10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended March 31, 2008


o		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 001-33451

BIODEL INC.

(Exact name of registrant as specified in its charter)


Delaware		90-0136863
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

100 Saw Mill Road
Danbury, Connecticut		06810
(Address of principal executive offices)		(Zip code)

(203) 796-5000
(Registrant’s telephone number, including area code)

Not Applicable
(Former Name or Former Address, 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. þ Yes o No

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


Non-accelerated filer þ	Large accelerated filer o	Accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

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

Indicate the number of shares outstanding of the issuer’s common stock as of the latest practicable date: As of April 30, 2008, there were 23,657,398 shares of the registrant’s common stock outstanding.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Biodel Inc.
(A Development Stage Company)

Condensed Balance Sheets
(in thousands, except share and per share amounts)


	September 30,			March 31,
	2007			2008
				(unaudited)
ASSETS

Current:
Cash and cash equivalents	$	80,022		$	107,884
Marketable securities		—			3,803
Prepaid and other assets		505			206

Total current assets		80,527			111,893
Property and equipment, net		1,717			3,357
Intellectual property, net		262			285

Total assets	$	82,506		$	115,535


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current:
Accounts payable	$	2,187		$	2,876
Accrued expenses:
Clinical trial expenses		1,164			1,560
Payroll and related		822			780
Accounting and legal fees		335			364
Severance expense		—			355
Other		680			617
Taxes payable		95			170

Total current liabilities		5,283			6,722

Other long term liabilities		—			141

Stockholders’ equity:
Preferred stock, $0.01 par value; 50,000,000 shares authorized		—			—
Common stock, $0.01 par value; 100,000,000 shares authorized; 20,160,836 and 23,611,346 shares issued and outstanding, respectively		202			236
Additional paid-in capital		116,854			168,853
Deficit accumulated during the development stage		(39,833	)		(60,417	)

Total stockholders’ equity		77,223			108,672

Total liabilities and stockholders’ equity	$	82,506		$	115,535

See accompanying notes to financial statements.

Biodel Inc.
(A Development Stage Company)

Condensed Statements of Operations
(in thousands, except share and per share amounts)
(unaudited)


													December 3, 2003
	Three Months Ended						Six Months Ended						(inception) to
	March 31,						March 31						March 31,
	2007			2008			2007			2008			2008
Revenue	$	—		$	—		$	—		$	—		$	—


Operating expenses:

Research and development		3,815			7,105			6,330			14,650			39,822

General and administrative		1,504			3,532			2,825			7,664			18,515


Total operating expenses		5,319			10,637			9,155			22,314			58,337

Other (income) and expense:

Interest and other income		(132	)		(1,111	)		(322	)		(1,783	)		(3,876	)

Interest expense		—			—			—			—			78

Loss on settlement of debt		—			—			—			—			627


Operating loss before tax provision		(5,187	)		(9,526	)		(8,833	)		(20,531	)		(55,166	)

Tax provision		28			31			46			53			191


Net loss		(5,215	)		(9,557	)		(8,879	)		(20,584	)		(55,357	)

Charge for accretion of beneficial conversion rights		—			—			—			—			(603	)

Deemed dividend — warrants		(4,457	)		—			(4,457	)		—			(4,457	)


Net loss applicable to common stockholders	$	(9,672	)	$	(9,557	)	$	(13,336	)	$	(20,584	)	$	(60,417	)


Net loss per share — basic and diluted	$	(1.79	)	$	(0.43	)	$	(2.48	)	$	(0.97	)

Weighted average shares outstanding — basic and diluted		5,396,220			22,045,400			5,369,136			21,116,654

See accompanying notes to financial statements.

Biodel Inc.
(A Development Stage Company)

Condensed Statements of Stockholders’ Equity
(in thousands, except share and per share amounts)


																				Deficit
					Series A Preferred						Series B Preferred									Accumulated
	Common stock				Stock						Stock						Additional			During the			Total
	$.01 Par Value				$.01 Par Value						$.01 Par Value						Paid in			Development			Stockholders’
	Shares		Amount		Shares			Amount			Shares			Amount			Capital			Stage			Equity
December 3, 2003 (inception) to September 30, 2004
Shares issued to founders		531	$	—		—		$	—			—		$	—		$	—		$	—		$	—
Effect of stock split approved December 23, 2004		5,313,213		53		—			—			—			—			(53	)		—			—
Additional shareholder contributions		—		—		—			—			—			—			1,146			—			1,146
Founder’s compensation contributed to capital		—		—		—			—			—			—			208			—			208
Net loss		—		—		—			—			—			—			—			(774	)		(774	)


Balance, September 30, 2004		5,313,744		53		—			—			—			—			1,301			(774	)		580
Additional shareholder contributions		—		—		—			—			—			—			514			—			514
Share-based compensation		—		—		—			—			—			—			353			—			353
Shares issued to employees and directors for services		42,656		1		—			—			—			—			60			—			61
July 2005 Private placement — Sale of Series A preferred stock, net of issuance costs of $379		—		—		569,000			6			—			—			2,460			—			2,466
Founder’s compensation contributed to capital		—		—		—			—			—			—			63			—			63
Net loss		—		—		—			—			—			—			—			(3,383	)		(3,383	)


Balance, September 30, 2005		5,356,400		54		569,000			6			—			—			4,751			(4,157	)		654
Share-based compensation		—		—		—			—			—			—			1,132			—			1,132
July 2006 Private placement — Sale of Series B preferred stock, net of issuance costs of $1,795		—		—		—			—			5,380,711			54			19,351			—			19,405
July 2006 — Series B preferred stock units issued July 2006 to settle debt		—		—		—			—			817,468			8			3,194			—			3,202
Shares issued to employees and directors for services		4,030		—		—			—			—			—			23			—			23
Accretion of fair value of beneficial conversion charge		—		—		—			—			—			—			603			(603	)		—
Net loss		—		—		—			—			—			—			—			(8,068	)		(8,068	)


Balance, September 30, 2006		5,360,430		54		569,000			6			6,198,179			62			29,054			(12,828	)		16,348
Proceeds from sale of common stock		5,750,000		58		—			—			—			—			78,697			—			78,755
Conversion of preferred stock on May 16, 2007		6,407,008		64		(569,000	)		(6	)		(6,198,179	)		(62	)		4			—			—
Share-based compensation		—		—		—			—			—			—			4,224			—			4,224
Shares issued to employees, non-employees and directors for services		2,949		—		—			—			—			—			16			—			16
Stock options exercised		3,542		—		—			—			—			—			5			—			5
Warrants exercised		2,636,907		26		—			—			—			—			397			—			423
Deemed dividend – warrants		—		—		—			—			—			—			4,457			(4,457	)		—
Net loss		—		—		—			—			—			—			—			(22,548	)		(22,548	)


Balance, September 30, 2007		20,160,836		202		—			—			—			—			116,854			(39,833	)		77,223
Proceeds from sale of common stock		3,260,000		32		—			—			—			—			46,785						46,817
Issuance of restricted stock		4,857		—		—			—			—			—			101			—			101
Share-based compensation		—		—		—			—			—			—			4,134			—			4,134
Stock options exercised		100,105		1		—			—			—			—			787			—			788
Warrants exercised		79,210		1		—			—			—			—			111			—			112
Proceeds from sale of stock — ESPP		6,338		—		—			—			—			—			81			—			81
Net loss		—		—		—			—			—			—			—			(20,584	)		(20,584	)


Balance, March 31, 2008 (unaudited)		23,611,346	$	236		—		$	—			—		$	—		$	168,853		$	(60,417	)	$	108,672

See accompanying notes to financial statements.

Biodel Inc.
(A Development Stage Company)

Condensed Statements of Cash Flows
(in thousands)
(unaudited)


							December 3, 2003
	Six Months Ended						(inception) to
	March 31,							March 31,
	2007			2008			2008
Cash flows from operating activities:

Net loss	$	(8,879	)	$	(20,584	)	$	(55,357	)

Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		176			201			906
Founder’s compensation contributed to capital		—			—			271
Share-based compensation for employees and directors		539			3,868			7,668
Share-based compensation for non-employees		602			266			2,256
Share-based compensation for restricted stock		—			101			101
Loss on settlement of debt		—			—			627
Write-off of loan to related party		—			—			41
(Increase) decrease in prepaid expenses		(9	)		299			(156	)
Increase (decrease) in:
Accounts payable		372			690			2,878
Income taxes payable		—			(99	)		169
Deferred compensation		—			—			(250	)
Accrued expenses		1,461			990			4,236

Total adjustments		3,141			6,316			18,747

Net cash used in operating activities		(5,738	)		(14,268	)		(36,610	)

Cash flows from investing activities:
Purchase of property and equipment		(559	)		(1,837	)		(4,240	)
Purchase of marketable securities		—			(3,803	)		(3,803	)
Acquisition of intellectual property		(61	)		(28	)		(309	)
Loan to related party		—			—			(41	)

Net cash used in investing activities		(620	)		(5,668	)		(8,393	)

Cash flows from financing activities:
Options exercised		5			788			793
Warrants exercised		361			112			535
Employee stock purchase plan		—			81			81
Deferred public offering costs		(346	)		—			(1,458	)
Shareholder contribution		—			—			1,660
Net proceeds from sale of Series A preferred stock		—			—			2,466
Net proceeds from sale of common stock		—			46,817			127,030
Proceeds from bridge financing		—			—			2,575
Net proceeds from sale of Series B preferred stock		36			—			19,205

Net cash provided by financing activities		56			47,798			152,887

Net (decrease) increase in cash and cash equivalents		(6,302	)		27,862			107,884
Cash and cash equivalents, beginning of period		17,539			80,022			—

Cash and cash equivalents, end of period	$	11,237		$	107,884		$	107,884

Supplemental disclosures of cash flow information:
Cash paid for interest and income taxes was:
Interest	$	—		$	—		$	9
Income taxes		—			88			91
Non-cash financing and investing activities:
Receivable due for warrants exercised	$	62		$	—		$	—
Settlement of debt with Series B preferred stock		—			—			3,202
Accrued expenses settled with Series B preferred stock		—			—			150
Deemed dividend – warrants		4,457			—			4,457
Accretion of fair value of beneficial charge on preferred stock		—			—			603
Conversion of convertible preferred stock to common stock		—			—			68

See accompanying notes to financial statements.

Biodel Inc.
(A Development Stage Company)

Notes to Condensed Financial Statements
(unaudited)

1. Business and Basis of Presentation

Business

Biodel Inc. (“Biodel” or the “Company”, and formerly Global Positioning Group Ltd.) is a development stage specialty biopharmaceutical company located in Danbury, Connecticut. The Company was incorporated in the State of Delaware on December 3, 2003 and commenced operations in January 2004. The Company is focused on the development and commercialization of innovative treatments for endocrine disorders, such as diabetes and osteoporosis. The Company develops product candidates by applying proprietary formulation technologies to existing drugs in order to improve their therapeutic results. The Company’s initial development efforts are focused on peptide hormones. The Company has two insulin product candidates currently in clinical trials for the treatment of diabetes. Additionally, the Company has two preclinical product candidates for the treatment of osteoporosis.

The Company has developed all of its product candidates utilizing its proprietary VIAdel^™ technology that allows the Company to study the interaction between peptide hormones and small molecules.

Basis of Presentation

The financial statements have been prepared by the Company and are unaudited. In the opinion of management, the Company has made all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position and results of operations for the interim periods presented. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) have been condensed or omitted. These condensed financial statements should be read in conjunction with the September 30, 2007 audited financial statements and accompanying notes included in the 2007 Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 21, 2007. The results of operations for the six months ended March 31, 2008 are not necessarily indicative of the operating results for the full year or any other interim period.

The Company is in the development stage, as defined in Statement of Financial Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by Development Stage Enterprises”, as its primary activities since incorporation have been establishing its facilities, recruiting personnel, conducting research and development, business development, business and financial planning and raising capital.

On April 12, 2007, the Company effected a 0.7085 for one (0.7085:1) reverse stock split. All references in these financial statements and accompanying notes to units of common stock or per share amounts are reflective of the reverse split for all periods reported.

Recently Adopted and Recently Issued Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN 48 are effective for the Company beginning October 1, 2007. See Note 5 for additional information, including the effects of adoption on the Company’s financial statements.

Biodel Inc.
(A Development Stage Company)

Notes to Condensed Financial Statements
(unaudited)

recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of SFAS No. 141(R) is not expected to have a material effect on the Company’s financial position and results of operations.

2. Secondary Offering

On February 12, 2008, the Company completed a follow-on public offering of 3,260,000 shares of its common stock at a price to the public of $15.50 per share. The Company received net proceeds from this offering, after deducting underwriting discounts and commissions and expenses, of $46.8 million. Certain of the Company’s stockholders sold 550,000 shares in the offering. The Company did not receive any proceeds from the sale of shares from the selling stockholders.

3. Marketable Securities

The Company maintains investments held with large, well capitalized financial institutions. Management determines the appropriate classification of securities at the time of purchase and reevaluates such designations as of each balance sheet date. Securities are classified as held-to-maturity because the Company does not intend to sell the securities prior to maturity. Securities classified as held-to-maturity are recorded at amortized cost. As of March 31, 2008, the Company has $3.8 million in marketable securities having maturities of less than one year.

4. Share-Based Compensation

Effective October 1, 2005, the Company adopted SFAS No. 123 (Revised 2004) (“SFAS 123(R)”), “Share-Based Payments” on a retrospective basis, to account for awards granted under the Company’s 2004 Stock Incentive Plan. SFAS 123(R) requires the Company to recognize share-based compensation arising from compensatory share-based transactions using the fair value at the grant date of the award. Determining the fair value of share-based awards at the grant date requires judgment. The Company uses an option-pricing model (Black-Scholes pricing model) to assist in the calculation of fair value. Due to its limited history, the Company uses the “calculated value method” which relies on comparable company historical volatility and uses the average of (i) the weighted average vesting period and (ii) the contractual life of the option, or eight years, as the estimated term of the option. The Company bases its estimates of expected volatility on the median historical volatility of a group of publicly traded companies that it believes are comparable to the Company based on the criteria set forth in SFAS 123(R), particularly in terms of line of business, stage of development, size and financial leverage.

The risk free rate of interest for periods within the contractual life of the stock option award is based on the yield of U.S. Treasury strips on the date the award is granted with a maturity similar to the expected term of the award. The Company estimates forfeitures based on actual forfeitures during its limited history. Additionally, the Company has assumed that dividends will not be paid.

For warrants or stock options granted to non-employees, the Company measures fair value of the equity instruments utilizing the Black-Scholes model, if that value is more reliably measurable than the fair value of the consideration or service received. The fair value of these instruments is recognized as expense over the related period of service or vesting period, whichever is longer. The Company periodically revalues the fair value of these financial instruments. In periods in which the Company experiences a decline in the price of its stock, the Company will periodically record income as these options are revalued to reflect the lower stock price. The total charge/(income) for options granted to non-employees for three and six months ended March 31, 2007 and 2008 was $299,000, $(419,000), $566,000, and $266,000, respectively.

The Company expenses ratably over the vesting period the cost of the stock options granted to employees and directors. The total compensation charge for the three and six months ended March 31, 2007 and 2008 was $362,000, $2,166,000, $539,000, and $3,969,000, respectively. At March 31, 2008, the total compensation charge related to non-vested options to

Biodel Inc.
(A Development Stage Company)

Notes to Condensed Financial Statements
(unaudited)

employees and directors and non-employee consultants not yet recognized was $16,974,000 which will be recognized over the next four years assuming the employees complete their service period for vesting of the options.

The following table summarizes the stock option activity during the six months ended March 31, 2008:


						Weighted Average
				Weighted		Remaining
				Average		Contractual		Aggregate
	Number			Exercise Price		Life in Years		Intrinsic Value
Outstanding options, September 30, 2007		1,685,974		$	6.80
Granted		1,487,397			17.15
Exercised		100,105			7.86				299,000
Forfeited, expired		(100,500	)		10.99

Outstanding options, March 31, 2008		2,972,768		$	12.01		7

Exercisable options, March 31, 2008		686,382		$	9.12		5	$	1,187,000

Options to purchase a total of 100,105 shares of common stock were exercised during the six months ended March 31, 2008 and cash received from the exercise of options was approximately $788,000. The Black-Scholes pricing model assumptions for the three and six months ended March 31, 2007 and 2008 are determined as discussed below:


	Three Months ended						Six Months Ended
	March 31,						March 31,
	2007			2008			2007			2008
Expected life (in years)		5.25			5.25			5.25			5.25
Expected volatility		60	%		58% – 66	%		60	%		58% – 66	%
Expected dividend yield		0	%		0	%		0	%		0	%
Risk-free interest rate		4.48	%		2.46% – 3.54	%		4.48	%		2.46% – 4.23	%
Weighted average grant date fair value	$	12.63		$	7.55		$	10.38		$	9.41

During the six months ended March 31, 2008, the Company granted 9,714 restricted stock shares to a member of its Scientific Advisory Board. The stock-based compensation expense recognized for the restricted stock was $101,000.

2005 Employee Stock Purchase Plan

The Company’s 2005 Employee Stock Purchase Plan (the “Purchase Plan”) was adopted by its Board of Directors and approved by its stockholders on March 20, 2007. The Purchase Plan became effective upon the closing of the Company’s initial public offering. The Purchase Plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Service Code.

Under the Purchase Plan, eligible employees may contribute up to 15% of their eligible earnings for the period of that offering withheld for the purchase of common stock under the Purchase Plan. The employee’s purchase price is equal to the lower of: 85% of the fair market value per share on the start date of the offering period in which the employee is enrolled or 85% of the fair market value per share on the semi-annual purchase date. The Purchase Plan imposes a limitation upon a participant’s right to acquire common stock if immediately after the purchase, the employee would own 5% or more of the total combined voting power or value of the Company’s common stock or of any of its affiliates not eligible to participate in the Purchase Plan. Offering periods are twenty-seven months in length. The compensation cost in connection with the plan for the three and six months ended March 31, 2008 was $6,000 and $22,000, respectively, in accordance with SFAS No. 123(R) and Financial Accounting Standards Board, Technical Bulletin No. 97-1 (As Amended) “Accounting under Statement 123 for Certain Employee Stock Purchase Plan with a Look-Back Option ‘FTB No. 97-1’.”

Biodel Inc.
(A Development Stage Company)

Notes to Condensed Financial Statements
(unaudited)

An aggregate of 1,400,000 shares of common stock are reserved for issuance pursuant to purchase rights to be granted to the Company’s eligible employees under the Purchase Plan. The Purchase Plan shares are replenished annually on the first day of each fiscal year by virtue of an evergreen provision. The provision allows for share replenishment equal to the lesser of 1% of the total number of shares outstanding on that date or 100,000 shares. In January 2008, the shares of common stock reserved for issuance was increased by 100,000 shares. During the six months ended March 31, 2008, the Company issued 6,338 shares under the Purchase Plan and received proceeds of $81,000. As of March 31, 2008, the Company recorded a compensatory charge of $22,000.

5. Income Taxes

Effective October 1, 2007, the Company adopted Financial Accounting Standards Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company’s income tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 utilizes a two-step approach for evaluating uncertain tax positions accounted for in accordance with SFAS No. 109. Step one, recognition, requires a company to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. Step two, measurement, is based on the largest amount of benefit, which is more likely than not to be realized on ultimate settlement. The cumulative effect of adopting FIN 48 on October 1, 2007 is recognized as a change in accounting principle, recorded as an adjustment to the opening balance of retained earnings on the adoption date. As a result of the implementation of FIN 48, the Company did not recognize any increase or decrease in the liability for unrecognized tax benefits related to tax positions taken in prior periods. Therefore, there was no corresponding adjustment in retained earnings.

The Company did not have any liabilites for unrecognized tax positions as of October 1, 2007 (adoption date) and March 31, 2008. Also, the Company did not have any amounts of unrecognized tax benefits that, if recognized, would affect its effective tax rate.

The Company files U.S. federal and state tax returns and has determined that its major tax jurisdictions are the United States and Connecticut. The tax years ended in 2004 through 2007 remain open and subject to examination by the appropriate governmental agencies in the United States and Connecticut.

The Company’s effective tax rate for the three and six months ended March 31, 2008 and 2007, was 0% for both periods, and differs from the federal statutory rate of 34% primarily due to the effects of state income taxes and change in valuation allowance for deferred tax assets.

6. Net Loss per share

Basic and diluted net loss per share has been calculated by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding during the period. All potentially dilutive common shares have been excluded from the calculation of weighted average common shares outstanding, as their inclusion would be antidilutive.

The amount of options and warrants excluded are as follows:


	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2007		2008		2007		2008
Common shares underlying warrants for Series A
Preferred Stock		198,025		118,815		198,025		118,815
Stock options		63,767		1,487,397		1,170,974		2,972,768

Biodel Inc.
(A Development Stage Company)

Notes to Condensed Financial Statements
(unaudited)

7. Warrants

In November 2007, a holder of warrants to purchase an aggregate of 79,210 shares of the Company’s common stock at an exercise price of $1.41 per share exercised such warrants on a cash exercise basis. The Company issued an aggregate of 79,210 shares of common stock and received approximately $0.1 million in connection with such exercise in January 2008.

8. Commitments

Former Chief Financial Officer Severance Agreement

On November 13, 2007, F. Scott Reding, the Company’s former Chief Financial Officer, Chief Accounting Officer and Treasurer, resigned from all his positions with the Company. In connection with Mr. Reding’s resignation, the Company and Mr. Reding entered into a severance agreement that established the terms of Mr. Reding’s separation of employment. Pursuant to the severance agreement, Mr. Reding received a lump sum payment of approximately $91,000, less taxes and withholdings, and the Company has reimbursed Mr. Reding for certain legal fees. In addition, pursuant to the severance agreement, Mr. Reding will receive a continuation of salary and certain benefits until November 30, 2009. Furthermore, the Company accelerated the vesting of options to purchase 54,575 shares of common stock at an exercise price of $5.65 per share and options to purchase an additional 35,425 shares of common stock at an exercise price of $5.65 per share remain exercisable through the original expiration date. In connection with Mr. Reding’s resignation, options to purchase 51,700 shares at an exercise price of $5.65 and 25,000 shares at an exercise price of $18.16 per share were forfeited. The charge of $482,000 for the lump sum payment, salary and benefit continuation for two years and option acceleration modification charge of $643,000 have been recorded in the three months ended December 31, 2007. The charge of $482,000, which includes lump sum payment and payment for the continuation of salary and certain benefits for two years, has been recorded as $341,000 short-term and $141,000 long-term liabilities.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Form 10-Q regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

Our forward-looking statements in this Form 10-Q are subject to a number of known and unknown risks and uncertainties that could cause actual results, performance or achievements to differ materially from those described in the forward-looking statements, including:

	•		our ability to secure Food and Drug Administration approval for our product candidates under Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act;

	•		our ability to market, commercialize and achieve market acceptance for product candidates developed using our VIAdel^tm technology;

	•		the progress or success of our research, development and clinical programs, the initiation and completion of our clinical trials, the timing of the interim analyses and the timing or success of our product candidates, particularly VIAject^tm and VIAtab^tm;

	•		our ability to secure additional patents for VIAject^tm and our other product candidates;

	•		our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;

	•		our ability to enter into collaboration arrangements for the commercialization of our product candidates and the success or failure of any such collaborations that we enter, or our ability to commercialize our product candidates ourselves;

	•		the rate and degree of market acceptance and clinical utility of our products;

	•		the ability of our major suppliers, including suppliers of insulin, to produce our product or products in our final dosage form, or our ability to manufacture our products ourselves;

	•		our commercialization, marketing and manufacturing capabilities and strategy; and

	•		our ability to accurately estimate anticipated operating losses, future revenues, capital requirements and our needs for additional financing.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Form 10-Q, particularly in “Part II. Item 1A-Risk Factors,” that could cause actual results or events to differ materially from the forward-looking statements that we make.

You should read this Form 10-Q and the documents that have filed as exhibits hereto and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements contained in this Form 10-Q.

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 financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q, 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 read the “Risk Factors” section of this Form 10-Q (see Part II-Item 1A below) 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

We are a specialty biopharmaceutical company focused on the development and commercialization of innovative treatments for endocrine disorders such as diabetes and osteoporosis, which may be safer, more effective and convenient. We develop our product candidates by applying our proprietary formulation technologies to existing drugs in order to improve their therapeutic results. Our initial development efforts are focused on peptide hormones. We have two insulin product candidates currently in clinical trials for the treatment of diabetes and two preclinical product candidates for the treatment of osteoporosis.

Our most advanced product candidate is VIAject^tm, a proprietary injectable formulation of recombinant human insulin designed to be absorbed into the blood faster than the currently marketed rapid-acting insulin analogs. We are currently conducting two pivotal Phase III clinical trials of VIAject^tm, one in patients with Type 1 diabetes and the other in patients with Type 2 diabetes. In addition to VIAject^tm, we are developing VIAtab^tm, a sublingual tablet formulation of insulin. We are currently in the Phase I stage of clinical testing of VIAtab^tm in patients with Type 1 diabetes. Our preclinical product candidates for the treatment of osteoporosis are VIAmass^tm, a sublingual rapid-acting formulation of parathyroid hormone 1-34, and VIAcal^tm, a sublingual rapid-acting formulation of salmon calcitonin.

The VIAject^tm formulation and presentation that we are using in our ongoing Phase III clinical trials is a two vial package, with one vial containing lyophilized insulin and the second vial containing 10cc of the proprietary VIAject^tm diluents. Upon reconstitution by the patient, the resulting formulation is at a 25 IU/cc concentration. We are currently developing a liquid, premixed formulation in a variety of presentations including vials and cartridges for use in pen injectors. Like currently available insulin analogs, the liquid presentations of VIAject^tm are stable when refrigerated. Unlike the insulin analogs, we anticipate, based on studies we have performed, that the same formulation of VIAject^tm will be stable when frozen, as well. We are developing the lyophilized vial and all of the liquid presentations in both the 25 IU/cc and 100 IU/cc concentrations. Accordingly, we filed an investigational new drug application, or IND, for VIAject^tm liquid insulin and amended our current IND to include the two part 100 IU/cc insulin concentration.

Development of a full line of VIAject™ insulin products has progressed more rapidly than we originally anticipated. We believe that focusing our resources on the later-stage VIAject™ program provides our best opportunity to maximize stockholder value. Given the priority being placed on the development of our VIAject™ product line, we expect to submit INDs for VIAcal™ and VIAmass™ no earlier than late 2008.

We have developed all of our product candidates utilizing our proprietary VIAdel^tm technology which allows us to study the interaction between peptide hormones and small molecules. We use our technology to reformulate existing peptide drugs with small molecule ingredients that are generally regarded as safe by the Food and Drug Administration, or FDA, to improve their therapeutic effect by entering the blood more rapidly and in greater quantities.

We are a development stage company. We were incorporated in December 2003 and commenced active operations in January 2004. To date, we have generated no revenues and have incurred significant losses. We have financed our operations and internal growth through public offerings of common stock in May 2007 and February 2008, and, prior to that, through private placements of convertible preferred stock and other securities. We have devoted substantially all of our efforts to research and development activities, including clinical trials. Our net loss applicable to common stockholders was $20.6 million for the six months ended March 31, 2008. As of March 31, 2008, we had a deficit accumulated during the development stage of $60.4 million. The deficit accumulated during the development stage is attributable primarily to our research and development activities. Research and development and general and administrative expenses represent approximately 66% and 31%, respectively, of the net loss that we have incurred since our inception. We expect to continue to generate significant losses as we continue to develop our product candidates.

In May 2007, we completed our initial public offering of 5,750,000 shares of common stock at a price to the public of $15.00 per share, with net proceeds totaling approximately $78.8 million. The completion of the initial public offering resulted in the conversion of our Series A and B convertible preferred stock. A total of 6,407,008 shares of common stock were issued upon the conversion of the preferred stock.

In November 2007, a holder of warrants to purchase an aggregate of 79,210 shares of our common stock at an exercise price of $1.41 per share exercised such warrants on a cash exercise basis. We issued an aggregate of 79,210 shares of common stock and received $0.1 million in connection with such exercise in January 2008.

In February 2008, we completed a follow-on public offering of 3,260,000 shares of our common stock at a price to the public of $15.50 per share. We received net proceeds from this offering, after deducting underwriting discounts and commissions and expenses, of $46.8 million. Certain of our stockholders sold 550,000 shares in the offering. We did not receive any proceeds from the sale of shares from the selling stockholders.

Financial Operations Overview

Revenues

To date, we have generated no revenues. We do not expect to begin generating any revenues unless any of our product candidates receive marketing approval or if we receive payments in connection with strategic collaborations that we may enter into for the commercialization of our product candidates.

Research and Development Expenses

Research and development expenses consist of the costs associated with our basic research activities, as well as the costs associated with our drug development efforts, conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings. Our research and development expenses consist of:

	•		external research and development expenses incurred under agreements with third-party contract research organizations and investigative sites, third-party manufacturing organizations and consultants;

	•		employee-related expenses, which include salaries and benefits for the personnel involved in our preclinical and clinical drug development and manufacturing activities; and

	•		facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment and laboratory and other supplies.

We use our employee and infrastructure resources across multiple research projects, including our drug development programs. To date, we have not tracked expenses related to our product development activities on a program-by-program basis. Accordingly, we cannot reasonably estimate the amount of research and development expenses that we incurred with respect to each of our clinical and preclinical product candidates. However, we estimate that the majority of our research and development expenses incurred to date are attributable to our VIAject^tm program.

The following table illustrates, for each period presented, our research and development costs by nature of the cost.


									December 3, 2003
									(Inception) to
	Three Months Ended March 31,				Six Months Ended March 31,				March 31,
	2007		2008		2007		2008		2008
Research and development expenses:
Preclinical expenses	$	319,000	$	788,000	$	562,000	$	1,632,000	$	6,946,000
Manufacturing expenses		810,000		672,000		1,493,000		1,856,000		5,515,000
Clinical/regulatory expenses		2,686,000		5,645,000		4,275,000		11,162,000		27,361,000

Total	$	3,815,000	$	7,105,000	$	6,330,000	$	14,650,000	$	39,822,000

The successful development of our product candidates is highly uncertain. If our ongoing Phase III clinical trials of VIAject^tm are successful, we intend to submit a new drug application, or NDA, to the FDA for this product candidate line by the end of 2008. We are currently in the Phase I stage of clinical testing of VIAtab^tm in patients with Type 1 diabetes. If the Phase I development is successful, the earliest we plan to initiate later stage clinical trials of VIAtab^tm would be the end of 2008. Development of a full line of VIAject^tm insulin products has progressed more rapidly than we originally anticipated. Given the priority being placed on the development of our VIAject^tm product line, we now expect to submit INDs for VIAcal^tm and VIAmass^tm no earlier than late 2008. However, at this time, we cannot reasonably estimate or know the nature, specific timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of, or the period, if any, in which material net cash inflows may commence from our product candidates. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

	•		the progress and results of our clinical trials of VIAject^tm and VIAtab^tm;

	•		the progress of the development of the full line of VIAject^tm insulin products;

	•		the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for VIAmass^tm, VIAcal^tm and other potential product candidates;

	•		the costs, timing and outcome of regulatory review of our product candidates;

	•		the costs of commercialization activities, including product marketing, sales and distribution;

	•		the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims;

	•		the emergence of competing technologies and products and other adverse market developments;

	•		the effect on our product development activities of actions taken by the FDA or other regulatory authorities;

	•		our degree of success in commercializing VIAject^tm and our other product candidates; and

	•		our ability to establish and maintain collaborations and the terms and success of those collaborations, including the timing and amount of payments that we might receive from potential strategic collaborators.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or other regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate will be required for the completion of the clinical development of a product candidate, we could be required to expend significant additional financial resources and time on the completion of that clinical development program.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related expenses for personnel, including stock-based compensation expenses, in our executive, legal, accounting, finance and information technology functions. Other general and administrative expenses include facility-related costs not otherwise allocated to research and development expense, travel expenses, costs associated with industry conventions and professional fees, such as legal and accounting fees and consulting costs.

We anticipate that our general and administrative expenses will increase, among others, for the following reasons:

	•		we expect to incur increased general and administrative expenses to support our research and development activities, which we expect to expand as we continue the development of our product candidates;

	•		we expect to incur additional expenses related to the construction of our new laboratory facility;

	•		we expect to incur additional expenses as we advance discussions and negotiations in connection with strategic collaborations for commercialization of our product candidates;

	•		we may also begin to incur expenses related to the sales and marketing of our product candidates as we approach the commercial launch of any product candidates that receive regulatory approval; and

	•		we expect our general and administrative expenses to increase as a result of increased payroll, expanded infrastructure and higher consulting, legal, accounting and investor relation fees associated with being a public company.

Interest Income

Interest income consists of interest earned on our cash and cash equivalents, resulting primarily from the $125.6 million in net proceeds received from our initial public offering in May 2007 and secondary offering in February 2008. In November 2007, our board of directors approved investment policy guidelines, the primary objectives of which are the preservation of capital, the maintenance of liquidity, maintenance of appropriate fiduciary control and maximum return, subject to our business objectives and tax situation.

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 unaudited financial statements, which 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 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 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 assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in Note 2 to our audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2007 and in the notes to our financial statements included in this Form 10-Q. We believe that our accounting policies relating to preclinical study and clinical trial accruals, stock-based compensation and income taxes are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations. These policies are described under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Significant Judgments and Estimates” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2007. There have been no material changes to such policies since the filing of such Annual Report.

Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 also includes an amendment to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, which applies to all entities with available-for-sale and trading securities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We are assessing the impact of SFAS No. 159 and anticipate that the adoption of this accounting pronouncement will not have a material effect on our financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements. This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007; however, the FASB has agreed to defer for one year the effective date for certain non-financial assets and liabilities. We anticipate that the adoption of this accounting pronouncement will not have a material effect on our financial statements.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transition. FIN 48 is effective for us beginning October 1, 2007. We adopted the provisions of FIN 48 on October 1, 2007 and it did not have any effect on our financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS No. 141(R)”), which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of SFAS No. 141(R) is not expected to have a material effect on our financial position and results of operations.

Results of Operations

Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007

Revenue. We did not recognize any revenue during the three months ended March 31, 2008 or 2007.

Research and Development Expenses


	Three Months Ended
	March 31,						Increase
	2007			2008			$		%
Research and Development	$	3,815,000		$	7,105,000		$	3,290,000		86.2	%

Percentage of net loss		73	%		74	%

Research and development expenses were $7.1 million for the three months ended March 31, 2008, an increase of $3.3 million, or 86.2%, from $3.8 million for the three months ended March 31, 2007. This increase was primarily attributable to increased research and development costs related to our continuing two pivotal Phase III clinical trials for VIAject^tm that we commenced in September 2006. Specific increases in research and development expenses included $2.4 million related to increased clinical trial expenses in 2008 and $0.9 million related to increased personnel costs, stock-based compensation expenses and consulting fees. Research and development expenses for the three months ended March 31, 2008 include $0.6 million in stock-based compensation expenses related to options granted to employees and $0.1 million in stock-based compensation income related to options granted to non-employees. Non-employee stock-based compensation income was attributable to a decrease in the price of our common stock.

We expect our research and development expenses to increase in the future as a result of increased development costs related to our clinical VIAject^tm and VIAtab^tm product candidates and as we seek to advance our preclinical VIAmass^tm and VIAcal^tm product candidates into clinical development. We expect the increased development costs related to VIAject^tm to include increased costs associated with the purchase of additional active pharmaceutical ingredients, costs related to the conduct of validation runs of our manufacturing processes, costs associated with preparing and submitting an NDA and costs associated with conducting potential Phase IIIb clinical trials. The timing and amount of these expenses will depend upon the outcome of our ongoing clinical trials, particularly the costs associated with our ongoing Phase III clinical trials of VIAject^tm and our Phase I and planned Phase II clinical trials of VIAtab^tm . The timing and amount of these expenses will also depend on the potential advancement of our preclinical programs into clinical development and the related expansion of our clinical development and regulatory organization, regulatory requirements and manufacturing costs.

General and Administrative Expenses


	Three Months Ended
	March 31,						Increase
	2007			2008			$		%
General and Administrative Expenses	$	1,504,000		$	3,532,000		$	2,028,000		134.8	%

Percentage of net loss		29	%		37	%

General and administrative expenses were $3.5 million for the three months ended March 31, 2008, an increase of $2.0 million, or 134.8%, from $1.5 million for the three months ended March 31, 2007. This increase was primarily attributable to a

$1.0 million increase in personnel expense. The balance of the increase was attributable to increases in insurance expenses, depreciation expenses, and higher legal and consulting fees associated with becoming a public company. General and administrative expenses for the three months ended March 31, 2008 include $1.6 million in stock-based compensation expense related to options granted to employees and $0.4 million in stock-based compensation income related to options granted to non-employees. Non-employee stock-based compensation income was attributable to a decrease in the price of our common stock.

We expect our general and administrative expenses to continue to increase in the future as a result of increased payroll as we add personnel necessary for the management of the anticipated growth of our business, expanded infrastructure and higher consulting, legal, accounting, investor relations and other expenses associated with being a public company.

Interest and Other Income


	Three Months Ended
	March 31,				Increase
	2007		2008		$		%
Interest and Other Income	$	132,000	$	1,111,000	$	979,000		741.7	%

Interest and other income increased to $1.1 million for the three months ended March 31, 2008 from $132,000 for the three months ended March 31, 2007. The increase was due to interest on higher balances of cash and cash equivalents in the March 31, 2008 quarter, resulting primarily from the $125.6 million in net proceeds received from our initial public offering in May 2007 and secondary offering in February 2008.

Net Loss Applicable to Common Stockholders and Net Loss per Share


	Three Months Ended
	March 31,						Decrease
	2007			2008			$		%
Net Loss Applicable to Common Stockholders	$	(9,672,000	)	$	(9,557,000	)	$	115,000		1.2	%

Net Loss Per Share	$	(1.79	)	$	(0.43	)

Net loss applicable to common stockholders was $9.6 million, or $(0.43) per share, for the three months ended March 31, 2008 compared to $9.7 million, or $(1.79) per share, for the three months ended March 31, 2007. Net loss for the quarter ended March 31, 2007 included the $4.5 million deemed dividend charge described below. There was no such charge in the quarter ended March 31, 2008. The net loss for the March 31, 2008 quarter was primarily attributable to increased expenses described above. We expect our losses to increase in the future as we incur increased clinical development costs to advance our VIAject^tm and VIAtab^tm product candidates through the clinical development process and as our general and administrative costs rise as our organization grows to support this higher level of clinical activity.

Deemed Dividend – Warrants. On March 20, 2007, we offered the holders of warrants to purchase an aggregate of 149,125 shares of our Series B convertible preferred stock and an aggregate of 3,417,255 shares of our common stock with an exercise price of $5.56 per share the opportunity to exercise such warrants at an exercise price of $3.67, representing a 34% discount in the exercise price. Such holders exercised all of such warrants on a combination of cashless and cash exercise basis. We issued an aggregate of 2,636,907 shares of common stock and received aggregate cash proceeds of $423,000 in connection with such exercises. As a result of the discounted exercise price, we recorded a non-cash deemed dividend charge of approximately $4.5 million for the warrants that were exercised in the fiscal quarter ended March 31, 2007. No equivalent charge to stockholders was incurred in the quarter ended March 31, 2008.

Six Months Ended March 31, 2008 Compared to Six Months Ended March 31, 2007

Revenue. We did not recognize any revenue during the six months ended March 31, 2008 or 2007.

Research and Development Expenses


	Six Months Ended
	March 31,						Increase
	2007			2008			$		%
Research and Development	$	6,330,000		$	14,650,000		$	8,320,000		131.4	%

Percentage of net loss		71	%		71	%

Research and development expenses were $14.7 million for the six months ended March 31, 2008, an increase of $8.3 million, or 131.4%, from $6.3 million for the six months ended March 31, 2007. This increase was primarily attributable to increased research and development costs related to our continuing two pivotal Phase III clinical trials for VIAject^tm that we commenced in September 2006. Specific increases in research and development expenses included $5.9 million related to increased clinical trial expenses in the six months ended March 31, 2008; $0.6 million related to increased manufacturing expenses in 2008 for the process development, scale-up and manufacture of commercial batches of VIAject^tm to support our clinical trials and regulatory submissions; and $0.6 million related to increased personnel costs, stock-based compensation expenses and consulting fees. Research and development expenses for the six months ended March 31, 2008 include $0.8 million in stock-based compensation expense related to options granted to employees and $0.2 million in stock-based compensation expense related to options granted to non-employees.

General and Administrative Expenses


	Six Months Ended
	March 31,						Increase
	2007			2008			$		%
General and Administrative Expenses	$	2,825,000		$	7,664,000		$	4,839,000		171.3	%

Percentage of net loss		32	%		37	%

General and administrative expenses were $7.7 million for the six months ended March 31, 2008, an increase of $4.8 million, or 171.3%, from $2.8 million for the six months ended March 31, 2007. This increase was primarily attributable to a $3.5 million increase in personnel expense. The balance of the increase was attributable to increases in insurance expenses, depreciation expenses, and higher legal and consulting fees associated with becoming a public company. General and administrative expenses for the six months ended March 31, 2008 include $3.2 million in stock-based compensation expense related to options granted to employees and $0.1 million in stock-based compensation expense related to options granted to non-employees.

Interest and Other Income


	Six Months Ended
	March 31,				Increase
	2007		2008		$		%
Interest and Other Income	$	322,000	$	1,783,000	$	1,461,000		453.7	%

Interest and other income increased to $1.8 million for the six months ended March 31, 2008 from $322,000 for the six months ended March 31, 2007. The increase was due to interest on higher balances of cash and cash equivalents in the six months ended March 31, 2008, resulting primarily from the $125.6 million in net proceeds received from our initial public offering in May 2007 and secondary offering in February 2008.

Net Loss Applicable to Common Stockholders and Net Loss per Share


	Six Months Ended
	March 31,						Increase
	2007			2008			$		%
Net Loss Applicable to Common Stockholders	$	(13,336,000	)	$	(20,584,000	)	$	7,248,000		54.3	%

Net Loss Per Share	$	(2.48	)	$	(0.97	)

Net loss applicable to common stockholders was $20.6 million, or $(0.97) per share, for the six months ended March 31, 2008 compared to $13.3 million, or $(2.48) per share, for the six months ended March 31, 2007. The increase in net loss applicable to common stockholders was primarily attributable to the increased expenses described above.

Liquidity and Capital Resources

Sources of Liquidity and Cash Flows

As a result of our significant research and development expenditures and the lack of any approved products or other sources of revenue, we have not been profitable and have generated significant operating losses since we were incorporated in 2003. We have funded our research and development operations primarily through proceeds from our Series A convertible preferred stock financing in 2005 and our mezzanine and Series B convertible preferred stock financings in 2006. Through December 31, 2006, we had received aggregate gross proceeds of $26.6 million from these sales. In May 2007, we completed our initial public offering and received proceeds, after deducting underwriting commissions and discounts and expenses, of $78.8 million. In February 2008, we completed our secondary offering and received proceeds, after deducting underwriting commissions and discounts and expenses, of $46.8 million.

At March 31, 2008, we had cash and cash equivalents totaling approximately $108 million. To date, we have invested our excess funds primarily in managed money market funds with three major financial institutions. All highly liquid investments with an original maturity of less than three months at the date of purchase are categorized as cash equivalents. We plan to continue to invest our cash and cash equivalents in accordance with our approved investment policy guidelines, which set forth our policy to hold investment securities to maturity.

Net cash used in operating activities was $14.3 million for the six months ended March 31, 2008 and $5.7 million for the six months ended March 31, 2007. Net cash used in operating activities for the six months ended March 31, 2008 primarily reflects the net loss for the period, offset in part by non-cash stock-based compensation, depreciation and amortization expenses and increases in accounts payable and accrued expenses. Net cash used in operating activities for the six months ended March 31, 2007 primarily reflects the net loss for the period, offset in part by depreciation and changes in accounts payable and accrued expenses.

Net cash used in investing activities was $5.7 million for the six months ended March 31, 2008 and $0.6 million for the six months ended March 31, 2007. Net cash used in investing activities in each period primarily reflects purchases of property and equipment and leasehold improvement costs for our facilities at Christopher Columbus Avenue and Saw Mill Road.

Net cash provided by financing activities was $47.8 million for the six months ended March 31, 2008 and $0.1 million for the six months ended March 31, 2007. Net cash provided by financing activities in 2008 primarily reflects the proceeds from the secondary offering and exercise of options. Net cash provided by financing activities in 2007 primarily reflects the proceeds from the warrants exercised, offset by deferred public offering costs.

We are in the process of analyzing whether to build and operate a fill and finish manufacturing facility for VIAject™ on the campus of our headquarters in Danbury, Connecticut. Subject to completing the construction of the facility, and obtaining all necessary regulatory inspections and approvals, we anticipate that the facility may be available for commercial operations in 2010.

We are making plans to initiate construction of our new research and laboratory facility on the campus of our headquarters in Danbury, Connecticut. We anticipate that the facility may be available for operations in the first calendar quarter of 2010.

Funding Requirements

We believe that our existing cash and cash equivalents will be sufficient to fund our anticipated operating expenses and capital expenditures for at least the next 16 months. We have based this estimate upon assumptions that may prove to be wrong and we could use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, and to the extent that we may or may not enter into collaborations with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current anticipated clinical trials.

Our future capital requirements will depend on many factors, including:

	•		the scope, progress, results and costs of our clinical trials of VIAject^tm and VIAtab^tm ;

	•		the progress of the development of the full line of VIAject^tm insulin products;

	•		the scope, progress, results and costs of preclinical development and laboratory testing and clinical trials for VIAmass^tm , VIAcal^tm and other potential product candidates;

	•		the costs, timing and outcome of regulatory reviews of our product candidates;

	•		the costs of commercialization activities, including increased insulin purchases and product marketing, sales and distribution costs;

	•		the costs associated with preparing and submitting an NDA and conducting potential Phase IIIb clinical trials for VIAject^tm;

	•		the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims;

	•		the emergence of competing technologies and products and other adverse market developments;

	•		the effect on our product development activities of actions taken by the FDA or other regulatory authorities;

	•		our degree of success in commercializing VIAject^tm and our other product candidates; and

	•		our ability to establish and maintain collaborations and the terms and success of those collaborations, including the timing and amount of payments that we might receive from potential strategic collaborators.

We do not anticipate generating product revenue for the next few years. In the absence of additional funding, we expect our continuing operating losses to result in increases in our cash used in operations over the next several quarters and years. To the extent our capital resources are insufficient to meet our future capital requirements, we will need to finance our future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements.

Additional equity or debt financing or corporate collaboration and licensing arrangements may not be available on acceptable terms, if at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate some or all of our research and development programs, reduce our planned commercialization efforts or obtain funds through arrangements with collaborators or others that may require us to relinquish rights to certain drug candidates that we might otherwise seek to develop or commercialize independently or enter into corporate collaborations at a later stage of development. In addition, any future equity funding will dilute the ownership of our equity investors.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Contractual Obligations

The following table summarizes our significant contractual obligations and commercial commitments as of March 31, 2008.


			Less than						More than
	Total		1 Year		1-3 Years		4-5 Years		5 Years
Operating lease obligations	$	3,294,000	$	541,000	$	1,521,000	$	1,050,000	$	182,000

Total fixed contractual obligations	$	3,294,000	$	541,000	$	1,521,000	$	1,050,000	$	182,000

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk is limited to our cash, cash equivalents and marketable securities. We invest in high-quality financial instruments, as permitted by the terms of our investment policy guidelines. Currently, our investments are limited to highly liquid money market investments. A portion of our investments may be subject to interest rate risk and could fall in value if interest rates were to increase. Our current intention is to hold longer term investments to maturity. The effective duration of our portfolio is currently less than one year, which we believe limits interest rate and credit risk. We do not hedge interest rate exposure.

Because most of our transactions are denominated in United States dollars, we do not have any material exposure to fluctuations in currency exchange rates.

Item 4T. Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2008. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As previously reported in Amendment No. 1 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007, our chief executive officer and former chief financial officer determined that, as of June 30, 2007, we had a material weakness in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board. Specifically, as of June 30, 2007, we had a material weakness relating to our controls over accounting for stock options in that our procedures did not operate effectively to detect errors in the calculation of non-cash share-based compensation expense arising from the granting of stock options. To remedy the material weakness, we have implemented enhanced procedures that are designed to provide for additional management oversight of our accounting activities to ensure that we will properly record non-cash share-based expense in the future.

As a result of that material weakness and because the period ended March 31, 2008 represents only the third accounting period in which we were able to evaluate the steps we implemented to remedy the material weakness, our chief executive officer and chief financial officer have concluded, that as of the end of the period covered by this report, our disclosure controls and procedures were not effective. However, notwithstanding the material weakness discussed above, our chief executive officer and chief financial officer have concluded that the financial statements included in this Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles.

PART II-OTHER INFORMATION

Item 1A. Risk Factors

Risks Related to Our Financial Position and Need for Additional Capital

We have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.

Since our inception in December 2003, we have incurred significant operating losses. Our net loss was approximately $20.6 million for the six months ended March 31, 2008. As of March 31, 2008, we had a deficit accumulated during the development stage of approximately $60.4 million. We have devoted substantially all of our time, money and efforts to the research and development of VIAject™, VIAtab™ and our preclinical product candidates. We have not completed development of any drugs. We expect to continue to incur significant and increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially as we:

	•		continue our ongoing Phase III clinical trials of VIAject™ in which we plan to treat more than 400 patients with Type 1 diabetes and more than 400 patients with Type 2 diabetes over a six-month period;

	•		conduct additional Phase I clinical development of VIAtab™ and subsequently initiate Phase II and Phase III clinical trials;

	•		conduct validation runs and potential Phase IIIb clinical trials for VIAject™;

	•		continue the research and development of our preclinical product candidates, VIAmass^™ and VIAcal™, and advance those product candidates into clinical development;

	•		seek regulatory approvals for our product candidates that successfully complete clinical trials;

	•		establish a sales and marketing infrastructure to commercialize products for which we may obtain regulatory approval;

	•		insulin purchases to build commercial supply inventory for VIAject™;

	•		construct our laboratory facility on the campus of our headquarters in Danbury, Connecticut; and

	•		add operational, financial and management information systems and personnel, including personnel to support our product development efforts and our obligations as a public company.

To become and remain profitable, we must succeed in developing and eventually commercializing drugs with significant market potential. This will require us to be successful in a range of challenging activities, including successfully completing preclinical testing and clinical trials of our product candidates, obtaining regulatory approval for these product candidates and manufacturing, marketing and selling those products for which we may obtain regulatory approval. We are only in the preliminary stages of these activities. We may never succeed in these activities and may never generate revenues that are significant or large enough to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the market price of our common stock and could impair our ability to raise capital, expand our business or continue our operations. A decline in the market price of our common stock could also cause you to lose all or a part of your investment.

We will 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.

We are a development stage company with no commercial products. All of our product candidates are still being developed, and all but VIAject™ are in early stages of development. Our product candidates will require significant additional development, clinical development, regulatory approvals and additional investment before they can be commercialized. We anticipate that VIAject™ will not be commercially available for several years, if at all.

We expect our research and development expenses to increase in connection with our ongoing activities, particularly as we continue our Phase III clinical trials of VIAject™, develop new clinical trials of VIAject™ to support our commercialization efforts, commence later stage clinical trials of VIAtab™ if our Phase I clinical development is successful and conduct preclinical testing of VIAmass^™ and VIAcal™. In addition, subject to obtaining regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, securing commercial quantities of product from our manufacturers and distribution. We will need substantial additional funding and may be unable to raise capital when needed or on attractive terms, which would force us to delay, reduce or eliminate our research and development programs or commercialization efforts.

Based upon our current plans, we believe that our existing cash and cash equivalents will enable us to fund our anticipated operating expenses and capital expenditures for at least the next 16 months. However, we cannot assure you that our plans will not change or that changed circumstances will not result in the depletion of our capital resources more rapidly than we currently anticipate. Our future capital requirements will depend on many factors, including:

	•		the scope, progress, results and costs of our clinical trials of VIAject™ and VIAtab™;

	•		the progress of the development of the full line of VIAject™ insulin products;

	•		the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for VIAmass™, VIAcal™ and other potential product candidates;

	•		the costs, timing and outcome of regulatory review of our product candidates;

	•		the costs of commercialization activities, including increased insulin purchases and product marketing, sales and distribution costs;

	•		the costs associated with preparing and submitting an NDA and conducting potential Phase IIIb clinical trials for VIAject™;

	•		the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims;

	•		the emergence of competing technologies and products and other adverse market developments;

	•		the effect on our product development activities of actions taken by the FDA or other regulatory authorities;

	•		our degree of success in commercializing VIAject™ and our other product candidates; and

	•		our ability to establish and maintain collaborations and the terms and success of the collaborations, including the timing and amount of payments that we might receive from potential strategic collaborators.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through public or private equity offerings and debt financings, strategic collaborations and licensing arrangements. If we raise additional funds by issuing additional equity securities, our stockholders will 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 or additional equity that we raise may contain terms, such as liquidation and other preferences that are not favorable to us or our stockholders. If we raise additional funds through collaboration, strategic alliance and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies or product candidates, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.

Our short operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.

We commenced active operations in January 2004. Our operations to date have been limited to organizing and staffing our company, developing and securing our technology and undertaking preclinical studies and clinical trials of our most advanced product candidates, VIAject™ and VIAtab™. We have not yet demonstrated our ability to successfully complete large-scale, pivotal clinical trials, obtain regulatory approvals, manufacture a commercial scale product, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history.

In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. We will need to transition from a company with a research focus to a company capable of supporting commercial activities. We may not be successful in such a transition.

Risks Related to the Development and Commercialization of Our Product Candidates

We depend heavily on the success of our most advanced product candidate, VIAject™. VIAtab™ is our only other product candidate which has undergone clinical development. We do not expect to advance any other product candidates into clinical trials any earlier than late 2008. Clinical trials of our product candidates may not be successful. If we are unable to commercialize VIAject™ and VIAtab™, or experience significant delays in doing so, our business will be materially harmed.

We have invested a significant portion of our efforts and financial resources in the development of our most advanced product candidates, VIAject™ and VIAtab™. Our ability to generate product revenues, which we do not expect will occur for at least the next several years, if ever, will depend heavily on the successful development and eventual commercialization of these product candidates. The commercial success of our product candidates will depend on several factors, including the following:

	•		successful completion of preclinical development and clinical trials;

	•		our ability to identify and enroll patients who meet clinical trial eligibility criteria;

	•		receipt of marketing approvals from the FDA and similar regulatory authorities outside the United States, including for the liquid formulations of VIAject™;

	•		establishing commercial manufacturing capabilities on our own or through arrangements with third-party manufacturers;

	•		launching commercial sales of the products, whether alone or in collaboration with others;

	•		acceptance of the products by patients, the medical community and third-party payors in the medical community;

	•		competition from other products; and

	•		a continued acceptable safety profile of the products following approval.

If we are not successful in completing the development and commercialization of our product candidates, or if we are significantly delayed in doing so, our business will be materially harmed.

The results of early stage clinical trials do not ensure success in later stage clinical trials.

To date, we have not completed the development of any products through commercialization. VIAject™ is currently being tested in two Phase III clinical trials in patients with Type 1 and Type 2 diabetes. If these trials are successful, we intend to submit an NDA under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act, or the FFDCA, to the FDA by the end of 2008. We are currently in the Phase I stage of clinical testing of VIAtab™ in patients with Type 1 diabetes. If Phase I clinical development of VIAtab™ is successful, we plan to initiate a Phase II clinical trial no earlier than the end of 2008. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials. Furthermore, interim results of a clinical trial do not necessarily predict final results. In particular, the interim results from our ongoing pivotal Phase III clinical trials of VIAject™ reported data on changes in body weight and daily insulin doses. These are secondary endpoints in the trial, not the primary endpoint of changes in HbA1c levels. The final results from our Phase III clinical trials of VIAject™ may be less favorable than the interim secondary endpoint data observed to date. In addition, the final safety and efficacy data from our Phase III clinical trials of VIAject™, which will be based on more than 400 Type 1 and more than 400 Type 2 diabetes patients, may be less favorable than the data observed to date in our Phase I and Phase II clinical trials. We cannot assure you that our clinical trials of VIAject™ or VIAtab™ will ultimately be successful. New information regarding the safety and efficacy of VIAject™ or VIAtab™ may arise from our continuing analysis of the data that may be less favorable than the data observed to date. In our clinical trials to date, patients took VIAject™ for a relatively small number of treatment days.

VIAject™ may not be found to be effective or safe when taken for longer periods, such as the six-month period of our Phase III clinical trials.

Even if our early phase clinical trials are successful, we will need to complete our Phase III clinical trials of VIAject™ and conduct Phase II and Phase III clinical trials of VIAtab™ in larger numbers of patients taking the drug for longer periods before we are able to seek approvals to market and sell these product candidates from the FDA and similar regulatory authorities outside the United States. If we are not successful in commercializing any of our product candidates, or are significantly delayed in doing so, our business will be materially harmed.

If our clinical trials are delayed or do not produce positive results, we may incur additional costs and ultimately be unable to commercialize our product candidates.

Before obtaining regulatory approval for the sale of our product candidates, we must conduct, at our own expense, extensive preclinical tests to demonstrate the safety of our product candidates in animals and clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Preclinical and clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more of our clinical trials of VIAject™ and VIAtab™ can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, preclinical testing of VIAmass™ and VIAcal™ and clinical trials of VIAject™ and VIAtab™ that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates, including:

	•		our preclinical tests or clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional preclinical testing or clinical trials or we may abandon projects that we had expected to be promising;

	•		the number of patients required for our clinical trials may be larger than we anticipate, enrollment in our clinical trials may be slower than we currently anticipate, or participants may drop out of our clinical trials at a higher rate than we anticipate, any of which would result in significant delays;

	•		our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner;

	•		we might have to suspend or terminate our clinical trials if the participants are being exposed to unacceptable health risks;

	•		regulators or institutional review boards may require that we hold, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;

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

	•		the supply or quality of our product candidates or other materials necessary to conduct our clinical trials may be insufficient or inadequate; and

	•		the effects of our product candidates may not be the desired effects or may include undesirable side effects or the product candidates may have other unexpected characteristics.

If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete our clinical trials or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:

	•		be delayed in obtaining marketing approval for our product candidates;

	•		not be able to obtain marketing approval;

	•		obtain approval for indications that are not as broad as intended; or

	•		have the product removed from the market after obtaining marketing approval.

Our product development costs will also increase if we experience delays in testing or approvals. We do not know whether any preclinical tests or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, if at all. Significant preclinical or clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do and impair our ability to commercialize our products or product candidates and may harm our business and results of operations.

If our product candidates are found to cause undesirable side effects we may need to delay or abandon our development and commercialization efforts.

Any undesirable side effects that might be caused by our product candidates could interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications. In addition, if any of our product candidates receive marketing approval and we or others later identify undesirable side effects caused by the product, we could face one or more of the following:

	•		a change in the labeling statements or withdrawal of FDA or other regulatory approval of the product;

	•		a change in the way the product is administered; or

	•		the need to conduct additional clinical trials.

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing the product, which in turn could delay or prevent us from generating significant revenues from its sale.

The major safety concern with patients taking insulin is the occurrence of hypoglycemic events, which we monitor on a daily basis in our clinical trials. As of March 12, 2007, we had a total of 113 mild and moderate hypoglycemic events in our Phase III clinical trials, 73 in patients receiving Humulin^® R and 40 in patients receiving VIAject™. As of that date, we also had a total of four severe hypoglycemic events, three in patients receiving Humulin^® R and one in a patient receiving VIAject™.

The commercial success of any product candidates that we may develop, including VIAject™, VIAtab™, VIAmass™ and VIAcal™ will depend upon the degree of market acceptance by physicians, patients, healthcare payors and others in the medical community.

Any products that we bring to the market, including VIAject™, VIAtab™, VIAmass™ and VIAcal™, if they receive marketing approval, may not gain market acceptance by physicians, patients, healthcare payors and others in the medical community. If these products do not achieve an adequate level of acceptance, we may not generate significant product revenues and we may not become profitable. Physicians will not recommend our product candidates until clinical data or other factors demonstrate the safety and efficacy of our product candidates as compared to other treatments. Even if the clinical safety and efficacy of our product candidates is established, physicians may elect not to recommend these product candidates for a variety of factors, including the reimbursement policies of government and third-party payors and the effectiveness of our competitors in marketing their products.

The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including:

	•		the willingness and ability of patients and the healthcare community to adopt our technology;

	•		the ability to manufacture our product candidates in sufficient quantities with acceptable quality and to offer our product candidates for sale at competitive prices;

	•		the perception of patients and the healthcare community, including third-party payors, regarding the safety, efficacy and benefits of our product candidates compared to those of competing products or therapies;

	•		the convenience and ease of administration of our product candidates relative to existing treatment methods, such as our ability to gain regulatory approval for our liquid 100 IU/ml formulations of VIAject™;

	•		the pricing and reimbursement of our product candidates relative to existing treatments; and

	•		marketing and distribution support for our product candidates.

If we fail to enter into strategic collaborations for the commercialization of our product candidates or if our collaborations are unsuccessful, we may be required to establish our own sales, marketing, manufacturing and distribution capabilities which will be expensive and could delay the commercialization of our product candidates and have a material and adverse affect on our business.

A broad base of physicians, including primary care physicians, internists and endocrinologists, treat patients with diabetes. A large sales force is required to educate and support these physicians. Therefore, our current strategy for developing, manufacturing and commercializing our product candidates includes securing collaborations with leading pharmaceutical and biotechnology companies for the commercialization of our product candidates. To date, we have not entered into any collaborations with pharmaceutical or biotechnology companies. We face significant competition in seeking appropriate collaborators. In addition, collaboration agreements are complex and time-consuming to negotiate, document and implement. For all these reasons, it may be difficult for us to find third parties that are willing to enter into collaborations on economic terms that are favorable to us, or at all. If we do enter into any such collaboration, the collaboration may not be successful. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. It is likely that our collaborators will have significant discretion in determining the efforts and resources that they will apply to these collaborations.

If we fail to enter into collaborations, or if our collaborations are unsuccessful, we may be required to establish our own direct sales, marketing, manufacturing and distribution capabilities. Establishing these capabilities can be time-consuming and expensive and we have little experience in doing so. Because of our size, we would be at a disadvantage to our potential competitors to the extent they collaborate with large pharmaceutical companies that have substantially more resources than we do. As a result, we would not initially be able to field a sales force as large as our competitors or provide the same degree of market research or marketing support. In addition, our competitors would have a greater ability to devote research resources toward expansion of the indications for their products. We cannot assure prospective investors that we will succeed in entering into acceptable collaborations, that any such collaboration will be successful or, if not, that we will successfully develop our own sales, marketing and distribution capabilities.

If we are unable to obtain adequate reimbursement from governments or third-party payors for any products that we may develop or if we are unable to obtain acceptable prices for those products, they may not be purchased or used and our revenues and prospects for profitability will suffer.

Our future revenues and profits will depend heavily upon the availability of adequate reimbursement for the use of our approved product candidates from governmental and other third-party payors, both in the United States and in other markets. Reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a product is:

	•		a covered benefit under its health plan;

	•		safe, effective and medically necessary;

	•		appropriate for the specific patient;

	•		cost-effective; and

	•		neither experimental nor investigational.

Obtaining reimbursement approval for a product from each government or other third-party payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical and cost-effectiveness data for the use of our products to each payor. We may not be able to provide data sufficient to gain acceptance with respect to reimbursement. Even when a payor determines that a product is eligible for reimbursement, the payor may impose coverage limitations that preclude payment for some uses that are approved by the FDA or comparable authorities. In addition, eligibility for coverage does not imply that any product will be reimbursed in all cases or at a rate that allows us to make a profit or even cover our costs. Interim payments for new products, if applicable, may also not be sufficient to cover our costs and may not be made permanent.

We are subject to pricing pressures and uncertainties regarding Medicare reimbursement and reform.

Recent reforms in Medicare added a prescription drug reimbursement benefit beginning in 2006 for all Medicare beneficiaries. Although we cannot predict the full effects on our business of the implementation of this legislation, it is possible that the new benefit, which will be managed by private health insurers, pharmacy benefit managers, and other managed care organizations, will result in decreased reimbursement for prescription drugs, which may further exacerbate industry-wide pressure to reduce the prices charged for prescription drugs. This could harm our ability to generate revenues.

Governments outside the United States tend to impose strict price controls, which may adversely affect our revenues, if any.

In some countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be adversely affected.

Legislation has been introduced in Congress that, if enacted, would permit more widespread re-importation of drugs from foreign countries into the United States, which may include re-importation from foreign countries where the drugs are sold at lower prices than in the United States. Such legislation, or similar regulatory changes, could decrease the price we receive for any approved products which, in turn, could adversely affect our operating results and our overall financial condition.

Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.

We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face an even greater risk if we commercially sell any products that we may develop. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

	•		decreased demand for any product candidates or products that we may develop;

	•		injury to our reputation;

	•		withdrawal of clinical trial participants;

	•		costs to defend the related litigation;

	•		substantial monetary awards to trial participants or patients;

	•		loss of revenue; and

	•		the inability to commercialize any products that we may develop.

We currently carry global liability insurance that we believe is sufficient to cover us from potential damages arising from proposed clinical trials of VIAject™. We also carry local insurance policies per clinical trial of our product candidates. The amount of insurance that we currently hold may not be adequate to cover all liabilities that we may incur. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for any products. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost. If losses from product liability claims exceed our liability insurance coverage, we may ourselves incur substantial liabilities. If we are required to pay a product liability claim, we may not have sufficient financial resources to complete development or commercialization of any of our product candidates and, if so, our business and results of operations would be harmed.

We face substantial competition in the development of our product candidates which may result in others developing or commercializing products before or more successfully than we do.

We are engaged in segments of the pharmaceutical industry that are characterized by intense competition and rapidly evolving technology. Many large pharmaceutical and biotechnology companies, academic institutions, governmental agencies and other public and private research organizations are pursuing the development of novel drugs that target endocrine disorders. We face, and expect to continue to face, intense and increasing competition as new products enter the market and advanced technologies become available. There are several approved injectable rapid-acting meal-time insulin analogs currently on the market including Humalog^®, marketed by Eli Lilly and Company, NovoLog^®, marketed by Novo Nordisk A/S, and Apidra^®, marketed by Sanofi-Aventis. These rapid-acting insulin analogs provide improvement over regular forms of short-acting insulin, including faster subcutaneous absorption, an earlier and greater insulin peak and more rapid post-peak decrease. Emisphere Technologies, Inc. is developing oral insulin in pill form. Emisphere is still in early-stage preclinical trials of its oral tablet. Generex has developed an oral spray that is currently in Phase II development. Several companies are also developing alternative insulin systems for diabetes, including Novo Nordisk, MannKind Corporation, Emisphere Technologies, Inc. and Aradigm Corporation. In addition, a number of established pharmaceutical companies, including GlaxoSmithKline plc and Bristol-Myers Squibb Company, are developing proprietary technologies or have entered into arrangements with, or acquired, companies with technologies for the treatment of diabetes.

Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization. Our competitors may develop products that are more effective, safer, more convenient or less costly than any that we are developing or that would render our product candidates obsolete or non-competitive. Our competitors may also obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours.

Many of our potential competitors have:

	•		significantly greater financial, technical and human resources than we have and may be better equipped to discover, develop, manufacture and commercialize product candidates;

	•		more extensive experience in preclinical testing and clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products;

	•		product candidates that have been approved or are in late-stage clinical development; or

	•		collaborative arrangements in our target markets with leading companies and research institutions.

Our product candidates may be rendered obsolete by technological change.

The rapid rate of scientific discoveries and technological changes could result in one or more of our product candidates becoming obsolete or noncompetitive. For several decades, scientists have attempted to improve the bioavailability of injected formulations and to devise alternative non-invasive delivery systems for the delivery of drugs such as insulin. Our product candidates will compete against many products with similar indications. In addition to the currently marketed rapid-acting insulin analogs, our competitors are developing insulin formulations delivered by oral pills, pulmonary devices and oral spray devices. Our future success will depend not only on our ability to develop our product candidates, but also on our ability to maintain market acceptance against emerging industry developments. We cannot assure present or prospective stockholders that we will be able to do so.

Our business activities involve the storage and use of hazardous materials, which require compliance with environmental and occupational safety laws regulating the use of such materials. If we violate these laws, we could be subject to significant fines, liabilities or other adverse consequences.

Our research and development work and manufacturing processes involve the controlled storage and use of hazardous materials, including chemical and biological materials. Our operations also produce hazardous waste products. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials. Although we believe that our safety procedures for handling and disposing of such materials and waste products comply in all material respects with the standards prescribed by federal, state and local laws and regulations, the risk of

accidental contamination or injury from hazardous materials cannot be completely eliminated. In the event of an accident or failure to comply with environmental laws, we could be held liable for any damages that may result, and any such liability could fall outside the coverage or exceed the limits of our insurance. In addition, we could be required to incur significant costs to comply with environmental laws and regulations in the future or pay substantial fines or penalties if we violate any of these laws or regulations. Finally, current or future environmental laws and regulations may impair our research, development or production efforts.

Risks Related to Our Dependence on Third Parties

Use of third parties to manufacture our product candidates may increase the risks that we will not have sufficient quantities of our product candidates or such quantities at an acceptable cost, or that our suppliers will not be able to manufacture our products in their final dosage form. In any such case, clinical development and commercialization of our product candidates could be delayed, prevented or impaired.

We do not currently own or operate manufacturing facilities for commercial production of our product candidates. We have limited experience in drug manufacturing and we lack the resources and the capabilities to manufacture any of our product candidates on a clinical or commercial scale. Our current strategy is to outsource all manufacturing of our product candidates and products to third parties. We also expect to rely upon third parties to produce materials required for the commercial production of our product candidates if we succeed in obtaining necessary regulatory approvals. Although we contract with a large commercial manufacturer for VIAject™, there can be no assurance that the manufacturer will support our VIAject™ or other manufacturing programs in the future. The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques, processes and quality controls.

Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates or products ourselves, including:

	•		reliance on the third party for regulatory compliance and quality assurance;

	•		the possible breach of the manufacturing agreement by the third party because of factors beyond our control; and

	•		the possible refusal by the third party to support our manufacturing programs, based on its own business priorities, at a time that is costly or inconvenient for us.

Our manufacturers may not be able to comply with current good manufacturing practice, or cGMP, regulations or other regulatory requirements or similar regulatory requirements outside the United States. Our manufacturers are subject to unannounced inspections by the FDA, state regulators and similar regulators outside the United States. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our product candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidates.

Our product candidates and any products that we may develop may compete with other product candidates and products for access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that are both capable of manufacturing for us and willing to do so. If the third parties that we engage to manufacture product for our clinical trials should cease to continue to do so for any reason, we likely would experience delays in advancing these trials while we identify and qualify replacement suppliers and we may be unable to obtain replacement supplies on terms that are favorable to us. In addition, if we are not able to obtain adequate supplies of our product candidates or the drug substances used to manufacture them, it will be more difficult for us to develop our product candidates and compete effectively.

Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins and our ability to develop product candidates and commercialize any products that receive regulatory approval on a timely and competitive basis.

We may choose to build and operate a fill and finish manufacturing facility for VIAject™ on the campus of our headquarters in Danbury, Connecticut. We do not have any experience in constructing or operating such a facility. We can provide no assurance that we will be able to develop the Danbury site into a plant capable of conducting the fill and finish operations for VIAject™ under conditions required by the FDA or foreign regulatory agencies on a timely basis, if at all. Any such fill and finish facility will be subject to FDA inspection and approval before we can begin operations there and will continue to be subject to ongoing FDA inspections thereafter. Any

such fill and finish facility will also be subject to European regulatory inspection and approval before we can begin operations there for European sales and will continue to be subject to ongoing European regulatory inspection thereafter.

We rely on third parties to conduct our clinical trials and those third parties may not perform satisfactorily, including failing to meet established deadlines for the completion of such trials.

We do not independently conduct clinical trials for our product candidates. We rely on third parties, such as contract research organizations, clinical data management organizations, medical institutions and clinical investigators, to enroll qualified patients and conduct our clinical trials. Our reliance on these third parties for clinical development activities reduces our control over these activities. 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. Moreover, the FDA requires us to comply with standards, commonly referred to as Good Clinical Practices, for conducting, recording, and reporting the results of 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. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, regulatory approvals for our product candidates and will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates.

If our suppliers, principally our sole insulin supplier, fail to deliver materials and provide services needed for the production of VIAject™ and VIAtab™ in a timely and sufficient manner, or if they fail to comply with applicable regulations, clinical development or regulatory approval of our product candidates or commercialization of our products could be delayed, producing additional losses and depriving us of potential product revenue.

We need access to sufficient, reliable and affordable supplies of recombinant human insulin and other materials for which we rely on various suppliers. We also must rely on those suppliers to comply with relevant regulatory and other legal requirements, including the production of insulin in accordance with cGMP. We can make no assurances that our suppliers, particularly our insulin supplier, will comply with cGMP.

We currently have an agreement with a single insulin supplier from which we obtain all of the insulin that we use for testing and manufacturing VIAject^tm and VIAtab^tm. Our agreement with this insulin supplier will terminate in November 2009; however, the supplier is obligated to continue to supply us with insulin pursuant to the terms of the agreement until the earlier of (1) such time as we have qualified a new insulin supplier and (2) November 2010. We are currently discussing with our current supplier the terms of a potential new commercial supply agreement.

We currently have sufficient supplies of insulin to complete our current and anticipated future clinical trials of VIAject^tm. In January 2008, our supplier notified us that they are unable or unwilling to supply us with the maximum quantities of insulin that we believe they are required to provide to us under our existing agreement for the years 2008 and 2009. We believe, however, that we will procure insulin under our existing supply agreement in quantities at least sufficient to support the initial commercial launch of VIAject^tm. We are seeking to qualify other insulin suppliers to serve as additional or alternative suppliers if we are unable or choose not to enter into a new commercial supply agreement with our existing supplier. We believe that we will be able to qualify a new insulin supplier prior to November 2010. However, we cannot assure you that our existing supplier will supply us with the amounts that we believe they are obligated to provide to us under our existing agreement, that we will be able to enter into a new agreement with our existing supplier, or that we will be able to qualify a new insulin supplier prior to November 2010. Even if we do qualify a new supplier in a timely manner, we cannot assure you that we will be able to enter into a commercial supply agreement with a new supplier on favorable terms. If we are unable to procure sufficient quantities of insulin from our current or any future supplier, if supply of recombinant human insulin and other materials otherwise becomes limited, or if our suppliers do not meet relevant regulatory requirements, and if we were unable to obtain these materials in sufficient amounts, in a timely manner and at reasonable prices, we could be delayed in the manufacturing and future commercialization of VIAject^tm and VIAtab^tm, which would have a material adverse effect on our business . We would incur substantial costs and manufacturing delays if our suppliers are unable to provide us with products or services approved by the FDA or other regulatory agencies.

Risks Related to Our Intellectual Property

If we are unable to protect our intellectual property rights, our competitors may develop and market similar or identical products that may reduce demand for our products, and we may be prevented from establishing collaborative relationships on favorable terms.

The following factors are important to our success:

	•		receiving patent protection for our product candidates;

	•		maintaining our trade secrets;

	•		not infringing on the proprietary rights of others; and

	•		preventing others from infringing our proprietary rights.

We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. We try to protect our proprietary position by filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. Because the patent position of pharmaceutical companies involves complex legal and factual questions, the issuance, scope and enforceability of patents cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. Thus, any patents that we own or license from others may not provide any protection against competitors.

We have been granted one patent and have ten pending United States patent applications relating to our VIAdel^™, VIAject™ and VIAtab™ technology. These pending patent applications, those we may file in the future, or those we may license from third parties, may not result in patents being issued. If patents do not issue with claims encompassing our products, our competitors may develop and market similar or identical products that compete with ours. Even if patents are issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Failure to obtain effective patent protection for our technology and products may reduce demand for our products and prevent us from establishing collaborative relationships on favorable terms.

The active and inactive ingredients in our VIAject™ and VIAtab™ product candidates have been known and used for many years and, therefore, are no longer subject to patent protection. Accordingly, our pending patent applications are directed to the particular formulations of these ingredients in our products, and their use. Although we believe our formulations and their use are patentable and provide a competitive advantage, even if issued, our patents may not prevent others from marketing formulations using the same active and inactive ingredients in similar but different formulations.

We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. We try to protect this information by entering into confidentiality agreements with parties that have access to it, such as potential corporate partners, collaborators, employees and consultants. Any of these parties may breach the agreements and disclose our confidential information or our competitors may learn of the information in some other way. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed. If any trade secret, know-how or other technology not protected by a patent were to be disclosed to or independently developed by a competitor, our business and financial condition could be materially adversely affected.

The laws of many foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States.

We may become involved in lawsuits and administrative proceedings to protect, defend or enforce our patents that would be expensive and time-consuming.

In order to protect or enforce our patent rights, we may initiate patent litigation against third parties in the United States or in foreign countries. In addition, we may be subject to certain opposition proceedings conducted in patent and trademark offices challenging the validity of our patents and may become involved in future opposition proceedings challenging the patents of others. The defense of intellectual property rights, including patent rights, through lawsuits, interference or opposition proceedings, and other legal and administrative proceedings can be costly and can divert our technical and management

personnel from their normal responsibilities. Such costs increase our operating losses and reduce our resources available for development activities. An adverse determination of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. For example, during the course of this kind of litigation and despite protective orders entered by the court, confidential information may be inadvertently disclosed in the form of documents or testimony in connection with discovery requests, depositions or trial testimony. This disclosure could materially adversely affect our business and financial results.

Claims by other parties that we infringe or have misappropriated their proprietary technology may result in liability for damages, royalties, or other payments, or stop our development and commercialization efforts.

Competitors and other third parties may initiate patent litigation against us in the United States or in foreign countries based on existing patents or patents that may be granted in the future. Many of our competitors may have obtained patents covering products and processes generally related to our products and processes, and they may assert these patents against us. Moreover, there can be no assurance that these competitors have not sought or will not seek additional patents that may cover aspects of our technology. As a result, there is a greater likelihood of a patent dispute than would be expected if our competitors were pursuing unrelated technologies.

While we conduct patent searches to determine whether the technologies used in our products infringe patents held by third parties, numerous patent applications are currently pending and may be filed in the future for technologies generally related to our technologies, including many patent applications that remain confidential after filing. Due to these factors and the inherent uncertainty in conducting patent searches, there can be no guarantee that we will not violate third-party patent rights that we have not yet identified.

There may be U.S. and foreign patents issued to third parties that relate to aspects of our product candidates. There may also be patent applications filed by these or other parties in the United States and various foreign jurisdictions that relate to some aspects of our product candidates, which, if issued, could subject us to infringement actions. The owners or licensees of these and other patents may file one or more infringement actions against us. In addition, a competitor may claim misappropriation of a trade secret by an employee hired from that competitor. Any such infringement or misappropriation action could cause us to incur substantial costs defending the lawsuit and could distract our management from our business, even if the allegations of infringement or misappropriation are unwarranted. A need to defend multiple actions or claims could have a disproportionately greater impact. In addition, either in response to or in anticipation of any such infringement or misappropriation claim, we may enter into commercial agreements with the owners or licensees of these rights. The terms of these commercial agreements may include substantial payments, including substantial royalty payments on revenues received by us in connection with the commercialization of our products.

Payments under such agreements could increase our operating losses and reduce our resources available for development activities. Furthermore, a party making this type of claim could secure a judgment that requires us to pay substantial damages, which would increase our operating losses and reduce our resources available for development activities. A judgment could also include an injunction or other court order that could prevent us from making, using, selling, offering for sale or importing our products or prevent our customers from using our products. If a court determined or if we independently concluded that any of our products or manufacturing processes violated third-party proprietary rights, our clinical trials could be delayed and there can be no assurance that we would be able to reengineer the product or processes to avoid those rights, or to obtain a license under those rights on commercially reasonable terms, if at all.

Risks Related to Regulatory Approval of Our Product Candidates

If we are not able to obtain required regulatory approvals, we will not be able to commercialize our product candidates, and our ability to generate revenue will be materially impaired.

Our product candidates, and the activities associated with their development and commercialization, including their testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in other countries. Failure to obtain regulatory approval for a product candidate will prevent us from commercializing the product candidate. We have not received regulatory approval to market any of our product candidates in

any jurisdiction. Securing FDA approval requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing FDA approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the FDA. Our future products may not be demonstrated effective, may be demonstrated only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or may prevent or limit commercial use.

The process of obtaining FDA and other regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved, the nature of the disease or condition to be treated and challenges by competitors. Changes in regulatory approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. The FDA has substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying agency interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate. Any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.

If the FDA does not believe that our product candidates satisfy the requirements for the Section 505(b)(2) approval procedure, the approval pathway will take longer and cost more than anticipated and in either case may not be successful.

We believe that VIAject™ and VIAtab™ qualify for approval under Section 505(b)(2) of the FFDCA. Because we are developing new formulations of previously approved chemical entities, such as insulin, this may enable us to avoid having to submit certain types of data and studies that are required in full NDAs and instead submit a Section 505(b)(2) NDA. The FDA may not agree that our products are approvable under Section 505(b)(2). Insulin is a unique and complex drug in that it is a complex hormone molecule that is more difficult to replicate and has more complex and unpredictable effects in the body than many small molecule drugs. The availability of the Section 505(b)(2) pathway for insulin is even more controversial than for small molecule drugs, and the FDA may not accept this pathway for our insulin product candidates. The FDA has not published any guidance that specifically addresses insulin Section 505(b)(2) NDAs. No other insulin product has yet been approved under a Section 505(b)(2) NDA. If the FDA determines that Section 505(b)(2) NDAs are not appropriate and that full NDAs are required for our product candidates, the time and financial resources required to obtain FDA approval for our product candidates could substantially and materially increase. This would require us to obtain substantially more funding than previously anticipated which could significantly dilute the ownership interests of our stockholders. Even with this investment, the prospect for FDA approval may be significantly lower. If the FDA requires full NDAs for our product candidates or requires more extensive testing and development for some other reason, our ability to compete with alternative products that arrive on the market more quickly than our product candidates would be adversely impacted.

Notwithstanding the approval of many products by the FDA under Section 505(b)(2) over the last few years, certain brand-name pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA’s interpretation of Section 505(b)(2) is successfully challenged, the FDA may be required to change its interpretation of Section 505(b)(2) which could delay or even prevent the FDA from approving any Section 505(b)(2) NDA that we submit. The pharmaceutical industry is highly competitive, and it is not uncommon for a manufacturer of an approved product to file a citizen petition with the FDA seeking to delay approval of, or impose additional approval requirements for, pending competing products. If successful, such petitions can significantly delay, or even prevent, the approval of the new product. However, even if the FDA ultimately denies such a petition, the FDA may substantially delay approval while it considers and responds to the petition.

Moreover, even if VIAject™ and VIAtab™ are approved under Section 505(b)(2), the approval may be subject to limitations on the indicated uses for which the product may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product.

Any product for which we obtain marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our products, when and if any of them are approved.

Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the

FDA and comparable regulatory authorities. These requirements include, in the case of FDA, submissions of safety and other post-marketing information and reports, registration requirements, cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product.

In addition, if any of our product candidates are approved, our product labeling, advertising and promotion would be subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about prescription drug products. In particular, a drug may not be promoted in a misleading manor or for uses that are not approved by the FDA as reflected in the product’s approved labeling. The FDA and other agencies actively enforce the laws and regulations prohibiting misleading promotion and the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability.

Discovery after approval of previously unknown problems with our products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in actions such as:

	•		restrictions on such products’ manufacturers or manufacturing processes;

	•		restrictions on the marketing or distribution of a product;

	•		warning letters;

	•		withdrawal of the products from the market;

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

	•		recall of products;

	•		fines, restitution or disgorgement of profits or revenue;

	•		suspension or withdrawal of regulatory approvals;

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

	•		product seizure;

	•		injunctions; or

	•		imposition of civil or criminal penalties.

Recently enacted legislation may make it more difficult and costly for us to obtain regulatory approval of our product candidates and to produce, market and distribute our existing products.

On September 27, 2007, the President signed into law the Food and Drug Administration Amendments Act of 2007, or the FDAAA. This new legislation grants significant new powers to the FDA, many of which are aimed at improving drug safety and assuring the safety of drug products after approval. Under the FDAAA, companies that violate the new law are subject to substantial civil monetary penalties. While we expect the FDAAA to have a significant impact on the pharmaceutical industry, the extent of the impact is not yet known. The new requirements and changes imposed by the FDAAA may make it more difficult, and more costly, to obtain and maintain approval of new pharmaceutical products and to produce, market and distribute existing products.

In addition, the FDA’s regulations, policies or guidance may change and new or additional statutes or government regulations may be enacted that could prevent or delay regulatory approval of our product candidates or further restrict or regulate post-approval activities. It is impossible to predict whether additional legislative changes will be enacted, or FDA regulations, guidance or interpretations implemented or modified, or what the impact of such changes, if any, may be.

Failure to obtain regulatory approval in international jurisdictions would prevent us from marketing our products abroad.

We intend to have our products marketed outside the United States. In order to market our products in the European Union and many other jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy and governing, among other things, clinical trials and commercial sales and distribution of our products. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ from that required to obtain FDA approval. The regulatory approval process outside the United States may include all of the risks associated with obtaining FDA approval, as well as additional risks. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. We may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market.

Reports of side effects or safety concerns in related technology fields or in other companies’ clinical trials could delay or prevent us from obtaining regulatory approval or negatively impact public perception of our product candidates.

At present, there are a number of clinical trials being conducted by us and by other pharmaceutical companies involving insulin or insulin delivery systems. The major safety concern with patients taking insulin is the occurrence of hypoglycemic events, which we monitor on a daily basis in our clinical trials. As of March 12, 2007, we had a total of 113 mild and moderate hypoglycemic events in our Phase III clinical trials, 73 in patients receiving Humulin^® R and 40 in patients receiving VIAject™. As of that date, we also had a total of four severe hypoglycemic events, three in patients receiving Humulin^® R and one in a patient receiving VIAject™. If we discover that our product is associated with a significantly increased frequency of hypoglycemic or other adverse events, or if other pharmaceutical companies announce that they observed frequent or significant adverse events in their trials involving insulin or insulin delivery systems, we could encounter delays in the commencement or completion of our clinical trials or difficulties in obtaining the approval of our product candidates. In addition, the public perception of our products might be adversely affected, which could harm our business and results of operations, even if the concern relates to another company’s product.

Risks Related to Employee Matters and Managing Growth

Our future success depends on our ability to retain our chief executive officer and other key executives and to attract, retain and motivate qualified personnel.

We are highly dependent on Dr. Solomon S. Steiner, our Chairman, President and Chief Executive Officer, Dr. Roderike Pohl, our Vice President, Research, and Gerard Michel, our Chief Financial Officer. Dr. Steiner and Dr. Pohl are the inventors of our VIAdel^™ technology. The loss of the services of any of these persons might impede the achievement of our research, development and commercialization objectives. With the exception of Dr. Steiner and Dr. Pohl, who each have employment agreements, all of our employees are “at will” and we currently do not have employment agreements with any of the other members of our management or scientific staff. Replacing key employees may be difficult and time-consuming because of the limited number of individuals in our industry with the skills and experiences required to develop, gain regulatory approval of and commercialize our product candidates successfully. Other than a $1 million key person insurance policy on Dr. Steiner, we do not have key person life insurance to cover the loss of any of our other employees.

Recruiting and retaining qualified scientific personnel, clinical personnel and sales and marketing personnel will also be critical to our success. We may not be able to attract and retain these personnel on acceptable terms, if at all, given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from other companies, universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.

We expect to expand our development, regulatory and sales and marketing capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.

We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of manufacturing, clinical trials management, regulatory affairs, business development and sales and marketing. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems and continue to recruit and train additional qualified personnel. Due to our limited financial resources we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.

Risks Related to Our Common Stock

Our executive officers, directors and principal stockholders have effective control over all matters submitted to stockholders for approval.

Our executive officers, directors and principal stockholders, in the aggregate, beneficially own shares representing approximately 50% of our outstanding capital stock. As a result, these stockholders, if they act together, will effectively be able to exercise a controlling influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations and sales of all or substantially all of our assets, and will have significant control over our management and policies. The interests of this group of stockholders may not always coincide with our corporate interests or the interests of other stockholders. This significant concentration of stock ownership could also result in the entrenchment of our management and adversely affect the price of our common stock.

Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our corporate charter and bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team.

Among others, these provisions:

	•		establish a classified board of directors such that not all members of the board are elected at one time;

	•		allow the authorized number of our directors to be changed only by resolution of our board of directors;

	•		limit the manner in which stockholders can remove directors from the board;

	•		establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors;

	•		require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent;

	•		limit who may call stockholder meetings;

	•		authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a stockholder rights plan or “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; and

•

require the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to amend or repeal certain provisions of our charter or bylaws.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

We may not be able to comply on a timely basis with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules of the Securities and Exchange Commission, beginning with our fiscal year ending September 30, 2008, we will be required to include in our annual report an assessment of the effectiveness of our internal control over financial reporting. Furthermore, our registered independent public accounting firm will be required to report on the effectiveness of our internal control over financial reporting. We have not yet completed our assessment of the effectiveness of our internal control over financial reporting. We restated our financial statements for the three and nine months ended June 30, 2007 and for the year ended September 30, 2006 to correct errors in the calculation of non-cash compensation expense related to options issued to non-employees. In connection with the restatements it was determined that we had material weaknesses in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board. We addressed and resolved these material weaknesses. We are also in the process of documenting, reviewing and, where appropriate, improving our internal controls and procedures in preparation for becoming subject to the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules. Implementing appropriate changes to our internal controls may entail substantial costs in order to modify our existing financial and accounting systems, take a significant period of time to complete, and distract our officers, directors and employees from the operation of our business. Moreover, these changes may not be effective in maintaining the adequacy or effectiveness of our internal controls. If we fail to complete the assessment on a timely basis, or if our independent registered public accounting firm cannot attest to our assessment, we could be subject to regulatory sanctions and a loss of public confidence. Also, the lack of effective internal control over financial reporting may adversely impact our ability to prepare timely and accurate financial statements.

If our stock price is volatile, purchasers of our common stock could incur substantial losses.

Our stock price may be volatile. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price for our common stock may be influenced by many factors, including:

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

	•		regulatory or legal developments in the United States and other countries;

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

	•		developments or disputes concerning patents or other proprietary rights;

	•		the recruitment or departure of key personnel;

	•		changes in the structure of healthcare payment systems;

	•		market conditions in the pharmaceutical and biotechnology sectors and issuance of new or changed securities analysts’ reports or recommendations;

	•		general economic, industry and market conditions; and

	•		the other factors described in this “Risk Factors” section.

We have never paid any cash dividends on our capital stock and we do not anticipate paying any cash dividends in the foreseeable future.

We have paid no cash dividends on our capital stock to date. We currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, we do not expect to pay any cash dividends in the foreseeable future, and payment of cash dividends, if any, will depend on our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. Furthermore, we may in the future become subject to contractual restrictions on, or prohibitions against, the payment of dividends. Capital appreciation, if any, of our common stock will be investors’ sole source of gain for the foreseeable future.

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. As of April 30, 2008, we had outstanding 23,657,398 shares of common stock. Of these, approximately 10.5 million shares are able to be sold in accordance with the SEC’s Rule 144 and the remainder are generally freely tradable without restriction under securities laws. Moreover, the holders of an aggregate of approximately 5.8 million of such shares will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders.

We will incur substantial costs as a result of operating as a public company, and our management will be required to devote substantial time to comply with public company regulations.

We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002 as well as other federal and state laws. These requirements may place a strain on our people, systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal controls over financial reporting, significant resources and management oversight will be required. This may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Item 4. Submission of Matters to a Vote of Security Holders

Our Annual Meeting of Stockholders was held on February 28, 2008.

There were present at the Annual Meeting in person or by proxy stockholders holding an aggregate of 13,712,936 shares of common stock. The results of the vote taken at the Annual Meeting with respect to each matter voted upon were as follows:

Proposal 1. The stockholders approved a proposal to elect each of the three nominees to the board of directors as class I directors. The tabulation of votes on this proposal was as follows:


Nominees	Votes For		Votes Withheld
Dr. Albert Cha		13,698,362		14,574
Mr. David Kroin		13,704,298		8,638
Dr. Samuel Wertheimer		13,704,448		8,448

Proposal 2. The stockholders approved a proposal to ratify the appointment of BDO Seidman, LLP as our independent registered public accounting firm for the 2008 fiscal year. The tabulation of votes on this proposal was as follows:


	Votes For		Votes Against		Votes Abstain
Ratification of the appointment of BDO Seidman, LLP for fiscal 2008		13,708,590		2,888		1,458

Item 6. Exhibits


Exhibit No.		Description

31.01		Chief Executive Officer–Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.02		Chief Financial Officer–Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.01		Chief Executive Officer and Chief Financial Officer–Certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


Dated: May 9, 2008	BIODEL INC.
	By:	/s/ Gerard Michel
		Gerard Michel, Chief Financial Officer,
		VP Corporate Development, and Treasurer


Dated: May 9, 2008		/s/ Solomon S. Steiner

		Solomon S. Steiner, Chairman, President and
		Chief Executive Officer


Dated: May 9, 2008		/s/ Gerard Michel

		Gerard Michel, Chief Financial Officer,
		VP Corporate Development, and Treasurer


Dated: May 9, 2008		/s/ Solomon S. Steiner

		Solomon S. Steiner, Chairman, President and
		Chief Executive Officer

Dated: May 9, 2008		/s/ Gerard Michel

		Gerard Michel, Chief Financial Officer,
		VP Corporate Development, and Treasurer


	Page
PART I – FINANCIAL INFORMATION

Item 1. Condensed Financial Statements		1

Condensed Balance Sheets at September 30, 2007 and March 31, 2008 (unaudited)		1

Condensed Statements of Operations (unaudited) for the Three and Six Months Ended March 31, 2007 and 2008 and for the period from December 3, 2003 (inception) to March 31, 2008		2

Condensed Statements of Stockholders’ Equity (unaudited) for the period from December 3, 2003 (inception) to March 31, 2008		3

Condensed Statements of Cash Flows (unaudited) for the Six Months Ended March 31, 2007 and 2008 and for the period from December 3, 2003 (inception) to March 31, 2008		4

Notes to Condensed Financial Statements		5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		11

Item 3. Quantitative and Qualitative Disclosure About Market Risk		20

Item 4T. Controls and Procedures		20

PART II – OTHER INFORMATION

Item 1A. Risk Factors		22

Item 4. Submission of Matters to Vote of Security Holders		40

Item 6. Exhibits		40

Signatures		41
EX-31.01: CERTIFICATION
EX-31.02: CERTIFICATION
EX-32.01: CERTIFICATIONS