations through the first quarter of 2013 at the planned level. Included in this estimation are costs of between $0.6 million and $1.2 million that the Company expects will be incurred in connection with the reformulation of ONSOLIS^®, but also savings in legal expense that the Company expects due to the March 2012 stay of its litigation with MonoSol. Certain planned expenditures are discretionary and could be deferred if the Company is required to do so to fund critical operations.

Accordingly, additional capital will likely be required to support commercialization efforts for ONSOLIS^® (including commercial launch in Europe which is expected in 2012), clinical development programs for BEMA^® Buprenorphine (the scale of which is being governed in large part by the requirements of the Company's agreement with Endo), planned development of BEMA^® Buprenorphine/Naloxone and general working capital. Based on product development timelines and agreements with the Company's development partners, the ability to scale up or reduce personnel and associated costs are factors considered throughout the product development life cycle. Available resources may be consumed more rapidly than currently anticipated, resulting in the need for additional funding.

In addition, the worldwide financial and credit crisis that began in 2008 and has fluctuated to the present time has strained investor liquidity and contracted credit markets. During the year ending December 31, 2011, the financial and credit crisis did not directly nor materially impact the Company. However, if this environment continues, fluctuates or worsens, it may make the future cost of raising funds through the debt or equity markets more expensive or make those markets unavailable at a time when the Company requires additional financial investment. If the Company is unable to attract additional funds it may adversely affect its ability to achieve development and commercialization goals, which could have a material and adverse effect on the business, results of operations and financial condition.