Bioject Medical (BJCT) 10-Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2008

OR

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

For the transition period from            to            

Commission file number 000-15360

BIOJECT MEDICAL TECHNOLOGIES INC.

(Exact name of registrant as specified in its charter)

Oregon	93-1099680
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
20245 SW 95th Avenue Tualatin, Oregon	97062
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (503) 692-8001

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

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

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

(Do not check if a smaller

reporting company)

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

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

Common Stock without par value	15,962,075
(Class)	(Outstanding at August 11, 2008)

BIOJECT MEDICAL TECHNOLOGIES INC.

FORM 10-Q

INDEX

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets – June 30, 2008 and December 31, 2007 (unaudited)	2
	Consolidated Statements of Operations - Three and Six Month Periods Ended June 30, 2008 and 2007 (unaudited)	3
	Consolidated Statements of Cash Flows - Six Months Ended June 30, 2008 and 2007 (unaudited)	4
	Notes to Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 4T.	Controls and Procedures	19
PART II - OTHER INFORMATION
Item 1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 4.	Submission of Matters to a Vote of Security Holders	27
Item 6.	Exhibits	27
Signatures		28

1

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements

BIOJECT MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30, 2008			December 31, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	1,538,090		$	1,722,705
Short-term marketable securities		679,980			666,534
Accounts receivable, net of allowance for doubtful accounts of $5,418 and $13,702		538,217			847,382
Inventories		1,080,251			777,151
Other current assets		195,372			323,824
Total current assets		4,031,910			4,337,596
Property and equipment, net of accumulated depreciation of $6,440,583 and $6,052,600		1,923,269			2,297,262
Goodwill		—			94,074
Other assets, net		1,260,464			1,240,319
Total assets	$	7,215,643		$	7,969,251
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term notes payable	$	649,582		$	827,621
Current portion of long-term debt		627,090			166,667
Accounts payable		860,726			1,052,364
Accrued payroll		123,141			178,851
Derivative liabilities		303,067			527,650
Accrued severance and related liabilities		—			129,123
Other accrued liabilities		778,771			719,882
Deferred revenue		474,452			316,031
Total current liabilities		3,816,829			3,918,189
Long-term liabilities:
Convertible notes payable		—			1,224,081
Deferred revenue		1,141,742			102,083
Other long-term liabilities		282,903			315,591
Commitments
Shareholders’ equity:
Preferred stock, no par value, 10,000,000 shares authorized:
Series D Convertible - 2,086,957 shares issued and outstanding at June 30, 2008 and December 31, 2007, liquidation preference of $1.15 per share		1,878,768			1,878,768
Series E Convertible - 3,308,392 shares issued and outstanding at June 30, 2008 and December 31, 2007, liquidation preference of $1.37 per share		5,478,466			5,316,106
Series F Convertible - 8,314 and 0 shares issued and outstanding at June 30, 2008 and December 31, 2007, liquidation preference of $75 per share		645,182			—
Common stock, no par value, 100,000,000 shares authorized; 15,917,771 shares and 15,403,705 shares issued and outstanding at June 30, 2008 and December 31, 2007		113,529,155			113,018,663
Accumulated deficit		(119,557,402	)		(117,804,230	)
Total shareholders’ equity		1,974,169			2,409,307
Total liabilities and shareholders’ equity	$	7,215,643		$	7,969,251

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

2

BIOJECT MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Revenue:
Net sales of products	$	1,376,309		$	1,950,393		$	3,057,460		$	3,586,909
License and technology fees		275,062			801,827			406,700			1,293,514
		1,651,371			2,752,220			3,464,160			4,880,423
Operating expenses:
Manufacturing		1,102,418			1,634,843			2,290,058			3,231,066
Research and development		544,625			778,241			1,138,156			1,752,016
Selling, general and administrative		791,133			635,127			1,524,453			1,930,552
Total operating expenses		2,438,176			3,048,211			4,952,667			6,913,634
Operating loss		(786,805	)		(295,991	)		(1,488,507	)		(2,033,211	)
Interest income		6,064			28,305			23,560			65,093
Interest expense		(135,683	)		(157,154	)		(328,580	)		(296,996	)
Change in fair value of derivative liabilities		495			(553,758	)		224,583			(827,214	)
		(129,124	)		(682,607	)		(80,437	)		(1,059,117	)
Net loss		(915,929	)		(978,598	)		(1,568,944	)		(3,092,328	)
Preferred stock dividend		(73,460	)		(96,965	)		(184,228	)		(190,923	)
Net loss allocable to common shareholders	$	(989,389	)	$	(1,075,563	)	$	(1,753,172	)	$	(3,283,251	)
Basic and diluted net loss per common share allocable to common shareholders	$	(0.06	)	$	(0.07	)	$	(0.11	)	$	(0.22	)
Shares used in per share calculations		15,658,307			14,986,559			15,571,353			14,867,664

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

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BIOJECT MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Six Months Ended June 30,
	2008			2007
Cash flows from operating activities:
Net loss	$	(1,568,944	)	$	(3,092,328	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Compensation expenses related to fair value of stock-based awards		451,585			368,827
Stock contributed to 401(k) Plan		31,879			46,440
Contributed capital for services		27,029			114,401
Depreciation and amortization		443,783			465,973
Goodwill impairment		94,074			—
Other non-cash interest expense		266,891			159,060
Change in fair value of derivative instruments		(224,583	)		827,214
Change in deferred rent		(9,337	)		(289	)
Changes in operating assets and liabilities:
Accounts receivable, net		309,165			650,266
Inventories		(303,100	)		96,298
Other current assets		23,928			99,825
Accounts payable		(191,638	)		(35,523	)
Accrued payroll		(55,711	)		6,687
Accrued severance and related liabilities and other accrued liabilities		(70,233	)		(12,883	)
Deferred revenue		1,198,079			(879,051	)
Net cash provided by (used in) operating activities		422,867			(1,185,083	)
Cash flows from investing activities:
Purchase of marketable seucrities		(650,000	)		(25,000	)
Maturity of marketable securities		636,554			—
Capital expenditures		(13,990	)		(68,862	)
Other assets		(87,653	)		(172,866	)
Net cash used in investing activities		(115,089	)		(266,728	)
Cash flows from financing activities:
Proceeds from (payments on) revolving note payable, net		(52,475	)		54,574
Payments made on capital lease obligations		(23,351	)		(23,217	)
Payments made on short and long-term debt		(416,567	)		(166,667	)
Net proceeds from sale of common stock		—			31,015
Net cash used in financing activities		(492,393	)		(104,295	)
Decrease in cash and cash equivalents		(184,615	)		(1,556,106	)
Cash and cash equivalents:
Beginning of period		1,722,705			1,977,546
End of period	$	1,538,090		$	421,440
Supplemental disclosure of cash flow information:
Cash paid for interest	$	35,972		$	137,104
Supplemental non-cash information:
Severance costs settled in restricted stock	$	—		$	501,435
Preferred stock dividend to be settled in Series E preferred stock		162,596			190,923
Preferred stock dividend to be settled in Series F preferred stock		21,632			—
Issuance of Series F preferred stock in exchange for note payable and accrued interest		623,550			—

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

4

BIOJECT MEDICAL TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The financial information included herein for the three and six-month periods ended June 30, 2008 and 2007 is unaudited; however, such information reflects all adjustments consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2007 is derived from Bioject Medical Technologies Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in Bioject’s Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

Due to our limited amount of additional committed capital, recurring losses, negative cash flows and accumulated deficit, the report of our independent registered public accounting firm for the year ended December 31, 2007 expressed substantial doubt about our ability to continue as a going concern.

We have historically suffered recurring operating losses and negative cash flows from operations. As of June 30, 2008, we had an accumulated deficit of $119.6 million with total shareholders’ equity of $2.0 million. Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, assuming that we will continue as a going concern.

Cash, cash equivalents and marketable securities were $2.2 million at June 30, 2008. Our revolving loan was paid off during the second quarter of 2008 and it expired on June 11, 2008. We received an upfront non-refundable payment $1.4 million from Merial Limited (“Merial”) for a new long-term exclusive license, development and supply agreement for a next generation companion animal device which allows for the delivery of injectables. We also expect to receive additional payments as milestones are met.

If we do not continue to enter into an adequate number of licensing, development and supply agreements, we may need to do one or more of the following to raise additional resources, or reduce our cash requirements:

• reduce our current expenditure run-rate;

• delay capital and maintenance expenditures;

• restructure current debt financing;

• secure additional short-term debt financing;

• secure additional long-term debt financing;

• secure additional equity financing; or

• secure a strategic partner.

There is no guarantee that such resources will be available to us on terms acceptable to us, or at all, or that such resources will be received in a timely manner, if at all, or that we will be able to reduce our expenditure run-rate without materially and adversely affecting our business. Inability to secure additional resources may result in our defaulting on our debt, resulting in our lender foreclosing on our assets, or may cause us to cease operations, seek bankruptcy protection, turn our assets over to our lender or liquidate.

Note 2. Forbearance Agreement

On November 19, 2007 we entered into Forbearance Agreement #1 with Partners for Growth, L.P. (“PFG”) in relation to the three loans that were then outstanding with PFG, which are referred to collectively as the “PFG Loans.” On May 30, 2008, we entered into Forbearance Agreement #2 with PFG in relation to the PFG Loans. As of June 30, 2008 the PFG Loans consisted of $1.25 million outstanding on our $1.25 million convertible loan (the “Convertible Loan”) and $83,433 outstanding on our August 31, 2007 $500,000 term loan.

5

Forbearance Agreement #1 expired June 1, 2008. Pursuant to Forbearance Agreement #2, PFG agreed to forbear, through no later than September 15, 2008 (the “Forbearance Period”), and not declare an Event of Default or exercise other remedies under the PFG Loans for a Permitted Default, as defined in Forbearance Agreement #2.

Forbearance Agreement #2 provides that the Convertible Loan may be restructured as follows if we comply with the terms of Forbearance Agreement #2 and no defaults occur under the PFG Loans:

• If we consummate an equity financing raising not less than $5.0 million in net proceeds by the end of the Forbearance Period, PFG will amend the Convertible Loan to include a minimum liquidity financial covenant to the effect that our ratio of (i) cash and cash equivalents, plus eligible accounts receivable to (ii) outstanding monetary obligations to PFG, shall equal or exceed 2:1, tested on a calendar monthly basis; or

• If we are unable to consummate (or abandon the active pursuit of) an equity financing raising not less than $5.0 million in net proceeds by the end of the Forbearance Period, PFG will amend the Convertible Loan to apply a monthly borrowing base formula to the Convertible Loan that is equal to 100% of Eligible Accounts plus 100% of Eligible Inventory (as defined in Forbearance Agreement #2). Any excess of outstanding monetary obligations under the Convertible Loan over the formula-eligible borrowings would be required to be immediately repaid to PFG upon notice from PFG, at PFG’s sole option and would not be eligible for re-borrowing. A minimum liquidity financial covenant, as defined above, would apply, but at a ratio of 1.25:1. The interest rate on the Convertible Loan would be at the Prime Rate plus 3%. Any reduction of principal amount due to repayment as required by these terms would reduce the amount of the Convertible Loan eligible for PFG to convert into our common stock.

During the Forbearance Period, the PFG Loans, other than the Convertible Loan, are amended by reducing the interest rate specified in each PFG Loan by 3% per annum.

At the end of the Forbearance Period, the only monetary obligation remaining outstanding with PFG will be the Convertible Loan. The term loan matures September 1, 2008. Our revolving loan with PFG and our December 2006 $500,000 term loan with PFG both matured June 11, 2008 and no amounts remain outstanding under either loan.

Note 3. NASDAQ Delisting

On November 19, 2007, we received a NASDAQ Staff Deficiency Letter stating that we had failed to comply with the minimum bid price requirement for continued listing set forth in Marketplace Rule 4310(c)(4) because for 30 consecutive business days the bid price of Bioject’s common stock had closed below the minimum $1.00 bid requirement. The letter stated that we were provided 180 calendar days, or until May 19, 2008, to regain compliance with the minimum bid price requirement.

We did not regain compliance with the minimum bid price requirement by May 19, 2008 and, accordingly, n July 21, 2008, the NASDAQ Panel determined to delist our common stock from The NASDAQ Stock Market, and suspended trading of our common stock effective with the open of business on July 23, 2008. Trading in our common stock was transferred to the Over-the-Counter Bulletin Board (“OTCBB”), an electronic quotation service maintained by the Financial Industry Regulatory Authority, effective with the open of the market on July 23, 2008. The symbol remains BJCT.

Note 4. Inventories

Inventories are stated at the lower of cost or market. Cost is determined in a manner which approximates the first-in, first out (FIFO) method. Costs utilized for inventory valuation purposes include labor, materials and manufacturing overhead.

6

Inventories, net of valuation reserves of $714,000 and $736,000, respectively, at June 30, 2008 and December 31, 2007, consisted of the following:

	June 30, 2008		December 31, 2007
Raw materials and components	$	855,927	$	502,763
Work in process		46,293		83,546
Finished goods		178,031		190,842
	$	1,080,251	$	777,151

Note 5. Net Loss Per Common Share

The following common stock equivalents are excluded from the diluted loss per share calculations, as their effect would have been antidilutive:

	Three and Six Months Ended June 30,
	2008	2007
Stock options and warrants	4,603,721	4,574,468
Convertible preferred stock	6,226,749	5,395,349
Series E Payment-in-kind dividends	550,516	293,256
Series F Payment-in-kind dividends	28,843	—
Convertible debt	2,188,889	912,409
Accrued interest on $600,000 convertible debt	36,121	—
Total	13,634,839	11,175,482

Note 6. Reduction in Force

On January 16, 2008, we eliminated 13 positions. We incurred approximately $0.1 million for severance and related costs in the first quarter of 2008 related to these actions.

Note 7. Product Sales and Concentrations

Product sales to customers accounting for 10% or more of our total product sales were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Merial	49	%	26	%	44	%	26	%
Serono	24	%	36	%	32	%	30	%
BioScrip	1	%	21	%	2	%	12	%
Amgen	—		16	%	—		18	%

At June 30, 2008, accounts receivable from Merial totaled 47% of our gross accounts receivable balance. In addition, two other customers accounted for 12% and 10%, respectively, of our gross accounts receivable as of June 30, 2008.

Note 8. Stock-Based Compensation

In the first quarter of 2008, we issued 243,895 restricted stock units (“RSUs”) to executives and other employees and options exercisable for 49,440 shares of our common stock to non-executive employees at $0.47 per share pursuant to our 1992 Stock Incentive Plan.

Of the 243,895 RSUs, 204,395 vest one year from the grant date and the remaining 39,500 vest over a three-year period from December 31, 2008, assuming the performance criteria are achieved for 2008.

Of the 49,440 options, 31,315 vest one year from the grant date and the remaining 18,125 vest over a three-year period from December 31, 2008, assuming the performance criteria are achieved for 2008.

In addition, pursuant to his employment agreement and based on 2007 company performance, Mr. Ralph Makar, our CEO, received a grant outside of our 1992 Stock Incentive Plan of 150,000 RSUs with a value of $0.47 per share. The RSUs vest as to 1/3 of the total on each of the first through third anniversaries of the grant date.

7

The total fair value of the grants in the first quarter of 2008 was $195,000.

In the second quarter of 2008, the following awards were made:

• we awarded 197,368 shares of our common stock with a value of $0.38 per share, for a total value of $75,000, to Mr. Ralph Makar in lieu of a $75,000 cash award that was earned by Mr. Makar pursuant to his employment agreement related to 2007 performance;

• each non-employee Board member was granted RSUs for a total of 298,000 RSUs with a value of $0.37 per share. The RSUs vest as to 50% in six months and as to the remaining 50% on the one year anniversary of the grant date. The total value of the RSUs was $110,260 and will be recognized over the one year vesting period of the RSUs; and

• two of our executive officers were each granted 75,000 RSUs with a value of $0.38 per share. The RSUs vest as to one-third of the total on each of December 31, 2009, 2010 and 2011. The total value of the RSUs was $57,000 and is being recognized over the vesting period of the RSUs.

The fair value of all of the 2008 grants was $437,000 and will be recognized over the vesting periods of the awards. Of this amount, $218,000 will be recognized in 2008.

The stock options were valued using the Black-Scholes valuation model with the following assumptions:

Risk-free interest rate	2.82	%
Expected dividend yield	0.0	%
Expected term (years)	7 years
Expected volatility	78.74-83.06	%

Note 9. Fair Value Measurements

Effective January 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” for our financial assets and liabilities. The adoption of this portion of SFAS No. 157 did not have any effect on our financial position or results of operations and we do not expect the adoption of the provisions of SFAS No. 157 related to non-financial assets and liabilities to have a material effect on our financial position or results of operations.

Various inputs are used in determining the fair value of our financial assets and liabilities and are summarized into three broad categories:

• Level 1 – quoted prices in active markets for identical securities;

• Level 2 – other significant observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.; and

• Level 3 – significant unobservable inputs, including our own assumptions in determining fair value.

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

Certain of our convertible debt and equity agreements include derivative liabilities as defined under EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Common Stock.” These instruments were recorded at fair value and are marked to market each period. The fair value of each of these instruments is determined using the Black-Scholes valuation model. Following are the disclosures related to our financial assets and (liabilities) as of June 30, 2008 pursuant to SFAS No. 157 (in thousands):

	June 30, 2008
	Fair Value			Input Level
Marketable securities	$	679,980		Level 1
Warrants issued in connection with $1.5 million bridge loan		(75,169	)	Level 3
$1.25 million convertible debt conversion feature		(227,898	)	Level 3
$1.25 million convertible debt convertible interest feature		—		Level 3

8

	Warrants issued in connection with March 2006 $1.5 million bridge loan			$1.25 million convertible debt conversion feature			$1.25 million convertible debt convertible interest feature
Black-Scholes Assumptions
Risk-free interest rate		3.5	%		3.5	%		—
Expected dividend yield		0.0	%		0.0	%		—
Contractual term (years)		2.19			2.74			—
Expected volatility		101.06	%		94.88	%		—
Certain Other Information
Fair value at December 31, 2007	$	(127,823	)	$	(400,139	)	$	312
Fair value at June 30, 2008	$	(75,169	)	$	(227,898	)	$	—
Change in fair value from December 31, 2007 to June 30, 2008	$	52,654		$	172,241		$	(312	)

Our marketable securities are valued using quoted prices in active markets for the same assets.

Note 10. Series F Convertible Preferred Stock

On January 22, 2008, we amended our Articles of Incorporation to designate 9,645 shares of our authorized preferred stock as Series F Convertible Preferred Stock (the “Series F Preferred Stock”). A description of the material rights and preferences of the Series F Preferred Stock is as follows:

• Receive 8% annual payment-in-kind dividends (“PIK Dividends”) for 24 months following January 22, 2008 (while these dividends will accrue, they will only be paid in connection with certain liquidation events or conversion of the Series F Preferred Stock);

• Receive on a pari passu basis with the holders of common stock, as if the Series F Preferred Stock had been converted into common stock immediately before the applicable record date, cash dividends at the same rate and in the same amount per share as any and all dividends declared and paid upon the then outstanding shares of common stock;

• Receive, in the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Company and before any payment is made in respect of the common stock, the Series E Convertible Preferred Stock or the Series D Convertible Preferred Stock, an amount per share of Series F Preferred Stock equal to $75 (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like), plus all accrued but unpaid dividends thereon to the date fixed for distribution, including, without limitation, the PIK Dividends to the extent not previously issued (if our assets available for distribution to shareholders are insufficient to pay the holders of Series F Preferred Stock the full amount to which they are entitled, then all the assets available for distribution to our shareholders shall be distributed ratably first to the holders of the Series F Preferred Stock);

• Be convertible, at any time at the option of the holder, into common stock at a conversion rate of one share of Series F Preferred Stock being convertible into one hundred (100) shares of common stock (subject to anti-dilution adjustments);

• One vote for each share of common stock into which Series F Preferred Stock could then be converted (excluding any PIK Dividends), and with respect to such vote, full voting rights and powers equal to the voting rights and powers of the holders of common stock;

• Consent rights with respect to certain extraordinary transactions; and

• Registration rights with respect to the shares of common stock issuable upon conversion of such shares of Series F Preferred Stock.

There is no restriction on the repurchase or redemption of the Series F Preferred Stock while there is an arrearage in the payment of dividends.

9

Note 11. Conversion of $615,000 Convertible Note

On January 22, 2008, we entered into a Purchase Agreement with each of Edward Flynn, Ralph Makar, Dr. David Tierney, Dr. Richard Stout and Christine Farrell (each a “Purchaser” and collectively, the “Purchasers”) for the purchase of an aggregate of 8,314 shares of our Series F Preferred Stock at a price of $75 per share. Gross proceeds from the sale were $623,550, payable by cancellation of the outstanding $615,000 principal amount of, and accrued interest on, promissory notes issued to each of the Purchasers in November 2007.

Note 12. Issuance of Warrants

On February 8, 2008, we issued a warrant exercisable for an aggregate of 31,875 shares of our common stock at an exercise price of $0.75 per share to Susan Levinson and Valerie Ceva of The Strategic Choice LLC for services provided. The warrants are immediately exercisable and expire four years from the date of grant. The value of the warrants was determined to be $8,158 using the Black-Scholes valuation model with the following assumptions and was expensed as a component of selling, general and administrative expense in the first quarter of 2008:

Risk-free interest rate	2.69	%
Expected dividend yield	0.0	%
Contractual term (years)	4 years
Expected volatility	89.55	%

On March 31, 2008, we issued a warrant exercisable for an aggregate of 59,375 shares of our common stock at an exercise price of $0.75 per share to Susan Levinson and Valerie Ceva of The Strategic Choice LLC for services provided. The warrants are immediately exercisable and expire four years from the date of grant. The value of the warrants was determined to be $11,192 using the Black-Scholes valuation model with the following assumptions and was expensed as a component of selling, general and administrative expense in the first quarter of 2008:

Risk-free interest rate	2.46	%
Expected dividend yield	0.0	%
Contractual term (years)	4 years
Expected volatility	81.44	%

On June 30, 2008, we issued a warrant exercisable for an aggregate of 18,125 shares of our common stock at an exercise price of $0.75 per share to Susan Levinson and Valerie Ceva of The Strategic Choice LLC for services provided. We also issued a warrant exercisable for an aggregate of 16,000 shares of our common stock at an exercise price of $0.75 per share to Andrew S. Forman for services provided. The warrants are immediately exercisable and expire four years from the date of grant. The value of the warrants was determined to be $7,678 using the Black-Scholes valuation model with the following assumptions and was expensed as a component of selling, general and administrative expense in the second quarter of 2008:

Risk-free interest rate	3.50	%
Expected dividend yield	0.0	%
Contractual term (years)	4 years
Expected volatility	93.78	%

Note 13. Other Current Liabilities

Included in other current liabilities was $641,000 and $633,000, respectively, at June 30, 2008 and December 31, 2007 related to prepaid inventory for Serono.

Note 14. Long-Term Agreement with Merial

In June 2008, we signed a new long-term exclusive license, development and supply agreement with Merial, a global animal health company, for a next generation companion animal device which allows for the delivery of injectables. The agreement included a non-refundable, up-front license payment of $1.4 million, $110,000 of which was recognized as license and technology fee revenue in the second quarter of 2008, with the balance to be recognized over the term of the agreement. The agreement also includes

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development milestones with associated payments, provisions for capital equipment and a supply agreement extending up to 10 years.

Note 15. Goodwill Impairment

Pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” we are required to test our goodwill for impairment at least annually or more frequently if conditions indicate that an impairment may have occurred. In the second quarter of 2008, as discussed in Note 3 above, our common stock was delisted from The NASDAQ Stock Market and now trades on the OTCBB. This may impair the price at which our common stock trades and the liquidity of the market for our common stock, which may negatively affect our ability to obtain additional funding. We tested our goodwill for impairment in the second quarter of 2008 and determined that an impairment had occurred. Accordingly, we recorded a non-cash charge of $94,074 as a component of manufacturing expense to fully write-off our goodwill balance, which was related to manufacturing assets, and, at June 30, 2008, we did not have any goodwill recorded on our balance sheet.

Note 16. New Accounting Pronouncements

FSP No. APB 14-1

In May 2008, the Financial Accounting Standards Board (“FASB”) issued Staff Position (“FSP”) No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement),” which clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 12, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.” Additionally, this FSP specifies that such instruments should separately account for the liability and equity components in a manner that reflects the entity’s non-convertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We believe that the adoption of this FSP will not have a material effect on our financial position or results of operations.

SFAS No. 162

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS No. 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 4311, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” We believe that our accounting principles and practices are consistent with the guidance in SFAS No. 162, and, accordingly, we do not expect the adoption of SFAS No. 162 to have a material effect on our financial position or results of operations.

SFAS No. 161

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which requires certain disclosures related to derivative instruments. SFAS No. 161 is effective prospectively for interim periods and fiscal years beginning after November 15, 2008. We do not have any derivative instruments that fall under the guidance of SFAS No. 161 and, accordingly, the adoption of SFAS No. 161 will not have a material effect on our financial position or results of operations.

EITF 07-3

In June 2007, the Emerging Issus Task Force (“EITF”) issued EITF 07-3, “Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities,” which states that non-refundable advance payments for services that will be consumed or performed in a future period in conducting research and development activities on behalf of the company should be recorded as an asset when the advance payment is made and then recognized as an expense when the research and development activities are performed. EITF 07-3 is applicable prospectively to new contractual arrangement entered into in fiscal years beginning after December 15, 2007. The adoption of EITF 07-3 effective January 1, 2008 did not have a material effect on our financial position or results of operations.

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SFAS No. 159

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The adoption of SFAS No. 159 effective January 1, 2008 did not have a material effect on our financial position or results of operations.

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

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements concerning payments to be received under agreements with strategic partners, capital expenditures and cash requirements. Such forward looking statements (often, but not always, using words or phrases such as “expects” or “does not expect,” “is expected,” “anticipates” or “does not anticipate,” “plans,” “estimates” or “intends,” or stating that certain actions, events or results “may,” “could,” “would,” “should,” “might” or “will” be taken, occur or be achieved) involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward looking statements. Such risks, uncertainties and other factors include, without limitation, the risk that we may not enter into anticipated licensing, development or supply agreements, the risk that we may not achieve the milestones necessary for us to receive payments under our development agreements, the risk that our products will not be accepted by the market, the risk that we will be unable to obtain needed debt or equity financing on satisfactory terms, or at all, uncertainties related to our dependence on the continued performance of strategic partners and technology and uncertainties related to the time required for us or our strategic partners to complete research and development and obtain necessary clinical data and government clearances. See also Part II, Item 1A, Risk Factors.

Forward-looking statements are based on the estimates and opinions of management on the date the statements are made. We assume no obligation to update forward-looking statements if conditions or management’s estimates or opinions should change, even if new information becomes available or other events occur in the future.

OVERVIEW

We are an innovative developer and manufacturer of needle-free injection therapy systems (“NFITS”).

Our long-term goal is to become the leading supplier of needle-free injection systems to the pharmaceutical and biotechnology industries. In 2007, we focused our business development efforts on new and existing licensing and supply agreements with leading pharmaceutical and biotechnology companies, as well as numerous research agreements that could lead to long-term agreements. Our pipeline of prospective new partnerships remains active. We are also actively pursuing additional opportunities both domestic and overseas as we expand our current product line.

Our NFITS work by forcing liquid medication at high speed through a tiny orifice held against the skin. This creates a fine stream of high-pressure medication that penetrates the skin, depositing the medication in the tissue beneath. By bundling customized needle-free delivery systems with partners’ injectable medications and vaccines, we can enhance demand for these products in the healthcare provider and end-user markets.

We began a strategic realignment of our company during 2007 with the singular goal of increasing shareholder value. The realignment has two concurrent phases. Phase One was to focus on our fixed operating expenses, primarily by reducing headcount and related expenses. Along this line, on January

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16, 2008, we eliminated an additional 13 positions, incurring approximately $0.1 million of severance and related costs in the first quarter of 2008. Phase Two of our realignment campaign is to increase our revenue by increasing product sales and adding license and development agreements. We have successfully completed key milestones with a number of our current partners. We continually review and discuss our agreements with our partners and may make changes to the agreements in the future based on strategic decisions that we believe are in the best interests of our shareholders. As we enter into new agreements or amend existing agreements, we intend to ensure, to the best of our ability, that they are profitable and aligned with the long-term interests of our shareholders. For example, in October 2007, we entered into a new three-year supply agreement with Serono for the delivery of the cool.click™ and Serojet™ spring-powered needle-free device for use with its recombinant human growth hormone drugs on terms more favorable to us than past agreements. In addition, in June 2008, we signed a new long-term exclusive license, development and supply agreement with Merial, a global animal health company, for a next generation companion animal device which allows for the delivery of injectables. We have also initiated new discussions with a number of potential new partners, as well as with past partners.

We intend to achieve future profitability by ensuring that we enter into profitable, revenue-generating agreements and that we do not enter into agreements that we believe will not add to long-term shareholder value. We recently completed a business assessment for strategic targeting and focusing on the most promising potential partnership opportunities, including opportunities to secure injectable indications allowing us to create our own drug+device combinations for the market. We are committed to working with our current partners and assessing ways to ensure continued beneficial long-term partner relationships. We have recently initiated discussions with new potential partners within the large pharmaceutical market, the biotechnology market, the specialty pharmaceutical market and others.

Revenues and results of operations have fluctuated and can be expected to continue to fluctuate significantly from quarter to quarter and from year to year. Various factors may affect quarterly and yearly operating results including: i) the length of time to close product sales; ii) customer budget cycles; iii) the implementation of cost reduction measures; iv) uncertainties and changes in product sales due to third party payer policies and proposals relating to healthcare cost containment; v) the timing and amount of payments under licensing and technology development agreements; vi) our ability to enter into new agreements with partners; and vii) the timing of new product introductions by us and our competitors.

We do not expect to report net income in 2008.

CONTRACTUAL PAYMENT OBLIGATIONS

A summary of our contractual commitments and obligations as of June 30, 2008 was as follows:

	Payments Due By Period
Contractual Obligation	Total		2008		2009 and 2010		2011 and 2012		2013 and beyond
August 2007 PFG $500,000 term loan	$	83,433	$	83,433	$	—	$	—	$	—
December 2007 $600,000 LOF convertible note		600,000		—		600,000		—		—
$1.25 million PFG term loan(1)		1,250,000		—		—		1,250,000		—
Interest on all debt facilities		156,438		40,702		104,756		10,980		—
Operating leases		2,616,333		187,044		770,148		809,141		850,000
Capital leases		79,414		23,367		49,674		6,373		—
Purchase order commitments		423,052		423,052		—		—		—
	$	5,208,670	$	757,598	$	1,524,578	$	2,076,494	$	850,000

(1) The accreted value of $566,149 of our $1.25 million term loan is classified as current on our consolidated balance sheet as of June 30, 2008 due to the fact that the agreement contains subjective acceleration clauses, which could result in the debt becoming due at any time. However, since none of the subjective acceleration clauses have been triggered to date, it is included in this table according to its contractual maturity.

Purchase order commitments relate to future raw material inventory purchases, research and development projects and other operating expenses.

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FORBEARANCE AGREEMENTS

See Note 2 of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

NASDAQ DELISTING

See Note 3 of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

CONVERSION OF $615,000 CONVERTIBLE NOTE

See Note 11 of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

OUTSTANDING DEBT

$1.25 Million Convertible Loan

We have outstanding a term loan agreement with PFG for $1.25 million of convertible debt financing (the “Debt Financing”). This loan is due in March 2011. However, due to certain subjective acceleration clauses contained in the Debt Financing agreement, the accreted value of the Debt Financing is reflected as current on our balance sheet. The loan bears interest at the prime rate and is convertible at any time by PFG into our common stock at $0.90 per share. In addition, if our common stock trades at a price of $4.11 per share or higher for 20 consecutive trading days, we can force PFG to convert the debt to common stock, subject to certain limitations on trading volume. If we prepay this loan, we will issue PFG a warrant to purchase a number of shares of common stock equal to what it would have received upon conversion at a price of $0.90 per share. As a result of the derivative accounting prescribed by EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Common Stock,” at June 30, 2008, this debt was recorded on our balance sheet at $566,000 and is being accreted on a straight-line basis at the rate of approximately $62,000 per quarter to its face value of $1.25 million over the 60-month contractual term of the debt.

August 31, 2007 $500,000 Term Loan

On August 31, 2007, we entered into a 2007 Term Loan and Security Agreement (the “2007 Loan Agreement”) with PFG for a $500,000 term loan (the “Loan”). The Loan is due in twelve equal monthly installments of $41,666.67 commencing October 1, 2007 and ending September 1, 2008. Interest accrues at the rate of the prime rate of Silicon Valley Bank plus 2% per annum and is due on the first day of each month for interest accrued during the prior month. Under the 2007 Loan Agreement, we are obligated to pay PFG a collateral handling fee of 0.55% per month on the average amount borrowed during that month. If the closing price of our common stock is between $2.00 and $4.00 per share for 30 consecutive trading days, the fee will be reduced to 0.38% per month. If the closing price of our common stock is at or above $4.00 per share for 30 consecutive trading days, the fee will be reduced to 0.22% per month. Under the Loan Agreement, we granted a security interest in substantially all of our assets to PFG to secure our obligations under the Loan Agreement. The 2007 Loan Agreement contains certain revenue and working capital covenants, which were replaced by the terms of the Forbearance Agreement. At June 30, 2008, $83,000 was outstanding on this Loan at an interest rate of 7.0%. Pursuant to the Forbearance Agreement, the interest rate on this loan is reduced by 3% per annum during the Forbearance Period, making the interest rate 4.0% at June 30, 2008.

$600,000 Convertible Notes

On December 5, 2007, we entered into Convertible Note Purchase and Warrant Agreements with each of Life Science Opportunities Fund II, L.P. (“LOF II”) and Life Sciences Opportunities Fund II (Institutional) L.P. (“LOF Institutional” and, together with LOF II, the “Purchasers”) pursuant to which we issued Convertible Promissory Notes and warrants to purchase our common stock. Pursuant to the agreements, we sold a note in the principal amount of $91,104 to LOF II and a note in the principal amount of $508,896 to LOF Institutional. The notes bear interest at the rate of 8% per annum with all principal and interest due May 15, 2009 and may not be prepaid without the written consent of the purchaser holding a given note. The notes are convertible at any time by the purchasers into our common stock at the rate of $0.75 per

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share. The notes will be automatically converted upon a qualified financing, as defined in the purchase agreement, at a price equal to the financing price.

The warrants are exercisable for an aggregate of 80,000 shares of our common stock at an exercise price of $0.75 per share. Each warrant is immediately exercisable and expires four years from the date of issuance.

GOING CONCERN AND CASH REQUIREMENTS FOR THE NEXT TWELVE-MONTH PERIOD

See Note 1 of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

RESULTS OF OPERATIONS

The consolidated financial data for the three and six-month periods ended June 30, 2008 and 2007 are presented in the following table:

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Revenue:
Net sales of products	$	1,376,309		$	1,950,393		$	3,057,460		$	3,586,909
License and technology fees		275,062			801,827			406,700			1,293,514
		1,651,371			2,752,220			3,464,160			4,880,423
Operating expenses:
Manufacturing		1,102,418			1,634,843			2,290,058			3,231,066
Research and development		544,625			778,241			1,138,156			1,752,016
Selling, general and administrative		791,133			635,127			1,524,453			1,930,552
Total operating expenses		2,438,176			3,048,211			4,952,667			6,913,634
Operating loss		(786,805	)		(295,991	)		(1,488,507	)		(2,033,211	)
Interest income		6,064			28,305			23,560			65,093
Interest expense		(135,683	)		(157,154	)		(328,580	)		(296,996	)
Change in fair value of derivative liabilities		495			(553,758	)		224,583			(827,214	)
Net loss		(915,929	)		(978,598	)		(1,568,944	)		(3,092,328	)
Preferred stock dividend		(73,460	)		(96,965	)		(184,228	)		(190,923	)
Net loss allocable to common shareholders	$	(989,389	)	$	(1,075,563	)	$	(1,753,172	)	$	(3,283,251	)
Basic and diluted net loss per common share allocable to common shareholders	$	(0.06	)	$	(0.07	)	$	(0.11	)	$	(0.22	)
Shares used in per share calculations		15,658,307			14,986,559			15,571,353			14,867,664

Revenue

The $0.6 million, or 29.4%, decrease and the $0.5 million, or 14.8%, decrease in product sales in the three and six-month periods ended June 30, 2008, respectively, compared to the same periods of 2007, were due primarily to the following:

• B2000 sales to BioScrip and Roche/Trimeris decreased from $223,000 to $12,000, or 95%, and from $417,000 to $110,000, or 74%, in the three and six-month periods ended June 30, 2008, respectively, compared to the same periods of 2007. These decreases were primarily a result of the October 2007 announcement from Hoffmann-La Roche Inc. and Trimeris Inc. that they were not going to continue with their FDA submission for Fuzeon^® to be administered with the B2000. However, patients currently utilizing the B2000 for administering Fuzeon^® and those in clinical trials may continue using the device under a doctor’s supervision;

• sales to Serono decreased from $660,000 to $323,000, or 35%, and from $1,063,000 to $966,000, or 43%, in the three and six-month periods ended June 30, 2008, respectively, compared to the same periods of 2007 due to the timing of orders from Serono; and

• there were no sales to Amgen in either the three or six-month periods ended June 30, 2008 compared to sales of $314,000 and $628,000 in the comparable periods of 2007. We do not anticipate any significant sales to Amgen in future periods.

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These factors were partially offset by:

• an increase in sales to Merial from $502,000 to $677,000, or 35%, and from $941,000 to $1,343,000, or 43%, in the three and six-month periods ended June 30, 2008, respectively, compared to the same periods of 2007 due to increased volume of product sales primarily related to the feline leukemia products; and

• an increase in sales to Great Lakes Naval Hospital from $50,000 to $123,000, or 146%, and from $67,000 to $153,000, or 128%, in the three and six-month periods ended June 30, 2008, respectively, compared to the same periods of 2007 due to increased volume of product sales, primarily the B2000 device and associated disposables.

We currently have significant supply agreements or commitments with Serono, Merial and Ferring Pharmaceuticals Inc.

License and technology fees decreased $0.5 million, or 65.7%, and $0.9 million, or 68.6% in the three and six-month periods ended June 30, 2008, respectively, compared to the same periods of 2007, in accordance with the terms of our current agreements. The three and six-month periods ended June 30, 2007 included the recognition of $434,000 and $614,000, respectively, related to former partnerships. The three and six-month periods ended June 30, 2008 included a $21,000 and a $68,000 increase, respectively, in payments from Serono compared to the same periods of 2007 in connection with their October 2007 supply agreement.

We currently have active licensing and/or development agreements, which often include commercial product supply provisions, with Merial, an undisclosed pharmaceutical company, the Centers for Disease Control and Prevention and Vical.

Manufacturing Expense

Manufacturing expense is made up of the cost of products sold and manufacturing overhead expense related to excess manufacturing capacity.

The $0.5 million, or 32.6%, decrease and the $0.9 million, or 29.1%, decrease in manufacturing expense in the three and six-month periods ended June 30, 2008, respectively, compared to the same periods of 2007 were primarily due to reduced indirect manufacturing headcount. In addition, there was $12,000 of restructuring and severance expense included in both the three and six-month periods ended June 30, 2008 compared to $0 and $55,000, respectively, in the comparable periods of 2007. The three and six-month periods ended June 30, 2008 included a $94,000 non-cash charge to fully write-off our goodwill balance. See Note 15 of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for additional information.

Research and Development Expense

Research and development costs include labor, materials and costs associated with clinical studies incurred in the research and development of new products and modifications to existing products.

The $0.2 million, or 30.0%, decrease and the $0.6 million, or 35.0%, decrease in research and development expense in the three and six-month periods ended June 30, 2008, respectively, compared to the same periods of 2007 were primarily due to the timing of expenses related to on-going projects and reduced headcount. These factors were partially offset by $92,000 of restructuring and severance expense included in the both the three and six-month periods ended June 30, 2008 compared to $0 and $38,000, respectively, in the comparable periods of 2007.

Current significant projects include the next generation spring-powered device with an auto disable feature.

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Selling, General and Administrative Expense

Selling, general and administrative costs include labor, travel, outside services and overhead incurred in our sales, marketing, management and administrative support functions.

The $0.2 million, or 24.6%, increase in selling, general and administrative expense in the three-month period ended June 30, 2008 compared to the same period of 2007 was due primarily to the hiring of our CEO in October 2007. The $0.4 million, or 21.0%, decrease in selling, general and administrative expense in the six-month period ended June 30, 2008 compared to the same period of 2007 was primarily a result of the hiring of our CEO being offset by a decrease in restructuring and severance expense. Restructuring and severance expense totaled $1,000 in both the three and six-month periods ended June 30, 2008 compared to $0 and $576,000, respectively, in the comparable periods of 2007.

Restructuring

Restructuring and severance charges were included as a component of operating expenses as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Manufacturing	$	12,330	$	—	$	12,330	$	55,229
Research and development		92,135		—		92,135		38,277
Selling, general and administrative		764		—		764		576,020
Total	$	105,229	$	—	$	105,229	$	669,526

Our accrued liability for past restructuring activities totaled zero and $129,000 at June 30, 2008 and December 31, 2007, respectively.

Interest Expense

Interest expense included the following:

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Contractual interest expense	$	26,000	$	78,000	$	62,000	$	139,000
Amortization of debt issuance costs		48,000		17,000		143,000		34,000
Accretion of $1.25 million convertible debt		62,000		62,000		124,000		124,000
	$	136,000	$	157,000	$	329,000	$	297,000

Change in Fair Value of Derivative Liabilities

Our derivative liabilities are recorded at fair value and are marked to market each period. The fair value of each of these instruments is determined using the Black-Scholes valuation model.

LIQUIDITY AND CAPITAL RESOURCES

Since our inception in 1985, we have financed our operations, working capital needs and capital expenditures primarily from private placements of securities, the exercise of warrants, loans, proceeds received from our initial public offering in 1986, proceeds received from a public offering of common stock in 1993, licensing and technology revenues and revenues from sales of products.

Total cash, cash equivalents and short-term marketable securities at June 30, 2008 were $2.2 million compared to $2.4 million at December 31, 2007. We had working capital of $0.2 million at June 30, 2008 compared to $0.4 million at December 31, 2007.

The overall decrease in cash, cash equivalents and short-term marketable securities during the first six months of 2008 resulted from $13,000 of net purchases of marketable securities, $14,000 used for capital expenditures, $88,000 used for other investing activities, primarily patent applications, and $0.5 million used for principal payments on short and long-term debt and capital leases. These factors were partially offset by $0.4 million provided by operations.

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Net accounts receivable decreased $0.3 million to $0.5 million at June 30, 2008 compared to $0.8 million at December 31, 2007. Receivables from one customer accounted for 47% of our gross accounts receivable balance at June 30, 2008. Of the accounts receivable due at June 30, 2008, $380,000 was collected prior to the filing of this Form 10-Q. Historically, we have not had collection problems related to our accounts receivable.

Inventories increased $0.3 million to $1.1 million at June 30, 2008 compared to $0.8 million at December 31, 2007, primarily due to prepaid inventory purchases for Serono.

Capital expenditures of $14,000 in the first six months of 2008 were primarily for the purchase of manufacturing tooling. We anticipate spending up to a total of $50,000 in 2008 for production molds for current research and development projects. We anticipate that we will be reimbursed by our partners for these expenditures.

Accounts payable decreased $0.2 million to $0.9 million at June 30, 2008 compared to $1.1 million at December 31, 2007 primarily due to payments to vendors for prepaid Serono inventory.

Derivative liabilities of $0.3 million at June 30, 2008 reflect the fair value of the derivative liabilities associated with certain of our debt and equity transactions. The fair value of the derivative liabilities is adjusted on a quarterly basis using the Black-Scholes valuation model, with changes in fair value being recorded as a component of earnings.

Deferred revenue totaled $1.6 million and $0.4 million, respectively, at June 30, 2008 and December 31, 2007. The balance at June 30, 2008 included $1.3 million received from Merial, $284,000 received from Serono and $21,000 received from Vical. See Note 14 of Notes to Consolidated Financial Statements for a discussion of our new agreement with Merial.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We reaffirm the critical accounting policies and estimates as reported in our Form 10-K for the year ended December 31, 2007, which was filed with the Securities and Exchange Commission on March 28, 2008.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

NEW ACCOUNTING PRONOUNCEMENTS

See Note 16. of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

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ITEM 4T. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our President and Chief Executive Officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our President and Chief Executive Officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our President and Chief Executive Officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1A. RISK FACTORS

In addition to the other information contained in this Form 10-Q, the following risk factors should be considered carefully in evaluating our business. Our business, financial condition, or results of operations could be materially adversely affected by any of these risks. Please note that additional risks not presently known to us or that we currently deem immaterial may also impair our business and operations.

We may need additional funding to support our operations beyond 2008; sufficient funding is subject to conditions and may not be available to us, and the unavailability of funding could adversely affect our business.We require cash for operations, debt service and capital expenditures. We had cash, cash equivalents and marketable securities of $2.2 million at June 30, 2008. If we are unable to enter into anticipated licensing agreements with our current partners or enter into new licensing, development and supply agreements, we may need to do one or more of the following:

• reduce our current expenditure run-rate;

• delay capital and maintenance expenditures;

• restructure current debt financing;

• secure additional short-term debt financing;

• secure additional long-term debt financing;

• secure additional equity financing; or

• secure a strategic partner.

There is no guarantee that such resources will be available to us on terms acceptable to us, or at all, or that such resources will be received in a timely manner, if at all, or that we will be able to reduce our expenditure run-rate without materially and adversely affecting our business. Inability to secure additional resources may result in our defaulting on our debt, resulting in our lender foreclosing on our assets, or may cause us to cease operations, seek bankruptcy protection, turn our assets over to our lender or liquidate.

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We have previously been out of compliance with the covenants in our loan agreements and, if we default under our loan agreements in the future, our lender could foreclose on our assets, which would adversely affect our business.In November 2007, we entered into Forbearance Agreement #1 with our lender and in May 2008, we entered in Forbearance Agreement #2. Forbearance Agreement #1 expired June 1, 2008.

Forbearance Agreement #2 provides that our $1.25 million convertible loan (the “Convertible Loan”) may be restructured as follows if we comply with the terms of Forbearance Agreement #2 and no defaults occur under the PFG Loans (as defined in Note 2 of Notes to Consolidated Financial Statements):

• If we consummate an equity financing raising not less than $5.0 million in net proceeds by the end of the Forbearance Period (as defined in Note 2 of Notes to Consolidated Financial Statements), Partners for Growth, L.P. (“PFG”) will amend the Convertible Loan to include a minimum liquidity financial covenant to the effect that our ratio of (i) cash and cash equivalents, plus eligible accounts receivable to (ii) outstanding monetary obligations to PFG, shall equal or exceed 2:1, tested on a calendar monthly basis; or

• If we are unable to consummate (or abandon the active pursuit of) an equity financing raising not less than $5.0 million in net proceeds by the end of the Forbearance Period, PFG will amend the Convertible Loan to apply a monthly borrowing base formula to the Convertible Loan that is equal to 100% of Eligible Accounts plus 100% of Eligible Inventory (each as defined in Forbearance Agreement #2). Any excess of outstanding monetary obligations under the Convertible Loan over the formula-eligible borrowings would be required to be immediately repaid to PFG upon notice from PFG, at PFG’s sole option and would not be eligible for re-borrowing. A minimum liquidity financial covenant, as defined above, would apply, but at a ratio of 1.25:1. The interest rate on the Convertible Loan would be at the Prime Rate plus 3%. Any reduction of principal amount due to repayment as required by these terms would reduce the amount of the Convertible Loan eligible for PFG to convert into our common stock.

Under Forbearance Agreement #2, our lender agreed not to declare an event of default with respect to certain alleged breaches under our loan agreement through September 15, 2008. In connection with Forbearance Agreement #1, we prepaid a portion of a loan and repriced warrants and convertible debt held by the lender.

During the Forbearance Period, the PFG Loans, other than the Convertible Loan, are amended by reducing the interest rate specified in each such loan agreement by 3% per annum.

At the end of the Forbearance Period, the only monetary obligation remaining outstanding with PFG will be the Convertible Loan. Our term loan with PFG matures September 1, 2008. Our revolving loan with PFG and our December 2006 $500,000 term loan with PFG both matured June 11, 2008 and no amounts were outstanding under either loan at June 30, 2008.

Our obligations to our lender are secured by a pledge of all of our assets. If we are unable to comply with the covenants addressed by Forbearance Agreement #2 at the end of the forbearance period, or if we otherwise breach our loan agreements, we could be required to negotiate a new forbearance agreement with our lender. If we cannot agree to a new forbearance agreement, or if our lender is unwilling to negotiate a new forbearance agreement, our lender could foreclose on our assets, which would materially and adversely affect our business.

We have a history of losses and may never be profitable. Since our formation in 1985, we have incurred significant annual operating losses and negative cash flow. At June 30, 2008, we had an accumulated deficit of $119.6 million and net working capital of $0.2 million. Due to our limited amount of additional committed capital, recurring losses, negative cash flows and accumulated deficit, the report of our independent registered public accounting firm dated March 28, 2008 expressed substantial doubt about our ability to continue as a going concern. We may never be profitable, which could have a negative effect on our stock price, our business and our ability to continue operations. Our revenues are derived from licensing and technology fees and from product sales. We sell our products to strategic partners, who market our products under their brand name, and to end-users such as public health clinics for

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vaccinations and nursing organizations for flu immunizations. We have not attained profitability at these sales levels. We may never be able to generate significant revenues or achieve profitability. In the future, we are likely to require substantial additional financing. Such financing may not be available on terms acceptable to us, or at all, which would have a material adverse effect on our business. Any future equity financing could result in significant dilution to shareholders.

If our products are not accepted by the market, our business could fail. Our success will depend on market acceptance of our needle-free injection drug delivery systems and on market acceptance of other products under development. If our products do not achieve market acceptance, our business could fail. Currently, the dominant technology used for intramuscular and subcutaneous injections is the hollow-needle syringe, which has a cost per injection that is significantly lower than that of our products. Our products may be unable to compete successfully with needle-syringes.

We may be unable to enter into additional strategic corporate licensing and distribution agreements or maintain existing agreements, which could cause our business to suffer. A key component of our sales and marketing strategy is to enter into licensing and supply arrangements with leading pharmaceutical and biotechnology companies for whose products our technology provides either increased medical effectiveness or a higher degree of market acceptance. If we cannot enter into these agreements on terms favorable to us or at all, our business may suffer.

In prior years, several agreements have been canceled by our partners prior to completion. These agreements were canceled for various reasons, including, but not limited to, costs related to obtaining regulatory approval, unsuccessful pre-clinical vaccine studies, changes in vaccine development and changes in business development strategies. These agreements resulted in significant short-term revenue. However, none of these agreements developed into the long-term revenue stream anticipated by our strategic partnering strategy.

In October 2007, Hoffmann-La Roche Inc. and Trimeris Inc. announced that they were not going to continue with their FDA submission for Fuzeon^® to be administered with the B2000. While we did not have a licensing and supply agreement with these parties, this announcement may negatively affect our B2000 sales in future periods.

We may be unable to enter into future licensing or supply agreements with major pharmaceutical or biotechnology companies. Even if we enter into these agreements, they may not result in sustainable long-term revenues which, when combined with revenues from product sales, could be sufficient for us to operate profitably.

Our drug+device strategy is new and is subject to a number of risks and uncertainties and, as a result, we may not be successful in implementing the strategy.We recently announced a new component of our business strategy pursuant to which we will attempt to secure rights to injectable medications to sell in combination with our products under our own brand. Successfully implementing this strategy is subject to a number of risks. We may not be successful in securing rights to medications we are interested in combining with our products. Even if successful in securing rights, these products would be subject to FDA approval, and it will be our responsibility to obtain such approval. This approval may not be obtained or may take a significant period of time to obtain. In addition, there is a risk that our device will not work for the new drug indication. We may also need to raise additional funds to finance this new strategy, and there is no assurance such funds will be available to us on acceptable terms or at all. We do not have experience manufacturing or marketing to end-users drug+device combinations. In addition, these new products may not be accepted by the market. Accordingly, there is no assurance that our new strategy will be successfully implemented, and failure to successfully implement the strategy could negatively affect our business.

We must retain qualified personnel in a competitive marketplace, or we may not be able to grow our business.Our success depends upon the personal efforts and abilities of our senior management. We may be unable to retain our key employees, namely our management team, or to attract, assimilate or retain other highly qualified employees. Although we have implemented workforce reductions, there

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remains substantial competition for highly skilled employees. Our key employees are not bound by agreements that could prevent them from terminating their employment at any time. If we fail to attract and retain key employees, our business could be harmed.

Our restructuring activities may not result in the expected benefits, which would negatively impact our future results of operations.In March 2007 and 2006, we restructured our operations, which included reducing the size of our workforce. Further headcount reductions were made in January 2008. Despite these efforts, we cannot assure you that we will achieve all of the operating expense reductions and improvements in operating margins and cash flows currently anticipated from these activities in the periods contemplated, or at all. If we are unable to realize these benefits or appropriately structure our business to meet market conditions, our results of operations could be negatively impacted. As part of our recent activities, we have reduced the workforce in certain portions of our business. This reduction in staffing levels could require us to forego certain future opportunities due to resource limitations, which could negatively affect our long-term revenues. In addition, these workforce reductions could result in a lack of focus and reduced productivity by remaining employees due to changes in responsibilities or concern about future prospects, which in turn may negatively affect our future revenues. Further, we believe our future success depends, in large part, on our ability to attract and retain highly skilled personnel. Our workforce reduction activities could negatively affect our ability to attract such personnel as a result of perceived risk of future workforce reductions. We cannot assure you that we will not be required to implement further restructuring activities or reductions in our workforce based on changes in the markets and industries in which we compete or that any future restructuring or workforce reduction efforts will be successful.

The delisting of our common stock from The NASDAQ Stock Market may impair the price at which our common stock trades, the liquidity of the market for our common stock and our ability to obtain additional funding.In our Current Report on Form 8-K filed July 22, 2008, we reported that we had received a NASDAQ Staff Determination Letter stating that the NASDAQ Hearings Panel had determined to delist our common stock from The NASDAQ Stock Market, and would suspend trading of our shares effective with the open of business on Wednesday, July 23, 2008. Effective with the open of the market on July 23, 2008, trading in our common stock was transferred to the Over-the-Counter Bulletin Board, an electronic quotation service maintained by the Financial Industry Regulatory Authority. As a consequence of the delisting from the NASDAQ Stock Market, the ability of a stockholder to sell our common stock, the price obtainable for our common stock and our ability to obtain additional funding may be materially impaired. Even if we regain compliance with the NASDAQ Rules and seek to be relisted, we cannot be certain that NASDAQ will approve any application we may make for relisting or that any other exchange will approve our common stock for listing.

The fair value of accounting for derivative liabilities may materially impact the results of our operations in future periods. We recorded derivative liabilities in connection with our convertible debt and equity financing agreements at inception in 2006. In accordance with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Common Stock” and SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” these derivative liabilities are reported at fair value each reporting period. Changes in the fair value are recorded as a component of earnings. Changes in the value of the derivative liabilities may materially impact results of operations in future periods.

We have limited manufacturing experience, and may be unable to produce our products at the unit costs necessary for the products to be competitive in the market, which could cause our financial condition to suffer. We have limited experience manufacturing our products in commercially viable quantities. We have increased our production capacity for the Biojector^® 2000 system and the Vitajet^® product line through automation of, and changes in, production methods, in order to achieve savings through higher volumes of production. If we are unable to achieve these savings, our results of operations and financial condition could suffer. The current cost per injection of the Biojector^® 2000 system and Vitajet^® product line is substantially higher than that of traditional needle-syringes, our principal competition. In order to reduce costs, a key element of our business strategy has been to reduce the overall manufacturing cost through automating production and packaging. There can be no assurance that

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we will achieve sales and manufacturing volumes necessary to realize cost savings from volume production at levels necessary to result in significant unit manufacturing cost reductions. Failure to do so will continue to make competing with needle-syringes on the basis of cost very difficult and will adversely affect our financial condition and results of operations. We may be unable to successfully manufacture devices at a unit cost that will allow the product to be sold profitably. Failure to do so would adversely affect our financial condition and results of operations.

We are subject to extensive government regulation and must continue to comply with these regulations or our business could suffer.Our products and manufacturing operations are subject to extensive government regulation in both the U.S. and abroad. If we cannot comply with these regulations, we may be unable to distribute our products, which could cause our business to suffer or fail. In the U.S., the development, manufacture, marketing and promotion of medical devices are regulated by the Food and Drug Administration (“FDA”) under the Federal Food, Drug, and Cosmetic Act (“FFDCA”). The FFDCA provides that new pre-market notifications under Section 510(k) of the FFDCA are required to be filed when, among other things, there is a major change or modification in the intended use of a device or a change or modification to a legally marketed device that could significantly affect its safety or effectiveness. A device manufacturer is expected to make the initial determination as to whether the change to its device or its intended use is of a kind that would necessitate the filing of a new 510(k) notification. The FDA may not concur with our determination that our current and future products can be qualified by means of a 510(k) submission or that a new 510(k) notification is not required for such products.

Future changes to manufacturing procedures could require that we file a new 510(k) notification. Also, future products, product enhancements or changes, or changes in product use may require clearance under Section 510(k), or they may require FDA pre-market approval (“PMA”) or other regulatory clearances. PMAs and regulatory clearances other than 510(k) clearance generally involve more extensive prefiling testing than a 510(k) clearance and a longer FDA review process. It is current FDA policy that pre-filled syringes are evaluated by the FDA by submitting a Request for Designation (“RFD”) to the Office of Combination Products (“OCP”). The pharmaceutical or biotechnology company with which we partner is responsible for the submission to the OCP, although we will have this responsibility with respect to drug+device combinations produced by us under our new strategy. A pre-filled syringe meets the FDA’s definition of a combination product, or a product comprised of two or more regulated components, i.e. drug/device. The OCP will assign a center with primary jurisdiction for a combination product (CDER, CDRH) to ensure the timely and effective pre-market review of the product. Depending on the circumstances, drug and combination drug/device regulation can be much more extensive and time consuming than device regulation.

FDA regulatory processes are time consuming and expensive. Product applications submitted by us may not be cleared or approved by the FDA. In addition, our products must be manufactured in compliance with Good Manufacturing Practices, as specified in regulations under the FFDCA. The FDA has broad discretion in enforcing the FFDCA, and noncompliance with the FFDCA could result in a variety of regulatory actions ranging from product detentions, device alerts or field corrections, to mandatory recalls, seizures, injunctive actions and civil or criminal penalties.

Sales of our products, including the Iject^® pre-filled syringe, are dependent on regulatory approval being obtained for the product’s use with a given drug to treat a specific condition. It is the responsibility of the strategic partner producing the drug to obtain this approval. The failure of a partner to obtain regulatory approval or to comply with government regulations after approval has been received could harm our business. In order for a strategic partner to sell our devices for delivery of its drug to treat a specific condition, the partner must first obtain government approval. This process is subject to extensive government regulation both in the U.S. and abroad. As a result, sales of our products, including the Iject^® product, to any strategic partner are dependent on that partner’s ability to obtain regulatory approval. Accordingly, delay or failure of a partner to obtain that approval could cause our financial results to suffer. In addition, if a partner fails to comply with governmental regulations after initial regulatory approval has been obtained, sales to that partner may cease, which could cause our financial results to suffer.

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If we cannot meet international product standards, we will be unable to distribute our products outside of the United States, which could cause our business to suffer.Distribution of our products in countries other than the U.S. may be subject to regulation in those countries. Failure to satisfy these regulations would impact our ability to sell our products in these countries and could cause our business to suffer.

We have received the following certifications from Underwriters Laboratories (“UL”) that our products and quality systems meet the applicable requirements, which allows us to label our products with the CE Mark and sell them in the European Community and non-European Community countries.

Certificate	Dated
ISO 13485:2003 and CMDCAS	February 2006
Annex V of the Directive 93/42/EEC on Medical Devices	March 2007
Annex II, section 3 of the Directive 93/42/EEC on Medical Devices	March 2007

If we are unable to continue to meet the standards of ISO 9001 or CE Mark certification, it could have a material adverse effect on our business and cause our financial results to suffer.

If the healthcare industry limits coverage or reimbursement levels, the acceptance of our products could suffer.The price of our products exceeds the price of needle-syringe combinations and, if coverage or reimbursement levels are reduced, market acceptance of our products could be harmed. The healthcare industry is subject to changing political, economic and regulatory influences that may affect the procurement practices and operations of healthcare facilities. During the past several years, the healthcare industry has been subject to increased government regulation of reimbursement rates and capital expenditures. Among other things, third party payers are increasingly attempting to contain or reduce healthcare costs by limiting both coverage and levels of reimbursement for healthcare products and procedures. Because the price of the Biojector^® 2000 system exceeds the price of a needle-syringe, cost control policies of third party payers, including government agencies, may adversely affect acceptance and use of the Biojector^® 2000 system.

We depend on outside suppliers for manufacturing.Our current manufacturing processes for the Biojector^® 2000 jet injector and disposable syringes as well as manufacturing processes to produce our modified Vitajets^® consist primarily of assembling component parts supplied by outside suppliers. Some of these components are currently obtained from single sources, with some components requiring significant production lead times. In the past, we have experienced delays in the delivery of certain components. To date, such delays have not had a material adverse effect on our operations. We may experience delays in the future, and these delays could have a material adverse effect on our financial condition and results of operations.

If we are unable to manage our growth, our results of operations could suffer.If our products achieve market acceptance or if we are successful in entering into significant product supply agreements with major pharmaceutical or biotechnology companies, we expect to experience rapid growth. Such growth would require expanded customer service and support, increased personnel, expanded operational and financial systems, and implementing new and expanded control procedures. We may be unable to attract sufficient qualified personnel or successfully manage expanded operations. As we expand, we may periodically experience constraints that would adversely affect our ability to satisfy customer demand in a timely fashion. Failure to manage growth effectively could adversely affect our financial condition and results of operations.

We may be unable to compete in the medical equipment field, which could cause our business to fail.The medical equipment market is highly competitive and competition is likely to intensify. If we cannot compete, our business will fail. Our products compete primarily with traditional needle-syringes, “safety syringes” and also with other alternative drug delivery systems. In addition, manufacturers of needle-syringes, as well as other companies, may develop new products that compete directly or indirectly with our products. There can be no assurance that we will be able to compete successfully in this market. A

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variety of new technologies (for example, transdermal patches) are being developed as alternatives to injection for drug delivery. While we do not believe such technologies have significantly affected the use of injection for drug delivery to date, there can be no assurance that they will not do so in the future. Many of our competitors have longer operating histories as well as substantially greater financial, technical, marketing and customer support resources.

We are dependent on a single technology, and if it cannot compete or find market acceptance, our business will suffer.Our strategy has been to focus our development and marketing efforts on our needle-free injection technology. Focus on this single technology leaves us vulnerable to competing products and alternative drug delivery systems. If our technology cannot find market acceptance or cannot compete against other technologies, business will suffer. We perceive that healthcare providers’ desire to minimize the use of the traditional needle-syringe has stimulated development of a variety of alternative drug delivery systems such as “safety syringes,” jet injection systems, nasal delivery systems and transdermal diffusion “patches.” In addition, pharmaceutical companies frequently attempt to develop drugs for oral delivery instead of injection. While we believe that for the foreseeable future there will continue to be a significant need for injections, alternative drug delivery methods may be developed which are preferable to injection.

We rely on patents and proprietary rights to protect our technology.We rely on a combination of trade secrets, confidentiality agreements and procedures and patents to protect our proprietary technologies. We have been granted a number of patents in the U.S. and several patents in other countries covering certain technology embodied in our current jet injection system and certain manufacturing processes. Additional patent applications are pending in the U.S. and certain foreign countries. The claims contained in any patent application may not be allowed, or any patent or our patents collectively may not provide adequate protection for our products and technology. In the absence of patent protection, we may be vulnerable to competitors who attempt to copy our products or gain access to our trade secrets and know-how. In addition, the laws of foreign countries may not protect our proprietary rights to this technology to the same extent as the laws of the U.S. We believe we have independently developed our technology and attempt to ensure that our products do not infringe the proprietary rights of others.

If a dispute arises concerning our technology, we could become involved in litigation that might involve substantial cost. Such litigation might also divert substantial management attention away from our operations and into efforts to enforce our patents, protect our trade secrets or know-how or determine the scope of the proprietary rights of others. If a proceeding resulted in adverse findings, we could be subject to significant liabilities to third parties. We might also be required to seek licenses from third parties in order to manufacture or sell our products. Our ability to manufacture and sell our products might also be adversely affected by other unforeseen factors relating to the proceeding or its outcome.

If our products fail or cause harm, we could be subject to substantial product liability, which could cause our business to suffer.Producers of medical devices may face substantial liability for damages in the event of product failure or if it is alleged the product caused harm. We currently maintain product liability insurance and, to date, have experienced one product liability claim. There can be no assurance, however, that we will not be subject to a number of such claims, that our product liability insurance would cover such claims, or that adequate insurance will continue to be available to us on acceptable terms in the future. Our business could be adversely affected by product liability claims or by the cost of insuring against such claims.

There are a large number of shares eligible for sale into the public market, which may reduce the price of our common stock.The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market, or the perception that such sales could occur. We have a large number of shares of common stock outstanding and available for resale. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. For example, since 1996, we have registered approximately 20.9 million shares for resale on Form S-3 registration statements, including approximately 2.8 million shares issuable upon exercise of warrants. In addition, as of June 30, 2008, we had approximately 168,000 shares of common

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stock available for future issuance under our stock incentive plan and our employee share purchase plan combined. As of June 30, 2008, options to purchase approximately 927,000 shares of common stock were outstanding and approximately 897,000 restricted stock units were outstanding and will be eligible for sale in the public market from time to time subject to vesting. In addition, there are shares issuable upon conversion or exercise of Series F preferred stock, convertible loans and notes and warrants which have not been registered for resale at this time.

Our stock price may be highly volatile, which increases the risk of securities litigation.The market for our common stock and for the securities of other small market-capitalization companies has been highly volatile in recent years. This increases the risk of securities litigation relating to such volatility. We believe that factors such as quarter-to-quarter fluctuations in financial results, new product introductions by us or our competition, public announcements, changing regulatory environments, sales of common stock by certain existing shareholders, substantial product orders and announcement of licensing or product supply agreements with major pharmaceutical or biotechnology companies could contribute to the volatility of the price of our common stock, causing it to fluctuate dramatically. General economic trends such as recessionary cycles and changing interest rates may also adversely affect the market price of our common stock.

Concentration of ownership could delay or prevent a change in control or otherwise influence or control most matters submitted to our shareholders.Certain funds affiliated with Life Sciences Opportunities Fund II (Institutional), L.P. (collectively, the “LOF Funds”) and its affiliates currently own shares of Series D preferred stock, Series E preferred stock, convertible debt and warrants to purchase common stock representing in aggregate approximately 34% of our outstanding voting power (assuming conversion of the debt and exercise of the warrants). As a result, the LOF Funds and their affiliates have the potential to control matters submitted to a vote of shareholders, including a change of control transaction, which could prevent or delay such a transaction.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In June 2008, we issued warrants to purchase an aggregate of 18,125 shares of our common stock at an exercise price of $0.75 per share to Susan Levinson and Valerie Ceva of The Strategic Choice LLC in exchange for services rendered during 2008 related to our strategic plan. We also issued a warrant exercisable for an aggregate of 16,000 shares of our common stock at an exercise price of $0.75 per share to Andrew S. Forman for services provided. The warrants are immediately exercisable and expire four years after the date of grant. The issuance of the warrants was deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering. The purchasers represented their intention to acquire the warrants for investment only and not with a view for sale in connection with any distribution thereof, and appropriate legends were affixed to the warrants. The sale of the warrants was made without general solicitation or advertising and the offering of the warrants was not underwritten.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The annual meeting of our shareholders was held on June 5, 2008, at which the following action was taken:

1. The shareholders elected the four nominees for director to the Board of Directors. The four directors elected, along with the voting results, were as follows:

Name	Class	No. of Shares Voting For	No. of Shares Withheld Voting
Randal D. Chase, Ph.D.	I	18,358,587	138,021
Jerald S. Cobbs	I	18,416,197	80,411
Ralph Makar	I	18,415,117	81,491
Edward L. Flynn	II	18,357,502	139,106

ITEM 6. EXHIBITS

The following exhibits are filed herewith and this list is intended to constitute the exhibit index:

Exhibit No.	Description
3.1	2002 Restated Articles of Incorporation of Bioject Medical Technologies Inc., as amended. Incorporated by reference to Form 8-K dated November 15, 2004.
3.1.1	Articles of Amendment to 2002 Restated Articles of Incorporation. Incorporated by reference to Form 8-K dated May 30, 2006 and filed June 5, 2006.
3.1.2	Articles of Amendment to 2002 Restated Articles of Incorporation. Incorporated by reference to Exhibit 3.1 in the Form 8-K filed January 23, 2008.
3.2	Second Amended and Restated Bylaws of Bioject Medical Technologies, Inc. Incorporated by reference to Form 8-K filed July 5, 2007.
4.1	Form of Rights Agreement dated as of July 1, 2002 between the Company and American Stock Transfer & Trust Company, including Exhibit A, Terms of the Preferred Stock, Exhibit B, Form of Rights Certificate, and Exhibit C, Summary of the Right To Purchase Preferred Stock. Incorporated by reference to Form 8-K dated July 2, 2002.
4.1.1	First Amendment, dated October 8, 2002, to Rights Agreement dated July 1, 2002 between Bioject and American Stock Transfer & Trust Company. Incorporated by reference to registration statement on Form 8-A/A filed with the Commission on October 8, 2002.
4.1.2	Second Amendment, dated November 15, 2004, to Rights Agreement dated July 1, 2002 between Bioject and American Stock Transfer & Trust Company. Incorporated by reference to Form 8-K dated November 15, 2004.
4.1.3	Third Amendment to Rights Agreement, dated March 8, 2006, between Bioject Medical Technologies Inc. and American Stock Transfer & Trust Company. Incorporated by reference to Form 8-K dated March 3, 2006 and filed March 9, 2006.
4.1.4	Fourth Amendment to Rights Agreement, dated as of November 20, 2007, between Bioject Medical Technologies Inc. and American Stock Transfer & Trust Company. Incorporated by reference to Form 8-K dated December 19, 2007 and filed December 20, 2007.
10.1	Forbearance No. 2, Limited Waiver and Modification to Loan and Security Agreement dated November 19, 2007 between Bioject Medical Technologies Inc. and Partners For Growth II, L.P. Incorporated by reference to Form 8-K dated May 30, 2008 and filed June 5, 2008.
10.2	Standard Form of Warrant.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
32.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
32.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

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SIGNATURES

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

Date: August 14, 2008	BIOJECT MEDICAL TECHNOLOGIES INC.
	(Registrant)
	/s/ RALPH MAKAR
	Ralph Makar
	President and Chief Executive Officer
	(Principal Executive Officer)
	/s/ CHRISTINE M. FARRELL
	Christine M. Farrell
	Vice President of Finance
	(Principal Financial and Accounting Officer)

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