form_10-k.htm

10-K 1 form_10-k.htm FORM 10-K form_10-k.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

For the fiscal year ended December 31, 2008

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

For the transition period from to .

Commission file number 001-31982

SCOLR Pharma, Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	91-1689591 (IRS Employer Identification No.)

19204 North Creek Parkway, Suite 100 Bothell, WA (Address of principal executive offices)	98011 (Zip Code)

Registrant’s telephone number, including area code: (425) 368-1050

Securities registered under Section 12(b) of the

Exchange Act:

Common Stock, $0.001 par value per share

(Title of each class)

Name of each exchange on which registered:

NYSE Alternext US Exchange

Securities registered under Section 12(g) of the Exchange Act:

Series A Junior Participating Preferred Share Purchase Rights

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act). Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x

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

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2008, was approximately $39.1 million, based upon the closing sale price on the NYSE Alternext US reported for such date. The number of shares outstanding of the registrant’s common stock was 41,098,270 as of March 6, 2009.

______________________

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DOCUMENTS INCORPORATED BY REFERENCE

Certain information required by Item 5 of this report and the information required by Part III of this annual report, to the extent not set forth herein, is incorporated herein by reference from the registrant’s definitive proxy statement relating to the registrant’s 2009 annual meeting of stockholders.

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SCOLR Pharma, Inc.

FORM 10-K

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Business	4
Item 1A.	Risk Factors	13
Item 1B.	Unresolved Staff Comments	20
Item 2.	Properties	20
Item 3.	Legal Proceedings	21
Item 4.	Submission of Matters to a Vote of Security Holders	21
	PART II
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	22
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 8.	Financial Statements and Supplementary Data	27
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	44
Item 9A.	Controls and Procedures	44
	PART III
Item 10.	Directors and Executive Officers of the Registrant	46
Item 11.	Executive Compensation	46
Item 12.	Security Ownership of Certain Beneficial Owners and Management	46
Item 13.	Certain Relationships and Related Transactions	46
Item 14.	Principal Accountant Fees and Services	46
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	47

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PART I

In this document, the words “we,” “our,” “ours,” and “us” refer only to SCOLR Pharma, Inc. and not to any other person or entity.

Item 1.

Business

This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the words “anticipate,” “believe,” “estimate,” “may,” “intend,” “expect,” and similar expressions identify certain of such forward-looking statements. Although we believe that our plans, intentions and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. Actual results, performance or achievements could differ materially from historical results or those contemplated, expressed or implied by the forward-looking statements contained in this annual report. Important factors that could cause actual results to differ materially from our forward-looking statements are set forth in this annual report, including Item 1A, as well as those discussed elsewhere in this annual report and others detailed from time-to-time in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We are a specialty pharmaceutical company that combines formulation experience and knowledge with our proprietary and patented Controlled Delivery Technology (CDT®) platforms to develop novel prescription, over-the-counter (OTC), and nutritional products. Our CDT platforms are based on multiple issued and pending patents and other intellectual property for custom designed controlled release and/or enhanced performance of active pharmaceutical ingredients and nutritional products.

Our innovative drug delivery technologies enable us to customize the formulations of tablets or capsules in order to release their active ingredients predictably over a specified timeframe of up to 24 hours. Our platforms are designed to offer a cost effective means to reduce the frequency of drug administration, improve the effectiveness of the drug treatment, ensure greater patient compliance with a treatment program, reduce side effects, and/or increase drug safety. In addition, our technology can be incorporated into oral formulations to increase the solubility characteristics of previously non-soluble and sparingly-soluble drugs without employing costly or complex nano-crystalization, micro-milling or coated particle technologies.

We have developed multiple private label controlled release nutritional products incorporating our CDT platforms that are sold by national retailers. In October 2005, we entered into a strategic alliance with a subsidiary of Perrigo Company for the manufacture, marketing, distribution, sale and use of certain dietary supplement products in the United States. We receive royalty payments based on a percentage of Perrigo’s net profits derived from the sales of products covered by our agreement.

Our lead product candidate is a CDT-based controlled release formulation of ibuprofen, an analgesic typically used for the treatment of pain, fever and inflammation. We successfully completed our pivotal phase III trial to evaluate the safety and efficacy of our 12 hour CDT 600mg controlled release ibuprofen for the OTC market. There are currently no controlled release formulations of ibuprofen approved for use in North America. In addition, we submitted our first Abbreviated New Drug Application, or ANDA, for our 12-hour pseudoephedrine product on August 5, 2008. In January 2009, the U.S. Food and Drug Administration, or FDA, issued a Complete Response Letter which requested additional information in the area of Chemical, Manufacturing and Controls, all of which was identified by the FDA as “minor.” Pseudoephedrine is a decongestant that is widely used to relieve sinus pressure related to allergies and the common cold. We have also conducted preliminary development of CDT-based controlled release formulations of ondansetron, rivastigmine, and risperidone, as well as an immediate release formulation of raloxifene. Potential formulations of ondansetron and raloxifene have been tested in clinical trials. Ondansetron is the active ingredient drug in Zofran®, GlaxoSmithKline’s product for anti-nausea and vomiting associated with chemotherapy and radiation treatments for cancer. Raloxifene is the active ingredient in Evista®, Eli Lilly’s product for osteoporosis which uses a different solubilization technology. Rivastigmine is the active ingredient in Exelon®, the Novartis drug for management of Alzheimer’s disease. Risperidone is the active ingredient in Risperdal®, Janssen, L.P.’s product for the management of schizophrenia and bipolar mania.

We entered into a collaboration and license agreement with Dr. Reddy’s Laboratories to pursue development and commercialization of an undisclosed oral prescription drug with significant potential for the cardiopulmonary market using our CDT technology. We are developing other products that we have not disclosed for competitive reasons, and we are evaluating additional drugs as potential development candidates for expanding our portfolio of CDT applications.

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We were incorporated on October 12, 1994, in Delaware under the name Caddy Systems, Inc. From April 1995 to July 2002, we operated under the name Nutraceutix, Inc. In July 2002, we changed our name to SCOLR, Inc. and to SCOLR Pharma, Inc. in July 2004. SCOLR is an acronym for “Self-Correcting Oral Linear Release,” an important feature of our lead technology.

Our principal executive offices are located at 19204 North Creek Parkway, Suite 100, Bothell, Washington 98011. Our general telephone number is (425) 368-1052. Our website is www.scolr.com. Information contained on our website is not part of, and is not incorporated into, this annual report. Our filings with the SEC are available without charge on our website.

Corporate Strategy

Our strategy is to develop prescription, OTC, and nutraceutical products utilizing our innovative oral drug delivery technologies. Our technologies enable us to develop custom formulations of tablets or capsules that release their active ingredients predictably over a specified timeframe of up to 24 hours. We believe that our technologies are capable of significantly improving the delivery of many prescription, OTC, and nutraceutical products.

We seek collaborative arrangements and alliances with corporate partners, licensors, and licensees to provide funding for the research, development, clinical testing, manufacturing, marketing, and commercialization of our product candidates. Controlled release drug delivery technologies such as our CDT platforms can be applied to reformulate existing drugs and extend the patent protection, thereby improving product release profiles and enhancing important revenue streams for pharmaceutical companies. Many pharmaceutical and specialty pharmaceutical companies have also successfully utilized controlled release technologies to develop product line extensions.

We expect to seek collaborations in order to advance the manufacturing, selling, and marketing of our potential products. However, based on an evaluation of each product opportunity and available funding, we may consider establishing limited manufacturing or sales and marketing capabilities to better maintain control over product development timelines and to capture more of their economic value of the opportunity. We do not currently have commercialization or manufacturing capabilities.

We spent $6.3 million on product research and development in 2008 and $7.8 million in 2007.

Commercial Relationships

An important part of our strategy is to seek collaborations and strategic partnerships to develop or market some of our products. We have entered into collaborations and currently plan to enter into additional collaborations with established third parties to manufacture and commercialize our existing and potential products. We are engaged in discussions with pharmaceutical companies regarding development of products incorporating our CDT platforms and other types of marketing, manufacturing, or distribution opportunities. Following is a summary of our recent collaborations.

Dr. Reddy’s Laboratories. On October 18, 2007, we entered into a collaboration and license agreement with Dr. Reddy’s Laboratories, an emerging global pharmaceutical company, to pursue the development and commercialization of an undisclosed oral prescription drug product. We have completed initial formulation work and product scale-up activities for pilot clinical trials. Under the terms of the agreement, Dr. Reddy’s is responsible for the development, manufacturing and marketing of the drug product. The agreement provides us with significant participation in net profits of the potential product after recovery of development and commercialization expenses.

Perrigo Company. On October 20, 2005, we entered into a strategic alliance with a subsidiary of Perrigo Company. Perrigo is a leading global healthcare supplier and one of the world’s largest manufacturers of OTC pharmaceutical and nutritional products for the store brand and contract manufacturing markets. Under the agreement, we granted a license to our CDT technology to Perrigo for the manufacture, marketing, distribution, and sale of specific dietary supplements in the United States. In addition, Perrigo may request that we develop additional dietary supplement products that use our technologies to be added to the agreement. Subject to certain exceptions described in the agreement, the license we granted to Perrigo is exclusive. We receive royalty payments based on Perrigo’s net profits derived from the sales of products subject to the agreement. The first product shipments by Perrigo began in the first quarter of 2006. Perrigo introduced three additional once-daily CDT-based private label products during the fourth quarter of 2006, and a fifth product was added late in 2007.

Wyeth Consumer Healthcare. In December 2005, we entered a licensing agreement with Wyeth Consumer Healthcare, a division of Wyeth, granting exclusive worldwide rights to use our CDT platforms for the development, manufacture and commercialization of products containing ibuprofen. On March 14, 2007, we received a notice of termination from Wyeth that our agreement would be terminated (without cause) effective April 16, 2007. Since

December 2005 through the termination of the contract, we received more than $2.1 million in milestone and other payments from Wyeth.

BioCryst. On September 5, 2006, we entered into a research collaboration with BioCryst Pharmaceuticals to develop an oral formulation of peramivir, using our CDT platforms. Peramivir is a novel therapeutic being developed by BioCryst for treatment of seasonal and life threatening influenza with a focus on intravenous and intramuscular delivery. The goal of the collaboration is to develop a tablet or capsule formulation for the oral administration of peramivir that improves its oral bioavailability. While this alliance has not proceeded to the next stage, we made significant progress in developing technology which offers the potential to create oral formulations for similar antiviral compounds and other injectable drugs.

Nutraceutix. We completed the sale of our probiotics development and manufacturing activities to Nutraceutix, Inc. as of December 31, 2003. In connection with the sale, we granted Nutraceutix the right to manufacture and sell certain products utilizing our CDT technologies. Subject to the rights of Nutraceutix to continue sales of certain inventories for up to one year, the license terminated on December 31, 2007.

Our CDT Platforms

We believe that our proprietary CDT platforms have the potential to significantly improve a large number of oral prescription, OTC, and nutritional products. Our proprietary CDT technologies can be used in solid oral dosage formulations to yield tablets or capsules that release their active agents in a custom designed, controlled manner over a specified timeframe of up to 24 hours.

Oral administration is the preferred route for drug delivery due to its convenience and widely accepted use. However, many orally-administered, immediate release drug products are rapidly utilized by the body, thereby requiring more frequent administration throughout the day. Consequently, patient non-compliance can be a significant problem for many of these products. Our oral controlled release technologies can eliminate the need for multiple daily dosing by extending the release of the active drug component so that the product maintains its therapeutic usefulness over a longer period of time. In addition, lowering the peak levels of certain drugs in the blood by extending their release profile may reduce the adverse effects associated with peak levels of these drugs.

Our CDT platforms provide a robust, simple and cost effective approach to drug tablet and capsule formulation that employ a simplified manufacturing processes using conventional granulation, blending, and compression equipment in a two or three-step process. Our controlled release tablet and capsule formulations contain readily available and generally-regarded-as-safe (GRAS) excipients (i.e., non-drug ingredients such as hydrophilic polymers, amino acids, or electrolytes). These excipients are used to modulate the release rate of the drug to provide delivery profiles, including controlled release with improved linearity or zero-order kinetics, first order kinetics, delayed release and/or bimodal release.

Our CDT technologies can accommodate comparatively high volumes of an active ingredient while being adaptable to deliver these active ingredients over a wide range of release profiles and timeframes. We believe that our CDT-based tablet and capsule formulations are capable of generating the controlled release profiles required for reproducible, cost-effective, and optimized in-vivo delivery of drugs for up to 24 hours.

In addition, our proprietary amino-acid technologies can be incorporated into solid oral formulations to increase the solubility characteristics of previously non-soluble or sparingly-soluble compounds. Our amino acid technologies are designed to allow the successful manufacture of these drugs without employing costly micro-milling, nano-particulate, coated-particle, or other complex solubility enhancing technologies.

Our CDT platforms are based on multiple issued and pending patents and other intellectual property for the programmed release or enhanced performance of active pharmaceutical ingredients and nutritional products. In aggregate, our amino acid, salt-based, and dual polymer technologies offer a range of formulation alternatives capable of addressing some of the most challenging hurdles in oral drug delivery, including zero order kinetics, poorly soluble active ingredients, and ingredients that are difficult to tablet. We have also done preliminary work on formulations that could provide enhanced bioavailability for selected drug targets. Our issued patents are summarized below.

• Dual Polymer Patent—(U.S. Patent No. 6,337,091 issued 2002 and expiring in 2017). This first generation of our technology is based on hydrophilic matrices which allow for the controlled diffusion of active ingredients from the matrix through progressive swelling and erosion of the tablets. The resulting CDT tablets or capsules employ combinations of conventional tableting materials selected specifically for the active ingredient(s) and the desired release profile. Various release patterns and rates can be achieved depending upon the matrix composition, the selection and ratio of polymers, ionic substrates, and excipients.

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• Salt Patent—(U.S. Patent No. 6,090,411 issued July 18, 2000 and expiring in 2018). This technology provides for the controlled and programmable release of the active pharmaceutical ingredient (API) with zero-order kinetics through dry blending and direct compression of a salt, a polymer, and the API. We believe that this salt-based technology

1) our technology employs a comparatively simple, two-step manufacturing process (involving no granulation), and the dry blending of a selected salt and polymer to create a dry matrix;

2) our salt patent platform is broadly applicable to dietary supplements, OTC products and prescription pharmaceuticals, and yields extremely rugged tablets;

3) the in-vitro dissolution results of these tablets are not affected by drug solubility, pH, tablet size or configuration, tablet hardness, or friability; and,

4) our technology uses GRAS excipients manufactured with standard pharmaceutical processing equipment thereby enabling cost-effective production.

• Amino Acid Patents—(U.S. Patent No. 6,517,868 issued February 11, 2003, U.S. Patent No. 6,936,275 issued August 30, 2005, and U.S. Patent 7,229,642 issued June 12, 2007). These technologies employ a controlled release matrix system based on the application of amino acids, gums and polymers which may improve drug solubility within the dosage form via hydrophobic/polar interaction. Our amino acid technologies are designed to offer simpler solutions to certain difficult formulation challenges. For example, our amino acid technologies are designed to successfully deliver poorly soluble drugs that are complex to formulate and difficult to manufacture using standard techniques and processes. The first of our amino acid patents will begin to expire in 2019.

Product Development

Our proprietary drug delivery technologies are applicable to a wide range of drugs with different physical and chemical properties, including water soluble and insoluble drugs, as well as high dose and low dose drugs. Using our CDT platforms, we can formulate drugs with precise release profiles. In selecting product candidates for development, we generally focus on the applicability of our platforms to a particular compound and benefits to patients, as well as market size, patent protection, competition and other factors.

Our CDT technologies have been used to develop several dietary supplement products that are currently manufactured and distributed by third parties. We currently receive royalties and other payments from the sale of products that incorporate our CDT technology, including combinations of glucosamine and chondroitin, calcium and other dietary products. These sales are being generated through our alliance with Perrigo, including relationships with national retailers. Our CDT glucosamine and chondroitin and calcium products are currently available nationwide.

We have also applied our CDT platforms to a portfolio of more than 20 pharmaceutical targets on a developmental demonstration basis. These target candidates include existing analgesic, cardiovascular, diabetes, anti-nausea, and pulmonary products. We have an internal development program targeting a select group of significant, existing drugs for reformulation in an effort to demonstrate the applicability and viability of our CDT platforms and for licensing to potential partners. We have engaged in development of CDT-based controlled release formulation of a number of products, including ibuprofen, pseudoephedrine, ondansetron, rivastigmine, and risperidone, as well as an immediate release formulations of raloxifene. We are currently evaluating additional drugs as potential CDT development candidates for expanding our growing portfolio of CDT applications. Although we are proceeding with development of our lead products, controlled release ibuprofen and pseudoephedrine, we are deferring significant expenditures on new projects as pending additional financing or partnership support.

The following tables summarize information regarding our current primary target candidates, clinical experience with other targets, and formulation work with other drugs and dietary supplements. These tables are qualified in their entirety by reference to the more detailed descriptions contained elsewhere in this annual report.

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Current Development Targets

Product	Application	Potential Advantages	Current Global Market Estimate(1)	Comments

12 hr Ibuprofen	OTC Analgesic	- 1st controlled release OTC ibuprofen - 1 tablet vs. 3 every 12 hrs. - Lower cost - Patent protected	>$1 billion (Includes all ibuprofen-containing products)	Successful Pivotal Phase III completed Actual Use Study required prior to FDA submission NDA 505(B)2 planned 2010

12 hr Pseudoephedrine	OTC Decongestant	- 1/3rd size of current OTC products - Lower cost - Patent protected	>$250 million (Includes all pseudoephedrine-containing products)	ANDA submitted August 2008 Complete Response Letter received January 2009 with minor (CMC) deficiencies noted

DRL Collaboration: Undisclosed CDT-based Rx target	Cardiopulmonary	- Lower cost - Patent protected - Other non-disclosed	Undisclosed	Confidential

(1)

Includes branded and generic products. Market data sources – Credit Suisse, IMS, Biopharm Insight, Verispan/VONA, IRI, SCOLR estimates.

Following are additional targets with completed clinical work pending additional financing or partnerships.

Clinical Experience

Product	Application	Comments

IR Raloxifene	Rx Osteoporosis	Two pilot pharmacokinetic trials completed

ER Ondansetron	Rx Anti-Nausea	Two pilot pharmacokinetic trials completed

ER Phenylephrine	OTC Decongestant	Initial pilot pharmacokinetic trial completed

ER Niacin	Cardiovascular	In-vivo performance comparable to Niaspan®

Niaspan® is a trademark of Abbott Laboratories.

Formulation Experience

Product	Application	Features

Fenofibrate (Tricor®)	Hypercholesterolemia, Hypertriglyceridemia	Novel immediate release tablet Novel solid dispersion formulation

Gabapentin (Lyrica®)	Pain Management	Novel 12 hour controlled release tablets

Tramadol (Ultram®)	Pain Management	Novel 12 and 24 hour controlled release tablets

Propranolol (Inderal LA®)	Beta-Blocker	Comparable to reference listed drug

Metoprolol (Toprol XL®)	Beta-Blocker	Comparable to reference listed drug

Diltiazem HCl (Dilacor®)	Ca channel Blocker	Comparable to reference listed drug

Nifedipine (Procardia®)	Ca channel Blocker	Comparable to reference listed drug

Verapamil (Covera-HS®)	Ca channel Blocker	Comparable to reference listed drug

Rivastigmine (Exelon®)	Alzheimer’s Disease	Novel 24 hour controlled release tablets

Risperidone (Risperdal®)	Schizophrenia/Bi-Polar	Novel 24 hour controlled release tablets

Glipizide (Glucotrol® XL)	Diabetes	Comparable to reference listed drug

Metformin (Glucophage® XR)	Diabetes	Comparable to reference listed drug

Dimenhydrinate (Dramamine®)	Motion Sickness	Novel 24 hour controlled release tablets

Theophylline (Theo-Dur®)	Asthma, Bronchodilator	Novel 12 hour controlled release tablets

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Tricor® is a trademark of Abbott Laboratories; Lyrica®, Procardia®, Glucotrol®, Dramamine® and Covera-HS® are trademarks of Pfizer; Ultram® and Risperdal® are trademarks of J&J; Inderal LA® is a trademark of Wyeth; Toprol® is a trademark of AstraZeneca; Dilacor® is a trademark of Watson; Exelon® is a trademark of Novartis; Glucophage® is a trademark of Bristol-Myers.

Dietary Supplements

Product	Features	Status

Glucosamine Chondroitin 500/400 (mg)	24 hour once daily tablets	- On Market

Glucosamine Chondroitin MSM 500/400/200 (mg)	24 hour once daily tablets	- On Market

Glucosamine Chondroitin (Sodium Free) 500/400 (mg)	12 hour controlled release tablets	- On Market

Glucosamine Sulfate 750 (mg)	12 hour controlled release tablets	- On Market

Calcium with Vitamin D 600/500 (mg/IU)	24 hour once daily tablets	- On Market

Vitamin C 500 (mg)	12 hour controlled release tablets (ascorbic acid delivered over 12 hrs)	- Available

Vitamin C 1000 (mg)	24 hour controlled release tablets (ascorbic acid delivered over 24 hrs)	- Available

Mineral Ascorbates 500 (mg)	12 hour controlled release tablets (ascorbic acid delivered over 12 hrs)	- Available

Niacin 250 (mg)	12 and 24 hour controlled release tablets	- Licensed

Caffeine 200 (mg)	10 hour controlled release tablets (for 12 hours of energy)	- Available

Guarana, Green Tea (200 mg Caffeine eq.)	10 hour controlled release tablets (for 12 hours of energy)	- Available

Novasoy®	Custom designed Pre-blends	- On Market (ADM)

Echinacea 400 (mg)	12 hour controlled release tablets	- Available

Ginkgo Biloba 120 (mg)	12 hour controlled release tablets	- Available

St. John's Wort 300 (mg)	12 hour controlled release tablets	- Available

Novasoy® is a trademark of the Archer Daniels Midland Company.

Development Status of Lead Products

Ibuprofen—We developed a controlled release formulation of ibuprofen based on our CDT platforms and continue preparations for submission of a New Drug Application, or NDA, for a 12-hour CDT-based ibuprofen product. Our pivotal Phase III clinical trial to evaluate the efficacy of our formulation achieved both primary endpoints and key secondary endpoints with no significant adverse events. The trial was a randomized, placebo controlled, double blind, parallel group study designed to evaluate the efficacy of multiple doses of ibuprofen 600 mg ER in dental pain following third molar extraction. The first primary endpoint was to demonstrate analgesic efficacy for the 8-12 hour period after the first dose as compared to placebo. The second primary endpoint measured the durability of effect of SCOLR’s formulation by the proportion of subjects in the controlled release group with meaningful improvement in pain intensity from baseline at all three assessment periods of 24, 36, and 48 hours. Both primary endpoints achieved positive, statistically significant results, at the p<0.0001 level. While we have undertaken the preparatory work for the actual use study required prior to submission of our NDA, we do not expect to be able to complete the required study without additional funding. There are currently no controlled release formulations of ibuprofen approved for use in North America. Based on industry sources, we estimate that global sales of ibuprofen are more than $1 billion per year.

Pseudoephedrine—We filed our first ANDA submission during August 2008. Our submission was accepted by the FDA in September 2008 (after 36 business days) and we received a complete response letter in January 2009. The complete response letter issued to us requests additional information in the area of Chemical Manufacturing and Controls, all of which was identified by the FDA as “minor.” The complete response letter is used to inform applicants of changes required in the application before an application can be approved, and

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communicates that the drug application will not be approved in its current form. We have initiated work to provide the additional information requested by the FDA. We believe our formulation will offer attractive tablet size and cost saving opportunities when compared to similar tablets already on the market. Based on industry sources, we estimate that aggregate North American sales of products containing pseudoephedrine have been more than $1 billion per year. However, our ability to commercialize products containing pseudoephedrine may be adversely impacted by legislative and market changes relating to diversion.

Raloxifene—We completed initial pilot pharmacokinetic clinical evaluations of CDT-based immediate release raloxifene formulations. While the results of those trials supported the advancement of an additional formulation and clinical work, we suspended further work on this compound pending additional funding or partnership interest. Raloxifene is used to prevent and treat osteoporosis. Additional studies would be required to provide further insight into the capabilities of the CDT-based technology and our ability to enhance bioavailability as well as to support development of a raloxifene product. Evista® is Eli Lilly’s immediate release raloxifene product for osteoporosis utilizing a complex solubilization technology. In 2007, Eli Lilly reported more than $1 billion in global sales of Evista.

Ondansetron—We completed initial pilot bioavailability testing of our refined 24-hour CDT-based ondansetron formulation. The results indicate that our amino acid formulation technology is capable of producing a once daily controlled release ondansetron tablet. We suspended further work on this compound pending additional funding or partnership interest. Ondansetron is the active ingredient in Zofran®, GlaxoSmithKline’s product for anti-nausea and vomiting associated with chemotherapy and radiation treatments for cancer.

Intellectual Property

We believe that patent and trade secret protection of our CDT platforms are important to our business and that our success will depend in part on our ability to maintain existing patent protection, obtain additional patents, maintain trade secret protection, and operate without infringing the proprietary rights of others. We have rights to five U.S. patents and three federal trademark registrations. Our policy is to pursue registrations for all of the trademarks associated with our key products and technologies. Our registered trademarks include: “CDT,” the CDT logo and design, and “SCOLR.”

Our CDT platforms are based on multiple issued and pending patents and other intellectual property for the programmed release or enhanced performance of active pharmaceutical ingredients and nutritional products. Our intellectual property includes two U.S. patents licensed exclusively to us by Temple University and two patent rights assigned to us by Dr. Reza Fassihi, a Professor of Biopharmaceutics and Industrial Pharmacy at the Temple University School of Pharmacy. Dr. Fassihi currently serves on our board of directors and is a consultant. Dr. Fassihi is also one of the inventors of the two patents licensed to us by Temple University. We are obligated to pay annual license maintenance fees, share in some up-front payments from customers, and pay royalties based on product sales with respect to the CDT patents licensed from Temple University or assigned to us by Dr. Fassihi. In the future, we plan to file further U.S. and foreign patent applications directed to new or improved products or processes.

We attempt 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. Our success will depend in part on our ability to obtain and maintain patent protection for our technologies, preserve our trade secrets, and operate without infringing the proprietary rights of others. However, the issuance of a patent is not conclusive as to its validity or as to the enforceable scope of the claims of the patent. Our competitors may challenge or circumvent any of our issued patents and the patents may not provide us proprietary protection or a commercial advantage. Furthermore, we cannot assure you that any of our future processes or products will be patentable or will not infringe upon the patents of third parties.

Competition

Our business is highly competitive and is affected by new technologies, government regulations, availability of financing, and other factors. In the drug delivery field, examples of our major competitors include, Biovail, Inc., Pacira Pharmaceutical Inc., Penwest, SkyePharma PLC, Depomed, Elan Corporation, PLC, Flamel Technologies, Inc., Impax Laboratories, Inc., Labopharm, Inc., and KV Pharmaceutical Company, as well as internal programs within many of the large pharmaceutical companies. The successful development and commercialization of major controlled-delivery prescription drugs can take five or more years and millions of dollars of research and clinical trials. These major competitors generally are better funded and equipped to fully realize the potential from new and unique patented drug delivery systems and are in possession of significantly stronger financial and research and development resources.

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Manufacturing

We currently have no internal commercial scale manufacturing capabilities. Generally, either our collaborators manufacture the pharmaceutical products or we use a contract manufacturer. Accordingly, we have to rely on third party manufacturers of the pharmaceutical products we are evaluating in clinical trials. We currently have agreements with Catalent Pharma Solutions, Inc. to support our efforts. We also work with Perrigo regarding the manufacturing of dietary supplements containing our CDT technology. Our dependence on third parties for the manufacture of our potential products and clinical supplies may adversely affect our ability to deliver such products in a timely or competitive basis.

Environmental Matters

Compliance with federal, state and local requirements which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment have not had, nor are they anticipated to have in the future, a material effect on our capital expenditures, earnings or competitive position.

Sources and Availability of Raw Materials and Principal Suppliers

Our technology allows for the use of conventional, readily available, GRAS excipients. A wide variety of materials can be used for our controlled delivery formulation development and are available from a large number of manufacturers and distributors. The active chemical raw materials essential to our business are generally readily available from multiple sources in the United States and throughout the world. Certain raw materials used in the manufacture of our products are, however, available from limited sources and, in some cases a single source. Any curtailment in the availability of such raw materials could result in production or other delays and, in the case of products for which only one raw material supplier exists or has been approved by the FDA, could result in material loss of sales with consequent adverse effects on our business and results of operations. During 2007 and 2006, regulatory restrictions impacted our ability to obtain commercial quantities of pseudoephedrine and resulted in delays to our development program. Also, because raw material sources for pharmaceutical products must generally be identified and approved by regulatory authorities, changes in raw material suppliers may result in production delays, higher raw material costs, and loss of sales and customers. We obtain a portion of our raw materials from foreign suppliers, and our arrangements with such suppliers are subject to, among other risks, FDA approval, governmental clearances, export duties, political instability, and restrictions on the transfers of funds.

Government Regulation

Government authorities in the United States and other countries extensively regulate the research, development, manufacture, labeling, promotion, advertising, distribution, and marketing of drug products. We must receive separate regulatory approval for each of our product candidates before we or our collaborators can sell them in the United States or internationally. In the United States, the FDA regulates drug products under the Federal Food, Drug, and Cosmetic Act, or FDCA, and implements regulations and other laws. Failure to comply with applicable U.S. requirements, both before and after approval, may subject us to administrative and judicial sanctions, such as a delay in approving or refusal by the FDA to approve pending applications, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, and/or criminal prosecutions.

The approval process requires substantial time, effort and financial resources, and we cannot be sure that any approval will be granted on a timely basis, or at all. There are several kinds of new drug applications, or NDAs, that may be submitted to obtain FDA approval of our or our collaborators’ drugs, including full NDAs; section 505(b)(2) NDAs; and abbreviated new drug applications, or ANDAs. A “full” NDA is an NDA in which the information required for approval, including investigations of safety and effectiveness, comes from studies conducted by or for the sponsor or for which the sponsor has obtained a right of reference. A section “505(b)(2)” NDA is an NDA in which at least some of the information required for approval comes from studies not conducted by or for the sponsor and for which the sponsor has not obtained a right of reference. An abbreviated new drug application, or ANDA, usually utilizes for proof of safety and effectiveness data demonstrating that the drug is “bioequivalent” to a drug which the FDA has previously approved.

NDAs: Approval of a full NDA by the FDA requires pre-clinical laboratory and animal tests and formulation studies; submission to the FDA of an Investigational New Drug Application for human clinical testing, which must be in effect before clinical trials can begin; and adequate and well-controlled clinical trials to establish safety and effectiveness of the product candidate for each indication for which approval is sought. To obtain approval an applicant must submit their application to the FDA; the FDA must complete a pre-approval inspection of manufacturing, analytical, and clinical research facilities to ensure that they are in compliance with cGMP, cGLP, local, state, and federal rules and regulations; and the FDA must deem the product safe and effective.”

505(b)(2) NDAs: Section 505(b)(2) applications contain the full reports of investigations of safety and effectiveness as a traditional NDA, but where at least some of the information required for approval comes from studies

not conducted by or for the applicant and for which the applicant has not obtained the right to reference. To obtain approval an applicant must submit its application to the FDA; the FDA must complete a pre-approval inspection of manufacturing, analytical, and clinical research facilities to ensure that they are in compliance with cGMP, cGLP, local, state, and federal rules and regulations; and the FDA must deem the product safe and effective.” Preparing a 505(b) (2) NDA is generally less costly and time-consuming than preparing a full NDA.

ANDAs: The FDA may approve an ANDA if the product is the same in important respects as an already approved drug, or if the FDA has declared the drug suitable for an ANDA submission. An ANDA contains information to show that the proposed product is identical in active ingredient, dosage form, strength, route of administration, labeling, quality, performance characteristics, and intended use to a previously approved product. To obtain approval an applicant must submit their application to the FDA; the FDA must complete a pre-approval inspection of manufacturing, analytical, and clinical research facilities to ensure that they are in compliance with cGMP, cGLP, local, state, and federal rules and regulations; and the FDA must deem the product safe and effective. Conducting bioequivalence studies is less time-consuming and costly than conducting pre-clinical and clinical studies necessary to support an NDA.

The testing and approval process requires substantial time, effort and financial resources, and each may take several years to complete. The FDA may not grant approval on a timely basis, or at all. We may encounter difficulties or unanticipated costs in our efforts to secure necessary government approvals, which could delay or preclude us from marketing our product candidates. The FDA may limit the indications for use or place other conditions on any approvals that could restrict the commercial application of our product candidates.

We use third party manufacturers to produce our product candidates in clinical and commercial quantities. Future inspections by the FDA may indentify compliance issues at the facilities of our contract manufacturers or collaborators that may disrupt production on distribution, or require substantial resources to connect. Also, new government requirements may be established that could delay or prevent regulatory approval of our product candidates under development.

Other FDA Requirements:

We and our collaborators are required to comply with a number of FDA requirements both before and after approval, regardless of the type of application submitted. For example, we are required to report certain adverse reactions and production problems, if any, to the FDA, and to comply with certain requirements concerning advertising and promotion for our products. Also, quality control and manufacturing procedures must continue to conform to cGMP after approval, and the FDA periodically inspects manufacturing facilities to assess compliance with cGMP. Accordingly, manufacturers must continue to expend time, money and effort in all areas of regulatory compliance, including production and quality control to comply with cGMP. In addition, discovery of issues such as safety problems may result in changes in labeling or restrictions on a product manufacturer or NDA holder, including removal of the product from the market. After approval, certain changes to the approved product, such as adding new indications, manufacturing changes, or additional labeling claims are subject to further FDA review and approval. In addition, the FDA may require post-approval studies.

Employees

As of December 31, 2008, we employed 17 employees, all of whom are full time. None of our employees is represented by labor unions. We believe our relationship with employees is good. On January 30, 2009, Dr. Bruce S. Mora joined us as Chief Executive Officer and President.

Executive Officers

Our executive officers are generally elected annually at the meeting of our board of directors held in conjunction with the annual meeting of stockholders. The following are our current executive officers and their ages as of March 1, 2009:

Name	Age	Office	Position Since
Bruce S. Morra	55	President and Chief Executive Officer	2009
Richard M. Levy	50	Vice President of Finance and Chief Financial Officer	2005
Alan M. Mitchel	52	Senior Vice President of Business and Legal Affairs	2005
Stephen J. Turner	38	Vice President, Chief Technical Officer	2003

The following sets forth the business experience, principal occupations and employment of each of our current executive officers.

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Bruce S. Morra, Ph.D., M.B.A., was appointed our President and Chief Executive Officer in January 2009. From 2004 to 2009, Dr. Morra was a consultant to companies in the pharmaceutical, medical device, drug delivery, biotech and polymers industries. From 2003 to 2004, Dr. Morra was president of West Pharmaceutical Services’ drug delivery and contract clinical research businesses. From 2002 to 2003, he was chief business officer of Progenitor Cell Therapy, LLC, a start-up company performing stem cell and other cell therapy process, device and drug contract research and manufacturing. From 1998 to 2004, Dr. Morra served as president, chief operating officer and chief financial officer of Biopore Corporation and its sister company Polygenetics, Inc. He serves on the boards of directors of InforMedix Holdings, Inc. and Unigene Laboratories, Inc. Dr. Morra earned his Ph.D. and M.S. in Polymer Science and Engineering and his M.B.A. from the University of Massachusetts, Ahmerst in 1980, after graduating magna cum laude in Chemical Engineering from Princeton University in 1976.

Richard M. Levy was appointed Chief Financial Officer and Vice President of Finance on June 8, 2006, and served as interim Chief Financial Officer and Vice President of Finance commencing December 15, 2005. Mr. Levy has experience as chief financial officer, controller, consultant and auditor. He served as the CFO for the specialty finance segment and corporate controller for Washington Mutual Bank. Mr. Levy worked for Bank of America for seven years. His experience there included serving as the senior vice president and controller of Bank of America Texas operations and also included coordinating all accounting activities and acting as chief financial officer for new acquisitions. His work at Bank of America also included international financial management experience in its international private banking and world banking divisions. His corporate financial duties included serving as director and as chief financial officer of various Bank of America subsidiaries. Mr. Levy earned his BA in business economics and accounting from the University of California, Santa Barbara and is licensed as a CPA.

Alan M. Mitchel has worked for SCOLR Pharma since January 2005 as Senior Vice President of Business and Legal Affairs and Chief Legal Officer. For more than five years prior to joining us, Mr. Mitchel practiced corporate law with private law firms in Seattle and Miami. Mr. Mitchel received an LLB from Duke University School of Law.

Stephen J. Turner has worked for SCOLR Pharma since the fall of 1999 and primarily has been responsible for the commercialization and application of our CDT platforms. In 2003, Mr. Turner was promoted to our Vice President and Chief Technical Officer. In addition to Mr. Turner’s involvement in our growth and application of our technology platforms, he is named on one patent issued to SCOLR, has contributed to numerous additional patent filings, has published articles in industry related publications, and has presented his research findings at numerous academic seminars and symposia. Mr. Turner is an active member in scientific organizations including AAPS (American Association of Pharmaceutical Scientists) and the Controlled Release Society. Mr. Turner holds a BS in biology with a minor in geochemistry from Western Washington University.

Item 1A.

Risk Factors

This annual report on Form 10-K contains forward looking statements that involve risks and uncertainties. Our business, operating results, financial performance, and share price may be materially adversely affected by a number of factors, including but not limited to the following risk factors, any one of which could cause actual results to vary materially from anticipated results or from those expressed in any forward-looking statements made by us in this annual report on Form 10-K or in other reports, press releases or other statements issued from time to time. Additional factors that may cause such a difference are set forth elsewhere in this annual report on Form 10-K.

We do not have sufficient cash to fund the development of our drug delivery operations. If we are unable to obtain additional financing during 2009, we will be required to curtail or cease operations.

We anticipate that, based on our current operating plan, our existing cash and cash equivalents, together with expected royalties from third parties, will be sufficient to fund our operations until late 2009. Our current operating plan reflects reductions in personnel, marketing and other expenses implemented during 2008. We are actively managing our liquidity by limiting our clinical and development expenses to our lead products and supporting our existing alliances and collaborations. We have deferred all significant expenditures on new projects as well as major expenditures for our lead products pending additional financing or partnership support. We plan to continue efforts to enter into collaboration and licensing agreements for our product candidates, including controlled release ibuprofen, that may provide additional funding for our operations. If we are unsuccessful with these efforts, we may have to curtail operations or cease operations.

We will need to raise additional capital to fund operations, conduct clinical trials, continue research and development projects, and commercialize our product candidates. The timing and amount of our need for additional financing will depend on a number of factors, including:

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the structure and timing of collaborations with strategic partners and licensees;

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our timetable and costs for the development of marketing operations and other activities related to the commercialization of our product candidates;

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the progress of our research and development programs and expansion of such programs;

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the emergence of competing technologies and other adverse market developments; and,

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the prosecution, defense and enforcement of potential patent claims and other intellectual property rights.

Additional equity or debt financing may not be available to us on acceptable terms, or at all. If we raise additional capital by issuing equity securities, substantial dilution to our existing stockholders may result which could decrease the market price of our common stock due to the sale of a large number of shares of our common stock in the market, or the perception that these sales could occur. These sales, or the perception of possible sales, could also impair our ability to raise capital in the future. In addition, the terms of any equity financing may adversely affect the rights of our existing stockholders. If we raise additional funds through strategic alliance or licensing arrangements, we may be required to relinquish rights to certain of our technologies or product candidates, or to grant licenses on terms that are unfavorable to us, which could substantially reduce the value of our business.

If we are unable to obtain sufficient additional financing, we would be unable to meet our obligations and we would be required to delay, reduce or eliminate some or all of our business operations, including the pursuit of licensing, strategic alliances and development of drug delivery programs.

We have a history of substantial operating losses and we expect to continue to incur substantial losses in the future, which may negatively impact our ability to run our business.

We have a history of operating losses and we expect to continue to incur significant losses in the future. We plan to continue the costly process of simultaneously conducting clinical trials and preclinical research for multiple product candidates. Our product development program may not lead to commercial products, either because our product candidates fail to be effective, are not attractive to the market, or because we lack the necessary financial or other resources or relationships to pursue our programs through commercialization. Our net losses are likely to continue as we advance preclinical research and clinical trials, apply for regulatory approvals, develop our product candidates, and support commercialization of our potential products.

We have funded our operations primarily through the issuance of equity securities and we may not be able to generate positive cash flow in the future. We need to seek additional funds through the issuance of equity securities or other sources of financing. If we are unable to obtain necessary additional financing, our ability to run our business will be adversely affected and we may be required to reduce the scope of our research and business activity or cease operations. These conditions raise substantial doubt about our ability to continue as a going concern. Consequently, the audit report prepared by our independent registered accounting firm relating to our financial statements for the year ended December 31, 2008 included a going concern explanatory paragraph.

Our limited experience in preparing applications for regulatory approval of our products, and our lack of experience in obtaining such approval, may increase the cost of and extend the time required for preparation of necessary applications.

Each OTC or pharmaceutical product we develop will require a separate costly and time consuming regulatory approval before we or our collaborators can manufacture and sell it in the United States or internationally. The regulatory process to obtain market approval for a new drug takes many years and requires the expenditure of substantial resources. We have had only limited experience in preparing applications and do not have experience in obtaining regulatory approvals. As a result, we believe we will rely primarily on third party contractors to help us prepare applications for regulatory approval, which means we will have less control over the timing and other aspects of the regulatory process than if we had our own expertise in this area. Our limited experience in preparing applications and obtaining regulatory approval could delay or prevent us from obtaining regulatory approval and could substantially increase the cost of applying for such approval.

We may not obtain regulatory approval for our products, which would materially impair our ability to generate revenue.

We may encounter delays or rejections during any stage of the regulatory approval process based upon the failure of clinical data to demonstrate compliance with, or upon the failure of the product to meet the FDA’s requirements for safety, efficacy, quality, and/or bioequivalence; and, those requirements may become more stringent due to changes in regulatory agency policy or the adoption of new regulations. For example, after submission of a marketing application, in the form of an NDA or ANDA, the FDA may deny the application, may require additional testing or data, and/or may

require post marketing testing and surveillance to monitor the safety or efficacy of a product. In addition, the terms of approval of any marketing application, including the labeling content, may be more restrictive than we desire and could affect the marketability of products incorporating our controlled release technology.

Certain products incorporating our technology will require the filing of an NDA. A full NDA must include complete reports of preclinical, clinical, and other studies to prove adequately that the product is safe and effective, which involves among other things, full clinical testing, and as a result requires the expenditure of substantial resources. In certain cases involving controlled release versions of FDA-approved immediate release products, we may be able to rely on existing publicly available safety and efficacy data to support an NDA for controlled release products under Section 505(b)(2) of the FDCA when such data exists for an approved immediate release or controlled release version of the same active chemical ingredient. We can provide no assurance, however, that the FDA will accept a Section 505(b)(2) NDA, or that we will be able to obtain publicly available data that is useful. The Section 505(b)(2) NDA process is a highly uncertain avenue to approval because the FDA’s policies on Section 505(b)(2) have not yet been fully developed. There can be no assurance that the FDA will approve an application submitted under Section 505(b)(2) in a timely manner or at all. Our inability to rely on the 505(b)(2) process would increase the cost and extend the time frame for FDA approvals.

If our clinical trials are not successful or take longer to complete than we expect, we may not be able to develop and commercialize our products.

In order to obtain regulatory approvals for the commercial sale of potential products utilizing our CDT platforms, we or our collaborators will be required to complete clinical trials in humans to demonstrate the safety and efficacy, or in certain cases, the bioequivalence, of the products. However, we or our collaborators may not be able to commence or complete these clinical trials in any specified time period, or at all, either because the appropriate regulatory agency objects or for other reasons, including:

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unexpected delays in the initiation of clinical sites;

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slower than projected enrollment of eligible patients;

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competition with other ongoing clinical trials for clinical investigators or eligible patients;

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scheduling conflicts with participating clinicians;

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limits on manufacturing capacity, including delays of clinical supplies; and,

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the failure of our products to meet required standards.

We also rely on academic institutions and clinical research organizations to conduct, supervise or monitor some or all aspects of clinical trials involving our product candidates. We have less control over the timing and other aspects of these clinical trials than if we conducted the monitoring and supervision on our own. Third parties may not perform their responsibilities for our clinical trials on our anticipated scheduled or consistent with a clinical trial protocol.

Even if we complete a clinical trial of one of our potential products, the clinical trial may not indicate that our product is safe or effective to the extent required by the FDA or other regulatory agency to approve the product. If clinical trials do not show any potential product to be safe, efficacious, or bioequivalent, or if we are required to conduct additional clinical trials or other testing of our products in development beyond those that we currently contemplate, we may be delayed in obtaining, or may not obtain, marketing approval for our products. Our product development costs may also increase if we experience delays in testing or approvals, which could allow our competitors to bring products to market before we do and would impair our ability to commercialize our products.

We face intense competition in the drug delivery business, and our failure to compete effectively would decrease our ability to generate meaningful revenues from our products.

The drug delivery business is highly competitive and is affected by new technologies, governmental regulations, health care legislation, availability of financing, litigation and other factors. Many of our competitors have longer operating histories and greater financial, research and development, marketing and other resources than we do. We are subject to competition from numerous other entities that currently operate or intend to operate in the industry. These include companies that are engaged in the development of controlled release drug delivery technologies and products as well as other manufacturers that may decide to undertake in-house development of these products. Some of our direct competitors in the drug delivery industry include Biovail, Inc., Penwest, SkyePharma PLC, Depomed, Elan, Flamel, Impax Laboratories, Inc., Labopharm, and KV Pharmaceuticals, Inc. Many of the major pharmaceutical companies also have internal drug delivery programs that may compete directly with our business.

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Many of our competitors have more extensive experience than we have in conducting preclinical studies and clinical trials, obtaining regulatory approvals, and manufacturing and marketing pharmaceutical products. Many competitors also have competing products that have already received regulatory approval or are in late-stage development, and may have collaborative arrangements in our target markets with leading companies and research institutions.

Our competitors may develop or commercialize more effective, safer or more affordable products, or obtain more effective patent protection, than we are able to develop, commercialize or obtain. As a result, our competitors may commercialize products more rapidly or effectively than we do, which would adversely affect our competitive position, the likelihood that our products will achieve market acceptance, and our ability to generate meaningful revenues from our products.

If we fail to comply with extensive government regulations covering the manufacture, distribution and labeling of our products, we may have to withdraw our products from the market, close our facilities or cease our operations.

Our products, potential products, and manufacturing and research activities are subject to varying degrees of regulation by a number of government authorities in the United States (including the Drug Enforcement Agency, FDA, Federal Trade Commission, and Environmental Protection Agency) and in other countries. For example, our activities, including preclinical studies, clinical trials, manufacturing, distribution, and labeling are subject to extensive regulation by the FDA and comparable authorities outside the United States. Also, our statements and our customers’ statements regarding dietary supplement products are subject to regulation by the FTC. The FTC enforces laws prohibiting unfair or deceptive trade practices, including false or misleading advertising. In recent years, the FTC has brought a number of actions challenging claims by nutraceutical companies.

Each OTC or pharmaceutical product we develop will require a separate costly and time consuming regulatory approval before we or our collaborators can manufacture and sell it in the United States or internationally. Even if regulatory approval is received, there may be limits imposed by regulators on a product’s use or it may face subsequent regulatory difficulties. Approved products are subject to continuous review and the facilities that manufacture them are subject to periodic inspections. Furthermore, regulatory agencies may require additional and expensive post-approval studies. If previously unknown problems with a product candidate surface, or the manufacturing or laboratory facility is deemed non-compliant with applicable regulatory requirements, an agency may impose restrictions on that product or on us, including requiring us to withdraw the product from the market, close the facility, and/or pay substantial fines.

We also may incur significant costs in complying with environmental laws and regulations. We are subject to federal, state, local and other laws and regulations governing the use, manufacture, storage, handling, and disposal of materials and certain waste products. The risk of accidental contamination or injury from these materials cannot be completely eliminated. If an accident occurs, we could be held liable for any damages that result and these damages could exceed our resources.

Our ability to commercialize products containing pseudoephedrine may be adversely impacted by retail sales controls, legislation, and other measures designed to counter diversion and misuse of pseudoephedrine in the production of methamphetamine, an illegal drug.

We are engaged in the development of a controlled release formulation of pseudoephedrine. On March 10, 2006, Congress enacted the Patriot Act, which included the Combat Methamphetamine Epidemic Act of 2005. Among its various provisions, this national legislation placed restrictions on the purchase and sale of all products containing pseudoephedrine and imposed quotas on manufacturers relating to the sale of products containing pseudoephedrine. Many states have also imposed statutory and regulatory restrictions on the manufacture, distribution and sale of pseudoephedrine products. We believe that such quotas and restrictions resulted in delays in obtaining materials necessary for the development of our pseudoephedrine product. Our ability to commercialize products containing pseudoephedrine and the market for such products may be adversely impacted by existing or new retail sales controls, legislation and market changes relating to diversion and misuse of pseudoephedrine in the production of methamphetamine.

If we cannot establish collaborative arrangements with leading individuals, companies and research institutions, we may have to discontinue the development and commercialization of our products.

We have limited experience in conducting full scale clinical trials, preparing and submitting regulatory applications, or manufacturing and selling pharmaceutical products. In addition, we do not have sufficient resources to fund the development, regulatory approval, and commercialization of our products. We expect to seek collaborative arrangements and alliances with corporate and academic partners, licensors and licensees to assist with funding research and development, to conduct clinical testing, and to provide manufacturing, marketing, and commercialization of our

product candidates. We may rely on collaborative arrangements to obtain the regulatory approvals for our products.

For our collaboration efforts to be successful, we must identify partners whose competencies complement ours. We must also enter into collaboration agreements with them on terms that are favorable to us and integrate and coordinate their resources and capabilities with our own. We may be unsuccessful in entering into collaboration agreements with acceptable partners or negotiating favorable terms in these agreements.

If we cannot establish collaborative relationships, we will be required to find alternative sources of funding and to develop our own capabilities to manufacture, market, and sell our products. If we were not successful in finding funding and developing these capabilities, we would have to terminate the development and commercialization of our products.

If our existing or new collaborations are not successful, we will have to establish our own commercialization capabilities, which would be expensive and time consuming and could delay the commercialization of the affected product.

Some of our products are being developed and commercialized in collaboration with corporate partners. Under these collaborations, we may be dependent on our collaborators to fund some portion of development, to conduct clinical trials, to obtain regulatory approvals for, and manufacture, market and sell products using our CDT platforms.

We have very limited experience in manufacturing, marketing and selling pharmaceutical products. There can be no assurance that we will be successful in developing these capabilities.

Our existing collaborations may be subject to termination on short notice. If any of our collaborations are terminated, we may be required to devote additional resources to the product covered by the collaboration, seek a new collaborator on short notice or abandon the product. The terms of any additional collaborations or other arrangements that we establish may not be favorable to us.

Our collaborations or other arrangements may not be successful because of factors such as:

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our collaborators may have insufficient economic motivation to continue their funding, research, development, and commercialization activities;

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our collaborators may discontinue funding any particular program, which could delay or halt the development or commercialization of any product candidates arising out of the program;

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our collaborators may choose to pursue alternative technologies or products, either on their own or in collaboration with others, including our competitors;

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our collaborators may lack sufficient financial, technical or other capabilities to develop these product candidates;

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we may underestimate the length of time that it takes for our collaborators to achieve various clinical development and regulatory approval milestones; or,

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our collaborators may be unable to successfully address any regulatory or technical challenges they may encounter.

We have no manufacturing capabilities and will be dependent on third party manufacturers.

We do not have commercial scale facilities to manufacture any products we may develop in accordance with requirements prescribed by the FDA. Consequently, we have to rely on third party manufacturers of the products we are evaluating in clinical trials. If any of our product candidates receive FDA or other regulatory authority approval, we will rely on third-party contractors to perform the manufacturing steps for our products on a commercial scale. We may be unable to identify manufacturers on acceptable terms or at all because the number of potential manufacturers is limited and the FDA and other regulatory authorities, as applicable, must approve any replacement manufacturer, including us, and we or any such third party manufacturer may be unable to formulate and manufacture our drug products in the volume and of the quality required to meet our clinical and commercial needs. We will be dependent upon these third parties to supply us in a timely manner with products manufactured in compliance with current good manufacturing practices (cGMPs) or similar manufacturing standards imposed by foreign regulatory authorities where our products will be tested and/or marketed. While the FDA and other regulatory authorities maintain oversight for cGMP compliance of drug manufacturers, contract manufacturers may at times violate cGMPs. The FDA and other regulatory authorities may take action against a contract manufacturer who violates cGMPs. We currently rely on Catalent Pharma Solutions, LLC (formerly Cardinal Health PTS, LLC) for the production of a number of our product candidates. If Catalent or other third

party manufacturers are unable to provide adequate products and services to us, we could suffer a delay in our clinical trials and the development of or the submission of products for regulatory approval. In addition, we would not have the ability to commercialize products as planned and deliver products on a timely basis, and we may have higher product costs or we may be required to cease distribution or recall some or all batches of our products.

If we fail to protect and maintain the proprietary nature of our intellectual property, our business, financial condition and ability to compete would suffer.

We principally rely on patent, trademark, copyright, trade secret and contract law to establish and protect our proprietary rights. We own or have exclusive rights to several U.S. patents and patent applications and we expect to apply for additional U.S. and foreign patents in the future. The patent positions of pharmaceutical, nutraceutical, and bio-pharmaceutical firms, including ours, are uncertain and involve complex legal and factual questions for which important legal issues are largely unresolved. The coverage claimed in our patent applications can be significantly reduced before a patent is issued, and the claims allowed on any patents or trademarks we hold may not be broad enough to protect our technology. In addition, our patents or trademarks may be challenged, invalidated or circumvented, or the patents of others may impede our collaborators’ ability to commercialize the technology covered by our owned or licensed patents. Moreover, any current or future issued or licensed patents, or trademarks, or existing or future trade secrets or know-how, may not afford sufficient protection against competitors with similar technologies or processes, and the possibility exists that certain of our already issued patents or trademarks may infringe upon third party patents or trademarks or be designed around by others. In addition, there is a risk that others may independently develop proprietary technologies and processes that are the same as, or substantially equivalent or superior to ours, or become available in the market at a lower price. There is a risk that we have infringed or in the future will infringe patents or trademarks owned by others, that we will need to acquire licenses under patents or trademarks belonging to others for technology potentially useful or necessary to us, and that licenses will not be available to us on acceptable terms, if at all. We cannot assure you that:

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our patents or any future patents will prevent other companies from developing similar or functionally equivalent products or from successfully challenging the validity of our patents;

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any of our future processes or products will be patentable;

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any pending or additional patents will be issued in any or all appropriate jurisdictions;

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our processes or products will not infringe upon the patents of third parties; or,

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we will have the resources to defend against charges of patent infringement by third parties or to protect our own patent rights against infringement by third parties.

We may have to litigate to enforce our patents or trademarks or to determine the scope and validity of other parties’ proprietary rights. Litigation could be very costly and divert management’s attention. An adverse outcome in any litigation could adversely affect our financial results and stock price.

We also rely on trade secrets and proprietary know-how, which we seek to protect by confidentiality agreements with our employees, consultants, advisors, and collaborators. There is a risk that these agreements may be breached, and that the remedies available to us may not be adequate. In addition, our trade secrets and proprietary know-how may otherwise become known to or be independently discovered by others.

Significant expenses in applying for patent protection and prosecuting our patent applications will increase our need for capital and could harm our business and financial condition.

We intend to continue our substantial efforts in applying for patent protection and prosecuting pending and future patent applications both in the United States and internationally. These efforts have historically required the expenditure of considerable time and money, and we expect that they will continue to require significant expenditures. If future changes in United States or foreign patent laws complicate or hinder our efforts to obtain patent protection, the costs associated with patent prosecution may increase significantly.

If we fail to attract and retain key executive and technical personnel we could experience a negative impact on our ability to develop and commercialize our products and our business will suffer.

The success of our operations will depend to a great extent on the collective experience, abilities and continued service of relatively few individuals. We are dependent upon the continued availability of the services of our employees, many of whom are individually key to our future success. For example, if we lose the services of Dr. Bruce S. Morra, our Chief Executive Officer and President, or our Vice President and Chief Technical Officer, Stephen J. Turner, we could experience a negative impact on our ability to develop and commercialize our CDT technology, our financial results, and

our stock price. We also rely on members of our scientific staff for product research and development. The loss of the services of key members of this staff could substantially impair our ongoing research and development and our ability to obtain additional financing. We do not carry key man life insurance on any of our personnel.

Our success also significantly depends upon our ability to attract and retain highly qualified personnel. We face intense competition for personnel in the drug delivery industry. To compete for personnel, we may need to pay higher salaries and provide other incentives than those paid and provided by more established entities. Our limited financial resources may hinder our ability to provide such salaries and incentives. Our personnel may voluntarily terminate their relationship with us at any time, and the process of locating additional personnel with the combination of skills and attributes required to carry out our strategy could be lengthy, costly, and disruptive. If we lose the services of key personnel, or fail to replace the services of key personnel who depart, we could experience a severe negative impact on our financial results and stock price.

Future laws or regulations may hinder or prohibit the production or sale of our products.

We may be subject to additional laws or regulations in the future, such as those administered by the FDA or other federal, state or foreign regulatory authorities. Laws or regulations that we consider favorable, such as the Dietary Supplement Health and Education Act, DSHEA, may be repealed. Current laws or regulations may be interpreted more stringently. We are unable to predict the nature of such future laws, regulations or interpretations, nor can we predict what effect they may have on our business. Possible effects or requirements could include the following:

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the reformulation of certain products to meet new standards;

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the recall or discontinuance of certain products unable to be reformulated;

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imposition of additional record keeping requirements;

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expanded documentation of the properties of certain products; or,

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expanded or different labeling, or scientific substantiation.

Any such requirement could have a material adverse effect on our results of operations and financial condition.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed.

The NYSE Alternext U.S. (formerly the American Stock Exchange, or AMEX) may consider delisting our common stock.

Section 1003 of the AMEX Company Guide (Application of Policies) provides that the AMEX may cause our common stock to be delisted under certain circumstances, including in connection with our failure to maintain stockholders' equity of at least $6,000,000, or where our financial condition has become so impaired that it appears questionable, in the opinion of the AMEX, as to whether we will be able to continue operations and/or meet our obligations as they mature. In the event we are unable to increase our revenue, obtain additional financing or otherwise obtain funding for our ongoing operations, our stockholders' equity may fall below the $6,000,000 threshold, or the AMEX may determine to delist our common stock based on our financial condition. If we are delisted from the AMEX then our common stock will trade, if at all, only on the over-the-counter markets, such as the OTC Bulletin Board securities market, and then only if one or more registered broker-dealer market makers comply with quotation requirements. In addition, delisting of our common stock could further depress our stock price, substantially limit the liquidity of our common stock and materially adversely affect our ability to raise capital on terms acceptable to us, or at all. Delisting from AMEX could also have other negative results, including the potential loss of confidence by suppliers and employees, the loss of institutional investor interest and fewer business development opportunities.

A significant number of shares of our common stock are or will be eligible for sale in the open market, which could drive down the market price for our common stock and make it difficult for us to raise capital.

As of December 31, 2008, 41,130,270 shares of our common stock were outstanding, and there were 7,615,481 shares of our common stock issuable upon the exercise of outstanding options, and warrants. Our stockholders may experience substantial dilution if we raise additional funds through the sale of equity securities, and sales of a large number of shares by us or by existing stockholders could materially decrease the market price of our common stock and

make it more difficult for us to raise additional capital through the sale of equity securities. The risk of dilution and the resulting downward pressure on our stock price could also encourage stockholders to engage in short sales of our common stock. By increasing the number of shares offered for sale, material amounts of short selling could further contribute to progressive price declines in our common stock.

Our stock price is subject to significant volatility.

The market price of our common stock could fluctuate significantly. Those fluctuations could be based on various factors in addition to those otherwise described in this report, including:

•

general conditions in the healthcare industry;

•

general conditions in the financial markets;

•

our failure or the failure of our collaborative partners, for any reason, to obtain FDA approval for any of our products or products we license;

•

for those products that are ultimately approved by the FDA, the failure of the FDA to approve such products in a timely manner consistent with the FDA’s historical approval process;

•

our failure, or the failure of our third-party partners, to successfully commercialize products approved by the FDA;

•

our failure to generate product revenues anticipated by investors;

•

problems with our sole contract manufacturer;

•

the exercise of our right to redeem certain outstanding warrants to purchase our common stock;

•

the sale of additional debt and/or equity securities by us;

•

announcements by us or others of the results of preclinical testing and clinical trials and regulatory actions, technological innovations or new commercial therapeutic products; and,

•

developments or disputes concerning patent or any other proprietary rights.

Certain provisions in our charter documents and otherwise may discourage third parties from attempting to acquire control of our company, which may have an adverse effect on the price of our common stock.

Our board of directors has the authority, without obtaining stockholder approval, to issue up to 5,000,000 shares of preferred stock and to fix the rights, preferences, privileges and restrictions of such shares without any further vote or action by our stockholders. Our certificate of incorporation and bylaws also provide for special advance notice provisions for proposed business at annual meetings. In addition, Delaware and Washington law contain certain provisions that may have the effect of delaying, deferring or preventing a hostile takeover of our company. Further, we have a stockholder rights plan that is designed to cause substantial dilution to a person or group that attempts to acquire our company without approval of our board of directors, and thereby make a hostile takeover attempt prohibitively expensive for a potential acquiror. These provisions, among others, may have the effect of making it more difficult for a third party to acquire, or discouraging a third party from attempting to acquire, control of our company, even if stockholders may consider such a change in control to be in their best interests, which may cause the price of our common stock to suffer.

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

Our corporate headquarters, including administrative offices and research and development facilities, are located approximately 20 miles northeast of Seattle, Washington at 19204 North Creek Parkway, Suite 100, Bothell, Washington 98011.

1. The property, consisting of approximately 20,468 square feet, is leased until January 31, 2016.

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Item 3.

Legal Proceedings

We are not a party to any material litigation.

Item 4.

Submission of Matters to a Vote of Securities Holders

No matters were submitted to our stockholders during the quarter ended December 31, 2008.

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PART II

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the NYSE Alternext US Exchange under the symbol “DDD.” The last sale price of our common stock as reported on the NYSE Alternext US on March 6, 2009, was $0.44 per share. The following table sets forth the range of high and low close prices for our common stock as reported on the NYSE Alternext US Exchange for each full quarterly period from January 1, 2007, through December 31, 2008.

COMMON STOCK

2008	High		Low
First Quarter	$	1.41	$	1.03
Second Quarter		1.30		.93
Third Quarter		1.19		.79
Fourth Quarter		1.04		.49

2007
First Quarter	$	4.80	$	2.07
Second Quarter		2.82		2.21
Third Quarter		3.00		1.62
Fourth Quarter		3.89		1.17

As of March 6, 2009, we had 1,198 stockholders of record. We have not paid or declared any dividends upon our common stock since inception and do not contemplate or anticipate paying any dividends upon the common stock in the foreseeable future.

EQUITY COMPENSATION PLAN INFORMATION

Information relating to our equity compensation plans is incorporated by reference to the definitive proxy statement for our 2009 annual meeting of stockholders. Additional information regarding our equity compensation plans is provided in Note 12 to our financial statements in this annual report.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

We are a specialty pharmaceutical company. Our corporate objective is to combine our formulation experience and knowledge with our proprietary and patented Controlled Delivery Technology (CDT®) platforms to develop novel pharmaceutical, OTC, and nutritional products. Our CDT platforms are based on multiple issued and pending patents and other intellectual property for the programmed release or enhanced performance of active pharmaceutical ingredients and nutritional products. Our strategy includes a significant commitment to research and development activities in connection with our drug delivery platforms. Our results of operations going forward depend on our ability to commercialize our products and technology and generate royalties, licensing fees, development fees, milestone and similar payments.

We expect our operating losses and negative cash flow to continue as we advance preclinical research an actual use study and related work to support applications for regulatory approvals and commercialization of our product candidates. We will need to raise additional capital to fund operations, continue research and development projects, and commercialize our products. The issuance of a large number of additional equity securities could cause substantial dilution to existing stockholders and could cause a decrease in the market price for shares of our common stock, which could impair our ability to raise capital in the future through the issuance of equity securities. We may not be able to secure additional financing on favorable terms, or at all. If we are unable to obtain necessary additional financing, our business will be adversely affected and we may be required to reduce the scope of our development activities or discontinue operations.

During September 2008, we relocated our offices to Bothell, Washington and received the remaining $3.1 million of the $4.1 million payment for termination of our lease in Bellevue, Washington. We have taken other steps to reduce expenses, including reductions in personnel and marketing, and the termination of a lease for additional space in Bellevue, Washington. We are actively managing our liquidity and capital resources by deferring significant expenses on development activities pending additional financing or partnership opportunities

Critical Accounting Policies and Estimates

Our financial statements are presented in accordance with accounting principles that are generally accepted in the United States. All professional accounting standards effective as of December 31, 2008, have been taken into

consideration in preparing the financial statements. The preparation of the financial statements requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Some of those estimates are subjective and complex, and, therefore, actual results could differ from those estimates. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements.

Revenue Recognition

We generate revenue from collaborative agreements, licensing fees, and from the assignment of developed and patented technology. We must exercise judgment and use estimates to determine the amount of revenue to recognize each period. Revenue under collaborative arrangements may take the form of up-front payments, payments for milestones, reimbursement of research and development costs, and licensing payments. We recognize license revenue from intellectual technology agreements. The payments received under these research collaboration agreements are contractually not refundable even if the research effort is not successful. Performance under our collaborative agreements is measured by scientific progress, as mutually agreed upon by us and our collaborators.

Up-front Payments. Up-front payments from our research collaborations include payments for technology transfer and access rights. Non-refundable, up-front payments received in connection with collaborative research and development agreements are deferred and recognized as licensing fees on a straight-line basis over the relevant periods specified in the agreement, generally the research term. When the research term is not specified in the agreement and instead the agreement specifies the completion or attainment of a particular development goal, we make an estimate of the time required to achieve that goal considering our experience with similar projects, level of effort and the development stage of the project. We review the basis of our revenue recognition and adjust it as necessary based on the status of the project against the estimated timeline as additional information becomes available.

License Fees. Non-refundable license fees where we have completed all future obligations are recognized as revenue in the period when persuasive evidence of an agreement exists, delivery has occurred, collectability is reasonably assured and the price is fixed and determinable.

Royalty Income. Royalties from licensees are based on reported sales of licensed products and revenue is calculated based on contract terms when reported sales are reliably measurable and collectability is reasonably assured.

Research and Development Income. Revenues from milestone payments are recognized when the milestone has been achieved, as long as the achievement of the milestone was not reasonably assured at the inception of the arrangement, there was substantial effort involved in achieving the milestone, the amount of the milestone payment is reasonable in relation with the level of effort associated with the achievement of the milestone, and the payment is non-refundable. Each milestone event must have substance, and must represent the achievement of specific defined goals. Reimbursements of research and development expenses we incur in connection with collaborative agreements are recognized as revenue at the time these amounts are determined to be measurable, reliable, and collectable.

Our judgment in determining the collectability of amounts due impacts the timing of revenue recognition. Credit worthiness and collectability are assessed, and when a party is not deemed credit worthy, revenue is recognized when payment is received. We also assess whether fees are fixed or determinable prior to recognizing revenue. We must make interpretations of our customer contracts and use estimates and judgments in determining if the fees associated with a license arrangement are fixed or determinable. In applying these criteria to revenue transactions, we must exercise judgment and use estimates to determine the amount of up-front payments, license fees, research and development income, and royalty income revenue to be recognized each period.

Deferred Taxes—Valuation Allowance

We make estimates and use our judgment in determining the provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against net deferred tax assets. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we may consider any potential future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period in which we made such determination. At December 31, 2008, we had recorded full valuation totaling approximately $18.0 million against our net deferred tax assets.

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Results of Operations

Fiscal 2008 Compared to Fiscal 2007

Revenues

Total revenues for the year ended December 31, 2008, were $958,320, a decrease of 51%, compared to $2.0 million for the same period in 2007. This decrease is primarily due to the higher level of research and development fees and licensing revenues in 2007 relating to a license agreement terminated in March 2007.

Royalty revenue from our CDT-based product sales of dietary supplement markets decreased 19%, or $219,164 to $958,320 for the year ended December 31, 2008, compared to $1.2 million for the same period in 2007 as a result of royalties generated through our alliance with Perrigo. Royalty payments from Perrigo are based solely on Perrigo’s net profits of CDT-based products which involve uncertainties and are difficult to predict. Revenues from Nutraceutix declined in 2008 as our license terminated on December 31, 2007 and Nutraceutix had limited rights to continue sales of certain inventory during 2008.

In the first quarter of 2007, we received approximately $600,000 in research and development milestone payments, and recognized previously deferred licensing fee income of approximately $173,000 associated with our agreement with Wyeth Consumer Healthcare. The December 2005 agreement with Wyeth provided for an upfront fee of $250,000 which was recorded as deferred revenue and was being amortized over the development period until the contract was terminated in March 2007, at which time the remaining balance was recorded to income.

Marketing and Selling Expenses

Marketing and selling expenses decreased 28%, or $264,021, to $672,675 for the year ended December 31, 2008, compared to $936,696 for the same period in 2007, primarily due to a decrease of $84,516 in advertising, tradeshow activities and related travel. In addition, payroll and related expenses decreased $133,129 in 2008 due to the reduction in staff early in the year and non-cash share-based compensation expense resulting from the lower fair value of stock options granted.

Research and Development Expenses

Research and development expenses decreased 19%, or $1.5 million, to $6.3 million for the year ended December 31, 2008, compared to $7.8 million for the same period in 2007. The decrease of $1.5 million was primarily due to our decision to defer development activities on certain projects pending additional funding. In addition, non-cash, share based compensation expense decreased $211,843 related to annual employee stock option grants due to the lower fair value of the stock options. These decreases were offset by an increase in outside consulting expense of $221,197 related to regulatory activities associated with our ibuprofen and pseudoephedrine projects.

General and Administrative Expenses

General and administrative expenses decreased 4%, or $198,259, to $4.4 million for the year ended December 31, 2008, compared to $4.6 million for the same period in 2007. This decrease is primarily due to a decrease in non-cash, share-based compensation expense of $158,143 related to employee stock option grants due to the lower fair value of the stock options and a lower bonus expense of $105,084. These decreases were offset by an increase in personnel expense of $64,084 for severance costs and annual increases in employee compensation.

Lease Termination

In May 2008, we entered into a lease termination and surrender agreement, under which we agreed to terminate the lease for our corporate facility for $4.1 million. Under the terms of the agreement, we received $1.0 million upon execution of the agreement and the remaining $3.1 million in September 2008, when we vacated the premises. We incurred costs of $116,867 related to relocation to our new facility and the lease buyout which were recognized in operating expense in September 2008.

Other Income (Expense), Net

Other income decreased 68%, or $453,634, to $215,593 for the year ended December 31, 2008, compared to $669,227 for the same period in 2007. This decrease was primarily due to a decrease in interest income due to lower cash balances and interest rates.

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Net Loss

Net loss decreased 42%, or $4.5 million, to $6.1 million for the year ended December 31, 2008, compared to $10.6 million for the same period in 2007. This decrease was primarily due to the gain of $4.1 million from the Lease Termination and Surrender Agreement associated with our corporate facility.

Liquidity and Capital Resources

We had approximately $6.4 million in cash and cash equivalents, and $473,711 in restricted cash as of December 31, 2008. We are investing our cash and cash equivalents in government-backed securities. We have limited capital resources and operations to date have been funded primarily with the proceeds from public and private equity and debt financings, and collaborative research agreements. Based on our current operating plan, we anticipate that our existing cash and cash equivalents, together with expected royalties from third parties, will be sufficient to fund our operations until late 2009. We are pursing new partnerships as well as collaborations, and exploring other financing options that would enable us to provide additional funding for our operations. However, we cannot be assured that financing will be available.

Our business will require substantial additional investment that we have not yet secured. Our plan is to raise capital and/or to pursue partnering opportunities. Our current operating plan reflects reductions in personnel, marketing and other operating expenses implemented in 2008. We are actively managing our liquidity by limiting clinical and development expenses to our lead products and supporting our existing alliances and collaborations. We have deferred all significant expenditures on new projects pending additional financing or partnership support. Without additional funding we do not expect to be able to complete development of our current projects

We plan to continue efforts to enter into collaboration and licensing agreements for our product candidates and seek other sources of capital to provide additional funding for our operations. We cannot be assured that financing will be available on favorable terms or at all. Our failure to raise capital, including financial support from partnerships or other collaborations, in 2009 will materially adversely affect our business, financial condition and results of operations, and could force us to reduce or cease operations. These conditions raise substantial doubt about our ability to continue as a going concern. Consequently, the audit report prepared by our independent registered public accounting firm relating to our financial statements for the year ended December 31, 2008 included a going concern explanatory paragraph.

In November 2005, the Securities and Exchange Commission declared effective our registration statement that we filed using a “shelf” registration process which expired on December 1, 2008. Under this registration statement, we offered from time-to-time, one or more offerings of common stock and/or warrants to purchase common stock under this shelf registration up to an aggregate public offering price of $40 million. Registered direct offerings were completed on December 4, 2007, and April 21, 2006, for approximately $3.6 million and $10.9 million respectively.

On November 14, 2008, we filed a new shelf registration statement in the amount of $40 million. At the time the new shelf registration was filed, $21.0 million remained available for issuance under the November 2005 filing. On November 25, 2008, the Securities and Exchange Commission declared our registration statement effective. Under this registration statement, we may offer from time-to-time, one or more offerings of common stock and/or warrants to purchase common stock under this shelf registration up to an aggregate public offering price of $40 million. If additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities will result in dilution to our existing stockholders.

Cash flows from operating activities—Net cash used in operating activities for the year ended December 31, 2008, was approximately $4.7 million compared to $7.8 million for the year end December 31, 2007. Expenditures for the year ended December 31, 2008, decreased approximately $2.0 million. In addition, during the year ended December 31, 2008, operating revenues decreased approximately $1.0 million due to lower royalty income and no research and development revenue. In addition, we received a cash payment of $4.1 million related to our facility lease buyout, which was recognized as a reduction to operating expense in September 2008.

Cash flows from investing activities—Cash flows used by investing activities of $695,001 represents restricted cash of $473,711 plus payments made for patent rights during the year ended December 31, 2008. The restricted cash is collateral for the outstanding letter of credit issued as collateral for our new facility lease. Cash flows provided by investing activities of $407,088 during the year ended December 31, 2007, primarily represented the application of maturing short-term investments to fund operating activities, off-set by purchases of patent rights and equipment.

Cash flows from financing activities— Cash flows used in financing activities of $39,961 represent the cash received of $40,086 from the exercise of stock options and warrants offset by payments made on our term loan during the year ended December 31, 2008. In the year ended December 31, 2007, cash flows from financing activities primarily

represented the proceeds from the sale of common stock, a term loan to purchase a piece of equipment to be used in our research and development activities, and the exercise of stock options and warrants.

As of December 31, 2008, we had $5.8 million of working capital compared to $11.1 million as of December 31, 2007. We have accumulated net losses of approximately $64 million from our inception through December 31, 2008. We have funded our operations primarily through the issuance of equity securities, including $3.6 million and $10.9 million in net proceeds from our registered direct offerings in December 2007 and April 2006, respectively, and $14.1 million from our private placement in February 2005.

New Accounting Pronouncements

In January 2008, the Financial Accounting Standards Board (FASB) ratified a consensus opinion reached by the Emerging Issues Task Force (EITF) on EITF Issue 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock,” to provide guidance for determining whether an equity-linked financial instrument or embedded feature is considered indexed to an entity’s own stock. The consensus establishes a two-step approach as a framework for determining whether an instrument or embedded feature is indexed to an entity’s own stock. The approach includes evaluating (1) the instrument’s contingent exercise provisions, if any, and (2) the instrument’s settlement provisions.

Entities that issue financial instruments such as warrants or options on their own shares, convertible debt, convertible preferred stock, forward contracts on their own shares, or market-based employee stock option valuation instruments will be affected by EITF Issue 07-5.

We intend to adopt EITF Issue 07-5 effective January 1, 2009, and apply its provisions to its outstanding instruments as of that date, as well as to instruments issued subsequent to that date. We do not believe there will be a material impact to its financial statements upon adoption on January 1, 2009.

In February 2008, the FASB issued FASB Staff Position No. SFAS 157-2, “Effective Date of FASB Statement No. 157”, which provides a one-year deferral of the effective date of FAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Effective June 1, 2008, we adopted the provisions of SFAS No. 157 with respect to our financial assets and liabilities recorded at fair value. We do not believe there will be a material impact on our financial statements upon adoption.

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Item 8.

Financial Statements and Supplementary Data

CONTENTS

	Page
Report of Independent Registered Public Accounting Firm	28
Financial Statements
Balance Sheets	29
Statements of Operations	30
Statement of Stockholders’ Equity	31
Statements of Cash Flows	32
Notes to Financial Statements	33

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Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders of SCOLR Pharma, Inc.

We have audited the accompanying balance sheets of SCOLR Pharma, Inc. (a Delaware corporation) (the “Company”) as of December 31, 2008, and 2007, and the related statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SCOLR Pharma, Inc. as of December 31, 2008, and 2007, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company incurred a net loss of $6.1 million during the year ended December 31, 2008, and, as of that date, the Company had net working capital of $5.8 million. These factors, among others, as discussed in Note 2 to the financial statements, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ GRANT THORNTON LLP

Seattle, Washington

March 9, 2009

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SCOLR Pharma, Inc.

BALANCE SHEETS

	December 31,
	2008			2007
ASSETS
Current Assets
Cash and cash equivalents	$	6,363,243		$	11,825,371
Accounts receivable		177,253			225,900
Interest and other receivables		1,157			16
Prepaid expenses		286,539			423,213
Total current assets		6,828,192			12,474,500

Property and equipment—net		790,947			748,931
Intangible assets—net		557,639			464,023
Restricted cash		473,711			—
Total assets	$	8,650,489		$	13,687,454

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	238,701		$	757,420
Accrued liabilities		668,694			586,849
Current portion of term loan		87,850			80,047
Total current liabilities		995,245			1,424,316

Long-term portion of term loan		23,269			111,119
Deferred rent		310,010			—
Total liabilities		1,328,524			1,535,435

Commitments and Contingencies (Notes 6 and 10)		—			—

Stockholders’ Equity
Preferred stock, authorized 5,000,000 shares, $0.01 par value, none issued or outstanding		—			—
Common stock, authorized 100,000,000 shares, $0.001 par value, 41,130,270 and 40,991,385 issued and outstanding as of December 31, 2008 and 2007, respectively		41,130			40,991
Additional contributed capital		71,255,901			69,945,666
Accumulated deficit		(63,975,066	)		(57,834,638	)
Total stockholders’ equity		7,321,965			12,152,019
Total liabilities and stockholders’ equity	$	8,650,489		$	13,687,454

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

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SCOLR Pharma, Inc.

STATEMENTS OF OPERATIONS

	Year Ended December 31,
	2008			2007
Revenues
Licensing fees	$	—		$	173,077
Royalty		958,320			1,177,484
Research and development		—			621,222
Total revenues		958,320			1,971,783

Operating expenses
Marketing and selling		672,675			936,696
Research and development		6,268,152			7,768,346
General and administrative		4,356,647			4,554,906

Facility Lease termination
Gain from lease buyout		(4,100,000	)		—
Expenses related to relocation and lease buyout		116,867			—
Total facility lease buyout		(3,983,133	)		—
Total operating expenses		7,314,341			13,259,948
Loss from operations		( 6,356,021	)		(11,288,165	)

Other income (expense)
Interest expense		(14,482	)		(15,724	)
Interest income		229,837			682,010
Other		238			2,941
Total other income (expense)		215,593			669,227
Net loss	$	(6,140,428	)	$	(10,618,938	)
Net loss per share, basic and diluted	$	(0.15	)	$	(0.28	)
Shares used in calculation of basic and diluted net loss per share		41,038,797			38,348,560

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

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SCOLR Pharma, Inc.

STATEMENT OF STOCKHOLDERS’ EQUITY

Years Ended December 31, 2008 and 2007

	Common Stock
	Number of Shares		Amount		Additional Contributed Capital			Accumulated Deficit			Accumulated Other Comprehensive Gain (Loss)			Total
Beginning Balance at January 1, 2007		38,048,146	$	38,048	$	64,472,277		$	(47,215,700	)	$	55		$	17,294,680
Issuance of common stock in direct offering		2,781,100		2,781		3,626,425			—			—			3,629,206
Exercise of common stock options		120,333		120		137,866			—			—			137,986
Exercise of warrants		41,806		42		(42	)		—			—			—
Share-based compensation issued for employee services		—		—		1,674,453			—			—			1,674,453
Share-based compensation issued for non-employee services		—		—		34,687			—			—			34,687
Unrealized loss on short-term investments		—		—		—			—			(55	)		(55	)
Net loss		—		—		—			(10,618,938	)		—			(10,618,938	)
Comprehensive loss		—		—		—			—			—			(10,618,993	)
Balance at December 31, 2007		40,991,385	$	40,991	$	69,945,666		$	(57,834,638	)	$	—		$	12,152,019
Exercise of common stock options		126,500		127		39,959			—			—			40,086
Exercise of warrants		12,385		12		(12	)		—			—			—
Share-based compensation issued for employee services		—		—		1,270,288			—			—			1,270,288
Net loss		—		—		—			(6,140,428	)		—			(6,140,428	)
Balance at December 31, 2008		41,130,270	$	41,130	$	71,255,901		$	(63,975,066	)	$	—		$	7,321,965

The accompanying notes are an integral part of this financial statement.

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SCOLR Pharma, Inc.

STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2008			2007
Cash flows from operating activities:
Net loss	$	(6,140,428	)	$	(10,618,938	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		419,854			401,643
Loss on disposal of equipment		1,091			5,700
Share-based compensation for non-employee services		—			34,687
Share-based compensation for employee services		1,270,288			1,674,453
Write-off of long-term assets		38,424			21,762
Changes in assets and liabilities:
Accounts and other receivables		47,506			654,280
Prepaid expenses and other assets		136,674			(76,077	)
Accounts payable and accrued expenses		(500,575	)		330,046
Deferred revenue		—			(185,577	)
Net cash used in operating activities		(4,727,166	)		(7,758,021	)
Cash flows from investing activities:
Purchase of equipment and furniture		(3,933	)		(353,829	)
Patent and technology rights payments		(217,357	)		(232,571	)
Purchase of short-term investments		—			(1,323,761	)
Maturities and sales of short-term investments		—			2,317,249
Restricted cash		(473,711	)		—
Net cash (used in) provided by investing activities		(695,001	)		407,088
Cash flows from financing activities:
Proceeds from term loan		—			246,500
Payments on long-term obligations and capital lease obligations		(80,047	)		(55,334	)
Proceeds from issuance of common stock, net of issuance costs		—			3,629,206
Proceeds from exercise of common stock options and warrants		40,086			137,986
Net cash (used in) provided by financing activities		(39,961	)		3,958,358
Net (decrease) in cash		(5,462,128	)		(3,392,575	)
Cash at beginning of period		11,825,371			15,217,946
Cash at end of period	$	6,363,243		$	11,825,371

Cash paid during the year for interest	$	13,127		$	14,128
Non-cash investing and financing activities:
Issuances of warrants in connection with common stock offering	$	—		$	918,457
Capital assets financed through tenant improvement allowance	$	373,711		$	—

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

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SCOLR Pharma, Inc.

NOTES TO FINANCIAL STATEMENTS

December 31, 2008 and 2007

Note 1—Description of Business and Summary of Significant Accounting Policies

SCOLR Pharma, Inc. (the “Company”) is a specialty pharmaceutical company that develops and formulates pharmaceutical, over-the-counter, and nutritional products. The Company uses its patented Controlled Delivery Technologies (CDT®) to develop products and license technologies to pharmaceutical and nutritional product companies. Prior to 2004, the Company manufactured nutraceutical-based health and dietary supplements for the animal and human nutrition markets. The Company’s transition to a focused specialty pharmaceutical business was completed with the sale of its probiotics business in 2003.

The Company has incurred net losses since 2000. As of December 31, 2008, the Company’s accumulated deficit was $64 million. The Company expects its operating losses and negative cash flow to increase as it advances preclinical research and clinical trials, applies for regulatory approvals, develops its product candidates, expands its operations, and develops the infrastructure to support commercialization of its products.

The Company’s business is subject to the risks and uncertainties associated with development of drug delivery systems and products. These risks include, but are not limited to, a history of net losses, technological changes, dependence on collaborations and key personnel, the successful commercialization of the Company’s product candidates, compliance with government regulations, patent infringement litigation and competition from current and potential competitors, (many of which have greater resources) dependence on third party manufacturers, and a requirement for additional funding.

A summary of the Company’s significant accounting policies consistently applied in the preparation of the accompanying financial statements follows.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates market value. The Company holds cash and cash equivalents and marketable securities at several major financial institutions, which often exceed FDIC insured limits. Historically, the Company has not experienced any losses as a result of such concentration of credit risk.

Accounts Receivable

The majority of the Company’s accounts receivable were due from companies that provide royalty income from the use of the Company’s CDT technology. Payments are received on a quarterly basis, usually within 45 days after the end of each quarter, for royalty income receivables.

The Company determines the allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, the customer’s previous loss history, the customer’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. The Company’s policy is to write off accounts receivable when they become uncollectible, and payments subsequently received on such accounts are credited to the provision for doubtful accounts.

Financial Instruments

The carrying values of financial instruments including cash and cash equivalents, accounts and notes receivable, accounts payable, and debt obligations approximate fair value.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter. Leased property under capital leases is amortized over the service lives of the assets as the leases substantially transfer ownership and have bargain purchase options. The straight-line method of depreciation is followed for substantially all assets for financial reporting purposes. The estimated useful lives in

determining depreciation and amortization are as follows:

Furniture and fixtures	3-5 years
Software	3 years
Machinery and equipment	3-10 years

Intangible Assets

Intangible assets include capitalized costs, technical and product rights, patents, and trademarks. Capitalized costs principally include legal fees incurred with the application for patents and trademarks. Technical and product rights, patents, and trademarks are stated at cost and amortized to operations over their estimated useful lives or statutory lives, whichever is shorter. The Company evaluates its long lived assets for impairments whenever events or changes in circumstances indicate that the carrying amount may not be recoverable using a fair value approach.

Revenue Recognition

The Company generates revenue from collaborative agreements, licensing fees and from the assignment of developed and patented technology. Revenue under collaborative arrangements may take the form of royalty income, up-front payments, payments for milestones, reimbursement of research and development costs, and licensing payments. Payments received under collaborative research agreements are generally not refundable even if the research effort is not successful.

Revenues recognized during 2008, and 2007, include amounts earned under royalty arrangements with related and third parties under which such parties are licensed to sell products that include technology developed or licensed by the Company. Such royalty revenues are recognized when earned, as reported to the Company by its licensees, and when collectability is reasonably assured.

Revenues recognized in 2007 also include non-refundable, up-front payments received in connection with collaborative research and development agreements, which were initially deferred and then recognized as licensing fees on a straight-line basis over the relevant periods specified in the agreement, generally the research term. Non-refundable license fees are recognized as revenue once no future performance obligation exists, the price is fixed and determinable, delivery has occurred, and collectability is reasonably assured.

For revenue arrangements with multiple elements, the delivered element is considered a separate unit of accounting only when the delivered element has stand-alone value to the customer, there is objective and reliable evidence of the fair value of the undelivered items, and delivery of the undelivered items is in the control of the Company. If these conditions are met, consideration received is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. Revenues from milestone payments are recognized when the milestone has been achieved, as long as the achievement of the milestone was not reasonably assured at the inception of the arrangement, there was substantial effort involved in achieving the milestone, the amount of the milestone payment is reasonable in relation with the level of effort associated with the achievement of the milestone, and the payment is non-refundable. Each milestone event must have substance and must represent the achievement of specific defined goals.

Reimbursements of research and development expenses incurred by the Company in connection with collaborative agreements are recognized as revenue at the time these amounts are determined to be measurable and reliable.

Income Taxes

The Company accounts for income taxes under SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities, for net operating loss carryforwards, and tax credit carryforwards. Deferred tax assets and liabilities, net operating loss carryforwards, and tax credit carryforwards are measured using enacted tax rates and laws that will apply when the assets and liabilities are expected to reverse. The Company provides a valuation allowance when necessary to reduce deferred tax assets to amounts expected to be realized.

Research and Development Costs

Research and development expenses consist of costs associated with products being developed internally as well as those products being developed under collaborative agreements with others. These expenses include related salaries and benefits, clinical trial and related clinical trial manufacturing costs, contract and other outside service fees, and facility related costs. Research and development costs are expensed as incurred. In instances where the Company enters into agreements with third parties for research, clinical trial, and related clinical trial manufacturing costs, such costs are

expensed upon the earlier of when non-refundable amounts are due or as services are performed. Amounts due to the Company under such arrangements may be either fixed fee or fee for service, and may include upfront payments, monthly payments, and payments upon the completion of milestones or receipt of deliverables or termination costs incurred in the orderly termination of services.

Advertising Costs

The policy of the Company is to expense advertising activities as incurred. Advertising expenses for the years ended December 31, 2008 and 2007 were $100,457 and $149.227, respectively.

Earnings (Loss) Per Share

Basic earnings (loss) per share is calculated based on the weighted average number of shares outstanding during the year and income available to common shareholders. Diluted earnings (loss) per share include the effect of potential common stock, except when their effect is anti-dilutive. The weighted average shares for computing basic earnings (loss) per share were 41,038,797 for the year ended December 31, 2008, and 38,348,560 for the year ended December 31, 2007. At December 31, 2008, and 2007, options, and warrants to purchase 7,615,481 and 7,301,745 shares of common stock, respectively, prior to the application of the treasury stock method, were not included in the calculation of diluted net loss per share as they were anti-dilutive.

Share-Based Compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment, (“SFAS 123(R)”) using the modified-prospective-transition method. Under that transition method, compensation cost recognized for the periods ended December 31, 2008 and 2007, includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), and (b) compensation cost for all share-based payments granted or modified subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R).

Share-based compensation expense for performance-based options granted to non-employees is determined in accordance with SFAS 123(R) and Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services (“EITF 96-18”), at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. The fair value of options granted to non-employees is measured as of the earlier of the performance commitment date or the date at which performance is complete (“measurement date”). When it is necessary under generally accepted accounting principles to recognize cost for the transaction prior to the measurement date, the fair value of unvested options granted to non-employees is remeasured at the balance sheet date.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management 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, and the reported amounts of revenues and expenses during the reporting period. Estimates are used for, but not limited to those used in revenue recognition; the determination of the allowance for doubtful accounts, depreciable lives of assets, estimates and assumptions used in the determination of fair value of stock options and warrants, and deferred tax valuation allowances. Future events and their effects cannot be determined with certainty. Accordingly, the accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Actual results could differ from those estimates.

New Accounting Pronouncements

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The Company intends to adopt EITF Issue 07-5 effective January 1, 2009, and apply its provisions to its outstanding instruments as of that date, as well as to instruments issued subsequent to that date. The Company does not believe there will be a material impact to its financial statements upon adoption on January 1, 2009.

In February 2008, the FASB issued FASB Staff Position No. SFAS 157-2, “Effective Date of FASB Statement No. 157”, which provides a one-year deferral of the effective date of FAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Effective June 1, 2008, the Company adopted the provisions of SFAS No. 157 with respect to the Company’s financial assets and liabilities recorded at fair value. The Company does not believe there was a material impact to its financial statements upon adoption.

Note 2—Liquidity

The Company incurred a net loss of approximately $6.1 million for the year ended December 31, 2008, and used cash from operations of approximately $4.7 million. These amounts include the net lease settlement gain of $4.0 million. Cash flows of $695,001 used by investing activities during the year ended December 31, 2008, represents $473,711 in restricted cash plus $217,357 in patent and trademark related expenditures. The restricted cash is collateral for the letter of credit issued to secure the Company’s obligations under the lease of the new facility. Cash flow used by financing activities of $39,961 for the year ended December 31, 2008, reflects net proceeds from the exercise of stock options and warrants during the quarter, offset by payments on the term loan.

The Company had approximately $6.4 million in cash and cash equivalents, and $473,711 in restricted cash as of December 31, 2008. The Company is investing its cash and cash equivalents in government-backed securities. These securities are considered level 1 securities in accordance with FASB 157 “Fair Value Measurements” as the securities have quoted prices in active markets.

The Company has a history of recurring losses and expects such net losses to continue as the Company proceeds with preclinical development for multiple product candidates and applies for regulatory approvals of product candidates. The Company will require substantial additional investment that it has not yet secured. The Company plans to raise capital and/or to pursue partnering opportunities. The Company’s current operating plan reflects reductions in personnel, marketing and other operating expenses implemented in 2008. The Company is actively managing liquidity by limiting clinical and development expenses to its lead products and supporting existing alliances and collaborations. The Company has deferred all significant expenditures on new projects pending additional financing or partnership support. Without additional funding the Company does not expect to be able to complete development of its current projects.

The Company plans to raise additional capital to fund operations, and continue research and development projects and advance commercialization of its product candidates. The Company may raise additional capital through public or private equity financing, partnerships, debt financing, or other sources. If the Company is unable to obtain necessary additional financing, its ability to run its business will be adversely affected and it will be required to reduce the scope of its business or discontinue operations.

The Company has limited capital resources and operations to date have been funded primarily with the proceeds of public and private equity financings and collaborative research agreements. The Company anticipates that its existing capital resources, without raising additional capital, or obtaining substantial cash inflows from potential partners or products, will enable it to continue operations until late 2009, unless unforeseen events arise that negatively impact its liquidity. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Consequently, the audit report prepared by the Company’s independent registered public accounting firm relating to the Company’s financial statements for the year ended December 31, 2008 included a going concern explanatory paragraph.

The business will require substantial additional financing that the Company have not yet secured, but intend to pursue during 2009 through public or private securities offerings and/or partnering opportunities. Expenses are expected to be partially offset with income-generating license agreements. Further, the Company will not have sufficient resources to develop fully any new products or technologies unless the Company is able to raise substantial additional financing on acceptable terms or secure funds from new or existing partners. The Company cannot be assured that financing will be available on favorable terms or at all.

In November 2005, the Securities and Exchange Commission declared effective the Company’s registration statement filed using a “shelf” registration process which expired on December 1, 2008. Under this registration

statement, the Company offered from time-to-time, one or more offerings of common stock and/or warrants to purchase common stock under this shelf registration up to an aggregate public offering price of $40 million. Registered direct offerings were completed on December 4, 2007, and April 21, 2006, for approximately $3.6 million and $10.9 million respectively.

On November 14, 2008, the Company filed a new shelf registration statement. At the time the new shelf registration was filed, $21.0 million remained available for issuance under the November 2005 registration statement. On November 25, 2008, the Securities and Exchange Commission declared the Company’s registration statement effective. Under the registration statement, the Company may make, from time-to-time, one or more offerings of preferred stock, common stock, debt securities and/or warrants to purchase common or preferred stock under this shelf registration up to an aggregate public offering price of $40 million. If additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities will result in dilution to the Company’s existing stockholders.

Note 3—Accounts Receivable

Accounts receivable consists of royalty receivables at December 31, 2008 and 2007. The Company did not have any write-offs or bad debt expense in 2008 and 2007. In addition, the Company did not have an allowance for doubtful accounts in 2008 or 2007 as all accounts receivable were considered collectible.

Note 4—Property and Equipment

Property and equipment consist of the following at December 31:

	2008			2007
Furniture and fixtures	$	70,813		$	70,813
Software		40,852			38,237
Machinery and equipment		1,546,650			1,555,854
Leasehold improvements		422,476			48,765
		2,080,791			1,713,669
Less accumulated depreciation and amortization		(1,289,844	)		(964,738	)
	$	790,947		$	748,931

For the years ended December 31, 2008, and 2007 depreciation expense totaled $334,537 and $329,710, respectively.

Note 5—Intangible Assets

Intangible assets consist of the following at December 31:

	2008			2007
Patents and trademarks	$	1,023,363		$	849,475
Less accumulated amortization		(465,724	)		(385,452	)
	$	557,639		$	464,023

For the years ended December 31, 2008, and 2007 amortization expense totaled $85,317, and $71,307, respectively.

The following is a schedule by years of future amortization expense for each of the next five years based on existing intangible assets as of December 31, 2008.

Year Ending December 31,
2009		85,335
2010		75,884
2011		71,114
2012		67,322
2013		64,353
2014 and thereafter		193,631
Total	$	557,639

The Company reviews its strategy related to patent initiatives and may decide not to pursue further research and development in certain areas, quarterly or when circumstances change as it relates to the programs. As a result,

capitalized costs associated with certain patent filings with net book values of approximately $38,000 and $22,000, were written-off in 2008, and 2007, respectively. The write-offs were recorded to research and development expense.

Note 6—Lease Obligations

In May 2008, the Company entered into a Lease Termination and Surrender Agreement, under which the Company agreed to terminate the lease for its corporate facility for consideration of $4.1 million. Under the terms of the agreement, the Company received $1.0 million upon execution of the agreement and the remaining $3.1 million in September 2008, at the time the Company vacated the premises. The $4.1 million cash settlement and $116,867 in costs that were incurred related to the lease and relocation to the new space were recognized in operating expense in September 2008.

In June 2008, the Company entered into an agreement to lease 20,468 rentable square feet at 19204 North Creek Parkway, Bothell, Washington for the Company’s office and research and development facilities. The lease commenced on September 19, 2008, for a term of 88 months ending on January 31, 2016. Under the terms of the lease, the Company received four months of free rent. The Company has the option to extend the lease term for one five-year period at the fair market rate at the time of extension. The average rent under the lease term is approximately $400,000 per year, subject to annual increases of approximately 3%. The related rent expense is recognized on a straight-line basis over the term of the lease. In connection with the lease agreement, the Company provided a $564,000 irrevocable, unconditional standby letter of credit which is secured by a money market account classified in the balance sheet as a non-current asset in restricted cash. The standby letter of credit was reduced by $90,289 in December 2008. At December 31, 2008, the standby letter of credit and the related security totaled $473,711. The stated amount of the standby letter of credit and the related security will be reduced further over the term of the lease.

The Company conducts its operations utilizing leased office facilities and certain equipment with terms expiring through 2016. The following is a schedule of future minimum lease payments for facilities and equipment under operating leases as of December 31, 2008:

Year Ending December 31,	Operating Leases
2009	$	340,507
2010		414,715
2011		420,477
2012		420,835
2013		426,881
2014 and thereafter		932,249
Total future minimum lease payments	$	2,955,664

Rent expense for leased facilities and equipment was $455,176, and $433,514, for the years ended December 31, 2008, and 2007, respectively.

Note 7 — Bank Term Loan

On March 26, 2007, the Company executed a $250,000 bank term loan agreement for the purchase of equipment to be used in its research and development activities. The stated interest rate and effective interest rate of the loan are 8.25% and 9.34%, respectively. The loan matures in March 2010. Principal and interest payments are to be made in 36 equal monthly payments of $7,877 each, with a final payment due on the date of maturity. The obligations under the loan are secured by the acquired equipment.

Note 8—Income Taxes

The Company has incurred net operating losses. The Company continues to maintain a valuation allowance for the full amount of the net deferred tax asset balance, including its net operating losses as sufficient uncertainty exists regarding its ability to realize such tax assets in the future. The Company expects the amount of the net deferred tax asset balance and associated valuation allowance to increase in future periods as the Company incurs future net operating losses.

The Company’s recorded provision for income taxes (zero in all years presented) differs from the amount computed by applying the statutory federal income tax rate of 34% to its net loss. The sources of the differences are as follows at December 31:

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	2008			2007
Tax benefit at statutory rate	$	(2,087,746	)	$	(3,610,439	)
Stock based compensation		200,520			263,132
Expiring net operating loss		292,023			92,392
Other permanent differences		91,330			9,453
Increase in valuation allowance		1,503,873			3,245,462
Total provision	$	—		$	—

Deferred income tax assets and liabilities reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are also recorded for the future tax benefit of net operating losses and tax credit carryforwards. The Company had no deferred tax liabilities in 2008 and 2007. Significant components of the Company’s deferred tax assets are as follows at December 31:

	2008			2007
Deferred Tax Assets
Net operating loss carry forwards	$	16,443,549		$	15,081,261
Depreciation and amortization		148,201			274,204
Stock options		1,219,835			1,073,786
Other assets		206,881			83,710
Deferred tax assets	$	18,018,466		$	16,512,961
Valuation allowance		(18,018,466	)		(16,512,961	)
Net deferred tax asset	$	—		$	—

The Company has established a valuation allowance for the full amount of the net deferred tax asset balance as sufficient uncertainty exists regarding its ability to realize such tax assets in the future. The net increase in the valuation allowance for the years ending December 31, 2008, and 2007, was $1,503,873, and $3,245,462, respectively.

At December 31, 2008, the Company had available net operating loss carryforwards of approximately $48.4 million of which $4.1 million related to stock option deductions. Net operating loss carryforwards of $858,890, and $271,740, expired during 2008, and 2007, respectively. The remaining net operating loss carryforwards will begin expiring in 2009 and may be used to offset future federal taxable income through the year ending December 31, 2027. The use of net operating losses may be limited in any given year under Internal Revenue Code Section 382 upon the occurrence of certain events, including significant changes in ownership interests which may have occurred, or which may occur in future years.

Historically, the Company has not incurred any interest or penalties associated with tax matters and no interest or penalties were recognized during the year ended December 31, 2008. However, the Company has adopted a policy whereby amounts related to interest and penalties associated with tax matters are classified as a general and administrative expense when incurred.

Tax years that remain open for examination include 2005, 2006, 2007 and 2008. In addition, tax years from 1993 to 2004 may be subject to examination in the event that the Company utilizes the net operating losses from those years in its current or future tax returns.

Note 9—Technical Rights, Patent License and Royalty Agreements

The Company has agreements with Temple University (“Temple”) providing the Company with exclusive worldwide rights for certain patents related to its Controlled Delivery Technology (CDT®), with the right to sublicense. On July 11, 2006, the Company completed an amendment to the license agreement with Temple, dated September 6, 2000, relating to the Company’s rights to U.S. Patent No. 6,090,411 (“salt patent”). The amendment provides for a reduction in the amount of the royalty for sales of prescription drugs covered by the license as well as a reduction in the annual license maintenance fee payable to Temple University. Under the terms of Temple University’s development policy, the inventors of the patent receive 50% of the royalty payments received by the University. In connection with the amendment to the license agreement, the Company paid $400,000 in cash to the inventors of the patent, including $200,000 to Dr. Reza Fassihi, a member of the Company’s board of directors, and the inventors agreed to waive their rights to payment of future royalties received by Temple University based on sales of prescription drugs as well as the portion of the annual license maintenance fee attributable to prescription drugs. These transactions were recorded as research and development expense. Under the terms of the amended agreements with Temple, the Company is required

to make minimum annual royalty payments of $48,750.

On March 25, 2002, the Company entered into an exclusive patent license agreement with Archer Daniels Midland Company (ADM). Under the terms of the agreement, the Company granted ADM a license to manufacture, use, and sell certain nutraceutical products covered by certain patents owned or licensed by the Company. The Company amended its license agreement with ADM in August 2006 which resulted in the Company’s payment to ADM of $200,000, and accrual of $250,000 associated with its obligation to pay ADM an additional $250,000. The second $250,000 payment was expensed in the third quarter of 2006 and paid in the third quarter of 2007. These transactions were recorded as research and development expense.

In August 2005, the Company entered into an amendment to the license agreement it originally granted to Nutraceutix. The amendment limited the rights previously granted to Nutraceutix to manufacture and sell certain controlled release dietary supplement products to certain designated customers of Nutraceutix, eliminated the right to use the Company’s trademarks, resolved certain disputes, and eliminated the remaining minimum payments due under the original agreement. Commencing July 1, 2005, the Company began receiving royalty payments on such sales at a reduced rate and such payments are recognized as royalty revenue as they become due. During the years ended December 31, 2008, and 2007, the Company recorded revenue in the amount of $64,155 and $163,668, respectively under this agreement. Subject to the rights of Nutraceutix to continue sales of certain inventories for up to one year, the license terminated on December 31, 2007.

On October 20, 2005, the Company entered into a Manufacture, License and Distribution Agreement with Perrigo Company of South Carolina, Inc. (“Perrigo”). Under the agreement, the Company granted a license to its CDT technology to Perrigo for the manufacture, marketing, distribution, sale, and use of specific dietary supplement products in the United States. In addition, Perrigo may request that the Company develop additional dietary supplement products that use this technology to be added to the agreement. The Company receives royalties based on a percentage of Perrigo’s net profits derived from the sales of licensed products under the agreement. During the years ended December 31, 2008, and 2007, the Company recorded royalty revenues earned under this agreement of $882,856, and $975,344, respectively.

During the first quarter of 2007, the Company recognized research and development income of $500,000 related to a milestone payment from Wyeth and approximately $109,000 for reimbursement of research and development costs related to the agreement. The $250,000 upfront fee was previously recorded as deferred revenue and was being amortized as licensing fee income over the development period. As a result of the termination of the agreement, the Company recognized the approximately $173,000 remaining balance of previously deferred licensing fee income during the first quarter of 2007.

On September 5, 2006, the Company entered into a research collaboration with BioCryst Pharmaceuticals (“BioCryst”), to develop an oral formulation of peramivir, a promising antiviral compound using the Company’s CDT platforms. Peramivir is a novel therapeutic being developed by BioCryst for treatment of seasonal and life threatening influenza with a focus on intravenous and intramuscular delivery. The goal of the collaboration is to develop a tablet or capsule formulation for the oral administration of peramivir that improves oral bioavailability.

On October 18, 2007, the Company entered into a collaboration and license agreement with Dr. Reddy’s Laboratories (“Dr. Reddy’s”) to pursue the development and commercialization of an undisclosed oral prescription drug product. Under the terms of the agreement, Dr. Reddy’s will be responsible for the development, manufacturing, and marketing of the drug product. The Company will be responsible for the formulation and assist with the scale-up activities of the product.

Note 10—Future Commitments

The Company has certain material agreements with its manufacturing and testing vendors related to its ongoing clinical trial work associated with its drug delivery technology. Contract amounts are paid based on materials used and on a work performed basis. Generally, the Company has the right to terminate these agreements upon 30 days notice and would be responsible for services and materials and related costs incurred prior to termination. Certain leases as discussed in Note 6 related to leased office facilities have terms expiring through 2016.

Note 11—Retirement Plan

The Company has a defined contribution 401(k) retirement plan which covers all employees. The Company matches 25% of employee contributions, up to 8% of eligible compensation. The Company contributed $37,356, and $35,689, to the Plan for the years ended December 31, 2008, and 2007, respectively.

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Note 12—Share-Based Compensation

The Company has granted equity incentive awards to its employees, consultants, officers, and directors under its 2004 Equity Incentive Plan (the “2004 Plan”) and its 1995 Stock Option Plan (the “1995 Plan”). The 2004 Plan was approved by stockholders in June 2004, and replaced the 1995 Plan. Under the 2004 Plan, equity-based incentive awards may be granted in the form of stock options, stock appreciation rights, stock awards, performance awards, and outside director options.

The equity incentive awards granted to employees are generally granted at exercise prices equal to the market value of the Company’s common stock on the date of grant, vest over three years, and expire ten years from the date of grant.

Under the terms of the 2004 Plan, non-employee directors receive automatic annual grants of stock options at exercise prices equal to the market value of the Company’s common stock on the date of grant, which generally vest in equal monthly installments over one year and expire ten years from the date of grant.

The 2004 Plan initially authorized the issuance of up to 2,000,000 shares of common stock, plus 388,441 shares which were previously reserved for issuance under the 1995 Plan not subject to outstanding options. On June 8, 2006, the Company’s stockholders approved a 2,000,000 share increase in the maximum aggregate number of shares that may be issued under the 2004 Equity Incentive Plan. If any award under the 2004 Plan, or any award previously issued and outstanding under the 1995 Plan, expires, lapses or otherwise terminates for any reason without having been exercised or settled in full, or if shares subject to forfeiture or repurchase are forfeited or repurchased by the Company, the shares underlying the award will again become available for issuance under the 2004 Plan. As of December 31, 2008, the Company had 630,156 shares available for future grants under both Plans.

The following tables set forth the aggregate share-based compensation expense resulting from equity incentive awards issued to the Company’s employees and to non-employees for services rendered that is recorded in the Company’s results of operations for the year ended December 31:

	2008		2007
Share-based compensation:
Marketing and selling	$	62,108	$	130,972
Research and development		399,050		610,895
General and administrative		809,130		932,586
Share-based compensation for employees		1,270,288		1,674,453
General and administrative, non-employee services		—		34,687
Total share-based compensation expense	$	1,270,288	$	1,709,140

The share-based compensation expense for non-employee services reflects option grants to outside consultants. There are no future performance conditions associated with these grants and no consideration was received for the options.

The fair value of share-based awards is estimated using the Black-Scholes option pricing model with the following assumptions for the years ended December 31, 2008, and 2007. When estimating forfeitures, the Company considers the potential for voluntary and involuntary terminations.

	Black-Scholes Model Assumptions December 31,
	2008			2007
Expected volatility		59%–74	%		56%–64	%
Expected dividend yield		0	%		0	%
Risk-free interest rate		1.87%–4.06	%		3.23%–5.26	%
Expected life	6 – 10 years			6 – 10 years

The Company’s computation of expected volatility is based on historical realized volatility. Prior to the implementation of SFAS 123(R), the Company estimated that the expected lives of all options were equal to their contractual term. The options granted to employees meet the definition of “plain vanilla” options defined in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 (“SAB 107”). Therefore, management utilizes the shortcut method described in SAB 107 in determining the expected life of employee options. The shortcut method estimates the expected term based on the midpoint between the vesting date and the end of the contractual term. The Company’s computation of expected life for non-employee director’s awards and for outside consultant awards under SFAS 123(R) continues to be based on the contractual term of the award. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant for issues with a term that approximates the expected life used as the assumption in the model.

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A summary of the Company’s stock option activity for the two years ended December 31, 2008 is as follows:

Stock Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding at December 31, 2006		3,240,665		$	3.64

Granted		734,167		$	2.10
Exercised		(120,333	)	$	1.15
Forfeited		(227,096	)	$	4.50
Outstanding at December 31, 2007		3,627,403		$	3.36

Granted		1,189,895		$	1.09
Exercised		(40,000	)	$	1.00
Forfeited		(333,216	)	$	2.28
Outstanding at December 31, 2008		4,444,082		$	2.85		6.80	$	14,400

Outstanding vested or expected to vest options at December 31, 2008		4,417,317		$	2.86		6.79	$	14,400
Options exercisable at December 31, 2008		3,443,427		$	3.22		6.11	$	14,400

Cash received from options exercised was $40,086 and $137,986, for the years ended December 31, 2008, and 2007, respectively. No actual tax benefit was realized for tax deductions from option exercise of the share-based payment arrangements because the Company has recorded a full valuation allowance against all deferred tax assets due to the uncertainty of realization of such assets. The Company has a policy of issuing new shares to satisfy share option exercises.

The weighted-average grant date fair value of equity options granted during the years ended December 31, 2008, and 2007, was $0.66 and $1.35, respectively. The total intrinsic value of options exercised for the years ended December 31, 2008, and 2007, was $4,800 and $223,103, respectively. The total fair value of stock options vested during the years ended December 31, 2008, and 2007, was $1,182,251, and $2,160,764, respectively.

As of December 31, 2008, there was $848,123 total unrecognized non-cash compensation cost related to non-vested options granted under the 1995 Plan and 2004 Plan. That cost is expected to be recognized over a weighted-average period of 1.68 years.

A summary of the Company’s restricted stock activity for the year ended December 31, 2008 is as follows:

Restricted stock	Shares		Weighted-Average Grant date fair value
Non-vested at December 31, 2007		—	$	—
Granted		86,500		1.29
Vested		—		—
Forfeited		—		—
Non-vested at December 31, 2008		86,500	$	1.29

The proceeds received for the restricted stock are included in the statement of stockholders’ equity as proceeds from the exercise of common stock options. Common shares outstanding as of December 31, 2008, include the 86,500 restricted stock shares granted. The shares will become vested on the third anniversary of the date of grant. The total fair value of restricted stock vested during the years ended December 31, 2008, and 2007, was $0, and $0, respectively. As of December 31, 2008, there was $58,763 total unrecognized non-cash compensation cost related to non-vested restricted stock granted under the 2004 Plan. That cost is expected to be recognized over a weighted-average period of 2.12 years.

Note 13—Financing Events

Registered Direct Offering

On December 4, 2007, the Company raised approximately $4.2 million in gross proceeds through a registered direct offering of 2,781,100 shares of the Company’s common stock at a purchase price of $1.50 per share. Purchasers of the Company’s stock also received warrants to purchase 1,390,550 shares of common stock at an exercise price of $2.10

per share, exercisable for five years. Net proceeds of the offering were approximately $3.6 million after placement agent fees of $250,300 and other direct and incremental offering costs of approximately $283,000. ThinkEquity Partners LLC acted as placement agent for the offering. Taglich Brothers, Inc. provided financial advisory services and was paid a fee of $112,509, which was deducted from the fee paid to the placement agent. Michael N. Taglich, a member of the Company’s board of directors, is the president and a principal shareholder of Taglich Brothers. In connection with the offering, the Company also issued warrants to purchase 1,390,550 shares of its common stock at $2.10 per share, exercisable for five years, and valued at $918,457 using the Black-Scholes option-pricing model. Under the terms of the warrant agreement, in the event that another offering was completed within a period of twelve months, the exercise price of the warrant would have been adjusted to be equal to the price at which the common stock would have been sold in the new offering had an offering occurred. The Black-Scholes valuation was based on the following assumptions: volatility of 64%; term of five years; risk-free interest rate of 3.28%; and 0% dividend yield.

Shelf Registration

On October 27, 2005, the Company filed a shelf registration statement on Form S-3 with the SEC, pursuant to which it may sell, from time to time, up to $40 million in common stock and/or common stock purchase warrants. The registration statement was declared effective by the SEC in November 2005 and expired on December 1, 2008. The specific terms of any future offering would be established at the time of the offering. Registered direct offerings were completed on December 4, 2007, and April 21, 2006, for approximately $3.6 million and $10.9 million respectively.

On November 14, 2008, the Company filed a new shelf registration statement in the amount of $40 million. At the time the new shelf registration was filed, $21.0 million remained available for issuance under the November 2005 filing. On November 25, 2008, the Securities and Exchange Commission declared the Company’s registration statement effective.

Note 14—Warrants

During the year ended December 31, 2008, a total of 140,238 warrants were exercised, including 127,853 warrants that were surrendered to satisfy the exercise price. As a result, 12,385 shares of common stock were issued during the year ended December 31, 2008. The weighted average exercise price for the year ended December 31, 2008, was $1.10. The Company had the following warrants to purchase common stock outstanding at December 31, 2008:

Issue Date	Issued Warrants		Exercise Price		Term	Outstanding Warrants		Expiration Date
September 30, 2002		750,000	$	0.50	10 years		750,000	September 30, 2012
February 24, 2004		1,046,773		4.75	5 years		944,849	February 23, 2009
February 8, 2005		75,000		5.00	5 years		75,000	February 7, 2010
April 21, 2006		11,000		7.50	5 years		11,000	April 20, 2011
December 4, 2007		1,390,550		2.10	5 years		1,390,550	December 3, 2012
Grand Total		3,273,323					3,171,399

Each warrant entitles the holder to purchase one share of common stock at the exercise price.

Note 15—Major Customers and Concentration of Credit Risk

In 2008, two customers accounted for 93% and 7% of total revenue. These revenues relate to the royalty income from the sale of products using our CDT technologies. In 2007, two customers accounted for 49% and 40% of net revenues.

The Company maintains its cash balances in four financial institutions, which at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.

Note 16—Related Party Transactions

The Company’s CDT platforms are currently based on five patented drug delivery technologies and includes intellectual property from two U.S. patents licensed exclusively to the Company by Temple University and two U.S. patents assigned to the Company by Dr. Reza Fassihi, a Professor of Biopharmaceutics and Industrial Pharmacy at the Temple University School of Pharmacy. Dr. Fassihi currently serves on the Company’s board of directors. Dr. Fassihi is also one of the inventors of the two patents licensed to the Company by Temple University.

The Company entered into two license agreements with Temple University pursuant to which the Company obtained exclusive worldwide rights to two patents issued to Temple University which listed Dr. Fassihi as one of the

inventors. Under the terms of Temple University’s development policy, the inventors receive 50% of the royalty payments received by the University. On July 11, 2006, the Company amended the license agreement with Temple University relating to the salt patent. The amendment provides for a reduction in the amount of the royalty for sales of prescription drugs covered by the license as well as a reduction in the annual license maintenance fee payable to Temple University. In connection with the amendment to the license agreement, the Company paid $400,000 in cash to the inventors of the patent, including $200,000 to Dr. Fassihi, and the inventors agreed to waive their rights to payment of royalties received by Temple University based on sales of prescription drugs as well as the portion of the annual license maintenance fee attributable to prescription drugs. As a result of these arrangements, the Company estimates that Dr. Fassihi received approximately $15,000 of the fees paid to Temple for the dual polymer patent during 2007.

Dr. Fassihi also assigned the Company all of his right, title and interest in and to the technology known as “oral controlled release dosage form based on the principle of controlled hydration” on May 24, 2001. Dr. Fassihi assigned all of his right, title and interest in the technology known as “multiple compressed asymmetric composite delivery system for release-rate modulation of bioactives” to us on August 1, 2002. Dr. Fassihi received $50,000 in connection with execution of this assignment agreement and filing of the patent and the Company agreed to pay an additional fee upon issuance of the first patent. The Company is obligated to pay Dr. Fassihi a share of upfront payments from customers and royalties based on product sales with respect to the intellectual property assigned to us under each agreement.

In addition, the Company has a consulting agreement with Dr. Fassihi. This agreement was amended effective December 31, 2006, to provide for the continuance of Dr. Fassihi’s consulting services. The agreement may be terminated by either party on 30 days’ notice. In the years ended December 31, 2008, and 2007, Dr. Fassihi was paid $48,000 each year for consulting services. In addition, in 2006 Dr. Fassihi received a $200,000 payment associated with the amendment to the Temple University agreement (see Note 9).

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

None.

Item 9A.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as of December 31, 2008. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2008.

Management’s Report on Internal Control Over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fourth quarter of our fiscal year ended December 31, 2008, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed under the supervision of our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

As of December 31, 2008, management assessed the effectiveness of our internal control over financial reporting based on the framework established in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, management has determined that our internal control over financial reporting was effective as of December 31, 2008.

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

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ii.

provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

iii.

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error and circumvention by collusion or overriding of controls. Accordingly, even an effective internal control system may not prevent or detect material misstatements on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

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PART III

Item 10.

Directors and Executive Officers of the Registrant

The information required by this item regarding our directors, executive officers and corporate governance is incorporated by reference to the definitive proxy statement for our 2009 annual meeting of stockholders. The information required by this item regarding executive officers is set forth in Item 1 of this annual report under the caption “Executive Officers.”

Item 11.

Executive Compensation

The information required by this item is incorporated by reference to the definitive proxy statement for our 2009 annual meeting of stockholders.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is incorporated by reference to the definitive proxy statement for our 2009 annual meeting of stockholders.

Item 13.

Certain Relationships and Related Transactions

The information required by this item is incorporated by reference to the definitive proxy statement for our 2009 annual meeting of stockholders.

Item 14.

Principal Accountant Fees and Services

The information required by this item is incorporated by reference to the definitive proxy statement for our 2009 annual meeting of stockholders.

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PART IV

Item 15.

Exhibits and Financial Statement Schedules

The following exhibits are filed herewith:

					Incorporated by Reference
Exhibit No.			Description	Filed Herewith	Form		Exhibit No.		File No.		Filing Date
	4.1		Certificate of Incorporation as amended on July 31, 2004		10-QSB			3		001-31982	8/13/2004

	4.2		Certificate of designation of Series A Junior Participating Preferred Stock			10-K		4.2		001-31982	3/11/2008

	4.3		Bylaws, as amended		10-QSB			3		001-31982	5/17/2004

	4.4		Rights Agreement, dated as of November 1, 2002, by and between SCOLR, Inc. and OTR, Inc.			10-K		4.4		001-31982	3/11/2008

	4.5		Form of Common Stock Purchase Warrant dated as of February 8, 2005			8-K		4.1		001-31982	2/11/2005

	4.6		Form of Warrant dated as of December 4, 2007			8-K		4.1		001-31982	11/30/2007

	10.1		Form of Common Stock Purchase Warrant dated June 25, 2003			S-2		10.3		333-107906	8/13/2003

	10.2		Form of Common Stock Purchase Warrant dated February 24, 2004			8-K		10.3		001-31982	2/26/2004

	10.3		Warrant Agreement dated September 30, 2002			10-K		10.3		001-31982	3/11/2008

	10.4		1995 Stock Option Plan, together with amendment No. 1 thereto*			10-K		10.6		001-319822	3/13/2007

	10.5		Amendment No. 2 to Company 1995 Stock Option Plan*			S-8		4.2		333-40290	6/28/2000

	10.6		Form of Incentive Stock Agreement*			S-2		10.8		333-107906	8/13/2003

	10.7		Form of Nonqualified Stock Option Agreement*			S-2		10.9		333-107906	8/13/2003

	10.8		Research and Transfer Agreement dated September 11, 1998, among Temple University, Dr. Reza Fassihi, and the Company			S-2		10.11		333-107906	8/13/2003

	10.9	†	License agreement dated December 22, 1998, as amended, between Temple University and the Company			S-2		10.12		333-107906	8/13/2003

	10.10	†	License Agreement dated September 6, 2000, between Temple University and the Company			S-2		10.13		333-107906	8/13/2003

	10.11	†	Master Research and Development Agreement dated May 1, 2001, between Temple University and the Company			S-2		10.14		333-107906	8/13/2003

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					Incorporated by Reference
Exhibit No.			Description	Filed Herewith	Form		Exhibit No.		Description		Filed Herewith
	10.12		Consulting Agreement dated December 22, 2000, between Dr. Reza Fassihi and the Company*			S-2		10.15		333-107906	8/13/2003

	10.13	†	Intellectual Property Assignment and Assumption Agreement dated May 24, 2001, between Dr. Reza Fassihi and the Company			S-2		10.16		333-107906	8/13/2003

	10.14	†	License Agreement dated September 1, 2001, between Temple University and the Company			S-2		10.17		333-107906	8/13/2003

	10.15	†	Intellectual Property Assignment and Assumption Agreement dated August 1, 2002, between Dr. Reza Fassihi and the Company			S-2		10.18		333-107906	8/13/2003

	10.16		Additional Services Agreement dated August 7, 2002, between Dr. Reza Fassihi and the Company*			S-2		10.19		333-107906	8/13/2003

	10.17		Form of Option Agreement under the 2004 Equity Incentive Plan*		10-QSB			10.2		001-31982	11/12/2004

	10.18		Form of Outside Director Option Agreement for Annual grants to directors under the 2004 Equity Incentive Plan*		10-QSB			10.3		001-31982	11/12/2004

	10.19		Form of Non Employee Director Option Agreement for stock based fee awards under the 2004 Equity Incentive Plan*		10-QSB			10.4		001-31982	11/12/2004

	10.20	†	Amendment No. 1 to Intellectual Property Assignment and Assumption Agreement dated July 16, 2004, between Dr. Reza Fassihi and the Company.		10-QSB			10.1		001-31982	11/12/2004

	10.21		Employment Agreement dated November 12, 2004, between Daniel O. Wilds and the Company*			8-K		10.1		001-31982	11/18/2004

	10.22		Employment Agreement dated January 10, 2005, between Alan M. Mitchel and the Company*			8-K		10.1		001-31982	1/11/2005

	10.23	†	Manufacture, License and Distribution Agreement dated October 20, 2005, between the Company and Perrigo Company of South Carolina			10-K		10.33		001-31982	3/23/2006

	10.24		First Amendment to Lease, effective as of October 12, 2005			10-K		10.35		001-31982	3/23/2006

	10.25	††	Amendment to License Agreement dated as of June 1, 2006, (executed July 11, 2006) between SCOLR Pharma, Inc. and Temple University			10-Q		10.1		001-31982	11/7/2006

	10.26	††	Amendment to License Agreement dated as of August 10, 2006, between Temple University and the Company			10-Q		10.4		001-31982	11/7/2006

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Incorporated by Reference

Exhibit

No.

Description

Filed

Herewith

Form

Exhibit

No.

Description

Filed

Herewith

10.27

Amendment to Consulting Agreement effective as of December 31, 2006, between Dr. Reza Fassihi and the Company*

10-K

10.42

001-31982

31/13/2007

10.28

Executive Employment Agreement dated April 14, 2008, between Richard M. Levy and the Company*

8-K

10.1

001-31982

4/16/2008

10.29

Executive Employment Agreement dated April 14, 2008, between Stephen J. Turner and the Company*

8-K

10.2

001-31982

4/16/2008

10.30

Standard Multi-Tenant Lease dated June 19, 2008, between Arden Realty Limited Partnership and the Company

8-K

10.1

001-31982

6/24/2008

10.31

Lease Termination and Surrender Agreement dated April 30, 2008, between Newport Corporate Center, LLC and the Company

10-Q

10.2

001-31982

8/7/2008

10.32

2004 Equity Incentive Plan, as Amended*

10.33

Form of Restricted Stock Purchase Agreement under the 2004 Equity Incentive Plan*

10.34

Executive Employment Agreement dated January 30, 2009, between Bruce S. Morra and the Company*

23.1

Consent of Grant Thornton LLP

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

†	Confidential treatment granted as to certain portions, which portions are omitted and filed separately with the SEC.

††	Portions of such exhibit have been omitted pursuant to a request for confidential treatment filed with the SEC.

*	Management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	SCOLR PHARMA, INC.

	By:	/s/ BRUCE S. MORRA
		Bruce S. Morra Chief Executive Officer and President (Principal Executive Officer)

Date: March 9, 2009

Signature	Title	Date

/s/ BRUCE S. MORRA	President, Chief Executive Officer and Director (Principal Executive Officer)	March 9, 2009
Bruce S. Morra

/s/ RICHARD M. LEVY	Chief Financial Officer and Vice President—Finance (Principal Financial and Accounting Officer)	March 9, 2009
Richard M. Levy

/s/ RANDALL L-W. CAUDILL	Director	March 9, 2009
Randall L-W. Caudill

/s/ REZA FASSIHI	Director	March 9, 2009
Reza Fassihi

/s/ HERBERT L. LUCAS, JR.	Director	March 9, 2009
Herbert L. Lucas, Jr.

/s/ JEFFREY B. REICH	Director	March 9, 2009
Jeffrey B. Reich

/s/ MICHAEL N. TAGLICH	Chairman of the Board	March 9, 2009
Michael N. Taglich

/s/ WAYNE L. PINES	Director	March 9, 2009
Wayne L. Pines

/s/ GREGORY L. WEAVER	Director	March 9, 2009
Gregory L. Weaver

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EXHIBIT INDEX

					Incorporated by Reference
Exhibit No.			Description	Filed Herewith	Form		Exhibit No.		File No.		Filing Date
	4.1		Certificate of Incorporation as amended on July 31, 2004		10-QSB			3		001-31982	8/13/2004

	4.2		Certificate of designation of Series A Junior Participating Preferred Stock			10-K		4.2		001-31982	3/11/2008

	4.3		Bylaws, as amended		10-QSB			3		001-31982	5/17/2004

	4.4		Rights Agreement, dated as of November 1, 2002, by and between SCOLR, Inc. and OTR, Inc.			10-K		4.4		001-31982	3/11/2008

	4.5		Form of Common Stock Purchase Warrant dated as of February 8, 2005			8-K		4.1		001-31982	2/11/2005

	4.6		Form of Warrant dated as of December 4, 2007			8-K		4.1		001-31982	11/30/2007

	10.1		Form of Common Stock Purchase Warrant dated June 25, 2003			S-2		10.3		333-107906	8/13/2003

	10.2		Form of Common Stock Purchase Warrant dated February 24, 2004			8-K		10.3		001-31982	2/26/2004

	10.3		Warrant Agreement dated September 30, 2002			10-K		10.3		001-31982	3/11/2008

	10.4		1995 Stock Option Plan, together with amendment No. 1 thereto*			10-K		10.6		001-319822	3/13/2007

	10.5		Amendment No. 2 to Company 1995 Stock Option Plan*			S-8		4.2		333-40290	6/28/2000

	10.6		Form of Incentive Stock Agreement*			S-2		10.8		333-107906	8/13/2003

	10.7		Form of Nonqualified Stock Option Agreement*			S-2		10.9		333-107906	8/13/2003

	10.8		Research and Transfer Agreement dated September 11, 1998, among Temple University, Dr. Reza Fassihi, and the Company			S-2		10.11		333-107906	8/13/2003

	10.9	†	License agreement dated December 22, 1998, as amended, between Temple University and the Company			S-2		10.12		333-107906	8/13/2003

	10.10	†	License Agreement dated September 6, 2000, between Temple University and the Company			S-2		10.13		333-107906	8/13/2003

	10.11	†	Master Research and Development Agreement dated May 1, 2001, between Temple University and the Company			S-2		10.14		333-107906	8/13/2003

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					Incorporated by Reference
Exhibit No.			Description	Filed Herewith	Form		Exhibit No.		Description		Filed Herewith
	10.12		Consulting Agreement dated December 22, 2000, between Dr. Reza Fassihi and the Company*			S-2		10.15		333-107906	8/13/2003

	10.13	†	Intellectual Property Assignment and Assumption Agreement dated May 24, 2001, between Dr. Reza Fassihi and the Company			S-2		10.16		333-107906	8/13/2003

	10.14	†	License Agreement dated September 1, 2001, between Temple University and the Company			S-2		10.17		333-107906	8/13/2003

	10.15	†	Intellectual Property Assignment and Assumption Agreement dated August 1, 2002, between Dr. Reza Fassihi and the Company			S-2		10.18		333-107906	8/13/2003

	10.16		Additional Services Agreement dated August 7, 2002, between Dr. Reza Fassihi and the Company*			S-2		10.19		333-107906	8/13/2003

	10.17		Form of Option Agreement under the 2004 Equity Incentive Plan*		10-QSB			10.2		001-31982	11/12/2004

	10.18		Form of Outside Director Option Agreement for Annual grants to directors under the 2004 Equity Incentive Plan*		10-QSB			10.3		001-31982	11/12/2004

	10.19		Form of Non Employee Director Option Agreement for stock based fee awards under the 2004 Equity Incentive Plan*		10-QSB			10.4		001-31982	11/12/2004

	10.20	†	Amendment No. 1 to Intellectual Property Assignment and Assumption Agreement dated July 16, 2004, between Dr. Reza Fassihi and the Company.		10-QSB			10.1		001-31982	11/12/2004

	10.21		Employment Agreement dated November 12, 2004, between Daniel O. Wilds and the Company*			8-K		10.1		001-31982	11/18/2004

	10.22		Employment Agreement dated January 10, 2005, between Alan M. Mitchel and the Company*			8-K		10.1		001-31982	1/11/2005

	10.23	†	Manufacture, License and Distribution Agreement dated October 20, 2005, between the Company and Perrigo Company of South Carolina			10-K		10.33		001-31982	3/23/2006

	10.24		First Amendment to Lease, effective as of October 12, 2005			10-K		10.35		001-31982	3/23/2006

	10.25	††	Amendment to License Agreement dated as of June 1, 2006, (executed July 11, 2006) between SCOLR Pharma, Inc. and Temple University			10-Q		10.1		001-31982	11/7/2006

	10.26	††	Amendment to License Agreement dated as of August 10, 2006, between Temple University and the Company			10-Q		10.4		001-31982	11/7/2006

Table of Contents

Incorporated by Reference

Exhibit

No.

Description

Filed

Herewith

Form

Exhibit

No.

Description

Filed

Herewith

10.27

Amendment to Consulting Agreement effective as of December 31, 2006, between Dr. Reza Fassihi and the Company*

10-K

10.42

001-31982

31/13/2007

10.28

Executive Employment Agreement dated April 14, 2008, between Richard M. Levy and the Company*

8-K

10.1

001-31982

4/16/2008

10.29

Executive Employment Agreement dated April 14, 2008, between Stephen J. Turner and the Company*

8-K

10.2

001-31982

4/16/2008

10.30

Standard Multi-Tenant Lease dated June 19, 2008, between Arden Realty Limited Partnership and the Company

8-K

10.1

001-31982

6/24/2008

10.31

Lease Termination and Surrender Agreement dated April 30, 2008, between Newport Corporate Center, LLC and the Company

10-Q

10.2

001-31982

8/7/2008

10.32

2004 Equity Incentive Plan, as Amended*

10.33

Form of Restricted Stock Purchase Agreement under the 2004 Equity Incentive Plan*

10.34

Executive Employment Agreement dated January 30, 2009, between Bruce S. Morra and the Company*

23.1

Consent of Grant Thornton LLP

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

†	Confidential treatment granted as to certain portions, which portions are omitted and filed separately with the SEC.

††	Portions of such exhibit have been omitted pursuant to a request for confidential treatment filed with the SEC.

*	Management contract or compensatory plan or arrangement.