UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 000-50680

BARRIER THERAPEUTICS, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	22-3828030
(State or Other Jurisdiction of Incorporation)	(I.R.S. Employer Identification Number)

600 College Road East, Suite 3200 Princeton, NJ	08540
(Address of Principal Executive Offices)	(Zip Code)

(609) 945-1200

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

¨  Large accelerated filer    x  Accelerated filer    ¨  Non-accelerated filer    ¨  Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class	Outstanding as of May 7, 2008
Common Stock, par value $.0001	35,169,441 Shares

BARRIER THERAPEUTICS, INC.

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS	3
PART I – FINANCIAL INFORMATION	4
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS	4
UNAUDITED CONSOLIDATED BALANCE SHEETS	4
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS	5
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS	6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS	7
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	21
ITEM 4. CONTROLS AND PROCEDURES	21
PART II – OTHER INFORMATION	22
ITEM 1A. RISK FACTORS	22
ITEM 6. EXHIBITS	40
SIGNATURES	41

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical facts or statements of current condition, this report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements contained in this report constitute our expectations or forecasts of future events as of the date this report was filed with the SEC and are not statements of historical fact. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Such statements may include words such as “anticipate,” “will,” “estimate,” “expect,” “project,” “intend,” “should,” “plan,” “believe,” “hope,” and other words and terms of similar meaning. In particular, these forward-looking statements include, among others, statements about:

• the trend of operating losses and the reasons for those losses;

• the commercialization of our products, particularly our Xolegel®, Vusion® and Solagé® products;

• the future commercialization of any of our product candidates, if approved, particularly our Hyphanox™ product candidate;

• the market success of our products and anticipated revenues associated with those products;

• our plans to in-license or acquire dermatological products for marketing;

• our spending on the clinical development of our product candidates;

• our plans regarding the development or regulatory path for any of our product candidates, particularly with respect to our Hyphanox, Rambazole™, Pramiconazole and Hivenyl™ product candidates;

• our plans to secure arrangements to help fund the development of Pramiconazole and Rambazole;

• the timing of the initiation or completion of any clinical trials, particularly with respect to our Hyphanox, Rambazole, Pramiconazole and Hivenyl product candidates;

• the potential safety or efficacy profiles anticipated for any of our product candidates;

• the timing of filing for regulatory approvals with governmental agencies; and

• other statements regarding matters that are not historical facts or statements of current condition.

Any or all of our forward-looking statements in this report may turn out to be wrong. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Therefore, you should not place undue reliance on any such forward-looking statements. The factors that could cause actual results to differ from those expressed or implied by our forward-looking statements include, in addition to those items set forth in Part II, Item 1A under the heading “Risk Factors”, our ability to:

• obtain substantial additional funds;

• obtain and maintain all necessary patents or licenses;

• market our Xolegel, Vusion and Solagé products, and product candidates if approved, and increase revenues;

• enter into development arrangements for Pramiconazole and Rambazole;

• demonstrate the safety and efficacy of product candidates at each stage of development;

• meet applicable regulatory standards in the United States to commence or continue clinical trials, particularly with respect to our Hyphanox, Rambazole, Pramiconazole and Hivenyl product candidates, and in the case of Rambazole, to remove the product from clinical hold;

• meet applicable regulatory standards and file for or receive required regulatory approvals;

• produce our drug products in commercial quantities at reasonable costs and compete successfully against other products and companies;

• meet our obligations and required milestones under our license and other agreements, including our agreements with the Johnson & Johnson family of companies; and

• accurately estimate prescription demand, inventory levels, rebates, product returns and other financial related data from third parties in our revenue recognition process.

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PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

BARRIER THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(Dollars in thousands)	March 31, 2008			December 31, 2007
Assets
Current assets:
Cash and cash equivalents	$	20,994		$	18,895
Marketable securities		16,317			29,568
Receivables, net of allowances of $238 and $262, respectively		9,955			11,792
Inventories, net		644			793
Prepaid expenses and other current assets		4,295			3,381
Total current assets		52,205			64,429
Property and equipment, net		669			659
Product rights, net		1,990			2,078
Other assets		229			250
Total assets	$	55,093		$	67,416
Liabilities and stockholders’ equity
Current liabilities:
Notes payable, current portion	$	8,860		$	8,711
Accounts payable		7,272			7,864
Accrued expenses		17,878			16,802
Other current liabilities		13			17
Total current liabilities		34,023			33,394
Notes payable, long-term portion		86			104
Stockholders’ equity:
Common stock, $.0001 par value; 80,000,000 shares authorized; 35,168,921 issued and outstanding at March 31, 2008; and 34,997,292 issued and outstanding at December 31, 2007		4			3
Additional paid-in capital		293,171			292,044
Accumulated deficit		(271,806	)		(257,850	)
Accumulated other comprehensive loss		(385	)		(279	)
Total stockholders’ equity		20,984			33,918
Total liabilities and stockholders’ equity	$	55,093		$	67,416

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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BARRIER THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(Dollars in thousands, except per share data)	Three months ended March 31,
	2008			2007
Revenues:
Net product revenues	$	8,333		$	2,649
Other revenues		17			73
Total net revenues		8,350			2,722
Costs and expenses:
Cost of product revenues		639			459
Research and development		6,269			7,853
Selling, general and administrative		15,779			10,445
Total operating expenses		22,687			18,757
Loss from operations		(14,337	)		(16,035	)
Interest income		418			685
Interest expense		(37	)		(15	)
Net loss	$	(13,956	)	$	(15,365	)
Basic and diluted net loss per share	$	(0.40	)	$	(0.53	)
Weighted-average shares outstanding—basic and diluted		34,889,122			29,111,539

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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BARRIER THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(Dollars in thousands)	Three months ended March 31,
	2008			2007
Operating activities
Net loss	$	(13,956	)	$	(15,365	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		125			112
Amortization of product rights		88			88
Loss on fixed assets retirement		35			—
Stock based compensation expense		1,020			1,151
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		(914	)		213
Inventories, net		149			183
Receivables		1,837			(359	)
Accounts payable and accrued expenses		484			1,069
Deferred revenue		—			(215	)
Other, net		18			120
Net cash used in operating activities		(11,114	)		(13,003	)
Investing activities
Purchase of fixed assets		(170	)		(42	)
Purchase of marketable securities		(3,935	)		(14,621	)
Sale and maturities of marketable securities		17,194			29,054
Net cash provided by investing activities		13,089			14,391
Financing activities
Borrowing under notes payable		8,680			—
Repayment of notes payable		(8,549	)		(93	)
Proceeds from exercise of stock options and other benefit plans		107			184
Net cash provided by financing activities		238			91
Effect of exchange rate on cash and cash equivalents		(114	)		12
Net increase in cash and cash equivalents		2,099			1,491
Cash and cash equivalents, beginning of period		18,895			11,061
Cash and cash equivalents, end of period	$	20,994		$	12,552
Supplemental disclosures of cash flow information
Cash paid during the period for interest	$	70		$	15

The accompanying notes are an integral part of these unaudited consolidated financial statements.

6

BARRIER THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Summary of Significant Accounting Policies

Organization, Description of Business and Basis of Presentation

Barrier Therapeutics, Inc. (the “Company”) is a pharmaceutical company focused on the development and commercialization of pharmaceutical products in the field of dermatology. The Company’s strategy is to become a leader in the development and commercialization of proprietary innovative products in therapeutic dermatology. Due to pricing pressures on its current product portfolio the Company has discontinued sales and marketing efforts in Canada and the European Union.

The Company currently markets three pharmaceutical products in the United States, Xolegel (ketoconazole, USP) Gel 2%, Vusion (0.25% miconazole nitrate, 15% zinc oxide, and 81.35% white petrolatum) Ointment and Solagé (mequinol 2.0% and tretinoin 0.01%) Topical Solution. The Company markets its products directly to dermatologists and other target physicians through both its own specialty sales force and under a co-promotion agreement with Novartis Consumer Health in the United States.

The Company has other product candidates in various stages of clinical development for the treatment of a range of dermatological conditions, including onychomycosis, psoriasis, acne, skin allergies and superficial fungal infections. In addition, the Company has access to the classes of compounds claimed in the patents licensed to it under its license agreements with affiliates of Johnson & Johnson. The development of each of the product candidates involves significant risks. No assessment of the efficacy or safety of any product candidate can be considered definitive until all clinical trials needed to support a submission for marketing approval are completed.

The Company has financed its operations and internal growth almost entirely through proceeds from private placements of preferred stock, its initial public offering in the second quarter of 2004 and its follow-on public offerings in the first quarter of 2005, the third quarter of 2006 and the third quarter of 2007. In June 2007, the Company entered into a $12 million senior secured credit facility to finance ongoing working capital requirements of its commercial operations.

The Company believes that its existing resources should be sufficient to find its anticipated operating expenses, debt obligations and capital requirements for the next twelve months. However, the Company’s capital requirements will depend on many factors, including the success of its development and commercialization of the Company’s product candidates. Even if the Company succeeds in developing and commercializing additional product candidates, it may never generate sufficient sales revenue to achieve or maintain profitability. There can be no assurance that the Company will be able to obtain additional capital when needed on acceptable terms, if at all.

Consolidation

The financial statements include the accounts of Barrier Therapeutics, Inc. and its wholly-owned subsidiaries, Barrier Therapeutics, NV and Barrier Therapeutics Canada Inc. All significant inter-company transactions and balances are eliminated in consolidation. The Company has no unconsolidated subsidiaries or investments accounted for under the equity method.

Basis of Presentation and Accounting Policies

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of adjustments of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2008 are not necessarily indicative of the results for the full year ending December 31, 2008. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2007 Form 10-K as filed with the Securities and Exchange Commission (“SEC”).

The Company included a Summary of Significant Accounting Policies as Note 2 to Consolidated Financial Statements in its 2007 Annual Report on Form 10-K. There have been no changes to the Significant Accounting Policies with the exception of the Company’s adoption of FASB Statement 157, Fair Value Measurement (“Statement 157”) as described herein.

Recent Accounting Pronouncements

The Company adopted the provisions of Statement 157 on January 1, 2008. Statement 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and establishes a hierarchy that categorizes and prioritizes the inputs to be used to estimate fair value. The three levels of inputs used are as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

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Level 2 – Inputs other than Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data by correlation or other means.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

On February 6, 2008, the FASB issued FASB Staff Position (FSP) 157-b which delays the effective date of Statement 157 for one year for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Statement 157 and FSP 157-b are effective for financial statements issued for fiscal years beginning after November 15, 2007. The company adopted SFAS 157 except as it applies to those nonfinancial assets and liabilities as affected by the one-year delay. The adoption of SFAS 157 did not have a material impact on the Company’s consolidated financial statements.

In accordance with FAS 157, the following table represents the fair value hierarchy for the financial assets measured at fair value on a recurring basis as of March 31, 2008:

(in thousands)	Total		Level 1		Level 2
Cash and cash equivalents	$	20,994	$	20,994	$	—
Corporate debt securities		15,967		15,967		—
Asset-backed securities		350		—		350
Total	$	37,311	$	36,961	$	350

2. Inventories

Inventories consist of finished goods and raw materials and are valued at the lower of cost or market, and include shipping and handling costs. Cost is computed on inventories using the first-in, first-out (“FIFO”) method. Inventories consist of the following:

(in thousands)	March 31, 2008			December 31, 2007
Finished goods inventory	$	895		$	1,125
Raw materials inventory		128			—
Valuation allowance		(379	)		(332	)
Total Inventories	$	644		$	793

The majority of inventories are subject to expiration dating. The Company regularly evaluates inventory for short-dated or slow-moving products, and when, in the opinion of the Company, factors indicate short-dated or slow-moving products exist, the Company establishes a reserve against the inventories’ carrying value. Determination that a valuation reserve might be required, in addition to the quantification of such reserve, requires the Company to utilize significant judgment. The Company bases analysis, in part, on the level of inventories on hand in relation to the estimated forecast of product demand, production requirements for forecasted product demand and the expiration dates of inventories. Although the Company makes every effort to ensure the accuracy of forecasts of future product demand, any significant unanticipated decreases in demand could have a material impact on the carrying value of the Company’s inventories and the Company’s reported operating results.

The Company expenses inventory costs associated with products prior to regulatory approval as research and development expense.

3. Stock Compensation

At March 31, 2008, the Company had two stock compensation plans, which are described more fully in Note 9 in the Company’s audited consolidated financial statements on Form 10-K for the year ended December 31, 2007. These plans include the 2004 Stock Incentive Plan (the “2004” Plan) and the Employee Stock Purchase Plan (the “ESPP”). The 2004 Plan allows the Company to offer shares of its common stock to key employees, Directors, advisors and consultants pursuant to option grants, stand-alone stock appreciation rights, direct stock issuances and other stock based awards. The ESPP Plan allows eligible employees the opportunity to acquire shares of Barrier’s common stock at periodic intervals through accumulated payroll deductions.

Stock options are granted to employees at exercise prices equal to the fair market value of the Company’s stock at date of grant. Stock options generally vest over four years and have a term of 10 years. Compensation cost is recognized over the requisite service period for each separately vesting portion of the stock option. The expense is recognized, net of forfeitures,

8

over the vesting period of the options using an accelerated method. The fair value of the options was estimated using the Black Scholes pricing model as described in detail in Note 9 in the Company’s audited consolidated financial statements on Form 10-K for the year ended December 31, 2007.

The fair value of the options for the three month period ended March 31, 2008 and 2007 was estimated using the Black-Scholes pricing model with the following assumptions:

	Three months ended March 31,
	2008		2007
Risk-free interest rate	2.70	%	4.65	%
Dividend yield	0	%	0	%
Weighted average expected life	5.83 years		5.91 years
Volatility	62.27	%	65.0	%

Restricted stock awards are granted to certain employees under the 2004 Plan. Compensation cost is recognized over the requisite service period for each separately vesting portion of the stock award based on the grant date fair value of the awards expected to vest using an accelerated method.

The Company records compensation expense related to its ESPP Plan. Eligible employees may purchase shares at the lower of 85% of the fair market value at the first day of the purchase period or the fair market value at the purchase date.

The following table summarizes information about stock option activity during the quarter ended March 31, 2008:

	Options Outstanding
	Number of Shares		Weighted- Average Exercise Price
Balance at December 31, 2007	3,125,901		$	7.91
Shares authorized	—			—
Options granted	913,463			3.35
Options exercised	(6,625	)		0.80
Options forfeited	(137,191	)		8.30
Balance at March 31, 2008	3,895,548		$	6.84

The following is a summary of changes in restricted stock awards during the quarter ended March 31, 2008:

	Shares		Weighted Average Fair Value Per Share
Unvested, December 31, 2007	150,391		$	7.19
Granted, net of forfeitures	126,866		$	3.35
Vested	(33,201	)	$	3.35
Unvested, March 31, 2008	244,056		$	5.70

Stock based compensation expenses were as follows:

	Three months ended March 31,
(in thousands)	2008		2007
Research and Development	$	205	$	293
Selling, General and Administrative		815		858
Total Stock Based Compensation Expense	$	1,020	$	1,151

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4. Comprehensive Loss

The components of comprehensive loss are as follows:

(Dollars in thousands) (unaudited)	Three months ended March 31,
	2008			2007
Net loss	$	(13,956	)	$	(15,365	)
Foreign currency translation		114			72
Change in unrealized net gain/(loss) on marketable securities		(8	)		(4	)
Comprehensive loss	$	(13,850	)	$	(15,297	)

Accumulated other comprehensive loss equals the cumulative translation adjustment and unrealized net losses on marketable securities which are the only components of other comprehensive loss included in the Company’s financial statements.

5. Credit Facility

In June 2007, the Company entered into a $12 million senior secured credit facility to finance ongoing working capital requirements of its commercial operations. The Company will make periodic borrowings and payments against the credit facility and considers the outstanding amounts to be short-term in nature. Credit available under the three-year revolving loan facility will be a percentage of its accounts receivable due from third-parties plus a percentage of inventory, with an interest rate equal to the one-month LIBOR rate at draw plus 300 basis points margin and 100 basis points collateral fee. The Company will also pay a 1% commitment fee of the line on the first anniversary of the closing date. Total direct expenses associated with obtaining the credit facility, including the 1% commitment fee of $0.2 million, are being amortized to interest expense over the three-year term of the credit facility. At March 31, 2008, outstanding borrowings under the facility were approximately $8.7 million and are classified as notes payable, current portion.

6. Geographic Segments

The Company manages its business and operations as one segment and is focused on the development and commercialization of its product candidates and approved products for marketing. The Company operates in United States and Belgium.

The following table presents financial information by product for the three-month periods ended March 31, 2008 and 2007:

	Three-month period ended March 31,
(in thousands)	2008		2007
Net product revenues
Vusion	$	6,749	$	1,827
Xolegel		1,343		520
Other products		241		302
Total net product revenues	$	8,333	$	2,649
Other revenues		17		73
Total revenues	$	8,350	$	2,722

Revenue within the United States represents approximately 100% of total revenue for the three months ended March 31, 2008.

The following tables present financial information based on the geographic location of the facilities of the Company for the three-month periods ended March 31, 2008 and 2007:

	Three-month period ended March 31,
(in thousands)	2008			2007
Loss before income tax benefit
U.S.	$	(11,639	)	$	(13,238	)
International		(2,317	)		(2,127	)
Total loss before income tax benefit	$	(13,956	)	$	(15,365	)

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The following tables present financial information based on geographic location of the facilities of the Company as of March 31, 2008 and December 31, 2007:

(in thousands)	March 31, 2008		December 31, 2007
Total assets
U.S.	$	53,918	$	66,649
International		1,175		767
Total assets	$	55,093	$	67,416

(in thousands)	March 31, 2008		December 31, 2007
Property and equipment, net
U.S.	$	428	$	490
International		241		169
Total property and equipment, net	$	669	$	659

7. Restructuring and Severance Charges

First quarter 2008 results include $2.6 million of restructuring charges, consisting primarily of severance costs, related to the Company’s international and US operations. The following table summarizes the classification of the restructuring and severance charges:

(in thousands)	March 31, 2008
Restructuring and severance charges
Research and development	$	773
Selling, general and administrative		1,816
Total restructuring and severance charges	$	2,589

The following table summarizes the restructuring and severance liability:

(in thousands)
Balance at December 31, 2007	$	—
Provision		2,589
Payments		(1,384	)
Balance at March 31, 2008	$	1,205

In January 2008, the Company announced that Mr. Alfred Altomari, the Chief Operating Officer of the Company, will succeed Dr. Geert Cauwenbergh, Founder and Chief Executive Officer of the Company, on March 31, 2008. Charges related to Dr. Cauwenbergh’s separation were recorded in the first quarter of 2008. Dr. Cauwenbergh will continue to serve on the Board of Directors of the Company. Mr. Altomari also became a member of the Board at the time of the announcement.

In February 2008, the Company determined that it would restructure its Belgian operations and commenced and completed a downsizing of the facility. Charges related to the restructuring were recorded in the first quarter of 2008.

In March 2008, the Company announced that Dennis P. Reilly, Vice President of Finance and Principal Accounting Officer of the Company, would succeed Anne M. VanLent as Chief Financial Officer of the Company effective May 1, 2008. Charges related to Ms. VanLent’s separation were recorded in the first quarter of 2008.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing elsewhere in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

Our goal is to develop a balanced portfolio of innovative products that address major medical needs in the treatment of dermatological diseases and disorders and become a leader in the development and commercialization of prescription pharmaceutical products to treat these diseases and disorders.

We currently market three pharmaceutical products in the U.S., Xolegel (ketoconazole, USP) Gel 2%, Vusion (0.25% miconazole nitrate, 15% zinc oxide, and 81.35% white petrolatum) Ointment and Solagé (mequinol 2.0% and tretinoin 0.01%) Topical Solution. We market our products directly to dermatologists and other target physicians through both our own specialty sales force and under a co-promotion agreement with Novartis Consumer Health in the United States.

We have other product candidates in various stages of clinical development for the treatment of a range of dermatological conditions, including onychomycosis, psoriasis, acne, skin allergies and superficial fungal infections. In addition, we have access to the classes of compounds claimed in the patents licensed to us under our license agreements with affiliates of Johnson & Johnson. The development of each of our product candidates involves significant risks. No assessment of the efficacy or safety of any product candidate can be considered definitive until all clinical trials needed to support a submission to the FDA for marketing approval are completed.

In the first quarter of 2008, we recognized total product revenues of $8.3 million mostly related to our Vusion and Xolegel sales in the United States. In the first quarter of 2007, we recognized total product revenues of $2.6 million mostly related to our Vusion sales in the U.S. and sales of Solagé in the U.S. and Canada. We expect full year 2008 product revenues to increase to between $40 million to $46 million, primarily due to the anticipated growth in sales for our Vusion and Xolegel products. We have increased our focus on the U.S. market for sales growth in the near term. Due to pricing pressures on our current product portfolio we have discontinued sales and marketing efforts in Canada and the European Union.

We have financed our operations and internal growth almost entirely through proceeds from private placements of preferred stock, our initial public offering in the second quarter of 2004 and our follow-on public offerings in the first quarter of 2005, the third quarter of 2006 and the third quarter of 2007. In June 2007, we entered into a $12 million senior secured credit facility to finance ongoing working capital requirements of our commercial operations.

Since our inception we have incurred significant losses. As of March 31, 2008, we had an accumulated deficit of $271.8 million. We expect to continue to spend significant amounts on the commercial development of our products, including the sales and marketing of Vusion and Xolegel. We also plan to continue to invest in the clinical development of our product candidates and to seek marketing approvals for our product candidates, primarily in the United States. Accordingly, we will need to generate significantly greater revenues to achieve and then maintain profitability. Additionally, we plan to continue to evaluate possible acquisitions of marketed products or businesses that complement our development and commercialization strategy.

The first quarter 2008 includes $2.6 million of restructuring charges, consisting primarily of severance costs, related to our international and U.S. operations.

Selling, general and administrative expenses consist primarily of salaries and other related personnel costs (including stock based compensation expense), sales, marketing and promotion expenses, general corporate activities, professional fees and facilities costs. In first quarter 2008, selling, general and administrative expenses totaled $15.8 million. We expect selling, general and administrative costs in 2008 to be within the range of $51 million to $54 million, as we continue to increase our commercial efforts in support of Vusion and Xolegel. In addition, if we were to acquire or in-license other products, we would then incur additional sales and marketing costs related to such products.

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Research and clinical development expenses represent:

• cost incurred for the conduct of our clinical trials,

• cost related to pre-clinical studies, including toxicology and pharmacokinetics,

• cost incurred in screening for new product candidates,

• manufacturing development costs related to our clinical product candidates,

• personnel and related costs related to our research and product development activities (including stock based compensation expense), and

• outside professional fees related to clinical development and regulatory matters.

We outsource the conduct of our pre-clinical studies, clinical trials and all of our manufacturing development activities to third parties to maximize efficiency and minimize our internal overhead. We expense these research and development costs as they are incurred. In first quarter 2008, research and development expenses totaled $6.3 million. We expect that our research and development expenses in 2008 to be within the range of $21 million to $25 million. We plan to complete our ongoing Hyphanox phase 3 study in onychomychosis. We plan to suspend all further development in the Rambazole and Pramiconazole programs until we establish partnerships. We also plan to limit current development expenses to the completion of ongoing studies and revenue generating projects, including life cycle management and the continued development of Hivenyl.

We expect to continue to incur net losses over the next several years as we continue our clinical development, apply for regulatory approvals, enter into arrangements with third parties for manufacturing and distribution services and market our products. We expect these losses to decrease over time with the anticipation of product revenue growth. We expect that our net loss will be lower in 2008 compared to 2007, within a range of $32 million to $38 million. We have a limited history of operations and anticipate that our quarterly results of operations will fluctuate for several reasons, including:

• the timing and extent of recognition of product and other revenues;

• the timing of any contract, license fee or royalty payments that we may receive or be required to make;

• the timing and outcome of our applications for regulatory approvals;

• the timing and extent of marketing and selling expenses;

• the timing and extent of our research and development efforts;

• the timing and extent of our adding new employees and infrastructure; and

• the timing and extent of employee stock grants and stock option grants.

Recent Developments

In January 2008, we announced that Mr. Alfred Altomari, our Chief Operating Officer, will succeed Dr. Geert Cauwenbergh, our Founder and Chief Executive Officer, on March 31, 2008. Charges related to Dr. Cauwenbergh’s separation were recorded in the first quarter of 2008. Dr. Cauwenbergh will continue to serve on our Board of Directors. Mr. Altomari also became a member of the Board at the time of the announcement.

In February 2008, we determined that we would restructure our Belgian operations and commenced and completed a downsizing of the facility. Charges related to restructuring were recorded in the first quarter of 2008.

In March 2008, we announced that Dennis P. Reilly, our Vice President of Finance and Principal Accounting Officer, will succeed Anne M. VanLent as Chief Financial Officer effective May 1, 2008. Charges related to Ms. VanLent’s separation were recorded in the first quarter of 2008.

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Results of Operations

Three month period ended March 31, 2008 and March 31, 2007

Net Revenues. Net Revenues are summarized below:

	March 31,
(in thousands)	2008		2007
Total net product revenues	$	8,333	$	2,649
Other revenues		17		73
Total net revenues	$	8,350	$	2,722

Total net revenues for the quarter were $8.4 million, an increase of $5.6 million as compared to the same period in 2007. Total net revenues increased during this quarter primarily due to increased product revenue.

Net Product Revenues. Included in the current quarter is $8.3 million of net product revenue as compared to $2.6 million for the same period in 2007. The increase was due to the increased price and volume growth for both Vusion and Xolegel. International product revenue declined as we have ceased our commercial efforts outside the United States.

	March 31,
(in thousands)	2008		2007
Net product revenues
Vusion	$	6,749	$	1,827
Xolegel		1,343		520
Other		241		302
Total net product revenues	$	8,333	$	2,649

Gross-to-Net Product Revenue Adjustments. We recognize product revenues net of allowances and accruals for estimated cash discounts, wholesaler fees, rebates, product returns and chargeback discounts. Cash discounts deductions reflect prompt payment term discounts extended to our customers. Wholesaler service fees are fees paid to our U.S wholesalers for distribution services. Allowance for sales returns are based on the actual returns history. Rebate deductions reflect estimates of coupon discounts and Medicaid rebates based on historical payment data and estimates of future Medicaid beneficiary utilization.

The following table summarizes our gross-to-net revenues deductions:

	March 31,
(in thousands)	2008			2007
Gross-to-net product revenues
Gross product revenues	$	15,583		$	3,827
Rebates (Medicaid and coupons)		(6,257	)		(854	)
Wholesaler fees		(547	)		(69	)
Cash discounts		(326	)		(72	)
Other (including product returns and charge backs)		(120	)		(183	)
Total net product revenues	$	8,333		$	2,649

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The following is a summary of gross to net sales reductions that are accrued on our consolidated balance sheets as of March 31, 2008 and December 31, 2007:

(in thousands)	March 31, 2008		December 31, 2007
Accounts Receivable Reductions
Cash discounts	$	203	$	227
Other *		35		35
Total accounts receivable reductions		238		262
Accrued Liabilities
Rebates (Medicaid and coupon)	$	10,784	$	10,013
Wholesaler fees		525		618
Other (including product returns, charge backs, etc)		475		448
Total revenue related accrued liabilities	$	11,784	$	11,079

* Includes allowance for bad debts which is included in sales, general, and administrative expense.

The following table provides a summary of activity with respect to our rebates, wholesaler fees and other accruals during the first quarter of 2008:

(in thousands)	Rebates			Wholesaler Fees			Other
Balance at December 31, 2007	$	10,013		$	618		$	448
Provision		6,257			547			120
Payments		(5,486	)		(640	)		(93	)
Balance at March 31, 2008	$	10,784		$	525		$	475

Cost of Product Revenues. Total cost of product revenues including cost of finished goods, distribution expenses, and amortization expenses related to Solagé was $0.6 million for the quarter as compared to $0.5 million for the same period in 2007.

	March 31,
(in thousands)	2008		2007
Cost of product revenue
Manufacturing costs	$	551	$	371
Amortization of product rights		88		88
Total cost of product revenue	$	639	$	459

Research and Development Expenses.

Total research and development expenses for the first quarter 2008 compared to the same period in 2007 decreased by $1.6 million. Aggregate spending for Rambazole and Pramiconazole decreased by $2.3 million compared to the same period in 2007, due to the completion of several preclinical and clinical studies in 2007. This decrease was partially offset by increased spending for Hyphanox of $0.7 million compared to the same period in 2007 related to the ongoing Phase 3 clinical study for this product.

Below is a summary of our research and development expenses:

(in thousands)	March 31, 2008		% of Total		March 31, 2007		% of Total
Research and development expenses
Marketed Products	$	587	9	%	$	658	8	%
Hyphanox		2,661	43	%		1,939	24	%
Pramiconazole		125	2	%		780	10	%
Rambazole		67	1	%		1,694	22	%
Other clinical/preclinical stage		189	3	%		448	6	%
Internal costs		2,435	39	%		2,041	26	%
Stock based compensation		205	3	%		293	4	%
Total research and development expenses	$	6,269	100	%	$	7,853	100	%

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In the preceding table, research and development expenses are set forth in the following seven categories:

• Marketed Products—Expenses for three months ending March 31, 2008 compared to the same period in 2007 decreased $0.1 million primarily attributable to lower Q1 2008 stability testing for Vusion, and Q1 2007 stability and qualification of active pharmaceutical ingredients supplier expenses related to Solagé, which did not reoccur in Q1 2008. These decreases were partially offset by development expense related to manufacturing for Xolegel in Q1 2008.

• Hyphanox— Hyphanox expenses of $2.7 million for the three months ended March 31, 2008 were up $0.7 million over 2007 due to timing of expenses related to our Phase 3 clinical study in toe nail onychomycosis.

• Pramiconazole— Pramiconazole expenses for three months ended March 31, 2008 compared to the same period in 2007 decreased $0.7 million. This reflects decreased preclinical, clinical study, and Pharmaceutical Development costs.

• Rambazole— Expenses related to Rambazole expenses for three months ended March 31, 2008 compared to the same period in 2007 decreased $1.6 million primarily due to the completion of our Phase 2b study in psoriasis.

• Other clinical/preclinical stage product expenses—Expenses for other clinical and preclinical stage products decreased by $0.3 million predominantly attributable to the completion of our Liarozole Phase 2/3 trial in 2007, for the treatment of lamellar ichthyosis.

• Internal expenses— Internal research and development expenses, including personnel and related costs, were $2.4 million for the first quarter 2008, as compared to $2.0 million in the corresponding period in 2007. Restructuring expenses of $0.8 million related to the downsizing of our Belgian operations, were partially offset by lower personnel and related costs in 2008.

• Stock based compensation expenses— Stock based compensation expense for the first quarter of 2008 was $0.2 million. Stock based compensation expense for the first quarter of 2007 was $0.3 million.

We anticipate that research and development expenses will decrease as the Hyphanox Phase 3 study approaches completion and further development in the Rambazole and Pramiconazole programs are suspended pending establishment of partnerships. We also expect our personnel and related expenses for research and development to decrease as we recognize savings from the restructuring of our Belgian operations which occurred during the first quarter.

Selling, general and administrative expense. Selling, general and administrative expenses for the first quarter of 2008 were $15.8 million compared with $10.4 million for the same quarter in 2007. This increase of $5.3 million over 2007 is primarily the result of increased sales force and commercial costs, as well as, costs related to restructuring and severance.

Below is a summary of our selling, general, and administrative expenses:

(in thousands)	March 31, 2008		% of Total		March 31, 2007		% of Total
Selling, general and administrative expenses
Selling expenses	$	4,111	26	%	$	3,198	31	%
Commercial and marketing infrastructure		7,035	45	%		4,323	41	%
Corporate administrative		3,818	24	%		2,067	20	%
Stock based compensation		815	5	%		857	8	%
Total selling, general and administrative expenses	$	15,779	100	%	$	10,445	100	%

Selling expenses—Selling expenses for the quarter ended March 31, 2008 increased $0.9 million as compared to the same period in 2007. Increased sales force costs and third party co-promotion services for Vusion accounted for the increase.

Commercial infrastructure and marketing—Commercial infrastructure and marketing expenses increased $2.7 million for the three months ended March 31, 2008 as compared to the same period in 2007. The increased costs in 2008 reflect increased spending for our direct to consumer television campaign for Vusion.

Corporate administrative expenses — Corporate administrative expenses totaled $3.8 million for the three months ended March 31, 2008, which represents an increase of $1.8 million compared to the same period in 2007. Expenses for the three months ended March 31, 2008 included $1.8 million of restructuring charges, consisting primarily of severance costs.

Stock based compensation—Stock based compensation expense for the first quarter of 2008 was $0.8 million. Stock based compensation expense for the first quarter of 2007 was $0.9 million.

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Interest income, net of interest expense. Interest income, net of expense, totaled $0.4 million for the first quarter of 2008, a decrease of $0.3 million as compared to the corresponding period in 2007. This decrease was primarily due to lower cash and marketable securities balances and interest expense on debt.

Liquidity and Capital Resources

Sources of Liquidity. Since our inception, we have funded our operations principally from issuances of our convertible preferred stock, the proceeds from our initial public offering of common stock and our follow-on public offerings of common stock.

In June 2007, we entered into a $12 million senior secured credit facility to finance ongoing working capital requirements of our commercial operations. We will make regular borrowings and payments each month against the credit facility and consider the outstanding amounts to be short-term in nature. Credit available under the three-year revolving loan facility will be a percentage of our accounts receivable due from third-parties plus a percentage of inventory, with an interest rate equal to the one-month LIBOR rate at draw plus 300 basis points margin and 100 basis points collateral fee. We will also pay a 1% commitment fee of the line on the first anniversary of the closing date. Total fees of $0.2 million are being amortized to interest expense over the three-year term of the credit facility. We issued no stock warrants or other dilutive securities in conjunction with the creation of the credit facility. At March 31, 2008, we had outstanding borrowings under the facility of approximately $8.7 million.

At March 31, 2008, we had cash, cash equivalents and marketable securities totaling $37.3 million and net working capital of $18.2 million.

Cash Flows. At March 31, 2008, we had $21.0 million in cash and cash equivalents, as compared to $18.9 million at December 31, 2007.

The following table summarizes cash flows for the three months ended March 31, 2008 and March 31. 2007:

	March 31,
(in thousands)	2008			2007
Cash Flows
Net cash used in operating activities	$	(11,114	)	$	(13,003	)
Net cash provided by investing activities		13,089			14,391
Net cash provided by financing activities		238			91
Effect of exchange rate changes on cash and cash equivalents		(114	)		12
Net increase in cash and cash equivalents	$	2,099		$	1,491

Working capital, which is calculated as current assets less current liabilities, decreased $18.1 million to $18.2 million at March 31, 2008 compared to $36.3 million at March 31, 2007 primarily due to a net decrease in cash and marketable securities balances of $8.6 million, an $11.2 million increase in accounts payable and accrued expenses, and an $8.6 million increase in current notes payable which were partially offset by a $7.8 million increase in trade receivables and a $2.7 million increase in prepaid expenses and other assets. The increase in accounts payable and accrued expenses primarily relates to revenue related accruals including Medicaid rebates, wholesaler fees and coupon rebates along with severance costs. The increase in notes payable relates to our borrowings under our $12 million senior secured credit facility. Receivables increases were directly attributable to our net product revenue growth in 2008.

Cash used in operating activities for the first quarter of 2008 was $11.1 million, mostly related to our spending on research and development, commercial operations, corporate administration and working capital. In the first quarter of 2007, cash used in operating activities was $13.0 million mostly related to our net loss from operations during the quarter.

Cash provided by investing activities for the quarter ended March 31, 2008 was $13.1 million. Cash provided by investing activities for the quarter ended March 31, 2007 was $14.4 million. This is primarily attributable to net proceeds from the sale and maturities of marketable securities. Our investing activities reflect investments in marketable securities and purchases of fixed assets necessary for operations. We plan to continue utilizing third parties to manufacture our products and to conduct laboratory-based research. Therefore, we do not expect to make significant capital expenditures for the foreseeable future.

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Net cash provided by financing activities for the quarter ended March 31, 2008 was $0.2 million. Net cash provided by financing activities for the quarter ended March 31, 2007 was $0.1 million, respectively, primarily related to proceeds from employee stock option exercises, purchase of common stock in our Employee Stock Purchase Plan and net borrowing under our credit facility.

We expect that our existing cash and marketable securities at March 31, 2008 will be sufficient to fund our anticipated operating expenses, debt obligations and capital requirements for the next twelve months. Our expectation is based on our internal financial forecasts rather than historical cash burn rates. Our net cash and marketable securities usage for the quarter ended March 31, 2008 was $11.2 million. For the remainder of 2008, our expected quarterly loss and cash burn should decline in line with our expected quarterly increases in revenues and gross margin. We currently have no additional commitments or arrangements, other than borrowings under the Merrill Lynch credit facility, for any additional financing to fund the commercialization of our marketed products and the research, development and commercial launch of our product candidates. We may require additional funding in order to continue our commercialization efforts and our research and development programs, including preclinical studies and clinical trials of our product candidates, to pursue regulatory approvals for our product candidates, pursue the commercial launch of our product candidates, expand our sales and marketing capabilities and for general corporate purposes. Our future capital requirements will depend on many factors, including:

• the success of our development and commercialization of our product candidates;

• the scope and results of our clinical trials;

• advancement of other product candidates into clinical development;

• potential acquisition or in-licensing of other products or technologies;

• our ability to enter into development and marketing agreements for our more advanced product candidates;

• the timing of, and the costs involved in, obtaining regulatory approvals;

• the costs of manufacturing activities; and

• the costs of commercialization activities, including product marketing, sales and distribution and related working capital needs.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 2, Summary of Significant Accounting Policies, in our Notes to Consolidated Financial Statements on our December 31, 2007 Form 10-K, we believe that the following accounting policies are critical to aid you in fully understanding and evaluating our reported financial results.

Revenue Recognition

We use revenue recognition criteria in Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements,” Emerging Issues Task Force (“EITF”) Issue 00-21 “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”) and Statement of Financial Accounting Standards No 48 (“FAS 48”) “Revenue Recognition When Right of Return Exists.” Revenue arrangements that include multiple deliverables are divided into separate units of accounting if the deliverables meet certain criteria, including whether the fair value of the delivered items can be determined and whether there is evidence of fair value of the undelivered items. In addition, the consideration is allocated among the separate units of accounting based on their fair values, and the applicable revenue recognition criteria are considered separately for each of the separate units of accounting.

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Net Product Revenue. In the United States, we sell our products primarily to wholesalers and distributors, who, in turn, sell to pharmacies. The following are our revenue recognition policies.

New Product Launch—At the time of a new product launch, we utilize a pull-through sales method that recognizes revenue based on estimated prescription demand based on third party market research data. Once we have established a normal level of wholesale inventory based on a normalized prescription demand, revenue is recognized, net of reserves, upon shipment to the wholesaler. Estimating the amount of returns and discounts for new products is based on specific facts and circumstances including acceptance rates from established products with similar marketing characteristics. At the time of a new product launch, absent the ability to make reliable estimates, we defer revenue on sales to wholesalers until we can make reliable estimates of returns, discounts and related end user demand. We attempt to monitor our inventory levels at our wholesalers and pharmacies to ensure inventory outstanding remain within normal levels. We estimate inventory at wholesalers based on historical sales to wholesalers, inventory data provided to us by these wholesalers and from third party market research data related to prescription trends and patient demand. Making these determinations involves estimating whether trends in past buying patterns will predict future product sales.

Product Sales Allowances—We record product sales net of the following significant categories of product sales allowances: prompt payment discounts, wholesaler fees, returns, coupons, discounts for Medicaid, managed care and governmental contracts. In determining allowances for product returns, coupons and Medicaid rebates, we must make significant judgments and estimates. For example, in determining these amounts, we estimate prescription demand and the levels of inventory held by wholesalers. Making these determinations involves estimating whether trends in past buying patterns will predict future product sales.

Calculating some of these items involves significant estimates and judgments and requires us to use information from external sources.

Customers can return short-dated or expired product that meets the guidelines set forth in our return goods policy. Returns are accepted from wholesalers and retail pharmacies. Wholesaler customers can return product within six months of shelf life expiry and expired product within twelve months subsequent to the expiration date. Retail pharmacies are not permitted to return short-dated product but can return expired product within twelve months subsequent the expiration date. We base our estimates of product returns for each of our products on the percentage of returns that we have experienced historically or based on industry data for similar products. Notwithstanding this, we may adjust our estimate of product returns if we are aware of other factors that we believe could meaningfully impact our expected return percentages. These factors could include, among others, our estimates of inventory levels of our products in the distribution channel, known sales trends and existing or anticipated competitive market forces such as product entrants and/or pricing changes.

Rebates—Patient Discount/Coupons—From time to time we offer patients the opportunity to obtain free or discounted products through a program whereby physicians provide coupons or payment cards to qualified patients for redemption at retail pharmacies. We reimburse retail pharmacies for the cost of these products through a third party administrator. We recognize the estimated cost of this reimbursement as a reduction of gross sales when product is sold. As a result of these patient discount and coupon offers, at the time of product shipment, we must estimate the likelihood that products sold to wholesalers and pharmacies might be ultimately sold to a patient who redeems a coupon. We base our estimates on the historic coupon redemption rates for similar products we receive from third party administrators, which detail historic patterns. We maintain an accrual for unused coupons based on inventory in the distribution channel and historical coupon usage rates and adjust this accrual whenever changes in such coupon usage rates occur.

Rebates—Medicaid discounts—In some states we participate or have applied to participate in the Federal Medicaid rebate program, as well as several state government-managed supplemental Medicaid rebate programs, which were developed to provide assistance to certain vulnerable and needy individuals and families. Under the Medicaid rebate program, we pay a rebate to each participating state and local government for our products that their programs reimburse. For purposes of this discussion, discounts and rebates provided through these programs are considered Medicaid rebates and are included in our Medicaid rebate accrual.

We record accruals for Medicaid rebates as a reduction of sales when product is sold to our wholesaler distributors. These reductions are based on historical rebate amounts and trends of sales eligible for these governmental programs for a period, as well as any expected changes to the trends of our total product sales. In addition, we estimate the expected unit rebate amounts to be used and adjust our rebate accruals based on the expected changes in rebate pricing. Rebate amounts are generally invoiced and paid quarterly in arrears, so that our accrual consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual for prior quarters’ unpaid rebates and an accrual for inventory in the distribution channel. We analyze the accrual at least quarterly and will adjust the balance as required.

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We will adjust our allowances for product returns, Medicaid and coupon rebates based on our actual sales experience, and we will likely be required to make adjustments to these allowances in the future. We continually monitor our allowances and make adjustments when we believe actual experience may differ from our estimates.

Other Revenues. Contract revenues include license fees and other payments associated with collaborations with third parties. Revenue is generally recognized when there is persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectibility is reasonably assured.

Revenue from non-refundable, upfront license fees where we have a continuing involvement is recognized ratably over the performance period. We periodically re-evaluate our estimates of the performance period and revise our assumptions as appropriate. These changes in assumptions may affect the amount of revenue recorded in our financial statements in future periods.

Grant revenues are recognized when we provide the services stipulated in the underlying grant based on the time and materials incurred up to the amount of grant payments received. Amounts received in advance of services provided are recorded as deferred revenue and amortized as revenue when the services are provided.

Inventories. Our inventories are valued at the lower of cost or market, and include the cost of finished good product and shipping and handling costs. Cost is computed on inventories using the first-in, first-out (“FIFO”) method. Inventories consist of the following:

(in thousands)	March 31, 2008			December 31, 2007
Finished goods inventory	$	895		$	1,125
Raw materials inventory		128			—
Valuation allowance		(379	)		(332	)
Total Inventories	$	644		$	793

The majority of inventories are subject to expiration dating. We regularly evaluate inventory for short-dated or slow-moving products, and when, in our opinion, factors indicate short-dated or slow-moving products exist, we establish a reserve against the inventories’ carrying value. Our determination that a valuation reserve might be required, in addition to the quantification of such reserve, requires us to utilize significant judgment. We base our analysis, in part, on the level of inventories on hand in relation to our estimated forecast of product demand, production requirements for forecasted product demand and the expiration dates of inventories. Although we make every effort to ensure the accuracy of forecasts of future product demand, any significant unanticipated decreases in demand could have a material impact on the carrying value of our inventories and our reported operating results.

We expense our inventory costs associated with products prior to regulatory approval as research and development expense.

We have committed to make future minimum payments to third parties for certain product inventories. The minimum purchase commitments total $8.2 million as of March 31, 2008, the majority of which relate to Vusion and Xolegel. We expect to fully utilize these contracts.

Recent Accounting Pronouncements

We adopted the provisions of the FASB Statement 157, Fair Value Measurement (“Statement 157”) on January 1, 2008. Statement 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and establishes a hierarchy that categorizes and prioritizes the inputs to be used to estimate fair value. The three levels of inputs used are as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data by correlation or other means.

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Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

On February 6, 2008, the FASB issued FASB Staff Position (FSP) 157-b which delays the effective date of Statement 157 for one year for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Statement 157 and FSP 157-b are effective for financial statements issued for fiscal years beginning after November 15, 2007. We adopted SFAS 157 except as it applies to those nonfinancial assets and liabilities as affected by the one-year delay. The adoption of SFAS 157 did not have a material impact on our consolidated financial statements.

In accordance with FAS 157, the following table represents the fair value hierarchy for our financial assets measured at fair value on a recurring basis as of March 31, 2008:

(in thousands)	Total		Level 1		Level 2
Cash and cash equivalents.	$	20,994	$	20,994	$	—
Corporate debt securities		15,967		15,967		—
Asset-backed securities		350		—		350
Total	$	37,311	$	36,961	$	350

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The recent decline in the market value of certain securities backed by residential mortgage loans has led to a large liquidity crisis effecting the broader U.S. housing market, the financial services industry and global financial markets. Investors in many industry sectors have experienced substantial decreases in asset valuations and uncertain market liquidity. Furthermore, credit rating authorities have, in many cases, been slow to respond to the rapid changes in the underlying value of certain securities and pervasive market illiquidity, regarding these securities.

As a result, this “credit crisis” may have a potential impact on the determination of the fair value of financial instruments or possibly require impairments in the future should the value of certain investments suffer a decline in value which is determined to be other than temporary. We currently do not believe that any change in the market value of our money market funds to be material or warrant a determination of an other than temporary write down.

Most of our transactions are conducted in United States dollars, although we do have some agreements with vendors located outside the United States. Transactions under some of these agreements are conducted in United States dollars, subject to adjustment based on significant fluctuations in currency exchange rates. Transactions under other of these agreements are conducted in the local foreign currency. We have a wholly-owned subsidiary, Barrier Therapeutics, N.V., which is located in Geel, Belgium. Except for funding being received under our grant from a Belgian governmental agency, which is denominated in Euros and locally earned interest income, all research costs incurred by Barrier Therapeutics, N.V. are funded under a service agreement with Barrier Therapeutics, Inc. from investments denominated in dollars. Therefore, we are subject to currency fluctuations and exchange rate gains and losses on these transactions. If the exchange rate undergoes a change of 10%, we do not believe that it would have a material impact on our results of operations or cash flows.

ITEM 4. CONTROLS AND PROCEDURES

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Change in Internal Control Over Financial Reporting

No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1A. RISK FACTORS

RISKS RELATED TO OUR BUSINESS

Our business faces significant risks, including those described below. We update and include our risk factors in our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q. Risk Factors which are new or which have been substantially changed from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2007 have been marked with an asterisk immediately following the heading of such risk factor.

Risks related to our financial results and potential need for additional financing

We have incurred losses since inception and anticipate that we will continue to incur losses for the next several years.

Since our inception in September 2001, we have incurred significant operating losses and, as of March 31, 2008, we had an accumulated deficit of $271.8 million. We currently market three pharmaceutical products: Vusion, Xolegel and Solagé. Our product pipeline includes several product candidates in various stages of clinical development. Prior to our acquisition of Solagé in February 2005, we had generated no revenues from the sale of our products. We expect to continue to incur significant operating expenses as we:

• conduct our sales and marketing activities to commercialize our products;

• conduct clinical trials;

• conduct research and development on existing and new product candidates;

• seek regulatory approvals for our product candidates;

• hire additional clinical, scientific, sales and marketing, management and compliance personnel;

• add operational, financial and management information systems; and

• identify and in-license or acquire additional compounds, technologies, marketed products or businesses.

We need to generate significant revenue to achieve profitability. We may never generate sufficient sales revenue to achieve and then maintain profitability. We expect to incur operating losses for the next several years.

We are highly dependent upon sales of Vusion and, if these revenues do not grow, or if we cannot grow sales of Xolegel or commercialize new products, we will not become profitable.

A significant portion of our revenues are generated by sales of Vusion. Until such time as we develop, acquire or in-license additional approved products or significantly increase sales of Xolegel, we will continue to rely on Vusion for most of our revenues. Accordingly, our near term success currently depends significantly on our ability to increase sales of Vusion. Our sales and marketing efforts may not be successful in increasing prescriptions for Vusion. Sales of Vusion are dependent upon our ability to, among other things:

• increase physician and patient awareness and continued use of the product;

• successfully implement our direct to consumer television advertising campaign and our other marketing efforts;

• obtain patent term extension for the existing patent covering Vusion’s formulation and obtain additional intellectual property protection;

• develop line extensions; and

• obtain coverage from third-party payors.

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For the foreseeable future, if we are unable to grow Vusion sales or if we cannot grow sales of Xolegel or commercialize new products, we will be unable to increase our revenues or achieve profitability and we may be forced to delay or change our current plans to develop our product candidates.

We may need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or commercialization efforts.

As of March 31, 2008, we had cash, cash equivalents and marketable securities of $37.3 million. We believe that our existing cash resources and our interest on these funds will be sufficient to meet our projected operating requirements and debt obligations for at least the next 12 months. Our expectation is based on our internal financial forecasts rather than historical cash burn rates. Other than our existing secured credit facility, we currently have no additional commitments or arrangements for any additional financing to fund the commercialization of our marketed products and the research, development and commercial launch of our product candidates. We may require additional funding in order to continue our commercialization efforts and our research and development programs, including preclinical studies and clinical trials of our product candidates, pursue regulatory approvals for our product candidates, commercialize our products, expand our sales and marketing capabilities and for general corporate purposes. Our future capital requirements will depend on many factors, including:

• the success of our commercialization of our marketed products and our ability to increase revenues;

• the costs of commercialization activities, including manufacturing, product advertising and marketing, sales and distribution, compliance, and related working capital needs;

• our ability to establish and maintain collaborative and other strategic arrangements;

• the advancement and success of the development of our product candidates, including clinical trial results;

• the timing of, and the costs involved in, obtaining regulatory approvals, particularly with respect to Hyphanox;

• the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property-related costs, including any possible litigation costs; and

• potential acquisition or in-licensing of other technologies, products or businesses.

A key part of our business strategy is to seek to selectively acquire additional marketed or approved dermatological products. The acquisition of any such product would likely require upfront and near term milestone payments which would require additional cash resources.

We may continue to seek additional capital through public or private equity offerings, or debt financings. Adequate financing may not be available on terms acceptable to us, if at all.

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If we raise additional funds by issuing equity securities, our stockholders would experience dilution. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring additional debt, making capital expenditures or declaring dividends. Any debt financing that we raise or additional equity we may sell may contain terms that are not favorable to us or our common stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it will be necessary to relinquish some rights to our technologies or our product candidates or grant licenses on terms that may not be favorable to us. Lack of funding could adversely affect our ability to pursue our business. For example, if adequate funds are not available, we may be required to curtail significantly or eliminate one or more of our product development programs or the commercialization of our marketed products.

We may not be able to complete the development of our Pramiconazole, Rambazole and Hivenyl product candidates if we can’t enter into acceptable development arrangements with third parties.

Developing pharmaceutical products, especially those based on new chemical entities such as Pramiconazole, Rambazole and Hivenyl, is costly and time-consuming and requires substantial financial and human resources. A key part of our business strategy is to enter into collaborative licensing arrangements to provide funding for the development and commercialization of our product candidates. These potential arrangements may be in several forms including out-licensing agreements, co-development arrangements, strategic alliances, or research and development joint ventures funded by third party investors. Currently, we are seeking these arrangements for our Pramiconazole product candidate and plan to seek such arrangements for Rambazole if we are able to remove the FDA’s clinical hold. If we are unable to enter into these types of arrangements or unable to do so in a timely manner, the development of one or more of our product candidates may be delayed or possibly discontinued.

If our ongoing Phase 3 pivotal clinical trial for Hyphanox in onychomycosis does not meet its primary endpoint , we will not be able to submit an application for marketing approval in a timely manner which would adversely affect our future revenues.

We are currently conducting a Phase 3 pivotal clinical trial for Hyphanox to test once daily dosing of one 200 mg tablet in the treatment of toenail onychomycosis. If the results of this Phase 3 clinical trial are favorable, we plan to file a New Drug Application, or NDA, seeking marketing approval with the United States Food and Drug Administration, or FDA, in the first quarter of 2009. If this trial does not produce favorable results we will not be able to submit an NDA for marketing approval with the FDA in our expected timeframe. This delay would likewise delay any potential approval, or depending upon the data, cause us to discontinue developing this product candidate, in either case adversely affecting any future revenues we might obtain from this product candidate.

Our revenues, operating results and cash flows may fluctuate in future periods and we may fail to meet investor expectations, which may cause the price of our common stock to decline.

Variations in our quarterly operating results and cash flows are difficult to predict and may fluctuate significantly from period to period. We are a relatively new company and our sales prospects are uncertain as we have only recently commenced our commercialization efforts. We currently only have three FDA-approved products: Vusion, Xolegel and Solagé. We cannot predict with certainty the timing or level of sales on these products in the future. In addition, our quarterly operating results and cash flows may fluctuate significantly depending on revenues and expenses related to our clinical development programs, including clinical trials and research and development, entry into new collaborative licensing arrangements, events or milestones under, or termination of, current collaborative licensing arrangements, and regulatory approval activities. If our quarterly or annual sales or operating results fall below expectations of investors or securities analysts, the price of our common stock could decline substantially.

If the estimates we make and the assumptions on which we rely in preparing our financial statements prove inaccurate, our actual results may vary significantly.

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, the amounts of charges taken by us and related disclosure. Such estimates and judgments include the carrying value of our inventory and intangible assets, the value of certain liabilities and revenue recognition, including prescription demand, rebates, coupon redemptions, and product returns, and forfeiture rates and other estimates related to stock based compensation. We base our estimates and judgments on historical experience

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and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and judgments are difficult to make accurately due to our limited operating history. In addition, these estimates and judgments, or the assumptions underlying them, may change over time, which could make any guidance we may give inaccurate and could require us to restate some of our previously reported financial information. A restatement of previously reported financial information could cause our stock price to decline and could subject us to securities litigation.

Risks related to commercialization

If our products and product candidates for which we receive regulatory approval do not achieve broad market acceptance, the revenues that we generate from their sales will be limited.

The commercial success of our products and our product candidates for which we obtain marketing approval from the FDA or other regulatory authorities will depend upon the acceptance of these products by physicians, patients and healthcare payors. Safety, efficacy, convenience and cost-effectiveness, particularly as compared to competitive products, are the primary factors that affect market acceptance. Even if a product displays a favorable efficacy and safety profile in clinical trials, market acceptance of the product will not be known until after it is launched. We have three FDA approved products: Vusion, Xolegel and Solagé. Our efforts to educate the medical community and third-party healthcare payors on the benefits of Vusion, Xolegel and Solagé, or any of our future products may require significant resources and may never be successful. Our most advanced product candidate, Hyphanox, contains the same active ingredient, itraconazole, as that contained in other branded and generic products currently on the market. Consequently, even if Hyphanox is approved by the FDA, we may not be able to achieve or maintain market acceptance of this product.

If our products fail to achieve and maintain market acceptance, including coverage by private and public health care insurers, or if new products or technologies are introduced by others that are more favorably received than our products, or if we are otherwise unable to market and sell our products successfully, our business, financial condition, results of operations and future growth will suffer.

If third-party payors do not reimburse patients for our products those products might not be used or purchased, and our revenues and profits will be adversely affected and may not grow.

Our revenues and profits depend, in part, upon the availability of coverage and reimbursement from third-party healthcare and state and federal government payors. Third-party payors include state and federal programs such as Medicare and Medicaid, managed care organizations, private insurance plans and health maintenance organizations. Reimbursement by a third-party payer may depend upon a number of factors, including determination if the product is:

• competitively priced;

• safe, effective and medically necessary;

• appropriate for the specific patient;

• cost-effective; and

• approved for the intended use.

Since reimbursement approval for a product is required from third-party and government payors, seeking this approval, particularly when seeking approval for a preferred form of reimbursement over other competitive products, is a time-consuming and costly process.

Managed care organizations and other third-party payors negotiate the pricing of medical services and products to control their costs. Managed care organizations and pharmacy benefit managers typically develop formularies to reduce their cost for medications. Formularies can be based on the prices and therapeutic benefits of the available products. Due to their lower costs, generics are often favored on formularies and the active ingredients in each of our marketed products are generically available, although not in the same formulations as our products. Consumers and third-party payors may not view our marketed products as cost-effective, and consumers may not be able to get reimbursement or reimbursement may be so low that we cannot market our products on a competitive basis. If a product is excluded or removed from a formulary, or if a formulary requires a physician to obtain authorization from the third party payor prior to writing a prescription, its usage may be sharply reduced in the managed care organization patient population. If our products, particularly our Vusion and Xolegel products, are not included within an adequate number of formularies or adequate reimbursement levels are not provided, or if those policies increasingly favor generic products, our market share and gross margins could be negatively affected, as could our overall business and financial condition.

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Any regulatory approval we may receive for our product candidates may be subject to limitations on its indicated uses which could adversely affect our ability to market the product as anticipated.

Even if regulatory approval of one or more of our product candidates is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. If this happens it could adversely affect our ability to market that product and potentially adversely affect our revenues for that product.

If we fail to comply with the laws governing the marketing and sale of our products, regulatory agencies may take action against us, which could significantly harm our business.

As a pharmaceutical company, we are subject to a large body of legal and regulatory requirements. In particular, there are many federal, state and local laws that we need to comply with now that we are engaged in the marketing, promoting, distribution and sale of pharmaceutical products. The FDA extensively regulates, among other things, promotions and advertising of prescription drugs. In addition, the marketing and sale of prescription drugs must comply with the Federal fraud and abuse laws, which are enforced by the Office of the Inspector General of the Division, or OIG, of the Department of Health and Human Services. These laws make it illegal for anyone to give or receive anything of value in exchange for a referral for a product or service that is paid for, in whole or in part, by any federal health program. The federal government can pursue fines and penalties under the Federal False Claims Act which makes it illegal to file, or induce or assist another person in filing, a fraudulent claim for payment to any governmental agency.

Because, as part of our commercialization efforts, we provide physicians with samples we must comply with the Prescription Drug Marketing Act, or PDMA, which governs the distribution of prescription drug samples to healthcare practitioners. Among other things, the PDMA prohibits the sale, purchase or trade of prescription drug samples. It also sets out record keeping and other requirements for distributing samples to licensed healthcare providers.

In addition, we must comply with the body of laws comprised of the Medicaid Rebate Program, the Veterans’ Health Care Act of 1992 and the Deficit Reduction Act of 2005. This body of law governs product pricing for government reimbursement and sets forth detailed formulas for how we must calculate and report the pricing of our products so as to ensure that the federally funded programs will get the best price.

Moreover, many states have enacted laws dealing with fraud and abuse, false claims, the distribution of prescription drug samples and gifts and the calculation of best price. These laws typically mirror the federal laws but in some cases, the state laws are more stringent than the federal laws and often differ from state to state, making compliance more difficult. We expect more states to enact similar laws, thus increasing the number and complexity of requirements with which we would need to comply.

Compliance with this body of laws is complicated, time consuming and expensive. We are a relatively small company that only recently began selling pharmaceutical products. As such, we have very limited experience in developing, managing and training our employees regarding, a comprehensive healthcare compliance program. We cannot assure you that we are or will be in compliance with all potentially applicable laws and regulations. Even minor, inadvertent irregularities can potentially give rise to claims that the law has been violated. Failure to comply with all potentially applicable laws and regulations could lead to penalties such as the imposition of significant fines, debarment from participating in drug development and marketing and the exclusion from government-funded healthcare programs. The imposition of one or more of these penalties could adversely affect our revenues and our ability to conduct our business as planned.

In addition, the Federal False Claims Act, which allows any person to bring suit alleging the false or fraudulent submission of claims for payment under federal programs and other violations of the statute and to share in any amounts paid by the entity to the government in fines or settlement. Such suits, known as qui tam actions, have increased significantly in recent years and have increased the risk that companies like us may have to defend a false claim action. We could also become subject to similar false claims litigation under state statutes. If we are unsuccessful in defending any such action, such action may have a material adverse effect on our business, financial condition and results of operations.

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If we fail to comply with regulatory requirements governing the manufacture of our marketed products, regulatory agencies may take action against us, which could significantly harm our business.

The manufacturing facilities and processes for our marketed products are subject to continual requirements and periodic inspection by the FDA and other regulatory bodies, as well as with compliance with the current Good Manufacturing Practices, or cGMPs. The cGMP regulations include requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation. We rely on the compliance by our contract manufacturers with cGMP regulations and other regulatory requirements relating to the manufacture of products. Other than through contract, we do not have control over compliance by our contract manufacturers with these regulations and standards. Our present or future contract manufacturers may not be able to comply with cGMPs and other FDA requirements or similar regulatory requirements outside the United States. Failure of our contract manufacturers or our employees to comply with applicable regulations or the discovery of previously unknown problems with our products or manufacturing processes may result in any of the following:

• restrictions on our products or manufacturing processes;

• warning letters;

• withdrawal of the products from the market;

• voluntary or mandatory recall;

• fines;

• suspension or withdrawal of regulatory approvals;

• refusal to permit the import or export of our products;

• refusal to approve pending applications or supplements to approved applications that we submit; and

• product seizure.

We rely on third parties to perform many necessary commercial services for our products, including services related to the distribution, storage, and transportation of our products and a large portion of the physician detailing for Vusion.

We rely on the Specialty Pharmaceutical Services unit of Cardinal Health to perform a variety of functions related to the sale and distribution of our products in the United States. These services include distribution, logistics management, inventory storage and transportation, invoicing and collections. We also rely on Novartis Consumer Health, Inc. to co-promote our Vusion product directly to pediatricians. If these third party service providers fail to comply with applicable laws and regulations, fail to meet expected deadlines or otherwise do not carry out their contractual duties, our ability to deliver products to meet commercial demand would be significantly impaired.

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We depend on three wholesalers for the vast majority of our product revenues in the United States, and the loss of any of these wholesalers would decrease our revenues.

The prescription drug wholesaling industry in the United States is highly concentrated, with a vast majority of all sales made by three major full-line companies. Those companies are Cardinal Health, McKesson Corporation and AmerisourceBergen. Approximately 82% of our product revenues in the first quarter of 2008 were through these three companies. Although we have entered into agreements with each of these companies concerning the terms of their purchase of products from us, none of them is under an obligation to purchase minimum quantities or to continue to purchase our products. The loss of any of these wholesalers, a material reduction in their purchases, the cancellation of product orders or unexpected returns of unsold products, or the failure to pay an outstanding invoice, from any one of these wholesalers could decrease our revenues and impede our future growth prospects.

It is also possible that these wholesalers, or others, could decide to change their policies or fees, or both in the future. This could result in their refusal to distribute smaller volume products, such as ours, or cause us to incur higher product distribution costs, lower margins or the need to find alternative methods of distributing our products. Such alternative methods may not exist or may not be economically feasible.

We may acquire additional products, product candidates, technology and businesses in the future and any difficulties from integrating such acquisitions could damage our ability to attain profitability.

We have acquired our entire current product pipeline by licensing intellectual property from third parties, and we may acquire additional products or product candidates or technologies that complement or augment our existing product development pipeline. However, because we acquired substantially all of our existing product candidates in the same transaction, we have limited experience integrating products or product candidates into our existing operations. Integrating any newly acquired product or product candidate could be expensive and time-consuming. We may not be able to integrate any acquired product or product candidate successfully. Moreover, we may need to raise additional funds through public or private debt or equity financing to make these acquisitions, which may result in dilution for stockholders and the incurrence of indebtedness.

We plan to consider, as appropriate, acquisitions of businesses, which may subject us to a number of risks that may affect our stock price, operating results and financial condition. If we were to acquire a business in the future, we would need to consolidate and integrate its operations with our business. Integration efforts often take a significant amount of time, place a significant strain on our managerial, operational and financial resources, and could prove to be more difficult and expensive than we predicted. If we fail to realize the expected benefits from acquisitions we may consummate in the future, our business, results of operations and financial condition could be adversely affected.

If our post-marketing studies or other data generated for one or more of our marketed products produce undesirable results, the FDA may require us to withdraw such products, make changes to the applicable product’s label or otherwise decrease demand, either of which could adversely affect our ability to market that product.

In connection with its approval of our Xolegel and Vusion products, the FDA has required us to conduct additional post marketing studies. For Xolegel, we must perform a pre-clinical dermal carcinogenicity study in mice to determine the carcinogenic potential of repeated treatment courses of Xolegel over a prolonged period of time. For Vusion, we were required to conduct two Phase 4 clinical studies: a percutaneous absorption study which was completed in August 2007 to determine the amount, if any, of miconazole nitrate which is absorbed into the bloodstream through the skin and its potential effect on liver function; and a microbial resistance study to evaluate the extent, if any, to which the Candida yeast may develop resistance to repeated treatment courses with Vusion, which is ongoing. If any of these studies, or any Phase 4 clinical study that we conduct, produces undesirable results, the FDA could require us to make changes to the approved label for Xolegel or Vusion, as applicable, which would adversely affect our ability to market that product and potentially adversely affect our revenues for that product.

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Risks related to development of product candidates

We will not be able to commercialize our product candidates if our preclinical studies do not produce successful results or if our clinical trials do not demonstrate safety and efficacy in humans.

We must conduct extensive preclinical studies and clinical trials to demonstrate the safety and efficacy in humans of our product candidates in order to obtain regulatory approval for the sale of our product candidates. Preclinical studies and clinical trials are expensive, can take many years and have uncertain outcomes.

Our success will depend on the success of our currently ongoing clinical trials and subsequent clinical trials that have not yet begun. It takes several years to complete the clinical trials of a product, and a failure of one or more of our clinical trials can occur at any stage of testing. We believe that the development of each of our product candidates involves significant risks at each stage of testing. If clinical trial difficulties and failures arise, our product candidates may never be approved for sale or become commercially viable. We do not believe that any of our product candidates have alternative uses if we are not successful developing them as pharmaceutical products.

There are a number of difficulties and risks associated with clinical trials. These difficulties and risks may result in the failure to receive regulatory approval to continue to test or to sell our product candidates or the inability to commercialize any of our product candidates. For instance, we may discover that a product candidate does not exhibit the expected therapeutic results in humans, may cause harmful side effects or have other unexpected characteristics that may delay or preclude regulatory approval or limit commercial use if approved. The risk of clinical trial failure is even greater where the product candidate contains a new chemical entity, such as Pramiconazole, Rambazole and Hivenyl, and where the product candidate uses a novel or not fully known mechanism of action, such as Rambazole. Likewise, the risk of discovering harmful side effects is greater where the product candidate contains a new chemical entity.

In addition, the possibility exists that:

• the results from early clinical trials may not be statistically significant or predictive of results that will be obtained from expanded, advanced clinical trials;

• institutional review boards or regulators, including the FDA, may hold, suspend or terminate our clinical research or the clinical trials of our product candidates for various reasons, including noncompliance with regulatory requirements or if, in their opinion, the participating subjects are being exposed to unacceptable health risks;

• subjects may drop out of our clinical trials;

• our preclinical studies or clinical trials may produce negative, inconsistent or inconclusive results, and we may decide, or regulators may require us, to conduct additional preclinical studies or clinical trials; and

• the cost of our clinical trials may be greater than we currently anticipate.

For example, the FDA has placed our oral Rambazole product candidate on clinical hold. If we do not receive regulatory approval to sell our product candidates or cannot successfully commercialize our product candidates, we would not be able to grow revenues in future periods, which would result in significant harm to our financial position and adversely impact our stock price.

If our clinical trials for our product candidates are delayed, we would be unable to commercialize our product candidates on a timely basis, which would materially harm our business.

Planned clinical trials may not begin on time, may take longer to complete than anticipated, or may need to be restructured after they have begun. Clinical trials can be delayed for a variety of reasons, including delays related to:

• obtaining an effective investigational new drug application, or IND, or regulatory approval to commence a clinical trial;

• identifying and engaging a sufficient number of clinical trial sites;

• negotiating acceptable clinical trial agreement terms with prospective trial sites;

• obtaining institutional review board approval to conduct a clinical trial at a prospective site;

• recruiting qualified subjects to participate in clinical trials in a timely manner;

• competition in recruiting clinical investigators;

• shortage or lack of availability of supplies of drugs for clinical trials;

• the need to repeat clinical trials as a result of inconclusive results or poorly executed testing;

• the placement of a clinical hold on a study;

• the failure of third parties conducting and overseeing the operations of our clinical trials to perform their contractual or regulatory obligations in a timely fashion; and

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• exposure of clinical trial subjects to unexpected and unacceptable health risks or noncompliance with regulatory requirements, which may result in suspension of the trial.

All of our product candidates have significant milestones to reach, including the successful completion of clinical trials, before commercialization. If we experience significant delays in or termination of clinical trials, our financial results and the commercial prospects for our product candidates or any other products that we may develop will be adversely impacted. In addition, our product development costs would increase and our ability to generate revenue could be impaired.

We may need or elect to alter the formulations of our product candidates which would increase the time and expense of development and could require us to repeat pre-clinical or clinical studies.

The current formulations of our product candidates, other than Hyphanox, may not be the final formulations for which we would seek regulatory approval. This risk is particularly applicable to our Pramiconazole, Hivenyl and Rambazole product candidates. Each of these product candidates is in a relatively early stage of development and we have not yet selected the final formulation for any of them. Altering the formulation of a product candidate would increase the cost and potentially the time of development due to the additional formulation development work and manufacturing work, as well as the potential need for additional pre-clinical and clinical trials. In addition, altering the formulation could affect the pharmaceutical properties of the product candidate thereby potentially decreasing the usefulness or reliability of any pre-clinical or clinical results utilizing our current formulation.

Risks related to regulatory approval of our product candidates

*We may not receive regulatory approvals for our product candidates or approvals may be delayed, either of which could materially harm our business.

Government authorities in the United States and foreign countries extensively regulate the development, testing, manufacture, distribution, marketing and sale of our product candidates and our ongoing research and development activities. Our failure to receive regulatory approval or failure to receive regulatory approval within the anticipated timeframe for our product candidates could significantly adversely affect future revenues.

The process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon the type, complexity and novelty of the product candidates involved. Application fees for the approval of prescription drugs continue to increase. According to the FDA, a Phase 1 clinical trial typically takes several months to complete, a Phase 2 clinical trial typically takes several months to two years to complete and a Phase 3 clinical trial typically takes one to four years to complete. Moreover, Phase 3 clinical trials may not directly follow successful completion of Phase 2 clinical trials, as additional non-clinical and clinical trials may be required prior to initiating a Phase 3 trial. For instance, the FDA may require a cardiovascular safety study at the expected dose and an elevated dose prior to initiating Phase 3 clinical trials. In addition, additional trials may be needed following successful completion of a Phase 3 clinical trial prior to seeking marketing approval. For instance, depending upon the outcome of our ongoing Phase 3 trial for Hyphanox, and any directions or feedback we may receive from regulatory agencies, we may need to perform additional non-clinical or clinical studies prior to seeking marketing approval for Hyphanox.

Industry sources report that the preparation and submission of new drug applications, or NDAs, which are required for regulatory approval, generally take six months to one year to complete after completion of a pivotal clinical trial. Industry sources also report that approximately 10 to 15% of all NDAs accepted for filing by the FDA are rejected and that FDA approval, if granted, usually takes approximately one year after submission, although it may take longer if additional information is required by the FDA. Accordingly, we cannot assure you that the FDA will approve any NDA that we may file. In addition, the Pharmaceutical Research and Manufacturers of America reports that only one out of five product candidates that enter clinical trials will ultimately be approved by the FDA for commercial sale.

In particular, human therapeutic products are subject to rigorous preclinical studies, clinical trials and other approval procedures of the FDA and similar regulatory authorities in foreign countries. The FDA regulates, among other things, the development, testing, manufacture, safety, efficacy, record keeping, labeling, storage, approval, advertising, promotion, sale and distribution of pharmaceutical products. Securing FDA approval requires the submission of extensive preclinical and clinical data, information about product manufacturing processes and inspection of facilities and supporting information to the FDA for each therapeutic indication to establish the product candidate’s safety and efficacy. Varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of a product

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candidate. For example in May 2005, the FDA issued a not approvable letter for Vusion. Although the FDA ultimately approved our Vusion product in February 2006, the FDA’s initial interpretation of our data and resulting not approvable letter resulted in a delay of approximately nine months.

It has also recently been reported that the FDA has indicated that the divisions which review NDAs may be authorized to miss response deadlines mandated under the Prescription Drug User Fee Act, or PDUFA. Under PDUFA, first enacted in 1992, companies like ours pay certain “user fees” in connection with their applications for new drugs or biologics in exchange for a reduction in the review and approval process by the FDA. The FDA has indicated that over the past several years the growth in workload for the Office of New Drugs has far outpaced its ability to adequately increase its staffing. An unanticipated delay in response from the FDA on an NDA for any of our product candidates could significantly impact our ability to bring new drugs to market.

Changes in the FDA approval process during the development period or changes in regulatory review for each submitted product application may also cause delays in the approval or result in rejection of an application. In addition, recent withdrawals of approved products by major pharmaceutical companies have resulted in a renewed focus on safety at the FDA, which may result in delays in the approval process.

The FDA has substantial discretion in the approval process and may reject our data or disagree with our interpretations of regulations or our clinical trial data or ask for additional information at any time during their review, which could result in one or more of the following:

• delays in our ability to submit an NDA;

• the refusal by the FDA to file any NDA we may submit;

• requests for additional studies or data;

• delays of an approval; or

• the rejection of an application.

Any FDA or other regulatory approval of our product candidates, once obtained, may be withdrawn, including for failure to comply with regulatory requirements, an increase in, or appearance of new, adverse events, or if clinical or manufacturing problems follow initial marketing.

In addition, any proposed brand name that we intend to use for our product candidates will require approval from the FDA. The FDA typically conducts a rigorous review of proposed product names, including an evaluation of potential for confusion with other product names. The FDA may also object to a product name if it believes the name inappropriately implies medical claims.

Any failure to receive the regulatory approvals necessary to commercialize our product candidates would severely harm our business. The process of obtaining these approvals and the subsequent compliance with appropriate domestic and foreign statutes and regulations require spending substantial time and financial resources. If we fail to obtain or maintain, or encounter delays in obtaining or maintaining, regulatory approvals, it could adversely affect the marketing of any product candidate we develop, our ability to receive product or royalty revenues, and our liquidity and capital resources.

Some of our product candidates are based on new chemical entities that have not been extensively tested in humans, which may affect our ability or the time we require to obtain necessary regulatory approvals.

Some of our product candidates are based on new chemical entities that have not been extensively tested in humans. The regulatory requirements governing these types of products may be less well defined or more rigorous than for products containing active ingredients that have been previously approved by the FDA. As a result, we may experience a longer and more expensive regulatory process in connection with obtaining regulatory approvals of these types of product candidates.

This risk is particularly applicable to our oral and topical Rambazole product candidates, which are based on a novel class of molecules known as retinoic acid metabolism blocking agents, or RAMBAs. Since 2004, the FDA has become

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increasingly concerned about the safety profile of a class of drugs known as synthetic retinoids. Although Rambazole is not a synthetic retinoid, it blocks the intracellular metabolism of natural retinoic acid in cells, resulting in an increased presence of the body’s own retinoic acid. Because this is designed to provide similar therapeutic benefits of synthetic retinoid therapy, the FDA and foreign regulatory authorities may impose a more difficult, time consuming and expensive regulatory path in order to commence and complete the clinical testing of these product candidates as compared to others in our pipeline at the same stage of development. The FDA has placed our oral Rambazole product candidate on clinical hold. Because the active ingredient of our topical Rambazole product candidate is the same as oral Rambazole, we may experience a longer and more expensive regulatory process for this product candidate, as well.

Risks related to our dependence on third parties for manufacturing, research and development and marketing and distribution activities

Because we have no manufacturing capabilities, we contract with third-party contract manufacturers whose performance may be substandard or not in compliance with regulatory requirements, which could increase the risk that we will not have adequate supplies of our product candidates and harm our ability to commercialize our product candidates.

We do not have any manufacturing facilities and we have limited manufacturing experience. We rely on third-party contract manufacturers to produce the products that we commercialize and use in our clinical trials. If we are unable to retain our current, or engage additional, contract manufacturers, we will not be able to conduct our clinical trials or sell any products for which we receive regulatory approval. The risks associated with our reliance on contract manufacturers include the following:

• Contract manufacturers may encounter difficulties in achieving volume production, quality control and quality assurance and also may experience shortages in qualified personnel. As a result, our contract manufacturers might not be able to meet our clinical development schedules or adequately manufacture our products in commercial quantities when required.

• Changing manufacturers may be difficult because the number of potential manufacturers for some of our product candidates may be limited and, in one case, there is only a single source of supply. Specifically, the intermediate for our product candidate Hyphanox is manufactured using a process that is proprietary to our contract manufacturer. We do not have a license to the technology used by our contract manufacturer to make the intermediate needed for the Hyphanox tablets. If this manufacturer cannot provide adequate supplies of the intermediate for Hyphanox, we cannot sublicense this technology to a third party to act as our supplier. As a result, it may be difficult or impossible for us to find a qualified replacement manufacturer quickly or on terms acceptable to us, the FDA and corresponding foreign regulatory agencies, or at all.

• Each of our marketed products could be produced by multiple manufacturers. However, if we need to change manufacturers, the FDA and corresponding foreign regulatory agencies must approve these manufacturers in advance. This would involve testing and pre-approval inspections to ensure compliance with FDA and foreign regulations and standards, which could potentially cause delays and could affect our cost of goods.

• Our contract manufacturers may breach our manufacturing agreements because of factors beyond our control or may terminate or fail to renew a manufacturing agreement based on their own business priorities at a time that is costly or inconvenient for us.

We may compete with other drug developers for access to manufacturing facilities for our products and product candidates. If we are not able to obtain adequate supplies of our products we may not be able to distribute our products as planned which could adversely affect our revenues. If we are not able to obtain adequate supplies of our product candidates, it will be more difficult for us to develop our product candidates. Dependence upon third parties for the manufacture of our product candidates may reduce our profit margins, if any, and may limit our ability to develop and deliver products on a timely and competitive basis.

We rely on a single source supplier for the manufacture of each of our marketed products and the active ingredients contained in those products and the loss of these suppliers could disrupt our business.

Although each of our marketed products and the active ingredients in those products can be produced by multiple manufacturers, we predominately rely on a single source of supply for those products and active ingredients. If any of these

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manufacturers, or any manufacturer of any other ingredient or component contained in our marketed products or their packaging, were to become unable or unwilling to continue to provide us with these products or ingredients, we may need to obtain an alternate supplier. The process of changing or adding a manufacturer includes qualification activities and may require approval from the FDA and corresponding foreign regulatory agencies, and can be time consuming and expensive. If we are not able to manage this process efficiently or if an unforeseen event occurs, we could face supply disruptions that would result in significant costs and delays, undermine goodwill established with physicians and patients, damage the commercial prospects for our products and adversely affect our operating results.

If third parties on whom we rely do not perform as contractually required or expected, we may not be able to obtain regulatory approval for or commercialize our products and product candidates.

We depend on independent clinical investigators and contract research organizations to conduct our clinical trials. Contract research organizations also assist us in the collection and analysis of trial data. The investigators, contract research organizations, and other contractors are not our employees, and we cannot control, other than by contract, the amount of resources, including time, that they devote to our product candidates. However, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial that have been approved by regulatory agencies and for ensuring that we report product-related adverse events in accordance with applicable regulations. Furthermore, the FDA and European regulatory authorities require us to comply with standards, commonly referred to as good clinical practice, for conducting, recording and reporting clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected.

In connection with our reliance on our independent clinical investigators and contract research organizations, our clinical trials may be extended, delayed, suspended, terminated, or deemed unacceptable including as a result of:

• the failure of these investigators and research organizations to comply with good clinical practice or to meet their contractual duties;

• the failure of our independent investigators to devote sufficient resources to the development of our product candidates or to perform their responsibilities at a sufficiently high level;

• our need to replace these third parties for any reason, including for performance reasons or if these third parties go out of business; or

• the existence of problems in the quality or accuracy of the data they obtain due to the failure to adhere to clinical protocols or regulatory requirements or for other reasons.

Extensions, delays, suspensions or terminations of our clinical trials as a result of the performance of our independent clinical investigators and contract research organizations will delay, and make more costly, regulatory approval for any product candidates that we may develop.

In addition, although we have used a number of contract research organizations to conduct our clinical trials, there are many other qualified contract research organizations available. Any change in a contract research organization during an ongoing clinical trial could seriously delay that trial and potentially compromise the results of the trial.

Risks related to intellectual property

* There are limitations on our patent rights relating to our products and product candidates that may affect our ability to exclude third parties from competing against us.

The patent rights that we own or have licensed relating to our products and product candidates are limited in ways that may affect our ability to exclude third parties from competing against us. In particular:

• We do not hold composition of matter patents covering the active pharmaceutical ingredients of Xolegel, Vusion, Solagé, or our Hyphanox product candidate. Composition of matter patents on active pharmaceutical ingredients are the strongest form of intellectual property protection for pharmaceutical products as they apply without regard to any method of use or other type of limitation. The active ingredients for Solagé, Vusion, Xolegel and Hyphanox are

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off patent. As a result, competitors who obtain the requisite regulatory approval can offer products with the same active ingredients as our products so long as the competitors do not infringe any method of use or formulation patents that we may hold.

• The composition of matter patent covering the formulation of our Vusion product is scheduled to expire on March 27, 2009. Although we have submitted an application for patent term extension until March 2012, it is possible that the USPTO could reject that application or grant an extension for a shorter period of time.

• Our patent licenses from Janssen Pharmaceutica Products, L.P., Johnson & Johnson Consumer Companies, Inc. and Ortho-McNeil Pharmaceutical, Inc. are limited to the field of dermatology. As a result, if we were to discover that one or more of our product candidates had potential to be effective in indications outside the field of dermatology, we would not be able to capitalize on that potential without first obtaining a license to do so. We may not be able to obtain such a license on attractive terms or at all.

These limitations on our patent rights may result in competitors taking product sales away from us, which would reduce our revenues and harm our business.

If we are unable to obtain and maintain patent protection for our intellectual property, our competitors could develop and market products similar or identical to ours, which may reduce demand for our product candidates.

Our success will depend in part on our ability to obtain and maintain patent protection for our proprietary technologies and product candidates and our ability to prevent third parties from infringing our proprietary rights. The patent situation in the field of biotechnology and pharmaceuticals generally, and dermatology products specifically, is highly uncertain and involves complex legal and scientific questions. We may not be able to obtain additional issued patents relating to our technology or products. Even if issued, patents may be challenged, narrowed, invalidated, or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection. We also may not have the resources to aggressively protect and enforce existing patent protection, and our competitors may infringe our patents or successfully avoid them through design innovation. To prevent infringement or unauthorized use, we may need to file infringement lawsuits, which are expensive and time-consuming.

Because of the substantial length of time and expense associated with bringing new products through the development and regulatory approval processes in order to reach the marketplace, the pharmaceutical industry places considerable importance on patent protection for new technologies, products and processes. Accordingly, we expect to seek patent protection for our new proprietary technologies and some of our product candidates. The risk exists, however, that new patents may be unobtainable and that the breadth of the claims in a patent, if obtained, may not provide adequate protection for our proprietary technologies or product candidates.

Although we own or otherwise have rights to a number of patents, these patents may not effectively exclude competitors. The issuance of a patent is not conclusive as to its validity or enforceability and third parties may challenge the validity or enforceability of our patents. Because patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publications of discoveries in the scientific literature often lag behind actual discoveries, we cannot be certain that we were the first to make the inventions claimed in our issued United States patents or pending patent applications, or that we were the first to file for protection of the inventions set forth in the foreign patents or patent applications. It is possible that a competitor may successfully challenge our patents or that challenges will result in the elimination or narrowing of patent claims and, therefore, reduce our patent protection.

We may need to initiate lawsuits to protect or enforce our patents and other intellectual property rights, which could result in the forfeiture of these rights.

Any issued patents that cover our proprietary technologies may not provide us with substantial protection or be commercially beneficial to us. The issuance of a patent may be challenged with respect to its validity or its enforceability. In particular, if a competitor were to file a paragraph IV certification under the United States Drug Price Competition and Patent

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Term Restoration Act of 1984, known as the Hatch-Waxman Act, in connection with that competitor’s submission to the FDA of an abbreviated new drug application, or ANDA, for approval of a generic version of any of our products for which we believed we held a valid patent, then we would have 45 days in which to initiate a patent infringement lawsuit against such competitor. In any infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, may narrow our patent claims or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover its technology. If a court so found that one of our patents was invalid or not infringed in an infringement suit under paragraph IV of the Hatch-Waxman Act, then the FDA would be permitted to approve the competitor’s ANDA resulting in a competitive generic product.

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology may be adversely affected.

In addition to patent protection, we rely upon trade secrets relating to unpatented know-how and technological innovations to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our employees, consultants and other third parties. We also have confidentiality and invention or patent assignment agreements with our employees and our consultants. If our employees, consultants or other third parties breach these agreements, we may not have adequate remedies for any of these breaches. In addition, our trade secrets may otherwise become known to or be independently developed by our competitors.

If the development of our product candidates infringes the intellectual property of our competitors or other third parties, we may be required to pay license fees or cease our development activities and pay damages, which could significantly harm our business.

Even if we have our own patents which protect our products and our product candidates they may nonetheless infringe the patents or violate the proprietary rights of third parties. In these cases, we may be required to obtain licenses to patents or proprietary rights of others in order to continue to develop and commercialize our product candidates. We may not, however, be able to obtain any licenses required under any patents or proprietary rights of third parties on acceptable terms, or at all. Even if we were able to obtain rights to a third party’s intellectual property, these rights may be non-exclusive, thereby giving our competitors potential access to the same intellectual property.

Third parties may assert patent or other intellectual property infringement claims against us, or our collaborators, with respect to technologies used in potential product candidates. Any claims that might be brought against us relating to infringement of patents may cause us to incur significant expenses and, if successfully asserted against us, may cause us to pay substantial damages. Even if we were to prevail, any litigation could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. In addition, any patent claims brought against our collaborators could affect their ability to carry out their obligations to us.

Furthermore, as a result of a patent infringement suit brought against us, or our collaborators, the development, manufacture or potential sale of product candidates claimed to infringe a third party’s intellectual property may have to be stopped or be delayed. Ultimately, we may be unable to commercialize some of our product candidates or may have to cease some of our business operations as a result of patent infringement claims, which could severely harm our business.

If we fail to comply with our obligations in the agreements under which we license development or commercialization rights to products or technology from third parties, we could lose license rights that are important to our business.

All of our current product candidates in clinical development are based on intellectual property that we have licensed from Janssen Pharmaceutica Products, L.P., Johnson & Johnson Consumer Companies, Inc. and Ortho-McNeil Pharmaceutical, Inc. We depend, and will continue to depend, on these license agreements. The terms of these licenses are set out in two license agreements. These license agreements may be terminated on a product-by- product basis, if, by dates specified in the license agreements, we are not conducting active clinical development of the particular product or if we do not obtain regulatory approval for that product. Either of the license agreements may also be terminated if we breach that license agreement and do not cure the breach within 90 days or in the event of our bankruptcy or liquidation.

Disputes may arise with respect to our licensing agreements regarding manufacturing, development and commercialization of any products relating to this intellectual property. These disputes could lead to delays in or termination of the development, manufacture and commercialization of our product candidates or to litigation.

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Various aspects of our Johnson & Johnson license agreements may adversely affect our business.

Under our principal license agreements, neither Johnson & Johnson nor any of its affiliates is restricted from developing or acquiring products that may address similar indications as our products or otherwise compete with our products. We have the sole right to commercialize any product candidate based on intellectual property licensed to us under these agreements that we elect to commercialize ourselves or with the assistance of a contract sales organization. In other circumstances, however, Johnson & Johnson and any of its affiliates has a right of first negotiation for the commercialization of our product candidates based on such intellectual property. The rights of first negotiation for the commercialization of our product candidates can be exercised on a territory-by-territory basis. This negotiation may extend for up to 180 days, which may delay our commercialization efforts or hinder our ability to enter into development, commercialization and distribution agreements.

The license agreements also permit each of Janssen Pharmaceutica Products, L.P., Johnson & Johnson Consumer Companies, Inc. and Ortho-McNeil Pharmaceutical, Inc., to abandon its maintenance of any patents or the prosecution of any patent applications included in the licensed intellectual property for any reason. If any of these companies abandon these activities, we have the option to undertake their maintenance and prosecution if we decide to prevent their abandonment. To date, we have assumed the maintenance and prosecution for all of the patents and patent applications relating to our Xolegel and Vusion product candidates. If we are required to undertake these activities for any additional product candidates, our operating costs will increase.

In addition, our license agreements limit our use of our product candidates to the specific field of dermatology as defined in the license agreements. As so defined, dermatology consists of applications for the treatment or prevention of diseases of human skin, hair, nails and oral and genital mucosa, but excludes treatments for skin cancer. This field of use restriction may limit our ability to market our products for indications outside of dermatology and, therefore, limit the potential market size for our products.

Risk related to our industry

Federal legislation will likely increase the pressure to reduce the price of pharmaceutical products paid for by Medicare, which will adversely affect our revenues.

The Medicare Prescription Drug Improvement and Modernization Act of 2003 reformed the way Medicare covers and reimburses for pharmaceutical products. The law expands Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for drugs. In addition, the law provides authority for limiting the number of drugs that will be covered in any therapeutic class. As a result of the expansion of federal coverage of drug products, we expect that there will be additional pressure to contain and reduce costs. These cost initiatives and other provisions of this law could decrease the coverage and price that we receive for our products and could seriously harm our business.

If we are not able to retain our current senior management team or attract and retain qualified scientific, technical and business personnel, our business will suffer.

We are dependent on the members of our senior management team for our business success. In addition, an important element of our strategy is to leverage the development, regulatory and commercialization expertise of our current management in our development activities. The loss of key employees may result in a significant loss in the knowledge and experience that we, as an organization, possess and could cause significant delays, or outright failure, in the further commercialization of our products and development of product candidates. If we are unable to attract and retain qualified and talented senior management personnel, our business may suffer.

In addition, competition for qualified scientific, technical, and business personnel is intense in the pharmaceutical industry. If we are unable to hire and retain qualified personnel, our business will suffer.

Our operations may be impaired unless we can successfully manage our growth.

As of March 31, 2008, we had 128 full-time employees, including approximately 64 sales representatives and field sales managers. We recently converted our sales force to be entirely Barrier employees. This type of expansion may place a significant strain on our management and operational resources. To manage this and any further growth, we will be required

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to continue to improve existing, and implement additional systems, procedures and controls, and hire, train and manage these additional employees. Our current and planned personnel, systems, procedures and controls may not be adequate to support our anticipated growth and we may not be able to hire, train, retain, motivate and manage required personnel. Our failure to manage growth effectively could limit our ability to achieve our business goals. In addition, our sales force consists of relatively newly hired employees. Turnover in our sales force or marketing team could adversely affect product sales growth.

We face potential product liability exposure, and, if successful claims are brought against us, we may incur substantial liability for a product and may have to limit its commercialization.

The use of our product candidates in clinical trials and the sale of products may expose us to the risk of product liability claims. This risk is even greater for our product candidates that are administered orally such as Hyphanox, Pramiconazole, Rambazole and Hivenyl or which contain a new chemical entity such as Pramiconazole, Rambazole and Hivenyl. Product liability claims might be brought against us by consumers, health care providers, pharmaceutical companies or others selling our products. If we cannot successfully defend ourselves against these claims, we may incur substantial losses or expenses, be required to limit the commercialization of our product candidates and face adverse publicity. We have product liability insurance coverage with a $10 million annual aggregate coverage limit, and our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us could cause our stock price to fall and, if judgments exceed our insurance coverage, could decrease our cash.

If our competitors develop and market products faster than we do or if the products of our competitors are considered more desirable than ours, revenues for any of our products and product candidates that are approved for marketing will not develop or grow.

The pharmaceutical industry, including the dermatology segment in particular, is highly competitive and includes a number of established, large and mid-sized pharmaceutical companies, as well as smaller emerging companies, whose activities are directly focused on our target markets and areas of expertise. We face and will continue to face competition in the discovery, in-licensing, development and commercialization of our product candidates, which could severely impact our ability to generate revenue or achieve significant market acceptance of our product candidates. Furthermore, new developments, including the development of other drug technologies and methods of preventing the incidence of disease, occur in the pharmaceutical industry at a rapid pace. These developments may render our product candidates or technologies obsolete or noncompetitive.

Compared to us, many of our competitors and potential competitors have substantially greater:

• capital resources;

• research and development resources, including personnel and technology;

• regulatory experience;

• preclinical study and clinical trial experience; and

• manufacturing, distribution and sales and marketing experience.

As a result of these factors, our competitors may obtain regulatory approval of their products more rapidly than us. Our competitors may obtain patent protection or other intellectual property rights that limit our ability to develop or commercialize our product candidates or technologies. Our competitors may also develop drugs that are more effective, useful and less costly than ours and may also be more successful than us in manufacturing and marketing their products.

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Each of our marketed products competes, and if approved each of our product candidates will compete, for a share of the existing market with numerous products that have become standard treatments recommended or prescribed by physicians. For example, we believe the primary competition for our marketed products are:

• For Xolegel, in the treatment of seborrheic dermatitis, Nizoral from Janssen, Desowen from Galderma S.A., Loprox from Medicis Pharmaceutical Corporation and the generic equivalents of each, Tersi Foam from Quinnova Pharmaceuticals and Extina Foam from Stiefel Laboratories, Inc.

• For Vusion in the treatment of diaper dermatitis complicated by candidiasis, from ointments and creams containing nystatin, Mycolog II from Bristol-Myers Squibb Company, clotrimazole containing creams from Bayer AG and from generic manufacturers and topical miconazole creams. None of these products are indicated for the treatment of diaper dermatitis complicated by documented candidiasis.

• For Solagé in the treatment of solar lentigines from Triluma from Galderma S.A., Avage from Allergan, Inc., EpiQuin Micro from SkinMedica, Inc. and other prescription 4% hydroquinone formulations as well as over-the-counter 2% hydroquinone products, Retin-A from Neutrogena and other tretinoin containing topical formulations.

We believe the primary competition for our later stage product candidates in development are:

• For Hyphanox and Pramiconazole, in the treatment of onychomycosis, Sporanox from Janssen and generic manufacturers, Lamisil from Novartis AG and generic manufacturers, and Penlac from Dermik Laboratories and generic suppliers.

• For Pramiconazole, in the treatment of superficial fungal infections, topical antifungal drugs including Loprox from Medicis, Lotrimin AF from Schering-Plough and generic manufacturers, Lotrimin Ultra from Schering Plough, Lamisil AT from Novartis, and ketoconazole, miconazole and nystatin from generic manufacturers.

• For oral Rambazole, in the treatment of psoriasis, Soriatane from Hoffman-La Roche and Stiefel Laboratories, biologic agents such as Amevive from Astellas Pharma US, Inc., Raptiva from Genentech, Inc., and methotrexate from generic manufacturers.

Risks related to our common stock

Our stock price is volatile, and the market price of our common stock may drop below the price you pay.

Market prices for securities of biopharmaceutical and specialty pharmaceutical companies have been particularly volatile. Some of the factors that may cause the market price of our common stock to fluctuate include:

• results of our clinical trials or those of our competitors;

• the regulatory status of our product candidates;

• failure of any of our products to achieve commercial success;

• our quarterly revenues and fluctuations in our prescription trend data;

• developments concerning our competitors and their products;

• success of competitive products and technologies;

• regulatory developments in the United States and foreign countries;

• developments or disputes concerning our patents or other proprietary rights;

• our ability to manufacture any products to commercial standards;

• public concern over our drugs;

• litigation involving our company or our general industry or both;

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• future sales of our common stock;

• changes in the structure of health care payment systems, including developments in price control legislation;

• departure of key personnel;

• period-to-period fluctuations in our financial results or those of companies that are perceived to be similar to us;

• changes in estimates of our financial results or recommendations by securities analysts;

• investors’ general perception of us; and

• general economic, industry and market conditions.

If any of these risks occur, it could cause our stock price to fall and may expose us to class action lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

Provisions in our certificate of incorporation and bylaws and under Delaware law may prevent or frustrate a change in control or a change in management that stockholders believe is desirable.

Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:

• a classified board of directors;

• limitations on the removal of directors;

• advance notice requirements for stockholder proposals and nominations;

• the inability of stockholders to act by written consent or to call special meetings; and

• the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval, which could be used to institute a rights plan, or a poison pill, that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors.

The affirmative vote of the holders of at least two-thirds of our shares of capital stock entitled to vote is necessary to amend or repeal the above provisions of our certificate of incorporation. In addition, absent approval of our board of directors, our bylaws may only be amended or repealed by the affirmative vote of the holders of at least two-thirds of our shares of capital stock entitled to vote.

In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns or within the last three years has owned 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Section 203 may discourage, delay or prevent a change in control of our company.

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ITEM 6. EXHIBITS

Exhibit No.	Description
10.1	Employment Agreement, dated as of March 14, 2008, by and between the Registrant and Alfred Altomari filed as Exhibit 10.1 to the Company’s Periodic Report on Form 8-K on March 17, 2008.
10.2	Employment Agreement, dated as of March 14, 2008, by and between the Registrant and Dennis P. Reilly filed as Exhibit 10.2 to the Company’s Periodic Report on Form 8-K on March 17, 2008.
10.3	Confidential Separation Agreement and General Release, dated as of March 31, 2008, by and between the Registrant and Geert Cauwenbergh, Ph.D. filed as Exhibit 10.1 to the Company’s Periodic Report on Form 8-K on April 2, 2008.
10.4	Confidential Separation Agreement and General Release, dated as of April 30, 2008, by and between the Registrant and Anne VanLent filed as Exhibit 10.1 to the Company’s Periodic Report on Form 8-K on May 1, 2008.
31.1	Certification of principal executive officer required by Rule 13a-14(a). (filed herewith)
31.2	Certification of principal financial and accounting officer required by Rule 13a-14(a). (filed herewith)
32.1	Section 1350 Certification of principal executive officer. (furnished herewith)
32.2	Section 1350 Certification of principal financial and accounting officer. (furnished herewith)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	BARRIER THERAPEUTICS, INC. (Registrant)
May 9, 2008	By	/s/ ALFRED ALTOMARI
		Alfred Altomari
		Chief Executive Officer (Principal Executive Officer)
	By	/s/ DENNIS P. REILLY
		Dennis P. Reilly
		Chief Financial Officer (Principal Financial Officer & Principal Accounting Officer)

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