10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

(Mark One)

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

For the fiscal year ended: December 31, 2010

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

COMMISSION FILE NUMBER 000-23017

ECHO THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	41-1649949
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
10 Forge Parkway, Franklin, Massachusetts	02038
(Address of principal executive offices)	(Zip Code)

(Registrant’s telephone number, including area code)

(508) 553-8850

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value per share

Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes £     No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes £     No x

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £     No £

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

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

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 Act). Yes £     No x

The approximate aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2010, based upon the closing price of such stock on that date, was approximately $36,354,000.

The number of shares of the registrant’s common stock outstanding as of March 16, 2011 was 33,601,131.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement (the “Proxy Statement”) to be filed with the Securities and Exchange Commission relative to the issuer’s 2011 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

ECHO THERAPEUTICS, INC.

2010 Annual Report on Form 10-K

TABLE OF CONTENTS

Item		Page
	PART I
1.	Business	3
1A.	Risk Factors	9
2.	Properties	19
3.	Legal Proceedings	19
	PART II
5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	19
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
8.	Financial Statements and Supplementary Data	32
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	33
9A.	Controls and Procedures	33
	PART III
10.	Directors, Executive Officers and Corporate Governance	34
11.	Executive Compensation	34
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	34
13.	Certain Relationships and Related Transactions, and Director Independence	34
14.	Principal Accounting Fees and Services	34
	PART IV
15.	Exhibits, Financial Statement Schedules	34
SIGNATURES		35

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In this report, the “Company”, “Echo,” “we,” “us,” and “our” refer to Echo Therapeutics, Inc. “Common Stock” refers to Echo’s Common Stock, $0.01 par value.

We own or have rights to various copyrights, trademarks and trade names used in our business, including the following: Symphony™ tCGM System, Prelude™ SkinPrep System, AzoneTS™ and Durhalieve™.

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, which involve risks and uncertainties. All statements other than statements of historical information provided herein may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes”, “anticipates”, “plans”, “expects” and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, those discussed in “Risk Factors” and elsewhere in this report and the risks discussed in our other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date hereof. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof.

PART I

ITEM 1.  BUSINESS.

We are a medical device and specialty pharmaceutical corporation formed in Delaware in 2007.  We are developing the Symphony™ transdermal continuous glucose monitoring (“tCGM”) System (“Symphony”) as a non-invasive, wireless, transdermal continuous glucose monitoring system for use in hospital critical care units and for patients with diabetes.  We are also developing our needle-free Prelude™ SkinPrep System (“Prelude”) as a platform technology for enhanced skin permeation for delivery of topical pharmaceuticals as well as for a wide range of transdermal reformulations of specialty pharmaceutical products previously approved by the United States Food and Drug Administration (“FDA”).

Medical Device Overview

We are a transdermal medical device company with deep expertise in advanced skin permeation technology. We are developing our Prelude System as a platform technology to allow for significantly enhanced and painless skin permeation that will enable two important applications:

• Analyte extraction with Symphony for needle-free, continuous glucose monitoring of hospital patients (critical care) as the first application; and

• Needle-free drug delivery, with the topical delivery of lidocaine as the first application.

Additional applications for painless, needle-free topical and systemic delivery of drugs are planned.

Prelude incorporates a patented, dynamic feedback control mechanism for optimal skin permeation control. Prelude allows for precise, highly effective and completely painless skin permeation prior to analyte extraction or topical drug delivery.

Utilizing the patented, core skin permeation technology found in Prelude, we are developing our needle-free Symphony tCGM System as a non-invasive, wireless,  monitoring and trending system for use in hospital critical care units and for people with diabetes. Symphony includes the Prelude SkinPrep System for needle-free skin permeation and our patented, non-invasive, continuous transdermal glucose biosensor. With Symphony, we are initially focused on the hospital critical care setting with technology designed to assist clinical professionals, improve patient compliance and achieve better overall glucose control in critically ill patients.  All existing FDA-approved continuous glucose monitoring (“CGM”) systems are needle-based, requiring insertion of a glucose sensor into the patient’s skin, which may give rise to risks of infection, inflammation or bleeding at the insertion site. None of these CGM systems are approved for use in a clinical setting.  Symphony is a non-invasive transdermal system that does not require insertion (via a needle) of its glucose sensor and thus does not give rise to the risks associated with needle-based CGM systems.

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PreludeSkinPrep System

We are developing Prelude as a safe, effective, easy-to-use and low-cost transdermal skin permeation device for our Symphony tCGM System to enhance the flow of interstitial fluids and molecules across the protective membrane of the stratum corneum, the outmost protective layer of the skin. Prelude incorporates our patented skin permeation control technology into a comfortable, hand-held device used to prepare a small area of the skin for the non-invasive sensor components of Symphony. We have successfully used Prelude to increase the permeability of the skin allowing for analyte extraction and small molecule drug delivery in both internal studies and external feasibility clinical studies for diabetics and for non-diabetics.

We believe Prelude can also be positioned in the transdermal drug delivery market. We expect that the localized disruption of the stratum corneum created by Prelude will potentially allow transdermal drug delivery. In addition, Prelude has the potential to provide a safe and cost effective skin permeation process for the rapid delivery of topical anesthetic creams. We believe our Prelude skin permeation process has the potential to increase skin permeation up to 100 times greater than untreated skin, perhaps making it possible to deliver a wide array of large molecule drugs.

The key feature of our skin permeation technology is our patented feedback mechanism to achieve optimal and pain-free skin preparation for our transdermal sensing technologies. Prelude’s proprietary, patented feedback control mechanism consists of software, microprocessor controlled circuit and measuring electrodes. While Prelude is in operation, the circuit measures the real-time electrical conductivity of the permeated skin site compared with the subject’s intact skin site. Prelude turns off automatically when the conductivity measurement reaches the effective output as established by the software, thus producing individualized, optimal skin permeation. As a result, Prelude only removes the outermost layer of the epidermis, the stratum corneum, which is about 0.01 mm thick and consists of only dry, dead skin cells. With the advantages of our proprietary feedback control mechanism, we believe the skin permeation process is safe, effective, and pain-free.

Partnership with Ferndale Pharma Group for Prelude for the Delivery of Lidocaine

During 2009, we entered into a licensing agreement with Ferndale Pharma Group, Inc. ("Ferndale"), a market leader in advanced skincare and topical therapeutic products. Under the terms of the agreement, we granted Ferndale the right to develop, market, sell and distribute Prelude for skin preparation prior to the application of topical anesthetics prior to a wide-range of needle-based medical procedures in North America and the United Kingdom. This partnership allows our skin permeation technology platform to be combined with Ferndale’s leadership in the topical anesthetic market.

SymphonytCGM System

Our lead medical device program involved with analyte extraction is our Symphony tCGM System, a non-invasive (needle-free), wireless, transdermal continuous glucose monitoring system designed to provide reliable, real-time blood glucose data conveniently, continuously and cost-effectively. Symphony incorporates Prelude (our proprietary skin permeation device), a transdermal sensor, a wireless transmitter and data display monitor.

Partnership with Handok Pharmaceutical for Symphony in South Korea

During 2009, we entered into a license agreement with Handok Pharmaceuticals Co., Ltd. (“Handok”), the largest diabetes care-focused pharmaceutical company in South Korea. Under the terms of the agreement, we granted Handok the right to develop, market, sell and distribute Symphony to medical facilities and diabetics in South Korea.

Symphony Market Opportunities

Importance of Continuous Blood Glucose Monitoring

We believe that continuous blood glucose monitoring can be an important part of a diabetes patient’s daily disease management program. Continuous blood glucose monitoring can help plan diabetes treatment, guide day-to-day choices about diet, exercise and insulin use, and avoid unwanted low blood glucose (hypoglycemia) and high blood glucose (hyperglycemia) events and the complications that they can cause. Blood glucose levels are affected by many factors such as the carbohydrate and fat content of food, exercise, stress, illness, and variability in insulin absorption among others; therefore, it is often challenging for diabetes patients to avoid frequent and unpredictable excursions above or below normal glucose levels. Patients are often unaware that their glucose levels are either too high or too low, resulting in their inability to tightly control their glucose levels and prevent the complications associated with unwanted glucose excursions.

In an attempt to achieve and maintain blood glucose levels within a desired range, diabetes patients must measure their glucose levels. The American Diabetes Association (“ADA”) recommends that patients test their blood glucose levels at least three or four times per day; however, despite evidence that intensive glucose management reduces the long-term complications associated with diabetes, industry sources estimate that people with diabetes test, on average, less than twice per day. We believe Symphony has the potential to improve patient compliance to frequent glucose testing, achieve better glucose control and make a positive impact on overall day-to-day diabetes management.

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Hospital Critical Care Market

We believe Symphony has the potential to offer a non-invasive, wireless, tCGM solution for use in the rapidly emerging hospital critical care market. A primary cause of infection in critically ill patients is hyperglycemia which is a result of insulin resistance and total parenteral nutrition. Clinical studies have demonstrated that intensive insulin therapy to maintain tight glycemic control significantly reduces patient mortality, complications and infection rates, as well as hospital stays, services and overall hospital costs.

Regular monitoring of blood glucose levels is rapidly becoming a necessary procedure performed by hospital critical care personnel to achieve tight glycemic control and ensure improved patient outcomes. In a survey by Boston Biomedical Consultants of more than 60 hospital critical care unit managers and nurse clinicians in the United States, more than 90% of those surveyed acknowledged the benefits of tight glycemic control protocols in the hospital critical care setting. We believe that tight glycemic control protocols are becoming the new standard of care in hospital critical care units across the United States, for patients with and without diabetes.

Today, standard practice by critical care nurses is to measure blood glucose at the patient’s bedside periodically. We believe that a needle-free CGM system such as Symphony will save valuable nursing time and expense by avoiding the need for frequent blood glucose sampling, in addition to providing more clinically relevant, real-time glucose level and trending information needed to develop better control algorithms for insulin administration.

Diabetes Home Use Market

Diabetes is a chronic and life-threatening disease caused by the body’s inability to produce or properly use insulin, a key hormone the body uses to manage glucose, which fuels the cells in the body. According to the ADA, about 26 million people in the United States, or approximately eight percent (8%) of the population, have diabetes, including over 7 million people who remain unaware that they have the disease. In addition, before people develop type 2 diabetes (discussed below), they usually have “pre-diabetes,” or blood glucose levels that are higher than normal but not yet high enough to be diagnosed as diabetes. According to the ADA, there are 79 million people in the United States who have pre-diabetes.

When blood glucose levels are high, diabetes patients often administer insulin to reduce their blood glucose level. Unfortunately, insulin administration can reduce blood glucose levels below the normal range, causing hypoglycemia. In cases of severe hypoglycemia, diabetes patients risk severe and acute complications, such as loss of consciousness or death. Due to the drastic nature of acute complications associated with hypoglycemia, many diabetes patients are afraid of sharply reducing their blood glucose levels and often remain in a hyperglycemic state, exposing themselves to long-term complications of that condition.

According to the ADA, the cost of diabetes care in the United States in 2007 was more than $174 billion, including $116 billion in excess medical expenditures attributed to diabetes and $58 billion in reduced national productivity. The ADA estimates that people with diabetes, on average, have medical expenditures that are approximately 2.3 times higher than the expenditures would be in the absence of diabetes and that approximately $1 in $10 healthcare dollars is attributed to diabetes. A significant portion of overall diabetes care costs, approximately $7 billion according to industry sources, is attributable to costs associated with monitoring blood glucose levels, and that market segment is projected to grow substantially by 2011 as patients and their physicians seek ways to manage glucose levels more effectively.

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Specialty Pharmaceutical Overview

Our specialty pharmaceuticals pipeline is based on our proprietary AzoneTS transdermal drug reformulation technology. AzoneTS is a nontoxic, nonirritating skin penetration enhancer that is intended to enable topical application of FDA-approved medications, including pharmaceutical products that previously could only be administered systemically. AzoneTS increases lipid membrane fluidity in the stratum corneum layer of the skin, thereby decreasing resistance to topically applied therapeutics. Our proprietary synergistic chemical combination enables AzoneTS to be a highly effective skin penetration enhancer at low concentration levels. When combined with AzoneTS, we believe the penetration of numerous commercially successful, FDA-approved drugs can be substantially improved. We believe that, despite their commercial success in large, chronic markets, many FDA-approved products with safety, efficacy and/or patient comfort and convenience issues that limit or prohibit their full commercial potential are amenable to our AzoneTS reformulation technology focused on improved dermal penetration.

Our most advanced drug candidate is Durhalieve, an AzoneTS formulation of triamcinolone acetonide, a widely-used, medium potency corticosteroid approved by the FDA for treatment of corticosteroid-responsive dermatoses. In addition to Durhalieve for the treatment of corticosteroid-responsive dermatoses, we believe that Durhalieve could be developed as a treatment for keloid scarring.

If Durhalieve is approved by the FDA for treatment of corticosteroid-responsive dermatoses, we believe we will be well-positioned to offer the pharmaceutical industry a highly efficient and relatively low cost, advanced topical alternative for several FDA-approved oral and injectable specialty pharmaceutical products.  Durhalieve has completed Phase 3 clinical trials and we are currently working to satisfy the remaining requirements that we believe are necessary to obtain FDA approval of Durhalieve.

Government Regulation

Government authorities in the United States, at the federal, state and local level, and other countries extensively regulate the research, development, testing, manufacture, labeling, promotion, advertising, distribution, marketing, export and import of products such as those we are developing. In the United States, pharmaceuticals, biologics and medical devices are subject to rigorous FDA regulation. Federal and state statutes and regulations govern, among other things, the testing, manufacture, safety, efficacy, labeling, storage, export, record keeping, approval, marketing, advertising and promotion of our potential products. The information that must be submitted to the FDA in order to obtain approval to market a new drug varies depending on whether the drug is a new product whose safety and effectiveness has not previously been demonstrated in humans, or a drug whose active ingredient(s) and certain other properties are the same as those of a previously approved drug. Drugs follow either the new drug application or biologics license application routes. Product development and approval within this regulatory framework takes a number of years and involves significant uncertainty combined with the expenditure of substantial resources.

FDA Approval Process for Medical Devices

Generally, medical devices require FDA approval or clearance before they may be marketed. There are two review procedures by which a product may receive such approval or clearance. Some products may qualify for clearance under a pre-market notification, or 510(k) procedure, in which the manufacturer provides to the FDA a pre-market notification that it intends to begin marketing the product, and demonstrates to the FDA’s satisfaction that the product is substantially equivalent to a legally marketed device. A product is considered substantially equivalent if it has the same intended use, and also has either the same technological characteristics (as defined in the Federal Food, Drug, and Cosmetic Act (“FD&CA”)), or if the product has different technological characteristics, the information submitted in the pre-market notification demonstrates that the product is as safe and effective as a legally marketed device and does not raise different questions of safety and effectiveness than a legally marketed device. Marketing may commence when the FDA issues a clearance letter. If a medical device does not qualify for the 510(k) procedure, the FDA must approve a pre-market approval application (“PMA”) before marketing can begin. PMA applications must demonstrate, among other matters, that the medical device is safe and effective. The PMA approval process is typically more comprehensive than the 510(k) process, and usually requires pre-clinical and extensive clinical studies. Further, before the FDA will approve a PMA, the manufacturer must pass an inspection demonstrating its compliance with the requirements of the FDA’s quality system regulations. FDA requests for additional studies during the review period are not uncommon and can significantly delay approvals.

In addition, a number of other FDA requirements apply to medical device manufacturers and distributors. Device manufacturers must be registered and their products listed with the FDA and certain adverse events and product malfunctions must be reported to the FDA. The FDA also prohibits an approved or cleared device from being marketed for unapproved or uncleared uses. Our product labeling, promotion and advertising will be subject to continuing FDA regulation. Manufacturers must comply with the FDA’s quality system regulation, which establishes extensive requirements for quality control and manufacturing procedures. The FDA periodically inspects facilities to ascertain compliance with these and other requirements. Thus, manufacturers and distributors must continue to spend time, money and effort to maintain compliance. Failure to comply with the applicable regulatory requirements may subject us to a variety of administrative and judicially imposed sanctions, including withdrawal of an approval or clearance, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, and civil and criminal penalties against us or our officers, directors or employees. Failure to comply with regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.

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In order to obtain marketing clearance for Symphony, we will be required to file a PMA that demonstrates the safety and effectiveness of the product.

FDA Approval Process for Pharmaceutical Products

In the United States, the FDA regulates drugs under FD&CA and implementing regulations. Before a drug may be marketed in the United States preclinical laboratory tests, animal studies and formulation studies must be conducted under the FDA’s current good laboratory practices, followed by submission to the FDA of an investigational new drug (“IND”) for human clinical testing, which must become effective before human clinical trials may begin and must include independent institutional review board approval at each clinical site before the trial is initiated.  

If clinical trials are permitted to commence, they are typically are conducted in three sequential phases, but the phases may overlap or be combined. Phase 1 trials usually involve the initial introduction of the investigational drug into humans to evaluate the product candidate’s safety, dosage tolerance and pharmacodynamics and, if possible, to gain an early indication of its effectiveness. Phase 2 trials usually involve controlled trials in a limited patient population to evaluate dosage tolerance and appropriate dosage, identify possible adverse effects and safety risks and evaluate the preliminary efficacy of the drug candidate for specific indications. Phase 3 trials usually further evaluate clinical efficacy and test further for safety in an expanded patient population. Phase 1, Phase 2 and Phase 3 testing may not be completed successfully within any specified period, if at all. Furthermore, the FDA or we may suspend or terminate clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

Assuming successful completion of the required clinical testing, the results of the preclinical studies and of the clinical studies, together with other detailed information, including information on the chemistry, manufacture and control criteria of the product, are submitted to the FDA in the form of a New Drug Application (“NDA”) requesting approval to market the product candidate for one or more indications. The FDA reviews a NDA to determine, among other things, whether a product candidate is safe and effective for its intended use and whether its manufacturing is current GMP-compliant to assure and preserve the product candidate’s identity, strength, quality and purity. The FDA may refuse to accept and review insufficiently complete applications.

Before approving a NDA, the FDA will inspect the facility or the facilities at which the product candidate is manufactured. If the FDA determines the application, manufacturing process or manufacturing facilities are not acceptable, it will outline the deficiencies in the submission and often will request additional testing or information. Notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.

The testing and approval process requires substantial time, effort and financial resources, and each may take several years to complete. The FDA may not grant approval on a timely basis, or at all. We may encounter difficulties or unanticipated costs in our efforts to secure necessary governmental approvals, which could delay or preclude us from marketing our products. The FDA may limit the indications for use or place other conditions on any approvals that could restrict the commercial application of the products. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval.

Foreign Regulation

In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our products. Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.

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Related Matters

From time to time, federal legislation is drafted, introduced and passed in the United States that could significantly change the statutory provisions governing the approval, manufacturing and marketing of products regulated by the FDA. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted, or FDA regulations, guidance or interpretations changed, or what the impact of such changes, if any, may be.

Research and Development

A major portion of our operating expenses to date is related to our research and development (“R&D”) activities. R&D expenses generally consist of internal salaries and related costs, and third-party vendor expenses for product design and development, product engineering and contract manufacturing. In addition, R&D costs include regulatory consulting, feasibility product testing (internal and external) and conducting nonclinical and clinical studies. R&D expenses were approximately $2,579,000 and $2,807,000, for the years ended December 31, 2010 and 2009, respectively. We intend to maintain our strong commitment to R&D as an essential component of our product development efforts. Licensed or acquired technology developed by third parties may be an additional source of potential products; however, our ability to raise sufficient financing may impact our level of R&D spending.

Manufacturing

We do not have, and do not intend to establish in the near term, our own manufacturing capability for our medical device products or our pharmaceutical products or their APIs, or the capability to package any products we may sell in the future. We intend to rely on third-party manufacturers and suppliers to manufacture our medical devices and to produce and supply the APIs and drug products that we require to meet preclinical research, testing and clinical study requirements.

We currently have engaged a third-party contract manufacturer for the tooling, assembly and testing of our Prelude System for sale to our licensee, Ferndale.  Also, we have contracted with several engineering and product design firms related to the final product development of our Symphony System. Our policy is to use third-party manufacturers that comply with the FDA’s GMP requirements and other rules and regulations prescribed by domestic and foreign regulatory authorities.

If our product candidates are approved, we believe that qualified suppliers and manufacturers for such medical device products and pharmaceutical products will be available in the future, at a reasonable cost to us, although there can be no assurance that this will be the case.

Competition

The medical device and pharmaceutical industries are intensely competitive. Many companies, universities, and research organizations developing competing product candidates have greater resources and significantly greater experience in financial, research and development, manufacturing, marketing, sales, distribution, and technical regulatory matters than we have. In addition, many competitors have greater name recognition and more extensive collaborative relationships. Our competitors could commence and complete clinical testing of their product candidates, obtain regulatory approvals, and begin commercial-scale manufacturing of their products faster than we are able to for our products. They could develop products that would render our product candidates, and those of our collaborators, obsolete and noncompetitive. Our competitors may develop more effective or more affordable products or achieve earlier patent protection or product commercialization than we do.

We expect that any products that we develop will compete primarily on the basis of product efficiency, safety, patient convenience, reliability, availability and price; however, there can be no assurance that we will successfully develop technologies and products that are more effective, safer, more convenient, more reliable, more available or more affordable than those being developed by our current and future competitors. Please see “Risks related to competition” in Item 1A below.

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Intellectual Property

We maintain a comprehensive US and international portfolio of intellectual property that we consider to be of material importance in protecting our technologies. Our success depends primarily on our ability to establish and maintain the proprietary nature of our technology through the patent process. In order to protect our proprietary technologies, we also rely on a combination of trademark, copyright and trade secret protection, as well as confidentiality agreements with employees, consultants and third parties.

Our intellectual property covers skin permeation control for enhanced drug delivery and transdermal diagnostics in the field of medical devices, and reformulations of topical products in the field of specialty pharmaceuticals.  We also have intellectual property in glucose sensor and hydrogel processes as they relate to analyte extraction.

These patents provide considerable protection from new entrants, and we focus our patent coverage only on aspects of our technologies that we believe will be significant and that could provide barriers to entry for our competition worldwide. Our success depends to a significant degree upon our ability to develop proprietary products and technologies and to obtain patent coverage for such products and technologies. We intend to continue our practice of filing patent applications covering newly developed products and technologies.

Employees

As of December 31, 2010, we had eleven (11) employees. Of these employees, six (6) are involved with finance and administration and five (5) are involved with research and development, clinical and regulatory matters. In addition to these individuals, we utilize outside contract engineering and contract manufacturing firms to support our operations. We have engaged a clinical research organization and several consulting firms involved with investor relations, regulatory strategy and clinical trial planning. We plan to increase the number of employees in the areas of clinical research and testing, engineering and administration.

As of December 31, 2009, we had nine (9) employees. Of these employees, five (5) were involved with finance and administration and four (4) were involved with research and development, clinical and regulatory matters.

Company Information

Our principal executive offices are located at 10 Forge Parkway, Franklin, Massachusetts 02038 and our telephone number is (508) 553-8850.   As of March 9, 2011, we entered into a lease for approximately 5,400 square feet of corporate office space in a single facility located in Philadelphia, Pennsylvania.

We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports available through our website, free of charge, as soon as reasonably practicable after we file such material with, or furnish it to the SEC. Our OTC Bulletin Board symbol is “ECTE” and our corporate website is www.echotx.com. The contents of our website are not part of this Report, and our internet address is included in this document as an inactive textual reference only.

ITEM 1A. RISK FACTORS.

Risk Factors

We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. Forward-looking statements in this document and those made from time to time by us through our senior management are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements concerning the expected future revenues or earnings or concerning projected plans, performance, or development of products and services, as well as other estimates related to future operations, are necessarily only estimates of future results and there can be no assurance that actual results will not materially differ from expectations. Forward-looking statements represent management’s current expectations and are inherently uncertain. We do not undertake any obligation to update forward-looking statements. Factors that could cause actual results to differ materially from results anticipated in forward-looking statements include, but are not limited to, the following:

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We continue to require substantial amounts of capital.

 Our development efforts to date have consumed and will continue to require substantial amounts of capital in connection with research and development of Symphony, Prelude and specialty pharmaceuticals programs. As we conduct more advanced development of our products, we will need significant funding to complete our product development programs and to pursue product commercialization. Our ability to meet our research, development and planned commercialization activities associated with our product pipeline is highly dependent on our ability to obtain sufficient financing.

We have a history of operating losses and we expect our operating losses to continue for the foreseeable future.

We have generated limited revenue and have had operating losses since inception, including a net loss of approximately $4,100,000 for the year ended December 31, 2010. As of December 31, 2010, we had an accumulated deficit of approximately $71,500,000. Losses have resulted principally from costs incurred in connection with our research and development activities and from general and administrative costs associated with our operations. We also expect to have negative cash flows for the foreseeable future as we fund our operating losses and capital expenditures. This will result in decreases in our working capital, total assets and shareholders’ equity, which may not be offset by future funding. It is possible that we will never generate sufficient revenue to achieve and sustain profitability. Even if we achieve profitability, we may not be able to sustain or increase profitability. We expect our operating losses to continue and increase for the foreseeable future as we continue to expend substantial resources to conduct research and development, seek to obtain regulatory approval for Symphony, Prelude, and Durhalieve, identify and secure collaborative partnerships, and manage and execute our obligations in possible strategic collaborations. These losses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity.

Our principal shareholders own a significant percentage of our stock and will be able to exercise significant influence.

Our principal shareholders own a significant percentage of our outstanding capital stock. Accordingly, these shareholders may be able to determine the composition of a majority of our Board of Directors, retain the voting power to approve certain matters requiring shareholder approval, and continue to have significant influence over our affairs. This concentration of ownership could have the effect of delaying or preventing a change in our control. Furthermore, so long as the purchasers in our January 2007 strategic private placement own 20% of the shares purchased in that transaction, the purchasers have the right to designate one director for election to our Board of Directors. The candidate is designated by the purchaser holding at least a majority of the shares of Common Stock purchased in the January 2007 financing, and such holder is currently Sherbrooke Partners, LLC, a beneficial owner of approximately 5.92% of our outstanding Common Stock as of March 16, 2011. Additionally, this significant concentration of share ownership may adversely affect the trading price of our Common Stock because investors often perceive disadvantages in owning stock in companies with a concentration of ownership.

Our future success is dependent upon successful collaborations with strategic partners.

Our future success is dependent upon our ability to selectively enter into and maintain collaborative arrangements with third parties for technology research and development, clinical testing, product development and sales and marketing. If we are unable to enter into additional development agreements or collaborative arrangements with strategic partners, we will be required to internally fund all of our product development activities, significantly increasing business risk and capital requirements in the development, clinical testing, manufacturing, marketing and commercialization of new products. We could also encounter significant delays in introducing products into markets or find that the development, manufacture or sale of proposed products in such markets is adversely affected by the absence of those collaborative arrangements.

The process of establishing collaborative partners is difficult, time-consuming and involves significant uncertainty. Discussions with potential collaborators may not lead to the establishment of new collaborative relationships on favorable terms, if at all. If successful in establishing a collaborative agreement, such agreement may never result in the successful development of products or the generation of significant revenue. Any such agreements could limit our flexibility in pursuing alternatives for the development or commercialization of our products. Even if we were to enter into additional collaborative arrangements with third parties, there can be no assurance that our financial condition or results of operations will significantly improve.

Our stock price has been volatile and may fluctuate in the future.

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The trading price of our Common Stock may fluctuate significantly. This price may be influenced by many factors, including:

• our financial condition, performance and prospects;

• the depth and liquidity of the market for our Common Stock;

• our ability to enter into successful collaborative arrangements with strategic partners for research and development, clinical testing, and sales and marketing;

• sales by selling shareholders of shares issued and issuable in connection with our private placements;

• investor perception of us and the industry in which we operate;

• general financial and other market conditions; and

• domestic and international economic conditions.

Public stock markets have experienced extreme price and trading volume volatility, particularly in the technology and life sciences sectors of the market. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to or disproportionately impacted by the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our Common Stock. In addition, fluctuations in our stock price may have made our stock attractive to momentum, hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction particularly when viewed on a quarterly basis.

Securities we issue to fund our operations could dilute or otherwise adversely affect our shareholders.

We need to raise substantial additional funds through public or private equity or debt financings to fund our operations. If we raise funds by issuing equity securities, the percentage ownership of current shareholders will be significantly reduced and the new equity securities may have rights senior to those of the shares of our Common Stock. We may not obtain sufficient financing on terms that are favorable to current investors or us. We may delay, limit or eliminate some or all of our proposed operations if adequate funds are not available.

Risks related to our discovery, development and commercialization of new medical products

Our medical device products are based on new technologies and may not be successfully developed or achieve market acceptance.

Most of our products under development have a high risk of failure because they are based on new technologies. To date, we have tested the feasibility of Prelude for various applications, including continuous glucose monitoring and certain topical anesthetic applications. We have also tested the feasibility of Symphony for the monitoring of glucose on a continuous basis; however, to develop additional products or additional uses, substantial expenditures will be required, including for feasibility studies, pre-clinical studies and clinical testing. Projected costs for such development are difficult to estimate and they may change and increase frequently.

Our success is dependent on further developing new and existing products and obtaining favorable results from pre-clinical studies and clinical trials and satisfying regulatory standards and approvals required for the market introduction of such products, including skin permeation methods and Symphony. There can be no assurance that we will not encounter unforeseen problems in the development of Symphony and Prelude, or that we will be able to successfully address the problems that do arise. There can be no assurance that any of our potential products will be successfully developed, proven safe and efficacious in clinical trials, meet applicable regulatory standards, be capable of being produced in commercial quantities at acceptable costs, or be eligible for third-party reimbursement from governmental or private insurers. Even if we successfully develop new products, there can be no assurance that such products will be successfully marketed or achieve market acceptance, or that expected markets will develop for such products. If any of our development programs are not successfully completed, required regulatory approvals or clearances are not obtained, or potential products for which approvals or clearances are obtained are not commercially successful, our business, financial condition and results of operations would be materially adversely affected.

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In addition, because our products are based on new technologies, they are subject to lengthy sales cycles and may take substantial time and effort to achieve market acceptance, especially at hospitals, which typically have a lengthy and rigorous approval process for adopting new technologies.

Our future success may be dependent in part upon successful development of Symphony for the hospital critical care market.

We have completed the initial prototypes and have conducted several feasibility human clinical studies at a leading Boston-area hospital, with a member of our Medical Advisory Board serving as principal investigator. Although we believe the clinical rationale exists for Symphony for the critical care market, there can be no assurance that such a market will be established, or that we will be able to successfully develop a product that will prove effective for this market or gain market acceptance should such a market develop. Our Symphony product development process may take several years and will require substantial capital outlays. If the critical care market does not develop as we expect, or if we are unable to successfully develop Symphony for such markets on a timely basis and within cost constraints, then our business and financial results will be materially adversely affected.

Our pharmaceutical products are in various stages of development and may not be successfully developed or obtain regulatory approval.

The product candidates in our AzoneTS pipeline are at various stages of developments. We have filed a NDA covering Durhalieve, our most advanced AzoneTS product candidate, for corticosteroid responsive dermatoses, with the FDA and we are now seeking to satisfy FDA manufacturing requirements necessary to secure market approval. We believe that the failure to advance Durhalieve beyond its current stage of development may have a material adverse effect on our financial condition and results of operations.

We cannot guarantee that we will be able to successfully complete clinical trials and other requirements needed to secure approval of our product candidates. As a result, our nonclinical and clinical development programs may be extended, delayed or terminated, and we may be unable to obtain regulatory approval or successfully commercialize our product candidates.

We may not be able to gain market acceptance of our product candidates, which would prevent us from becoming profitable.

Even if our product candidates receive regulatory approval, we cannot be certain that any of our product candidates will gain market acceptance among physicians, patients, healthcare payers, hospitals, pharmaceutical companies and the medical community in general. The degree of market acceptance will depend on a number of factors, including:

• Our establishment and demonstration to the medical community of the clinical efficacy and safety of our product candidates;

• Our ability to create products that are superior to alternatives currently on the market; and

• Our ability to establish in the medical community the potential advantage of our treatments over alternative treatment methods.

These and other factors combined with obtaining regulatory approvals will not guarantee future revenues. Sales of medical products largely depend on the reimbursement of patients’ medical expenses by government healthcare programs and private health insurers. Governments and private insurers closely examine medical products to determine whether they should be covered by reimbursement and, if so, the level of reimbursement that will apply. We cannot be certain that third party payers will sufficiently reimburse sales of our products, or enable us to sell our products at profitable prices. Similar concerns could also limit the reimbursement amounts that health insurers or government agencies in other countries are prepared to pay for our products. In many areas where we plan to market our products, including Europe, Japan and Canada, the pricing of prescription drugs is controlled by the government or regulatory agencies. Government or other regulatory agencies in these countries could determine that the pricing for our products should be based on prices of other commercially available drugs for the same disease, rather than allowing us to market our products at a premium as new drugs.

Sales of medical products also depend on physicians’ willingness to prescribe the treatment, which is likely to be based on a determination by these physicians that the products are safe, therapeutically effective and cost-effective. We cannot predict whether physicians, other healthcare providers, government agencies or private insurers will determine that our products are safe, therapeutically effective and cost effective relative to competing treatments.

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We may not be able to obtain and maintain the third party relationships that are necessary to develop, commercialize and manufacture some or all of our product candidates.

We expect to depend on collaborators, partners, licensees, contract research organizations, manufacturers and other third parties to support our efforts to develop and commercialize our product candidates, to manufacture clinical and commercial scale quantities of our product candidates and products and to market, sell, and distribute any products we successfully develop.

We cannot guarantee that we will be able to successfully negotiate agreements for or maintain relationships with collaborators, partners, licensees, clinical investigators, manufacturers and other third parties on favorable terms, if at all. If we are unable to obtain or maintain these agreements, we may not be able to clinically develop, formulate, manufacture, obtain regulatory approvals for or commercialize our product candidates, which will in turn adversely affect our business.

We expect to expend substantial management time and effort to enter into relationships with third parties and, if we successfully enter into such relationships, to manage these relationships. We must attract and retain collaborative partners and develop technologies and pipeline candidates that meet the requirements of prospective collaborative partners. In addition, substantial amounts of our expenditures will be paid to third parties in these relationships.

We cannot control the amount or timing of resources our contract partners will devote to our research and development programs, product candidates or potential product candidates, and we cannot guarantee that these parties will fulfill their obligations to us under these arrangements in a timely fashion, if at all. In addition, our contract partners will generally have the right to abandon research projects and terminate applicable agreements, including funding obligations, prior to or upon the expiration of agreed upon research terms. There can be no assurance that we will be successful in establishing multiple future collaborative arrangements on acceptable terms or at all, that current or future collaborative partners will not terminate funding before completion of projects, that our existing or future collaborative arrangements will result in successful product commercialization or that we will derive any revenues from such arrangements. Some or all of our collaborative partners may receive exclusive or co-exclusive rights to market products incorporating our technology in a particular field of use or a particular territory. The grant of such rights will limit our alternatives in commercializing certain of our products and technologies.

We have no experience in sales, marketing and distribution and may have to enter into agreements with third parties to perform these functions, which could prevent us from successfully commercializing our product candidates.

We currently have no sales, marketing or distribution capabilities. To commercialize our product candidates, we must either develop our own sales, marketing and distribution capabilities, which will be expensive and time consuming, or make arrangements with third parties to perform these services for us. If we enter into third party arrangements, the third parties may not be capable of successfully selling any of our products. If we decide to market any of our products on our own, we will have to commit significant resources to developing a marketing and sales force and supporting distribution capabilities. If we decide to enter into arrangements with third parties for performance of these services, we may find that they are not available on terms acceptable to us, or at all. If we are not able to establish and maintain successful arrangements with third parties or build our own sales and marketing infrastructure, we may not be able to commercialize our product candidates which would adversely affect our business and financial condition.

Disputes under key agreements or conflicts of interest with our scientific advisors, clinical investigators or other third party collaborators could delay or prevent development or commercialization of our product candidates.

Any agreements we have or may enter into with third parties, such as collaborators, licensees, suppliers, manufacturers, clinical research organizations, clinical investigators or clinical trial sites, may give rise to disputes regarding the rights and obligations of the parties. Disagreements could develop over rights to ownership or use of intellectual property, the scope and direction of research and development, the approach for regulatory approvals or commercialization strategy. We intend to conduct research programs in a range of therapeutic areas, but our pursuit of these opportunities could result in conflicts with the other parties to these agreements that may be developing or selling pharmaceuticals or conducting other activities in the same therapeutic areas. Any disputes or commercial conflicts could lead to the termination of our agreements, delay progress of our product development programs, compromise our ability to renew agreements or obtain future agreements, lead to the loss of intellectual property rights or result in costly litigation.

We collaborate with outside scientific advisors and collaborators at academic and other institutions that assist us in our research and development efforts. Our scientific advisors are not our employees and may have other commitments that limit their availability to us. If a conflict of interest between their work for us and their work for another entity arises, we may lose their services.

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We may have challenges in managing our outside contractors for product and regulatory accomplishments.

We rely heavily upon and have relationships with outside contractors and consultants with expertise in drug development, regulatory strategy, manufacturing and other matters. These parties are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. We have limited control over the activities of consultants and outside contractors and, except as otherwise required by our collaboration and consulting agreements, can expect only limited amounts of their time to be dedicated to our activities. If any third party with whom we have or enter into a relationship is unable or refuses to contribute to projects on which we need their help, our ability to generate advances in our technologies and develop our product candidates could be significantly harmed.

Risks related to regulatory approvals

None of our product candidates has received regulatory approval. If we are unable to obtain regulatory approval to market one or more of our product candidates, our business will be adversely affected.

Most of our pharmaceutical product candidates are in early stages of development, and we do not expect these product candidates to be commercially available in the foreseeable future, if at all. Our product candidates are subject to strict regulation by regulatory authorities in the United States and in other countries. In particular, human pharmaceutical therapeutic product candidates are subject to rigorous preclinical and clinical testing and other requirements by the FDA in the United States and similar authorities in other countries in order to demonstrate safety and efficacy. Data obtained from preclinical studies and clinical trials are subject to varying interpretations that could delay, limit or prevent regulatory approval. In addition, failure to comply with regulatory requirements or inadequate manufacturing processes could also prevent product approval. Because our product candidates involve or are expected to involve the application of new technologies or are based upon a new therapeutic approach, they may be subject to substantial additional review by various governmental regulatory authorities and, as a result, the process of obtaining regulatory approval for them may proceed more slowly than for product candidates based upon more conventional technologies. Furthermore, we may encounter delays or rejections due to additional government regulation from future legislation, administrative action or changes in FDA policy. We do not know whether regulatory agencies will grant approval for any of our product candidates. Even if we complete preclinical studies and clinical trials successfully, we may not be able to obtain regulatory approval or we may not receive approval to make claims about our products that we believe to be necessary to effectively market our products.

We cannot market any product candidate until we have completed all necessary preclinical studies and clinical trials and have obtained the necessary regulatory approvals. Outside the United States, our ability to market any of our potential products is dependent upon receiving marketing approval from the appropriate regulatory authorities. These foreign regulatory approval processes include all of the risks associated with the FDA approval process described above plus additional risks. If we are unable to receive regulatory approval, we will be unable to commercialize our product candidates, and our business may fail.

If we are unable to successfully complete the preclinical studies or clinical trials necessary to support PMA or NDA submissions to the FDA, we may be unable to commercialize Symphony, Prelude or AzoneTS products under development, which could impair our financial position.

Before submitting a PMA application to the FDA for Symphony (which includes our Prelude SkinPrep System) or a NDA for an AzoneTS product candidate, we must successfully complete preclinical studies and clinical trials that we believe will demonstrate that our product is safe and effective. Product development, including preclinical studies and clinical trials, is a long, expensive and uncertain process and is subject to delays and failure at any stage. Furthermore, the data obtained from the studies and trial may be inadequate to support approval of a PMA or NDA, as the case may be. With respect to our medical device programs, while we have in the past obtained, and may in the future obtain, an Investigational Device Exemption, or IDE, prior to commencing clinical trials for Symphony, FDA approval of an IDE application permitting us to conduct testing does not mean that the FDA will consider the data gathered in the trial to be sufficient to support approval of a PMA application, even if the trial’s intended safety and efficacy endpoints are achieved.

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The commencement or completion of any of our clinical trials may be delayed or halted, or be inadequate to support approval of a PMA or NDA, as the case may be, for numerous reasons, including, but not limited to, the following:

• the FDA or other regulatory authorities do not approve a clinical trial protocol or a clinical trial, or place a clinical trial on hold;

• patients do not enroll in clinical trials at the rate we expect;

• patients do not comply with trial protocols;

• patient follow-up is not at the rate we expect;

• patients experience adverse side effects;

• patients die during a clinical trial, even though their death may not be related to our products;

• institutional review boards (“IRBs”) and third-party clinical investigators may delay or reject our trial protocol;

• third-party clinical investigators decline to participate in a trial or do not perform a trial on our anticipated schedule or consistent with the investigator agreements, clinical trial protocol, good clinical practices or other FDA or IRB requirements;

• third-party organizations do not perform data collection, monitoring and analysis in a timely or accurate manner or consistent with the clinical trial protocol or investigational or statistical plans;

• regulatory inspections of our clinical trials or contract manufacturing facilities may, among other things, require us to undertake corrective action or suspend or terminate our clinical trials;

• changes in governmental regulations or administrative actions;

• the interim or final results of the clinical trial are inconclusive or unfavorable as to safety or efficacy; or

• the FDA concludes that our trial design is inadequate to demonstrate safety and efficacy.

The results of preclinical studies do not necessarily predict future clinical trial results, and predecessor clinical trial results may not be repeated in subsequent clinical trials. Additionally, the FDA may disagree with our interpretation of the data from our preclinical studies and clinical trials, or may find the clinical trial design, conduct or results inadequate to prove safety or efficacy, and may require us to pursue additional pre-clinical studies or clinical trials, which could further delay the approval of our products. If we are unable to demonstrate the safety and efficacy of our products in our clinical trials, we will be unable to obtain regulatory approval to market our products. The data we collect from our current clinical trials, our pre-clinical studies and other clinical trials may not be sufficient to support FDA approval.

The regulatory approval process is costly and lengthy and we may not be able to successfully obtain all required regulatory approvals.

The preclinical development, clinical trials, manufacturing, marketing and labeling of medical devices and specialty pharmaceuticals are all subject to extensive regulation by numerous governmental authorities and agencies in the United States and other countries. We must obtain regulatory approval for each of our product candidates before marketing or selling any of them. It is not possible to predict how long the approval processes of the FDA or any other applicable federal or foreign regulatory authority or agency for any of our products will take or whether any such approvals ultimately will be granted. The FDA and foreign regulatory agencies have substantial discretion in the medical device and drug approval process, and positive results in preclinical testing or early phases of clinical studies offer no assurance of success in later phases of the approval process. Generally, preclinical and clinical testing of products can take many years and require the expenditure of substantial resources, and the data obtained from these tests and trials can be susceptible to varying interpretations that could delay, limit or prevent regulatory approval. If we encounter significant delays in the regulatory process that result in excessive costs, this may prevent us from continuing to develop our product candidates. Any delay in obtaining, or failure to obtain, approvals could adversely affect the marketing of our products and our ability to generate product revenue. The risks associated with the approval process include:

• failure of our product candidates to meet a regulatory entity’s requirements for safety, efficacy and quality;

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• limitation on the indicated uses for which a product may be marketed;

• unforeseen safety issues or side effects; and

• governmental or regulatory delays and changes in regulatory requirements and guidelines.

If we fail to obtain adequate reimbursement for our product candidates, the use of our potential products could be severely limited.

Our ability to successfully commercialize our product candidates will depend significantly on our ability to obtain acceptable prices and the availability of reimbursement to the patient from third-party payors. Significant uncertainty exists as to the reimbursement status of newly-approved healthcare products. If our potential products are not considered cost-effective or if we fail to generate adequate third-party reimbursement for the users of our potential products and treatments, then we may be unable to maintain price levels sufficient to realize an appropriate return on our investment in product development. In both the United States and other markets, sales of our potential products, if any, will depend in part on the availability of reimbursement from third-party payors, examples of which include government health administration authorities, private health insurers, health maintenance organizations, and pharmacy benefit management companies.

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Risks related to competition

We operate in highly competitive medical device and specialty pharmaceuticals markets and face competition from large, well-established companies with significantly more resources, and, as a result, we may not be able to compete effectively.

The industries in which we operate are extremely competitive. Many companies, universities, and research organizations developing competing product candidates have greater resources and significantly greater experience in financial, research and development, manufacturing, marketing, sales, distribution, and regulatory matters than we have. In addition, many competitors have greater name recognition and more extensive collaborative relationships. Our competitors could commence and complete clinical testing of their product candidates, obtain regulatory approvals, and begin commercial-scale manufacturing of their products faster than we are able to for our products. They could develop products that would render our product candidates and those of our collaborators obsolete and noncompetitive. Our competitors may develop more effective or more affordable products or achieve earlier patent protection or product commercialization than us. If we are unable to compete effectively against these companies, then we may not be able to commercialize our product candidates or achieve a competitive position in the market. This would adversely affect our ability to generate revenues.

The markets for glucose monitoring devices and specialty pharmaceuticals are intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. Several companies are developing or currently marketing (for diabetes home-use purposes) continuous glucose monitoring products that will compete directly with our Symphony tCGM System. To date, Abbott, Cygnus, DexCom and Medtronic have received approval from the FDA for continuous glucose monitors for diabetes home-use purposes. The product originally developed and marketed by Cygnus is no longer actively marketed. No company has received FDA approval for continuous glucose monitoring in a hospital setting but Edwards Lifesciences, Luminous Medical, Optiscan and Glumetrics are among those companies actively developing continuous or near-continuous glucose monitoring devices for use in critical care. Most of the companies developing or marketing competing glucose monitoring devices and specialty pharmaceuticals are publicly traded or divisions of publicly-traded companies and these companies enjoy several competitive advantages, including:

• significantly greater name recognition;

• established relations with healthcare professionals, customers and third-party payors;

• established distribution networks;

• additional lines of products, and the ability to offer rebates or bundle products to offer higher discounts or incentives to gain a competitive advantage;

• greater experience in conducting research and development, manufacturing, clinical trials, obtaining regulatory approval for products and marketing approved products; and

• greater financial and human resources for product development, sales and marketing, and patent litigation.

As a result, we may not be able to compete effectively against these companies or their products.

No continuous glucose monitoring system has yet received FDA clearance as a replacement for single-point finger stick devices, and Symphony may never be approved for that indication.

We do not expect Symphony to eliminate the need for single-point finger stick devices in the foreseeable future. At present, there is no established precedent for FDA approval of a continuous glucose monitoring system in a hospital environment or as a replacement technology for standard of care blood glucose monitoring.

Technological breakthroughs in the glucose monitoring market could render our product obsolete.

The glucose monitoring market is subject to rapid technological change and product innovation. Our product is based on our proprietary technology, but a number of companies and medical researchers are pursuing new technologies for the monitoring of glucose levels. FDA approval of a commercially viable continuous glucose monitor or sensor produced by one of our competitors could significantly reduce market acceptance of our system. Several of our competitors are in various stages of developing continuous glucose monitors or sensors, including non-invasive and invasive devices, and the FDA has approved four of these competing products. In addition, the National Institutes of Health and other supporters of diabetes research are continually seeking ways to prevent, cure or improve treatment of diabetes. As a result, our products may be rendered obsolete by technological breakthroughs in diabetes monitoring, treatment, prevention or cure.

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Risks related to products liability exposure

We may have significant product liability exposure which may harm our business and our reputation.

We face exposure to product liability and other claims if our product candidates, products or processes are alleged to have caused harm. These risks are inherent in the testing, manufacturing, and marketing of human therapeutic products. Although we currently maintain product liability insurance, we may not have sufficient insurance coverage, and we may not be able to obtain sufficient coverage at a reasonable cost, if at all. Our inability to obtain product liability insurance at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of any products or product candidates that we develop. If we are sued for any injury caused by our products, product candidates or processes, our liability could exceed our product liability insurance coverage and our total assets. Claims against us, regardless of their merit or potential outcome, may also generate negative publicity or hurt our ability to obtain physician endorsement of our products or expand our business.

Risks related to our intellectual property

Our inability to adequately protect our intellectual property could allow our competitors and others to produce products based on our technology, which could substantially impair our ability to compete.

Our success and our ability to compete are dependent, in part, upon our ability to maintain the proprietary nature of our technologies. We rely on a combination of patent, copyright and trademark law, trade secrets and nondisclosure agreements to protect our intellectual property; however, such methods may not be adequate to protect us or permit us to gain or maintain a competitive advantage. Our patent applications may not issue as patents in a form that will be advantageous to us, or at all. Our issued patents, and those that may issue in the future, may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing related products.

To protect our proprietary rights, we may in the future need to assert claims of infringement against third parties to protect our intellectual property. The outcome of litigation to enforce our intellectual property rights in patents, copyrights, trade secrets or trademarks is highly unpredictable, could result in substantial costs and diversion of resources, and could have a material adverse effect on our financial condition and results of operations regardless of the final outcome of such litigation. In the event of an adverse judgment, a court could hold that some or all of our asserted intellectual property rights are not infringed, invalid or unenforceable, and could award attorney fees to the other party.

Despite our efforts to safeguard our unpatented and unregistered intellectual property rights, we may not be successful in doing so or the steps taken by us in this regard may not be adequate to detect or deter misappropriation of our technology or to prevent an unauthorized third party from copying or otherwise obtaining and using our products, technology or other information that we regard as proprietary. Additionally, third parties may be able to design around our patents. Furthermore, the laws of foreign countries may not protect our proprietary rights to the same extent as the laws of the United States. Our inability to adequately protect our intellectual property could allow our competitors and others to produce products based on our technology, which could substantially impair our ability to compete.

We are subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from commercializing our product candidates, require us to obtain licenses from third parties or to develop non-infringing alternatives, and subject us to substantial monetary damages and injunctive relief.

As is generally the case in the medical device and pharmaceutical industries in which we operate, third-parties may, in the future, assert infringement or misappropriation claims against us with respect to our current or future products. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain; therefore, we cannot be certain that we have not infringed the intellectual property rights of such third parties or others. Our competitors may assert that our product candidates, technologies and/or the methods we employ in the use of Symphony and/or AzoneTS pipeline candidates are covered by U.S. or foreign patents held by them. This risk is exacerbated by the fact that there are numerous issued patents and pending patent applications relating to self-monitored glucose testing systems in the medical technology field. Because patent applications may take years to issue, there may be applications now pending of which we are unaware that may later result in issued patents that our products infringe. There could also be existing patents of which we are unaware that one or more components of our system may inadvertently infringe. As the number of competitors in the market for continuous glucose monitoring systems and specialty pharmaceuticals grows, the possibility of inadvertent patent infringement by us or a patent infringement claim against us increases.

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Any infringement or misappropriation claim could cause us to incur significant costs, place significant strain on our financial resources, divert management’s attention from our business and harm our reputation. If the relevant patents were upheld as valid and enforceable and we were found to infringe, we could be prohibited from selling our product that is found to infringe unless we obtain the right to use the technology covered by the patent or are able to design around the patent. We may be unable to obtain such rights on terms acceptable to us, if at all, and we may not be able to redesign our products to avoid infringement. Even if we are able to redesign our products to avoid an infringement claim, we may not receive FDA approval for such changes in a timely manner or at all. A court could also order us to pay compensatory damages and prejudgment interest for such infringement and could, in addition, treble the compensatory damages and award attorney fees. These damages could be substantial and could harm our reputation, business, financial condition and operating results. A court also could enter orders that temporarily, preliminarily or permanently enjoin us and our customers from making, using, selling or offering to sell our products, or could enter an order mandating that we undertake certain remedial activities. Depending on the nature of the relief ordered by the court, we could become liable for additional damages to third parties.

ITEM 2. PROPERTIES.

We lease approximately 13,000 square feet of research-scale manufacturing, laboratory and office space in a single facility located in Franklin, Massachusetts under a lease expiring March 31, 2014.  In addition, as of March 9, 2011, we entered into a lease for approximately 5,400 square feet of corporate office space in a single facility located in Philadelphia, Pennsylvania.

ITEM 3. LEGAL PROCEEDINGS.

None.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our Common Stock is currently traded through the OTC Bulletin Board (OTCBB) and is quoted under the symbol “ECTE”. The following table sets forth the range of high and low closing prices for our Common Stock for the periods indicated as reported by the OTCBB in 2009 and 2010.  The number of common shareholders of record of Echo as of March 16, 2011 was 178.

Fiscal Year Ended December 31, 2009	High		Low
First Quarter	$	0.70	$	0.25
Second Quarter	$	1.69	$	0.35
Third Quarter	$	1.96	$	1.36
Fourth Quarter	$	1.70	$	1.22

Fiscal Year Ended December 31, 2010	High		Low
First Quarter	$	2.02	$	1.47
Second Quarter	$	1.70	$	1.16
Third Quarter	$	1.32	$	0.92
Fourth Quarter	$	1.60	$	0.92

* The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

We have never paid or declared any cash or other dividends on our Common Stock.

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Information regarding our equity compensation plans and the securities authorized for issuance hereunder is set forth in Note 10 and Items 11 and 12. Information regarding sales of unregistered securities is set forth in Item 7, Notes 8, 9 and 14.

We did not repurchase any shares of Common Stock during the year ended December 31, 2010.

During 2010, warrants to purchase 143,793 shares of our Common Stock were exercised voluntarily in cashless exercises, providing no gross proceeds.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion of our consolidated financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this Form 10-K. The matters discussed herein contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, which involve risks and uncertainties. All statements other than statements of historical information provided herein may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes”, “anticipates”, “plans”, “expects” and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, those discussed in “Risk Factors” and elsewhere in this report and the risks discussed in our other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date hereof. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof.

Organization

We are a medical device and specialty pharmaceutical company. We are developing the Symphony™ transdermal continuous glucose monitoring (“tCGM”) System (“Symphony”) as a non-invasive, wireless, transdermal continuous glucose monitoring system for use in hospital critical care units and for patients with diabetes.  We are also developing our needle-free Prelude™ SkinPrep System (“Prelude”) as a platform technology for enhanced skin permeation for delivery of topical pharmaceuticals as well as for a wide range of transdermal reformulations of specialty pharmaceutical products previously approved by the United States Food and Drug Administration (“FDA”).

Operating Plan

We are principally involved with product development and clinical studies for our Symphony tCGM System using our Prelude SkinPrep System. Symphony is a next-generation, non-invasive (needle-free), wireless tCGM system designed to provide reliable, continuous blood glucose data conveniently and cost-effectively. We have completed our principal research and advanced our feasibility development of our Symphony prototype, including necessary product development for our proprietary Prelude SkinPrep System, and have engaged several product development, engineering, and contract manufacturing firms to assist us with all necessary efforts in connection with our plan to finalize product development and advance our regulatory approval process through the FDA. We have completed several clinical studies using Symphony in an acute care (hospital) environment, as well as in ambulatory settings for type 1 and type 2 diabetics and non-diabetics. In order to complete our product development, clinical development programs and to obtain regulatory approval for Symphony, we need to raise substantial additional financing.

In connection with a license agreement with Ferndale for Prelude, we have substantially completed product development and are currently working with our contract manufacturer regarding final manufacturing and product testing.

Our specialty pharmaceuticals pipeline is based on our proprietary AzoneTS transdermal drug reformulation technology. We believe that, despite their commercial success in large, chronic markets, many FDA-approved products are candidate for our AzoneTS reformulation technology that is focused on improved and enhanced dermal penetration. Our lead product candidate is Durhalieve, an AzoneTS topical reformulation of triamcinolone acetonide. Durhalieve is covered by our NDA on file with the FDA for treatment of corticosteroid-responsive dermatoses. Presently, we are working to satisfy the FDA’s remaining manufacturing and clinical study requirements necessary to secure FDA approval of Durhalieve. In order to complete our product development program and to continue efforts to obtain regulatory approval for Durhalieve, we need to raise substantial additional financing.

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Research and Development

A significant portion of our research and development expenses includes salaries paid to personnel, outside product development design and engineering firms and other contract service providers, as well as for the allocation of facilities costs.

Our product development efforts are principally concentrated on Symphony and Prelude. While our medical device product development programs are progressing, financial constraints in both 2009 and 2010 have prevented us from advancing these programs in accordance with the timelines we had originally anticipated.

Due to financial constraints in 2009 and 2010, we have been unable to advance and finalize our AzoneTS product development programs as rapidly as we had originally anticipated. If we are unable to obtain sufficient funding necessary to complete our current planned development schedule for Durhalieve, then we may incur additional time and expenses to obtain approval for Durhalieve from the FDA and to commercialize Durhalieve. Should Durhalieve not receive FDA approval, then we may be required to write-off as an impairment charge all or a portion of the intangible assets acquired based on the specific facts and circumstances that will be evaluated at a future date.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

On an ongoing basis, we evaluate our estimates and judgments for all assets and liabilities, including those related to stock-based compensation expense and, the fair value determined for stock purchase warrants classified as derivative liabilities. We base our estimates and judgments on historical experience, current economic and industry conditions and on various other factors that are believed to be reasonable under the circumstances. This forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Our significant accounting policies are described in “Item 8 — Financial Statements — Note 2 — Summary of Significant Accounting Policies.” We believe the critical accounting policies discussed below are those most important for an understanding of our financial condition and results of operations and require our most difficult, subjective or complex judgments.

Intangible Assets and Other Long-Lived Assets — We record intangible assets at acquisition date fair value. As a policy, we amortize our intangible assets using the straight-line method over their estimated useful lives, as follows: patents and licenses, two (2) to twenty (20) years; definite-lived core and developed technology, five (5) to twenty-five (25) years; and other intangible assets, over various periods. In connection with our acquisition of Durham Pharmaceuticals Ltd., a North Carolina corporation doing business as Echo Therapeutics, Inc. (the “ETI Acquisition”) in September 2007, intangible assets related to contractual arrangements were amortized over the estimated useful life of three (3) years and ended in 2010.  Intangible assets related to technology are expected to be amortized on a straight-line basis over the period ending 2018 when the underlying patents expire and will commence upon revenue generation.

Accounting for Impairment and Disposal of Long-Lived Assets — We review intangible assets subject to amortization quarterly to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. Conditions that would indicate impairment and trigger an impairment assessment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset, or an adverse action or assessment by a regulator. If the carrying value of an asset exceeds its undiscounted cash flows, we write-down the carrying value of the intangible asset to its fair value in the period identified.

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For purposes of this analysis, we estimate our cash flows using a projection period not exceeding ten years, market size based on estimated prescription volume, estimated market share, average pricing, estimated costs to complete product development, operating expenses and a blended tax rate. Generally, cash flow forecasts for purposes of impairment analysis are prepared on a consistent basis and using a consistent methodology as those prepared for the income approach used to initially estimate the intangible asset’s fair value.

If the carrying value of assets is determined not to be recoverable, we record an impairment loss equal to the excess of the carrying value over the fair value of the assets. Our estimate of fair value is based on the best information available to us, in the absence of quoted market prices.

We generally calculate fair value as the present value of estimated future cash flows that we expect to generate from the asset using the income approach as described above. Significant estimates included in the discounted cash flow analysis as consistent with those described above are used except that we introduce a risk-adjusted discount rate. The risk-adjusted discount rate is estimated using a weighted-average cost of capital analysis. If the estimate of an intangible asset’s remaining useful life is changed, we amortize the remaining carrying value of the intangible asset prospectively over the revised remaining useful life. For other long-lived assets, we evaluate quarterly whether events or circumstances have occurred that indicate that the carrying value of these assets may be impaired.

Share-based Payments — We record share-based payments at fair value. The grant date fair value of awards to employees and directors, net of expected forfeitures, is recognized as expense in the statement of operations over the requisite service period. The fair value of options is calculated using the Black-Scholes option pricing model. This option valuation model requires input of assumptions including the volatility of our stock price, the expected life of the option and the risk-free interest rate. We estimate the volatility of our stock price using historical prices. We estimate the expected life of our option using the average of the vesting period and the contractual term of the option. The estimated forfeiture rate is based on historical forfeiture information as well as subsequent events occurring prior to the issuance of the financial statements. Because our stock options have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, the existing model may not necessarily provide a reliable single measure of fair value of our stock options.

Derivative Instruments — We generally do not use derivative instruments to hedge exposures to cash-flow or market risks; however, certain warrants to purchase Common Stock that do not meet the requirements for classification as equity are classified as liabilities. In such instances, net-cash settlement is assumed for financial reporting purposes, even when the terms of the underlying contracts do not provide for a net-cash settlement. Such financial instruments are initially recorded at fair value with subsequent changes in fair value charged (credited) to operations in each reporting period. If these instruments subsequently meet the requirements for classification as equity, we reclassify the fair value to equity.

Revenue Recognition — To date, we have generated revenue primarily from licensing agreements, including upfront, nonrefundable license fees, and from amounts reimbursed by licensees for third-party engineering services for product development. We recognize revenue when the following criteria have been met:

• persuasive evidence of an arrangement exists;

• delivery has occurred and risk of loss has passed;

• the price to the buyer is fixed or determinable; and

• collectability is reasonably assured.

In addition, when evaluating multiple element arrangements, we consider whether the components of the arrangement represent separate units of accounting. Multiple elements are divided into separate units of accounting if specified criteria are met, including whether the delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. The consideration received is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. Otherwise, the applicable revenue recognition criteria are applied to combined elements as a single unit of accounting.

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We typically receive upfront, nonrefundable payments for the licensing of our intellectual property upon the signing of a license agreement. We believe that these payments generally are not separable from the payments we receive for providing research and development services because the license does not have stand-alone value from the research and development services we provide under these agreements. Accordingly, we account for these elements as one unit of accounting and recognize upfront, nonrefundable payments as revenue on a straight-line basis over its contractual or estimated performance period. Revenue from the reimbursement of research and development efforts is recognized as the services are performed based on proportional performance adjusted from time to time for any delays or acceleration in the development of the product. We determine the basis of the estimated performance period based on the contractual requirements of its collaboration agreements. At each reporting period, we evaluate whether events warrant a change in the estimated performance period.

Other Revenue includes amounts earned and billed under the license and collaboration agreements for reimbursement for research and development costs for contract engineering services. For the services rendered, principally third-party contract engineering services, the revenue recognized approximates the costs associated with the services.

We believe that full consideration has been given to all relevant circumstances that we may be subject to, and the consolidated financial statements accurately reflect our best estimate of the results of operations, financial position and cash flows for the periods presented.

Results of Operations

Comparison of the years ended December 31, 2010 and 2009

Licensing Revenue — We signed two licensing agreements during the year ended December 31, 2009, each with a minimum term of ten years, that required up-front non-refundable license payments by the licensees. The up-front non-refundable license payments received in cash totaled $1,250,000. We are recognizing the up-front, non-refundable payments as revenue on a straight-line basis over our contractual or estimated performance period. During 2010, we adjusted our amortization period for revenue recognition for each of our license arrangements to reflect estimated timing of regulatory approval (or clearance).  Accordingly, we determined that approximately $226,000 and $536,000 of the non-refundable license revenue was recognizable in the years ended December 31, 2010 and 2009, respectively. Approximately $405,000 is recognizable over the next 12 months and is shown as current deferred revenue and approximately $82,000 is recognizable as revenue beyond the 12 month period and is classified as non-current.

Other Revenue — We retained contract engineering services in connection with our product development for one of our licensees and such costs are reimbursed and recorded as Other Revenue.  The significant amount of contract engineering services for this licensee occurred in 2009. Accordingly, Other Revenue of approximately $203,000 and $795,000 related to such services were recognized and received from our licensee during the years ended December 31, 2010 and 2009, respectively. The costs from the contract engineering services are included in Research and Development expenses on the Statements of Operations. There was no markup on the contract engineering services recorded as Other Revenue.

Research and Development Expenses — Research and development expenses decreased by approximately $228,000 to approximately $2,579,000 for the year ended December 31, 2010 from approximately $2,807,000 for the year ended December 31, 2009. Research and development expenses decreased primarily as a result of our decreased product and clinical development activity due to funding restrictions for Symphony, Prelude, and Azone product candidates. The cost for services from outside product development and design contractors decreased by approximately $292,000 and costs of our clinical studies decreased by approximately $79,000 compared with the prior year.  Our research and development employee costs (payroll and benefits) rose approximately $241,000 compared with the prior year. The legal costs in 2010 decreased by approximately $40,000 compared with 2009 due to a reduction in new filings. Our facility costs allocated to research and development were reduced by approximately $16,000 in 2010 compared to 2009 due to various costs savings including reduced lease costs in December 2010 as a result of entering into a facilities lease extension. Amortization of a long-term service contract for approximately $84,000 decreased approximately $35,000 in 2010 as a result of the end of the contract term. Other research and development costs went down approximately $7,000 in 2010.

 Research and development expenses amounted to approximately 48% of total operating expenses during both years ended December 31, 2010 and 2009, and included product development and regulatory consulting expenses for Prelude and Symphony. Product development and clinical expenses included in research and development expenses represented approximately 98% and 2%, respectively, of research and development expenses for the year ended December 31, 2010. Product development and clinical expenses included in research and development expenses represented approximately 95% and 5%, respectively, of research and development expenses for the year ended December 31, 2009.  We engaged several engineering and product development firms during the years ended December 31, 2010 and 2009 for product development of our Symphony System and product development and manufacturing of our Prelude System.

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Selling, General and Administrative Expenses — Selling, general and administrative expenses decreased by approximately $295,000 to approximately $2,760,000 for the year ended December 31, 2010 from approximately $3,055,000 for the year ended December 31, 2009. The primary decreases between 2010 and 2009 in selling, general and administrative expenses included decreases of approximately $1,213,000, $115,000, $239,000 and $25,000 in share-based compensation, legal fees, consulting fees and cash charitable contributions, respectively. The primary increases between 2010 and 2009 in selling, general and administrative expenses included approximately $113,000, $1,075,000 and $118,000 for non-cash charitable contributions, investor relations fees and payroll salaries and benefits, respectively.

Selling, general and administrative expenses represented 52% of total operating expenses during both years ended December 31, 2010 and 2009. We are not engaged in selling activities and, accordingly, general and administrative expenses relate principally to salaries and benefits for our executive, financial and administrative staff, public company reporting costs, investor relations, legal, accounting and media costs, capital-raising costs, and costs for general operations.

Interest Income — Interest income was approximately $2,000 for the years ended December 31, 2010 and 2009.

Interest Expense — Interest expense was approximately $38,000 for the year ended December 31, 2010, compared to interest expense of approximately $332,000 for the year ended December 31, 2009, a decrease of approximately $294,000. The approximate net decrease in interest expense for each note payable obligation is shown in the table below:

	Years ended
Note Payable Obligations	December 31, 2010		December 31, 2009		Increase (Decrease)
Senior convertible notes	$	—	$	55,000	$	(55,000	)
2008 Senior secured notes		—		204,000		(204,000	)
2009 Senior secured note		—		16,000		(16,000	)
Capitalized Leases		1,000		1,000		—
Other short-term financing		37,000		56,000		(19,000	)
Total notes payable	$	38,000	$	332,000	$	(294,000	)
Non-cash Interest included above	$	35,000	$	313,000	$	(278,000	)

During 2010, substantially all debt was either repaid or converted into equity except for $100,000 in a short-term promissory note that was converted into equity during January 2011.

Grant income —Grants received are recognized as income when the related work is performed and the qualifying research and development costs are incurred and are presented as other income in our consolidated statement of operations. We received grants totaling approximately $245,000 under the Qualified Therapeutic Discovery Project Grants Program and all grant income was recognized in 2010. The Qualified Therapeutic Discovery Project Grants Program was included in the healthcare reform legislation and established a one-time pool of $1 billion for grants to small biotechnology companies developing novel therapeutics which show potential to: (a) result in new therapies that either treat areas of unmet medical need, or prevent, detect, or treat chronic or acute diseases and conditions; (b) reduce long-term health care costs in the United States; or (c) significantly advance the goal of curing cancer within a the 30-year period.

Gain (Loss) on Extinguishment of Debt — During the year ended December 31, 2009, we recorded a loss on extinguishment of debt in the amount of approximately $1,820,000 relating to the retirement of the 2009 Senior Secured Note in exchange for 200.6031 shares of Series B Perpetual Preferred Stock (“Series B Stock”) and 3,113.084 shares of Series C Preferred Stock (“Series C Stock”). Additionally in 2009, we recorded a loss on extinguishment of debt in the amount of approximately $32,000 relating to the 2008 Senior Secured Note.

On November 13, 2009, we recorded a loss on extinguishment when the remaining Senior Convertible Notes and accrued interest totaling $355,070 were exchanged for 284,056 shares of Common Stock and warrants. The loss of approximately $196,000 on extinguishment of these notes consisted of approximately $27,000 of unamortized deferred financing costs, $18,000 of unamortized discount and approximately $150,000 in excess fair value of the shares and warrants issued on extinguishment over that received under the original terms.

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In September, 2010, we issued $250,000 of short-term notes to mature in 90 days.  The note holders were issued common stock in lieu of interest. The fair value of the common stock was recorded as deferred financing costs and amortized over the 90 day period. One note amounting to $100,000 was extended for up to two months in exchange for 5,000 shares of common stock at the end of each month. Total deferred finance cost for these notes was approximately $35,000.  One other note amounting to $50,000 was repaid in November, 2010 and we recognized approximately $4,000 as a loss on extinguishment of debt for the unamortized finance cost.  The final note amounting to $100,000 was extinguished early when the holder converted the note for the purchase of 100,000 shares of common stock in November 2010. Unamortized finance cost of approximately $12,000 was recognized as a loss on extinguishment of debt on this final note.

On September 30, 2009, we entered into the Letter with BHP extending the due date of the Fee payable by us to BHP in connection with placement agent services provided by BHP pursuant to an engagement letter dated June 30, 2009.  The Fee was originally due upon the earlier of (i) our net cash balance exceeding $2,000,000 or (ii) October 1, 2009.  The Letter provides that the Fee is due and payable by us upon the earlier of (i) our net cash balance exceeding $2,000,000 or (ii) June 30, 2010.  In March 2010, BHP agreed that we do not owe BHP any fees pursuant to any and all previous agreements between BHP and us. Accordingly, the Fee was waived and we recorded a gain on extinguishment of financing fee payable of $200,000 in 2010.

Derivative Gain (Loss) — At December 31, 2010 and 2009, we had outstanding warrants to purchase 10,336,292 and 7,356,502 shares, respectively, of our Common Stock. Included in these warrants are outstanding warrants to purchase 1,356,289 and 1,483,760 shares, respectively, that are considered to be derivative instruments since the agreements contain “down round” provisions whereby the number of shares covered by the warrants is subject to change in the event of certain dilutive stock issuances. The fair value of these derivative instruments at December 31, 2010 and 2009 was approximately $1,545,000 and $2,117,000, respectively, and is included in Derivative Warrant Liability, a current liability. Changes in fair value of the derivative financial instruments are recognized currently in the Consolidated Statement of Operations as a Derivative Gain (Loss). The primary underlying risk exposure pertaining to the warrants is the change in fair value of the underlying Common Stock. The Derivative gain on warrants subject to “down round” provisions for the year ended December 31, 2010 was approximately $371,000. The Derivative loss on warrants subject to “down round” provisions for the year ended December 31, 2009 amounted to approximately $4,050,000. During the year ended December 31, 2010, warrants to purchase 143,793 shares of Common Stock were exercised with anti-dilution provisions, which resulted in a reclassification to additional paid-in capital in the amount of approximately $200,000.  During the year ended December 31, 2009, warrants to purchase 1,584,515 shares of Common Stock were exercised, of which 664,397 shares included anti-dilution provisions, which resulted in a reclassification to additional paid-in capital in the amount of approximately $3,268,000.

Net Loss — As a result of the factors described above, we had a net loss of approximately $4,147,000 for the year ended December 31, 2010 compared to approximately $10,958,000 for the year ended December 31, 2009.

Liquidity and Capital Resources

We have financed our operations since inception primarily through private sales of our Common Stock and preferred stock, the issuance of convertible promissory notes, unsecured and secured promissory notes, up-front non-refundable payments received under license agreements and cash received in connection with exercises of Common Stock purchase options and warrants. As of December 31, 2010, we had approximately $1,342,000 of cash and cash equivalents, with no other short term investments.

Net cash used in operating activities was approximately $3,630,000 for the year ended December 31, 2010. The use of cash in operating activities was primarily attributable to the net loss of approximately $4,147,000, offset by non-cash expenses of approximately $109,000 for depreciation and amortization, $165,000 for share-based compensation expense, $995,000 for the fair value of stock, warrants and options issued for services, $113,000 for fair value of common stock issued as charitable contribution, and $35,000 in non-cash interest expense relating to short-term promissory notes.  Included in net loss is a non-cash derivative gain of approximately $371,000 and a non-cash gain on extinguishment of debt of approximately $184,000.  A decrease in accounts payable and deferred revenue relating to license agreements reduced used cash available for operations by approximately $320,000 and $226,000, respectively.  An increase in accounts receivable, net of a decrease in prepaid expenses and other assets provided approximately $22,000 of cash. An increase in accrued expenses and other liabilities provided approximately $179,000 of cash.

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Net cash used in investing activities was approximately $280,000 for the year ended December 31, 2010. Cash of approximately $266,000 was used as result of an increase in restricted cash in escrow at December 31, 2010 related to a January 2011 finance closing. Cash was used to purchase approximately $14,000 in office equipment.

Net cash provided by financing activities was approximately $4,085,000 for the year ended December 31, 2010. The cash was primarily attributable to proceeds from the sale of common stock and warrants of approximately $3,887,000.   We had proceeds of $250,000 from short-term promissory notes, of which $50,000 was repaid in cash and $100,000 was converted into common stock in connection with the November 2009 Financing.  Principal payments on capitalized lease obligations used less than $2,000 during 2010.

At December 31, 2010, we had outstanding warrants to purchase 10,336,292 shares of Common Stock at exercise prices ranging from $0.50 to $5.80.

As of March 16, 2011, we had cash and cash equivalents of approximately $5,076,000.

We continue to aggressively pursue additional financing from existing relationships (prior shareholders, investors and lenders) and from new investors to support our product and clinical development programs, and operations. We engage investment banking firms to assist us with these efforts. During the period January 2011 through March, 16, 2011, we raised an approximately $4,652,000 in cash from our Common Stock and Warrant Offerings and through a new series of Convertible Preferred Stock.  In addition during that period, we received cash in the amount of approximately $465,000 as a result of common stock warrant exercises.

For additional information about our operating plan with respect to our products and product development, please see our Business discussion in Item 1 above.

We have demonstrated the ability to manage our costs aggressively and increase our operating efficiencies while advancing our medical device product development and clinical programs.  During the year ended December 31, 2010, we managed the extent of our medical device product development, clinical and operating costs while pursuing necessary funding. In order to advance our product development, clinical programs, establish contract manufacturing and support our Licensee for our Prelude System, pursue  FDA approval for our Symphony System and support our operating activities, we expect our monthly operating costs associated with salaries and benefits, regulatory and public company consulting, contract engineering and manufacturing, legal and other working capital costs to increase. In the past, we have relied primarily on raising equity capital in order to meet our operating budget and to achieve our business objectives, and we plan to continue that practice in the future. Although we have been successful in the past with raising sufficient capital, we will continue to vigorously pursue additional financing as necessary for meeting our business objectives.  However, there can be no guarantee that additional capital will be available in sufficient amounts on terms favorable to us, if at all.

The economic conditions during 2010, including the tightening of available funding in the financial markets, had a significant impact on our fund raising initiatives to fund our product development and clinical programs in accordance with our original projected level of operations. Although we have recently raised sufficient capital, we believe that uncertainties in the financial markets may occur in the future. The extent of our future product development, clinical programs and regulatory activities may be dependent on available additional funding from investors. Without sufficient funding for our programs, our plan to obtain regulatory approval for Symphony and Durhalieve may be delayed.

Our ability to fund our future operating requirements will depend on many factors, including the following:

• our ability to obtain funding from third parties, including any future collaborative partners, on reasonable terms;

• our progress on research and development programs;

• the time and costs required to gain regulatory approvals;

• the costs of manufacturing, marketing and distributing our products, if successfully developed and approved;

• the costs of filing, prosecuting and enforcing patents, patent applications, patent claims and trademarks;

• the status of competing products; and

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• the market acceptance and third-party reimbursement of our products, if successfully developed and approved.

During 2010 and through March 16, 2011, we have not redeemed any warrants.  During 2010, common stock warrants to purchase 143,793 shares were exercised through a cashless exercise provision and none were exercised for cash..  During 2011 and through March 16, 2011, common stock warrants to purchase 799,914 shares were exercised through a cashless exercise provision and 230,048 shares were exercised for cash providing gross proceeds to us of $465,279.

2009 Series A-2 Preferred Stock Financing — On April 8, April 24, April 28 and May 31, 2009, we entered into an Amended and Restated Stock and Warrant Purchase Agreement dated as of April 2, 2009 (the “A-2 Agreement”) with certain strategic institutional and accredited investors (the “A-2 Investors”) in connection with a private placement transaction (the “A-2 Financing”) in which the A-2 Investors purchased an aggregate of 640,000 shares of Series A-2 Stock at a price of $0.50 per share and received warrants to purchase 153,912 shares of Common Stock. The A-2 Financing provided us with gross proceeds of $700,000 and we used the net proceeds for working capital and general corporate purposes.  As of June 29, 2009 the Series A-2 Stock was exchanged for Common Stock (see below).

For the year ended December 31, 2009, we satisfied 8% quarterly dividend commitments for our Series A Stock, Series A-1 Stock and Series A-2 Stock with the issuance of additional preferred stock of 62,539 shares, 30,985 shares and 22,436 shares, respectively.

2009 Senior Secured Note — On June 1, 2009, we issued to Platinum Montaur Life Sciences, LLC (“Platinum”) a 10% Senior Secured Promissory Note (the “Platinum Note”) in the principal amount of $1,990,000. The outstanding principal of the Platinum Note accreted in value at an annual rate of 10%, compounded monthly.

The maturity date of the Platinum Note was June 29, 2009, which maturity date was subsequently extended to July 7, 2009. We used the net proceeds of the Platinum Note to pay a substantial portion of the Senior Secured Notes. As of June 30, 2009, we exchanged the Platinum Note and interest for 200.6031 shares of Series B Stock and 1,205.016 shares of Series C Stock.

Series A Preferred Stock Exchange — On June 29, 2009, we entered into an Exchange Agreement (the “Series A Exchange Agreement”) with all of the holders of the Series A Convertible Preferred Stock (collectively, the “Series A Holders”). The Series A Holders held an aggregate of 1,632,733 shares of Series A Stock, including paid-in-kind dividends accrued through June 29, 2009, constituting all of the issued and outstanding Series A Stock.

Under the terms of the Series A Exchange Agreement, we issued and delivered to the Series A Holders, in exchange for the cancellation of the Series A Stock, 2,938,920 shares of Common Stock. The Series A Exchange Agreement states that, if, as a result of this exchange transaction, any Series A Holder or any of its affiliates, individually or in the aggregate, would beneficially own more than 9.99% of our issued and outstanding Common Stock (the “Threshold Amount”), the Series A Holder would receive Common Stock rounded to the nearest whole share, up to the Threshold Amount, and the remaining Common Stock would be exchanged for Series C Stock convertible into the number of shares of Common Stock equal to the difference between the aggregate number of shares of Common Stock to be issued to the Series A Holder and the actual number of shares of Common Stock issued. As a result of this provision, one Series A Holder received 2,323.105 shares of Series C Stock instead of 2,323,105 shares of Common Stock. The remaining Series A Holders received 615,815 shares of Common Stock. As a result of the terms of the Series A Exchange Agreement, we do not have any shares of Series A Stock issued and outstanding.

In 2009, we recorded a deemed dividend on the beneficial conversion equal to the incremental fair value resulting from the reduction in the conversion price, or approximately $2,012,000. This deemed dividend is included in the Statement of Operations in arriving at Net Loss Applicable to Common Shareholders.

Series A-1 Preferred Stock Exchange — On June 29, 2009, we entered into an Exchange Agreement (the “A-1 Exchange Agreement”) with all of the holders of the Series A-1 Convertible Preferred Stock (collectively, the “A-1 Holders”). The A-1 Holders held an aggregate of 809,121 shares of our Series A-1 Stock, including paid-in-kind dividends accrued through June 29, 2009, constituting all of the issued and outstanding Series A-1 Stock.

Under the terms of the A-1 Exchange Agreement, we issued and delivered to the A-1 Holders, in exchange for the cancellation of the Series A-1 Stock, 1,078,828 shares of Common Stock. The A-1 Exchange Agreement states that, if, as a result of this exchange transaction, any A-1 Holder or any of its affiliates, individually or in the aggregate, would beneficially own more than the Threshold Amount, the A-1 Holder would receive Common Stock rounded to the nearest whole share, up to the Threshold Amount, and the remaining Common Stock would be exchanged for Series C Stock convertible into the number of shares of Common Stock equal to the difference between the aggregate number of shares of Common Stock to be issued to the A-1 Holder and the actual number of shares of Common Stock issued. As a result of this provision, one A-1 Holder received 280.993 shares of Series C Stock instead of 280,993 shares of Common Stock. The remaining A-1 Holders received 797,835 shares of Common Stock. As a result of the A-1 Exchange Agreement, we do not have any shares of Series A-1 Stock issued and outstanding.

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In 2009, we recorded a deemed dividend on the beneficial conversion equal to the incremental fair value resulting from the reduction in the conversion price, or approximately $415,000. This deemed dividend is included in the Statement of Operations in arriving at Net Loss Applicable to Common Shareholders.

Series A-2 Preferred Stock Exchange — On June 29, 2009, we entered into an Exchange Agreement (the “A-2 Exchange Agreement”) with all of the holders of the Series A-2 Stock (collectively, the “A-2 Holders”). The A-2 Holders held an aggregate of 1,422,436 shares of the Series A-2 Stock, including paid-in-kind dividends accrued through June 29, 2009, constituting all of the issued and outstanding Series A-2 Stock.

Under the terms of the A-2 Exchange Agreement, we issued and delivered to the A-2 Holders, in exchange for the cancellation of the Series A-2 Stock, 1,422,436 shares of Common Stock. The A-2 Exchange Agreement states that, if, as a result of this exchange transaction, any A-2 Holder or any of its affiliates, individually or in the aggregate, would beneficially own more than the Threshold Amount, the A-2 Holder would receive Common Stock rounded to the nearest whole share, up to the Threshold Amount, and the remaining Common Stock would be exchanged for Series C Stock convertible into the number of shares of Common Stock equal to the difference between the aggregate number of shares of Common Stock to be issued to the A-2 Holder and the actual number of shares of Common Stock issued. As a result of this provision, one A-2 Holder received 508.986 shares of Series C Stock instead of 508,986 shares of Common Stock. As a result of the A-2 Exchange Agreement, we do not have any shares of Series A-2 Stock issued and outstanding. The remaining A-2 Holders received 913,450 shares of Common Stock.

Series B Perpetual Preferred Stock and Warrant Financing — On July 7, 2009, we entered into a Stock Purchase Agreement as of June 30, 2009 (the “Series B Agreement”) with Platinum in connection with our private placement (the “Series B Financing”) of 200.6031 shares of Series B Stock, together with 1,205,016 shares of Common Stock, for an aggregate price of $2,006,031. We received payment of the purchase price in the form of the extinguishment of the 2009 Senior Secured Note in the amount of $2,006,031, which amount included principal and interest accrued through June 30, 2009. As the Platinum Note was not originally convertible, we recognized a loss on the extinguishment of this debt of approximately $1,820,000 which represents the excess of the fair value of the Series B Stock and the Series C Stock over the carrying value of the Platinum Note.

The Series B Agreement states that the Series B Financing may not result in a purchaser or any of its affiliates, individually or in the aggregate, beneficially owning more than the Threshold Amount; provided, however, that a purchaser may waive the foregoing provision upon sixty-one (61) days’ advance written notice to us. If the Series B Financing would result in a purchaser owning Common Stock in excess of the Threshold Amount, then the purchaser would receive Common Stock rounded to the nearest whole share, up to the Threshold Amount, and the remaining Common Stock would be exchanged for Series C Stock convertible into the number of shares of Common Stock equal to the difference between the aggregate number of shares of Common Stock to be issued to the purchaser and the actual number of shares of Common Stock issued. As a result of this provision, Platinum received 1,205.016 shares of Series C Stock instead of 1,205,016 shares of Common Stock that it otherwise would have received pursuant to the Series B Agreement.

Pursuant to the terms of the Certificate of Designation, Preference and Rights of Series B Perpetual Preferred Stock (the “Series B Certificate”), the Series B Stock is redeemable under certain circumstances.

The Series B Stock yields a quarterly dividend commencing as of January 1, 2010, at an initial annual rate of 8%, which is payable in cash or in kind at our option on a quarterly basis. If the Series B Stock is outstanding on the twelve month anniversary of the Issuance Date (as defined in the Series B Certificate), the dividend rate shall increase to 10% per annum and, if the Series B Stock is outstanding on the eighteen month anniversary of the Issuance Date, then the dividend rate shall increase to 12% per annum.

In the event of any Liquidation Event (as defined in the Series B Certificate) the holders of the Series B Stock will be entitled to receive (subject to the rights of any securities designated as senior to the Series B Stock) a liquidation preference equal to the Face Amount thereof plus any accrued but unpaid dividends thereon. We cannot create or issue any security senior to the Series B Stock without the prior approval of the holders of at least 67% of the outstanding Series B Stock.

28

In accordance with redemption requirements, during the year ended December 31, 2009, the Company redeemed 59.3750 shares of Series B Stock at a cost of $593,750 in connection with the financings dated November 13, and December 3, 2009. Of this amount, $450,000 was satisfied by offsetting proceeds owed in connection with the 2009 November Financing (see Note 9) and $143,750 was included in Accrued Expenses.

On January 19, 2010, we entered into a letter agreement with the sole holder of Series B Stock (the “Series B Holder”) regarding the payment to the Series B Holder of $143,750 (the “Redemption Amount”) for the redemption of 14.375 shares of Series B Stock in connection with the 2009 November Financing and 2009 December Financing. The Series B Holder waived payment of the Redemption Amount until we has a net cash balance in excess of $3,000,000. In consideration for the deferral, we agreed that, upon the closing of its next equity offering with gross proceeds of less than $5,000,000, it would use 25% of the gross proceeds to redeem Series B Stock (the “25% Redemption”).

On March 16, 2010, we entered into an additional agreement with the Series B Holder pursuant to which the Series B Holder waived both the 25% Redemption identified in the January 19, 2010 letter and the redemption required by the Series B Certificate with respect to amounts received in the February Financing through March 16, 2010. Accordingly, a redemption in the amount of approximately $614,000 was waived by the Series B Holder in connection with the February 2010 Financing.

On November 10, 2010, we entered into a letter agreement (the “November Letter”) with the Series B Holder pursuant to which the Series B Holder waived the 25% Redemption triggered by the 2010 November Financing (see Note 9) and any subsequent equity or equity-linked financing conducted by us up to an aggregate of $1,000,000 of gross proceeds from all such financings.  In consideration for the waiver in the November Letter, we issued to the Series B Holder 125,000 Series-1 Warrants and 125,000 Series-2 Warrants with a combined fair value of $185,000 which was recorded as a non-cash stock issuance cost.

On December 29, 2010, we entered into a letter agreement (the “December Letter”) with the Series B Holder pursuant to which the Series B Holder waived the 25% Redemption triggered by the 2010 November Financing and any subsequent equity or equity-linked financing conducted by us for gross proceeds from the 2010 November Financing.

We paid approximately $132,000 of dividends by issuing approximately 13 shares of Series B Stock during 2010. This dividend is included in the Statements of Operations in arriving at Net Loss Applicable to Common Shareholders.  In accordance with the Series B Preferred Stock Agreement there were no dividends due for the year ended December 31, 2009.

Series C Preferred Stock — We authorized 10,000 shares of Series C Stock, $0.01 par value, of which 4,918.1 shares were issued and outstanding as of December 31, 2010 and 2009, respectively. The Series C Stock was created on June 30, 2009.  Pursuant to the terms of the Certificate of Designation, Preference and Rights of Series C Preferred Stock (the “Series C Certificate”), each share of Series C Stock is initially convertible into one thousand shares of Common Stock, subject to adjustment for stock splits, combinations or similar events. Each holder who receives Series C Stock may convert its Series C Stock at any time following its issuance. In the event of any Liquidation Event (as defined in the Series C Certificate), the holders of Series C Stock will be entitled to receive (subject to the rights of any securities designated as senior to the Series C Stock) a per share liquidation preference equal to an amount calculated by taking the total amount available for distribution to holders of all outstanding Common Stock before deduction of any preference payments for the Series C Stock, divided by the total of (x) all of the then outstanding shares of Common Stock, plus (y) all of the shares of Common Stock into which all of the outstanding shares of the Series C Stock can be converted, in each case prior to any distribution to the holders of Common Stock or any other securities designated as junior to the Series C Stock.

November 2009 Common Stock and Warrant Financing — On November 13, 2009, we entered into a Common Stock and Warrant Purchase Agreement (the “November Agreement”) with certain strategic institutional and accredited investors (the “November Investors”) in connection with our private placement (the “November Financing”) of 1,969,056 shares of Common Stock at a price of $1.25 per share (the “November Shares”) together with warrants to purchase 2,398,339 shares of Common Stock.  The November Financing provided us with gross proceeds of $3,211,320. Of this amount, we received payment of a portion of the purchase price in the form of the extinguishment of the Gemini Notes in the approximate amount of $355,000 which amount included principal and interest accrued through November 13, 2009. We used the net proceeds of the November Financing primarily for working capital and general corporate purposes.

29

December 2009 Common Stock and Warrant Financing — On December 3, 2009, we closed on a Common Stock and Warrant Purchase Agreement dated November 30, 2009 (the “December Agreement”) with certain strategic institutional and accredited investors in connection with the private placement (the “December Financing”) of 450,000 shares of Common Stock at a price of $1.25 per share (the “December Shares”) together with warrants to purchase 315,000 shares of Common Stock. In connection with the December Financing, we received proceeds of $562,500 and we used the net proceeds primarily for working capital and general corporate purposes.

February 2010 Common Stock and Warrant Financing — On February 4, 2010, we entered into a Common Stock and Warrant Purchase Agreement (the “February Agreement”) with certain strategic institutional and accredited investors in connection with our private placement (the “February Financing”) of shares of Common Stock, at a price of $1.50 per share (the “February Shares”). Under the terms of the February Agreement, each investor received warrants to purchase a number of shares of Common Stock with an exercise price of $2.25 per share equal to fifty percent (50%) of the number of February Shares purchased by such investor (the “February Warrants”).  We issued 1,636,739 shares of Common Stock and received gross proceeds of approximately $2,455,000 in connection with the February Financing.

Pursuant to the February Agreement, we issued an aggregate of 818,362 February Warrants to the investors with a fair value of approximately $943,000. The February Warrants are immediately exercisable and expire no later than five (5) years from the date of issuance. The exercise price is subject to adjustment for stock splits, combinations or similar events. The February Warrants allow for cashless exercise. An exercise under the February Warrants may not result in the holder beneficially owning more than 4.99% or 9.99%, as applicable, of all of the Common Stock outstanding at the time; provided, however, that a holder may waive the foregoing provision upon sixty-one (61) days’ advance written notice to us.

November 2010 Common Stock and Warrant Financings — In November 2010, we initiated a private placement (the “November 2010 Financing”) of up to 120 units (each, a “Unit” and together, the “Units”) or partial Units at a price per Unit of $25,000.  Each Unit consists of (i) 25,000 shares of Common Stock, $0.01 par value, (ii) Series-1 warrants to purchase 12,500 shares of Common Stock, $0.01 par value with an exercise price of $1.50 per share (the “Series-1 Warrants”), and (iii) Series-2 warrants to purchase 12,500 shares of Common Stock with an exercise price of $2.50 per share (the “Series-2 Warrants”).

Through December 31, 2010, we had entered into subscription agreements with certain strategic institutional and accredited investors in connection with the November 2010 financing for a total of 68.8units.  We received gross proceeds from these subscriptions in the amount of $1,720,000.   We received proceeds of $100,000 in the form of extinguishment of a Promissory Note issued by us on September 28, 2010, which included principal and interest.  Additionally, we received a commitment for an additional 11.4 units in which the proceeds of $285,000 were not received as of December 31, 2010.  This is treated as stock subscription receivable as of December 31, 2010.  The proceeds of $285,000 were received in January and February 2011.

Pursuant to the November 2010 Financings noted above, including the commitment for 11.4 units as of December 31, 2010, we issued an aggregate of 1,002,500 Series-1 Warrants and 1,002,500 Series-2 Warrants to the investors.  These warrants are immediately exercisable and expire three years after issuance. The exercise price is subject to adjustment for stock splits, combinations or similar events.  An exercise under these warrants may not result in the holder beneficially owning more than 4.99% or 9.99%, as applicable, of all of the Common Stock outstanding at the time; provided, however, that a holder may waive the foregoing provision upon sixty-one (61) days’ advance written notice to us.

As of December 31, 2010, the November 2010 Financing remained open and we entered into additional Subscription Agreements with certain strategic institutional and accredited investors  for a total of 35.66units.  We received proceeds from these subscriptions in the amount of $891,500.   Pursuant to these subscriptions we issued an aggregate of 445,750 Series-1 Warrants and 445,750 Series-2 Warrants to the investors.

8% Senior Promissory Note - On January 5, 2011, we issued an 8% Senior Promissory Note to Platinum Montaur Life Sciences, LLC (“Montaur”) in the amount of $1,000,000.  The outstanding principal balance of this Note, together with all accrued and unpaid interest, shall be due and payable in full on February 1, 2011 and later extended to February 8, 2011 by agreement of the parties.

Series D Convertible Preferred Stock Purchase - On February 8, 2011 we entered into a Series D Convertible Preferred Stock Purchase Agreement (the “Series D Agreement”) dated as of February 7, 2011 with Montaur and certain other strategic accredited investors (each, an “Investor” and collectively, the “Investors”) in connection with the Company’s private placement (the “Series D Financing”) of Series D Convertible Preferred Stock (“Series D Stock”) at a price per share of $1.00. For every $100,000 face value of Series D Stock purchased in the Series D Financing, the Investor was issued (i) Series 1 warrants to purchase 50,000 shares of Common Stock, $0.01 par value (“Common Stock”) with an exercise price of $1.50 per share (the “Series 1 Warrants”), and (ii) Series 2 warrants to purchase 50,000 shares of Common Stock with an exercise price of $2.50 per share (the “Series 2 Warrants” and, together with the Series 1 Warrants, the “Warrants”).

30

On February 8, 2011, there was a closing in connection with the Series D Agreement and we received proceeds of $3,506,000 for the purchase of 3,506,000 shares of Series D Stock. We received payment of a portion of the proceeds in the form of the extinguishment of an 8% Senior Promissory Note issued on January 5, 2011 in the principal amount of $1,000,000, which amount included principal and interest accrued through February 8, 2011 in the amount of $6,000. We intend to use the net proceeds of the Series D Financing primarily for working capital and general corporate purposes.

We issued an aggregate of 1,753,000 Series 1 Warrants and 1,753,000 Series 2 Warrants to the Investors pursuant to the Agreement.  The Warrants are immediately exercisable and expire on February 7, 2013; however, if the Warrants are not exercised in full by February 7, 2013 by virtue of the application of a beneficial ownership blocker (described below), then the term of the Warrants shall be extended for thirty (30) days past the date on which the beneficial ownership blocker is no longer applicable. The exercise price is subject to adjustment for stock splits, business combinations or similar events.  An exercise under the Warrants may not result in the holder beneficially owning more than 4.99% or 9.99%, as applicable, of all of the Common Stock outstanding at the time; provided, however, that a holder may waive the foregoing provision upon sixty-one (61) days’ advance written notice to us.

Pursuant to the Certificate of Designation, Preferences and Rights of Series D Convertible Preferred Stock, the shares of Series D Stock are initially convertible into shares of Common Stock at a price per share equal to $1.00, subject to adjustment for stock splits, business combinations or similar events, and shall have a liquidation preference equal to their stated value.  Each holder who receives Series D Stock may convert it at any time following its issuance.   The Series D Stock does not pay a dividend and is not redeemable.

In accordance with (i) the Certificate of Designation, Rights and Preferences of the Series B Stock and (ii) a letter agreement dated January 19, 2010 between us and the sole holder of the Series B Perpetual Preferred Stock, we were obligated to use 25% of the gross proceeds from the Series D Financing to redeem Series B Stock. On February 4, 2011, we entered into a letter agreement (the “Letter”) with the sole holder of the Series B Perpetual Preferred Stock pursuant to which the Series B share holder waived the redemption of shares of the Series B Perpetual Preferred Stock triggered by the Series D Financing.

Facilities, Property and Equipment — We conduct our operations in leased facilities and have agreed to a lease through March 2014. Our property and equipment does not include manufacturing machinery and is limited to laboratory testing equipment, office furniture and computer systems (network hardware, software and employee desk top systems).   As of March 9, 2011, we entered into a lease for approximately 5,400 square feet of corporate office space in a single facility located in Philadelphia, Pennsylvania. The lease is for a period through April 30, 2014. Except for the purchase (possibly through capital lease financing) of tooling, molds and dies in connection with product development and manufacturing of Symphony and Prelude, we do not anticipate any significant purchases or sales of property and equipment during the next 12 months.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements, including unrecorded derivative instruments that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We have certain warrants and options outstanding but we do not expect to receive sufficient proceeds from the exercise of these instruments unless and until the trading price of our Common Stock is significantly greater than the applicable exercise prices of the options and warrants and mainly following any necessary registering of underlying securities.

Effect of Inflation and Changes in Prices

Management does not believe that inflation and changes in price will have a material effect on our operations.

31

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Echo Therapeutics, Inc. Consolidated Financial Statements

	Page
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets as of December 31, 2010 and 2009	F-2
Consolidated Statements of Operations for the years ended December 31, 2010 and 2009	F-3
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2010 and 2009	F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009	F-5
Notes to Consolidated Financial Statements	F-7

32

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of

Echo Therapeutics, Inc.

Franklin, Massachusetts

We have audited the accompanying consolidated balance sheets of Echo Therapeutics, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Echo Therapeutics, Inc. as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

/s/ WOLF & COMPANY, P.C.

Boston, Massachusetts

March 18, 2011

F- 1

Echo Therapeutics, Inc.

Consolidated Balance Sheets

	As of,
	December 31, 2010			December 31, 2009
ASSETS
Current Assets:
Cash and cash equivalents	$	1,342,044		$	1,166,858
Accounts receivable		141,488			130,036
Stock subscriptions receivable		285,000			—
Prepaid expenses and other current assets		195,205			226,641
Total current assets		1,963,737			1,523,535
Property and Equipment, at cost:
Computer equipment		265,862			262,278
Office and laboratory equipment (including assets under capitalized leases)		626,823			618,723
Furniture and fixtures		17,019			14,288
Manufacturing equipment		129,320			129,320
Leasehold improvements		177,768			177,768
		1,216,792			1,202,377
Less-Accumulated depreciation and amortization		(1,168,758	)		(1,143,167	)
Net property and equipment (including assets under capitalized leases)		48,034			59,210
Other Assets:
Restricted cash		275,249			9,749
Intangible assets, net of accumulated amortization		9,625,000			9,708,822
Deposits and other assets		250			2,000
Total other assets		9,900,499			9,720,571
Total assets	$	11,912,270		$	11,303,316
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	605,634		$	948,712
Deferred revenue		405,454			591,051
Current portion of notes payable and capital lease obligation, net of discounts		102,071			1,874
Derivative warrant liability		1,544,996			2,116,696
Accrued expenses and other liabilities		463,475			481,679
Total current liabilities		3,121,630			4,140,012
Notes Payable and capital lease obligation, net of current portion and discounts		6,176			8,247
Deferred Revenue, net of current portion		82,180			122,451
Total liabilities		3,209,986			4,270,710
Commitments
Stockholders’ Equity:
Perpetual, Redeemable Preferred Stock:
Series B, $0.01 par value, authorized 40,000 shares, issued and outstanding 154.3940 and 141.2281 at December 31, 2010 and 2009, respectively (preference in liquidation of $1,543,939 at December 31, 2010)		2			2
Convertible Preferred Series:
Series C, $0.01 par value, authorized 10,000 shares, issued and outstanding 4,918.1 at December 31, 2010 and 2009		49			49
Common stock, $0.01 par value, authorized 100,000,000 shares at December 31, 2010 and 2009, issued and outstanding 31,126,245 and 27,045,792 shares at December 31, 2010 and 2009, respectively		311,264			270,459
Additional paid-in capital		79,646,385			74,155,716
Common stock subscribed for but not paid for or issued, 285,000 shares		285,000			—
Accumulated deficit		(71,540,416	)		(67,393,620	)
Total stockholders’ equity		8,702,284			7,032,606
Total liabilities and stockholders’ equity	$	11,912,270		$	11,303,316

See notes to the consolidated financial statements.

F- 2

Echo Therapeutics, Inc.

Consolidated Statements of Operations

	For the Years ended December 31,
	2010			2009
Licensing revenue	$	225,868		$	536,497
Other revenue		202,592			795,424
Total Revenues		428,460			1,331,921
Operating Expenses:
Research and development		2,578,852			2,807,405
Selling, general and administrative		2,760,062			3,054,984
Total operating expenses		5,338,914			5,862,389
Loss from operations		(4,910,454	)		(4,530,468	)
Other Income (Expense):
Interest income		1,519			1,562
Interest expense		(37,549	)		(331,500	)
Qualified therapeutic research grant		244,480			—
Gain (loss) on extinguishment of debt		183,863			(2,047,292	)
Derivatives gain (loss)		371,345			(4,050,443	)
Other income (expense), net		763,658			(6,427,673	)
Net loss		(4,146,796	)		(10,958,141	)
Deemed dividend on beneficial conversion of Series A and A-1 Preferred Stock		—			(2,426,876	)
Accretion of dividends on Convertible Perpetual Redeemable Preferred Stock		(131,659	)		—
Accretion of dividends on Convertible Preferred Stock		—			(126,676	)
Net loss applicable to common shareholders	$	(4,278,455	)	$	(13,511,693	)
Net loss per common share, basic and diluted	$	(0.15	)	$	(0.61	)
Basic and diluted weighted average common shares outstanding		29,031,158			22,290,956

See notes to the consolidated financial statements.

F- 3

Echo Therapeutics, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

Years Ended December 31, 2010 and 2009

	Preferred Stock						Common Stock
	Number of Shares			Carrying Value			Number of Shares		Carrying Value		Additional Paid-in Capital			Common Stock Subscribed		Accumulated Deficit			Total Stockholders’ Equity
Balance at December 31, 2008		2,348,330		$	23,483			19,095,838	$	190,960	$	64,668,550		$	—	$	(58,281,663	)	$	6,601,330
Reclassification of warrants to derivative liability		—			—			—		—		(2,926,302	)				1,846,184			(1,080,118	)
Issuance of Series A-2 Preferred Stock		1,400,000			14,000			—		—		685,576			—		—			699,576
Dividends on Series A, A-1 and A-2 Preferred Stock		115,960			1,160			—		—		(1,206	)		—		—			(46	)
Exercise of warrants		—			—			1,211,704		12,117		(12,117	)		—		—			—
Share-based payments — restricted stock, net of forfeitures		—			—			1,992,094		19,921		289,837			—		—			309,758
Share-based payments — options, net of forfeitures		—			—			—		—		1,298,789			—		—			1,298,789
Fair value of warrants issued for services		—			—			—		—		173,726			—		—			173,726
Redemption of Series B Preferred Stock		(59	)		(1	)		—		—		(593,749	)		—		—			(593,750	)
Issuance of Common Stock and Series C Preferred Stock, net of cash issuance costs of $229,048		600			6			2,419,056		24,190		3,670,774			—		—			3,694,970
Exchange of Series A, A-1 and A-2 Preferred Stock for Series C Preferred Stock and common stock		(3,861,178	)		(38,611	)		2,327,100		23,271		15,340			—		—			—
Exchange of Senior Secured Note and accrued interest for Series B and C Preferred Stock, net of cash issuance costs of $207,148		1,406			14			—		—		3,618,445			—		—			3,618,459
Fair value of derivative warrant liabilities reclassified to additional paid-in capital		—			—			—		—		3,268,053			—		—			3,268,053
Net Loss		—			—			—		—		—			—		(10,958,141	)		(10,958,141	)
Balance at December 31, 2009		5,059			51			27,045,792		270,459		74,155,716			—		(67,393,620	)		7,032,606
Exercise of warrants		—			—			35,714		357		(357	)		—		—			—
Share-based payments — restricted stock, net of forfeitures		—			—			363,000		3,630		389,619			—		—			393,249
Share-based payments — options, net of forfeitures		—			—			—		—		164,810			—		—			164,810
Fair value of warrants issued for services		—			—			—		—		616,634			—		—			616,634
Fair value of options issued for services		—			—			—		—		59,471			—		—			59,471
Common Stock issued to charitable organization		—			—			60,000		600		112,800			—		—			113,400
Issuance of Common Stock, net of cash issuance costs of $188,333 and non-cash costs of $468,741		—			—			3,356,739		33,568		3,484,485			—		—			3,518,053
Fair value of fully vested Common Stock issued for services		—			—			265,000		2,650		462,850			—		—			465,500
Fair value of derivative warrant liabilities reclassified to additional paid-in capital		—			—			—		—		200,357			—		—			200,357
Common stock subscription, 285,000 shares		—			—			—		—		—			285,000		—			285,000
Dividends on Series B preferred stock		13			—			—		—		—			—		—			—
Net Loss		—			—			—		—		—			—		(4,146,796	)		(4,146,796	)
Balance at December 31, 2010		5,072		$	51			31,126,245	$	311,264	$	79,646,385		$	285,000	$	(71,540,416	)	$	8,702,284

See notes to the consolidated financial statements.

F- 4

Echo Therapeutics, Inc

Consolidated Statements of Cash Flows

	Years Ended December 31,
	2010			2009
Cash Flows From Operating Activities:
Net loss	$	(4,146,796	)	$	(10,958,141	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		109,413			158,618
Share-based compensation		164,810			1,298,789
Fair value of common stock and warrants issued for services		935,144			429,093
Fair value of common stock issued as charitable contribution		113,400			—
Fair value of derivative warrant liability issued for services		—			245,369
Fair value of options issued for services		59,471			—
Derivative (gain) loss		(371,344	)		4,050,443
Non-cash (gain) loss on extinguishment of debt		(183,863	)		2,024,031
Non-cash interest expense		35,190			312,652
Other non-cash expense		—			64,136
Changes in assets and liabilities:
Accounts receivable		(11,452	)		(130,036	)
Prepaid expenses and other current assets		31,436			(209,509	)
Deposits and other assets		1,750			—
Accounts payable		(320,078	)		(229,007	)
Deferred revenue		(225,868	)		713,502
Accrued expenses and other liabilities		178,969			(43,986	)
Net cash used in operating activities		(3,629,819	)		(2,274,046	)
Cash Flows from Investing Activities:
Purchase of property and equipment		(14,415	)		(20,938	)
Decrease (increase) in restricted cash		(265,500	)		501
Net cash used in investing activities		(279,915	)		(20,437	)
Cash Flows From Financing Activities
Proceeds from short-term  notes		250,000			125,000
Repayment of short-term notes		(50,000	)		(125,000	)
Proceeds from the sale of Series A-2 preferred stock, net of expenses		—			699,576
Proceeds from the sale of common stock and warrants, net of cash expenses		3,886,794			2,739,703
Principal payments for capital lease obligations		(1,874	)		(866	)
Proceeds from Senior Secured Note		—			1,990,000
Proceeds (payments) from (on) Senior Secured Convertible Notes and Warrants		—			(2,209,426	)
Deferred financing costs		—			(467	)
Dividends paid in cash on Series A, A-1 and A-2 preferred stock		—			(46	)
Net cash provided by financing activities		4,084,920			3,218,474
Net Increase in Cash and Cash Equivalents		175,186			923,991
Cash and Cash Equivalents, beginning of period		1,166,858			242,867
Cash and Cash Equivalents, end of period	$	1,342,044		$	1,166,858

See notes to the consolidated financial statements.

F- 5

Echo Therapeutics, Inc

Consolidated Statements of Cash Flows

	Years Ended December 31,
	2010		2009
Supplemental Disclosure of Cash Flow Information and Non Cash Financing Transactions:
Cash paid for interest	$	2,124	$	18,848
Accretion of dividend on Series A, A-1 and A-2 Convertible Preferred Stock	$	—	$	126,676
Derivative warrant liability reclassified from stockholders’ equity	$	—	$	1,080,118
Senior Convertible Notes issued for accrued interest	$	—	$	23,622
Fair Value of common stock issued for interest on short-term notes payable	$	48,500	$	—
Accretion of dividend on Series B Perpetual Redeemable Preferred Stock	$	131,659	$	—
Issuance of common stock in settlement of accounts payable and accrued expenses	$	23,000	$	83,000
Deemed dividend on beneficial conversion of Series A and A1 Preferred Stock	$	—	$	2,426,876
Conversion of Senior Secured Note to Series B and Series C preferred	$	—	$	2,006,031
Redemption of Series B Preferred Stock included in accrued expenses	$	—	$	143,750
Redemption liability satisfied through offset of proceeds due in connection with November 2009 Financing	$	—	$	450,000
Conversion of short-term note to common stock in connection with the November 2010 Financing	$	100,000	$	—
Senior Convertible Note exchanged for Common Stock and warrants	$	—	$	355,070
Reclassification of derivative liability to additional paid-in capital	$	200,357	$	3,268,053
Fair value of warrants included in stock issuance costs	$	468,741	$	869,484
Exchange of Series A, A-1 and A-2 Preferred Stock to Series C Preferred Stock and common stock	$	—	$	3,724,529
Asset acquired under Capital Lease Agreement	$	—	$	10,988
Common stock subscriptions receivable	$	285,000	$	—

See notes to the consolidated financial statements.

F- 6

ECHO THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2010 and 2009

(1) ORGANIZATION, BASIS OF PRESENTATION

Echo Therapeutics, Inc. is a transdermal medical device company with deep expertise in advanced skin permeation technology that is initially focused on continuous glucose monitoring and needle-free drug delivery.  Echo is developing its Prelude™ SkinPrep System as a platform technology to allow for significantly enhanced and painless skin permeation that will enable two important applications:

· Analyte extraction, with the Symphony™ tCGM System for needle-free, continuous glucose monitoring in hospital patients and diabetics as the first application.

· Needle-free drug delivery, with the topical delivery of lidocaine as the first application. Additional applications for painless, needle-free delivery of drugs are planned.

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Sontra Medical, Inc., a Delaware corporation. All significant inter-company balances and transactions have been eliminated in consolidation.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements reflect the application of the following accounting policies:

The accompanying consolidated financial statements have been prepared in accordance with the Financial Accounting Standards Board (“FASB”) “FASB Accounting Standard Codification™” (the “Codification”) which is the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of ninety days or less to be cash equivalents. Cash equivalents consisted of money market funds as of December 31, 2010 and 2009. The Company maintains its cash in bank deposit accounts which, at times, may exceed the federally insured limits. Restricted cash represents a security deposit on the Company’s leased offices and cash in escrow related to the November 2010 Common Stock and Warrant Financings completed in February 2011 (see Note 14).

Accounts Receivable

Accounts receivable represent amounts billed by the Company. The balance as of December 31, 2010 also includes an amount due to the Company related to an insurance claim approved by the insurance carrier.  An allowance for doubtful accounts is determined based on management’s best estimate of probable losses inherent in the accounts receivable balance. Amounts determined to be uncollectible are written off against the allowance. Management assesses the allowance based on information regarding nature of the receivables and historical experience. No allowance was deemed necessary as of December 31, 2010 and 2009.

Intangible Assets and Other Long-Lived Assets

F- 7

The Company records intangible assets at the acquisition date fair value. As a policy, the Company amortizes its intangible assets using the straight-line method over their estimated useful lives, as follows: patents and licenses, two (2) to twenty (20) years; definite-lived core and developed technology, five (5) to twenty-five (25) years; and other intangible assets over various periods. In connection with the acquisition of Durham Pharmaceuticals Ltd., a North Carolina corporation doing business as Echo Therapeutics, Inc. (the “ETI Acquisition”), intangible assets related to contractual arrangements were amortized over the estimated useful life of three (3) years and ended in 2010.  Intangible assets related to technology are expected to be amortized on a straight-line basis over the period ending 2018 and will commence upon revenue generation.

The Company reviews intangible assets subject to amortization quarterly to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life of any intangible asset. Conditions that would indicate impairment and trigger an impairment assessment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset, or an adverse action or assessment by a regulator. If the carrying value of an asset exceeds its undiscounted cash flows, the Company writes down the carrying value of the intangible asset to its fair value in the period identified.

For other long-lived assets, the Company evaluates quarterly whether events or circumstances have occurred that indicate that the carrying value of these assets may be impaired.

The Company generally calculates fair value as the present value of estimated future cash flows it expects to generate from the asset using a risk-adjusted discount rate. If the estimate of an intangible asset’s remaining useful life is changed, the Company amortizes the remaining carrying value of the intangible asset prospectively over the revised remaining useful life.

The Company performs a regular review of the underlying assumptions, circumstances, time projections and revenue and expense estimates to decide if there is a possible impairment. In reviewing the long-lived assets relating to the ETI Acquisition as of December 31, 2010, the Company concluded that there was no impairment of the carrying value of such long-lived assets. No impairment losses were recorded for the years ended December 31, 2010 and 2009.

Depreciation and Amortization

The Company provides for depreciation and amortization by charges to operations for the cost of assets using the straight-line method based on the estimated useful lives of the related assets, as follows:

Asset Classification	Estimated Useful Life
Computer equipment.	3 years
Office and laboratory equipment	3-5 years
Furniture and fixtures.	7 years
Manufacturing equipment.	5 years
Leasehold improvements.	Life of lease

Share-Based Payments

The Company recognizes compensation costs resulting from the issuance of stock-based awards to employees and directors as an expense in the statement of operations over the service period based on a measurement of fair value for each stock award. The Company’s policy is to grant employee and director stock options with an exercise price equal to or greater than the fair value of the Common Stock at the date of grant.

The Company recognizes compensation costs resulting from the issuance of stock-based awards to non-employees as an expense in the statement of operations over the service period based on a measurement of fair value for each stock award.

Derivative Instruments

The Company generally does not use derivative instruments to hedge exposures to cash-flow or market risks; however, certain warrants to purchase Common Stock that do not meet the requirements for classification as equity are classified as liabilities. In such instances, net-cash settlement is assumed for financial reporting purposes, even when the terms of the underlying contracts do not provide for a net-cash settlement. Such financial instruments are initially recorded at fair value with subsequent changes in fair value charged (credited) to operations in each reporting period. If these instruments subsequently meet the requirements for classification as equity, the Company reclassifies the fair value to equity.

F- 8

Concentration of Credit Risk

The Company has no significant off-balance-sheet risk. Financial instruments, which subject the Company to credit risk, principally consist of cash and cash equivalents. The Company mitigates its risk by maintaining the majority of its cash and equivalents with high-quality financial institutions.

Financial Instruments

The estimated fair value of the Company’s financial instruments, which include cash and cash equivalents, restricted cash, accounts receivable, accounts payable and capital lease obligation, approximates their carrying value due to the short-term nature of these instruments and their market terms.

Net Loss per Common Share

Basic and diluted net loss per share of Common Stock has been computed by dividing the net loss applicable to common stockholders in each period by the weighted average number of shares of Common Stock outstanding during such period. For the periods presented, options, warrants and convertible securities were anti-dilutive and therefore excluded from diluted loss per share calculations.

Segment Information

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions regarding resource allocation and assessing performance. To date, the Company has viewed its operations and manages its business as principally one operating segment, which is the development of transdermal skin permeation and diagnostics medical devices and, specialty pharmaceutical drugs. As of December 31, 2010 and 2009, all of the Company’s assets were located in the United States.

Research and Development Expenses

The Company charges research and development expenses to operations as incurred. Research and development expenses primarily consist of salaries and related expenses for personnel and outside contractor and consulting services. Other research and development expenses include the costs of materials and supplies used in research and development, prototype manufacturing, clinical studies, related information technology and an allocation of facilities costs.

Grant income

Grants received are recognized as income when the related work is performed and the qualifying research and development costs are incurred and are presented as Other Income on the Company’s consolidated statements of operations. The Company received a grant totaling approximately $244,500 under the Qualified Therapeutic Discovery Project Grants Program during 2010. The Qualified Therapeutic Discovery Project Grants Program was included in the healthcare reform legislation and established a one-time pool of $1 billion for grants to small biotechnology companies developing novel therapeutics which show potential to: (a) result in new therapies that either treat areas of unmet medical need, or prevent, detect, or treat chronic or acute diseases and conditions; (b) reduce long-term health care costs in the United States; or (c) significantly advance the goal of curing cancer within a the 30-year period.

Income Taxes

The Company is primarily subject to U.S. federal, Massachusetts and New Jersey state income tax. Tax years subsequent to 2006 remain open to examination by U.S. federal and state tax authorities.

For federal and state income taxes, deferred tax assets and liabilities are recognized based upon temporary differences between the financial statement and the tax basis of assets and liabilities. Deferred income taxes are based upon prescribed rates and enacted laws applicable to periods in which differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Accordingly, since the Company cannot be assured of realizing the deferred tax asset, a full valuation allowance has been provided.

F- 9

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. There was no uncertain tax position liabilities recorded at December 31, 2010.

The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. As of December 31, 2010 and 2009, the Company had no accruals for interest or penalties related to income tax matters.

Licensing and Other Revenue Recognition

To date, the Company has generated revenue primarily from licensing agreements, including upfront, nonrefundable license fees, with collaborators and licensees. The Company recognizes revenue when the following criteria have been met:

• persuasive evidence of an arrangement exists;

• delivery has occurred and risk of loss has passed;

• the price to the buyer is fixed or determinable; and

• collectability is reasonably assured.

In addition, when evaluating multiple element arrangements, the Company considers whether the components of the arrangement represent separate units of accounting. Multiple elements are divided into separate units of accounting if specified criteria are met, including whether the delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. The consideration received is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. Otherwise, the applicable revenue recognition criteria are applied to combined elements as a single unit of accounting.

The Company typically receives upfront, nonrefundable payments for the licensing of its intellectual property upon the signing of a license agreement. The Company believes that these payments generally are not separable from the payments it receives for providing research and development services because the license does not have stand-alone value from the research and development services it provides under its agreements. Accordingly, the Company accounts for these elements as one unit of accounting and recognizes upfront, nonrefundable payments as revenue on a straight-line basis over its contractual or estimated performance period. Revenue from the reimbursement of research and development efforts is recognized as the services are performed based on proportional performance adjusted from time to time for any delays or acceleration in the development of the product and is included in Other Revenue. The Company determines the basis of the estimated performance period based on the contractual requirements of its collaboration agreements. At each reporting period, the Company evaluates whether events warrant a change in the estimated performance period.

Other Revenue includes amounts earned and billed under the license and collaboration agreements for reimbursement of research and development costs for contract engineering services. For the services rendered, principally third-party contract engineering services, the revenue recognized approximates the costs associated with the services.

F- 10

Recent Accounting Pronouncements

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820), Improving Disclosures about Fair Value Measurements.  This Update requires new disclosures and clarifies existing disclosures regarding recurring and nonrecurring fair value measurements to provide increased transparency to users of the financial statements.  The new disclosures and clarification of existing disclosures are effective for interim and annual periods beginning after December 15, 2009, except for the disclosures pertaining to the roll forward of activity for Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The adoption of this Update on January 1, 2010 did not have a material impact on the Company’s financial statements.

(3) INTANGIBLE ASSETS

As of December 31, 2010 and 2009, intangible assets related to the ETI Acquisition are as follows:

				2010				2009
	Estimated Life	Cost		Accumulated Amortization		Net		Net
Contract related intangible asset:
Cato Research discounted contract	3 years	$	355,000	$	355,000	$	—	$	83,822
Technology related intangible assets:
Patents for the AzoneTS-based product candidates and formulation	6 years		1,305,000		—		1,305,000		1,305,000
Drug Master Files containing formulation, clinical and safety documentation used by the FDA	6 years		1,500,000		—		1,500,000		1,500,000
In-process pharmaceutical products for two (2) indications	6 years		6,820,000		—		6,820,000		6,820,000
Total technology related intangible assets			9,625,000		—		9,625,000		9,625,000
Total		$	9,980,000	$	355,000	$	9,625,000	$	9,708,822

Intangible assets related to technology are expected to be amortized on a straight-line basis over the period ending 2018 when the underlying patents expire and will commence upon revenue generation, which the Company has estimated to be during 2013.  The contract related intangible asset was amortized over a 3 year period and ended in 2010. Amortization expense relating to the contract was approximately $84,000 and $118,000 for the years ended December 31, 2010 and 2009, respectively, and is included in research and development in the Consolidated Statement of Operations.

Estimated amortization expense for each of the next five years is as follows:

Year Ending December 31:	Estimated Amortization Expense
2011	$	—
2012		—
2013		1,604,000
2014		1,604,000
2015		1,604,000

(4) OPERATING AND CAPITAL LEASE COMMITMENTS

Operating Lease — The Company leases approximately 13,000 square feet of manufacturing, laboratory and office space in a single facility located in Franklin, Massachusetts under a lease expiring March 31, 2014. Future minimum lease payments under this operating lease are approximately as follows:

For the years ended December 31,	Amount
2011	$	144,000
2012		144,000
2013		144,000
2014		36,000
Total	$	468,000

F- 11

The Company’s facilities lease expense was approximately $169,000 and $185,000 for the years ended December 31, 2010 and 2009, respectively.

Capital Lease — In July 2009, the Company entered into a five-year lease of an office copier which is included with the Office and Laboratory Equipment. The value of the equipment capitalized was approximately $11,000. The lease payments of $234 per month, payable in arrears, reflect a 10% interest rate. Accumulated depreciation on the leased copier as of December 31, 2010 was approximately $3,300. During the years ended December 31, 2010 and 2009, interest expense related to the capital lease obligation was approximately $500 in both years.

(5) NOTES PAYABLE AND CAPITAL LEASE OBLIGATION

Notes payable and capital lease obligations at December 31, 2010 and 2009 consisted of the following:

	2010		2009
Short-term Notes	$	100,000	$	--
Capital lease obligation		8,247		10,121
Total notes payable and capital lease obligation		108,247		10,121
Less current portion of notes payable and capital lease obligation		102,071		1,874
Notes Payable and capital lease obligation, net of current portion	$	6,176	$	8,247

2008 Senior Secured Note and Warrant Financing

On March 24, 2008, the Company entered into a Secured Note financing with Imperium Master Fund, Ltd. (“Imperium”), providing for, at the Company’s option, the issuance of up to an aggregate $2,000,000 of original issue discount senior secured notes (the “Secured Notes”) in four equal tranches, together with warrants (the “Imperium Warrants”) that include an anti-dilution feature relating to exercise price and the number of warrant shares. On March 24, 2008, the Company drew down the initial $500,000 in gross proceeds and issued the Imperium Warrants upon execution of the agreement. The Company also issued additional Secured Notes and drew down $500,000 in gross proceeds on each of April 24, 2008, June 2, 2008 and June 24, 2008, completing the financing for $2,000,000.  On June 2, 2009, the Company paid all of the outstanding Secured Notes and accrued interest.  Interest expense related to the Secured Notes in the year ended December 31, 2009 was approximately $204,000.

2009 Senior Secured Note

On June 1, 2009, the Company issued to Platinum Montaur Life Sciences, LLC (“Platinum”) a 10% Senior Secured Promissory Note (the “Platinum Note”) in the principal amount of $1,990,000. The outstanding principal of the Platinum Note accreted in value at an annual rate of 10%, compounded monthly.

The Company used the net proceeds of the Platinum Note to pay a substantial portion of the 2008 Senior Secured Notes. As of June 30, 2009, the Company exchanged the Platinum Note and accrued interest for 200.6031 shares of Series B Perpetual Preferred Stock (“Series B Stock”) and 1,205.016 shares of Series C Preferred Stock (“Series C Stock”) (see Note 8). The Company recognized a loss of approximately $1,820,000 from the extinguishment of this debt. During the year ended December 31, 2009, interest expense related to the 2009 Senior Secured Note, including amortization of discounts and deferred financing costs was approximately $16,000.

2009 Promissory Demand Notes

On October 6, 2009, the Company issued Promissory Demand Notes (collectively, the “2009 Notes”) in the aggregate amount of $125,000 to three payees. In connection with the loan evidenced by each 2009 Note, the Company was required to issue each payee 1,000 unregistered shares of common stock for every $10,000 of principal invested for each week such 2009 Note remains outstanding. Each 2009 Note was due and payable upon the earlier of (i) a demand of payment made any time after October 31, 2009 or (ii) the acceleration of obligations under the terms of the 2009 Note. A total of 37,500 shares with a fair value of approximately $54,000 were issued in October 2009 pursuant to the 2009 Notes which was included in interest expense. The 2009 Notes were paid in full on October 31, 2009.

F- 12

2010 Short-term Notes

In September 2010, the Company issued $250,000 of short-term notes, maturing in 90 days.  In lieu of interest, the note holders were issued 2,000 unregistered shares of the Company’s common stock for every $10,000 of principal loaned.  A total of 50,000 shares with a fair value of approximately $48,500 were issued in September 2010 pursuant to these short-term notes.  The fair value of the stock was amortized over the 90 day term.  One short-term note in the amount of $100,000 was extended for one month on December 23, 2010 in exchange for 5,000 shares of common stock issued in January 2011.  Another short-term note for $50,000 was repaid in November 2010. Unamortized interest cost of approximately $4,000 was recognized as a loss on extinguishment of debt.  The final short-term note for $100,000 was converted into the November 2010 Common Stock and Warrant offering (see Note 9) on November 5, 2010. Unamortized interest cost of approximately $12,000 was recognized as a loss on extinguishment of debt.

Total non-cash interest expense for the 2010 short-term notes was approximately $35,000.

(6) DERIVATIVE INSTRUMENTS

Derivative financial instruments are recognized as a liability on the consolidated balance sheet and measured at fair value.

At December 31, 2010 and 2009, the Company had outstanding warrants to purchase 10,336,292 and 7,356,502 shares of its common stock, respectively. Included in these outstanding warrants at December 31, 2010 are warrants to purchase 1,356,289 shares that are considered to be derivative instruments since the agreements contain “down round” provisions whereby the number of shares covered by the warrants is subject to change in the event of certain dilutive stock issuances. The fair value of these derivative instruments at December 31, 2010 and 2009 was approximately $1,545,000 and $2,117,000, respectively, and is included in Derivative Warrant Liability, a current liability. Changes in fair value of the derivative financial instruments are recognized currently in the Statements of Operations as a Derivatives Gain or Loss. The changes in the fair value of the derivative warrant liability in the years ended December 31, 2010 and 2009 resulted in a gain of approximately $371,000 and a loss of approximately $4,050,000, respectively.

The primary underlying risk exposure pertaining to the warrants is the change in fair value of the underlying common stock for each reporting period. Of the total warrants exercised in 2010, warrants to purchase 143,793 shares of common stock were exercised per a cashless exercise provision. For the years ended December 31, 2010 and 2009, warrants with down round provisions to purchase 143,793 and 1,572,015 shares, respectively, were exercised and certain anti-dilution rights were waived (see Note 11) which resulted in a reclassification to additional paid-in capital in the amount of approximately $200,000 and $3,268,000, respectively.

(7) FAIR VALUES OF ASSETS AND LIABILITIES

The Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

 Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

 Level 2 – Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. For example, Level 2 assets and liabilities may include debt securities with quoted prices that are traded less frequently than exchange-traded instruments or mortgage loans held for sale, for which the fair value is based on what the securitization market is currently offering for mortgage loans with similar characteristics.

 Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain asset-backed securities, certain private equity investments, residential mortgage servicing rights, and long-term derivative contracts.

F- 13

The following methods and assumptions were used by the Company in estimating fair value for the warrants considered to be derivative instruments.

The Company uses valuation methods and assumptions that consider among other factors the fair value of the underlying stock, risk-free interest rate, volatility, expected life and dividend rates in estimating fair value for the warrants considered to be derivative

instruments.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:

	December 31, 2010
	Level 1		Level 2		Level 3		Fair Value
Liabilities:
Derivative warrant liability	$	—	$	1,544,996	$	—	$	1,544,996

	December 31, 2009
	Level 1		Level 2		Level 3		Fair Value
Liabilities:
Derivative warrant liability	$	—	$	2,116,696	$	—	$	2,116,696

The Company may also be required, from time to time, to measure certain other financial assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. There were no such adjustments in the years ended December 31, 2010 and 2009.

(8) PREFERRED STOCK

The Company is authorized to issue up to 40,000,000 shares of preferred stock with such rights, preferences and privileges as are fixed by the Board of Directors.

 Series A Preferred Stock Exchange

On June 29, 2009, the Company entered into an Exchange Agreement (the “Series A Exchange Agreement”) with all of the holders of the Series A Stock (collectively, the “Series A Holders”). The Series A Holders held an aggregate of 1,632,733 shares of the Series A Stock, including paid-in-kind dividends accrued through June 29, 2009, constituting all of the issued and outstanding Series A Stock. The Series A Stock was initially convertible into shares of Common Stock at the option of the holder at a price per share of $1.35, subject to adjustment for stock splits, combinations or similar events and subject to customary weighted average anti-dilution adjustments.

Under the terms of the Series A Exchange Agreement, the Company issued and delivered to the Series A Holders, in exchange for the cancellation of the Series A Stock, 2,938,920 shares of Common Stock. The Series A Exchange Agreement states that, if, as a result of this exchange transaction, any Series A Holder or any of its affiliates, individually or in the aggregate, would beneficially own more than 9.99% of the Company’s issued and outstanding Common Stock (the “Threshold Amount”), the Series A Holder would receive Common Stock rounded to the nearest whole share, up to the Threshold Amount, and the remaining Common Stock would be exchanged for Series C Stock convertible into the number of shares of Common Stock equal to the difference between the aggregate number of shares of Common Stock to be issued to the Series A Holder and the actual number of shares of Common Stock issued. As a result of this provision, one Series A Holder received 2,323.105 shares of Series C Stock instead of 2,323,105 shares of Common Stock. The remaining Series A Holders received 615,815 shares of Common Stock.

As a result of the terms of the Series A Exchange Agreement, the Company does not have any shares of Series A Stock issued and outstanding.

In 2009, the Company recorded a deemed dividend on the beneficial conversion equal to the incremental fair value resulting from the reduction in the conversion price, or approximately $2,012,000. This deemed dividend is included in the Consolidated Statement of Operations in arriving at Net Loss Applicable to Common Shareholders.

F- 14

Series A-1 Preferred Stock Exchange

On June 29, 2009, the Company entered into an Exchange Agreement (the “Series A-1 Exchange Agreement”) with all of the holders of the Series A-1 Convertible Preferred Stock (collectively, the “Series A-1 Holders”). The Series A-1 Holders held an aggregate of 809,121 shares of the Company’s Series A-1 Convertible Preferred Stock (“Series A-1 Stock”), including paid-in-kind dividends accrued through June 29, 2009, constituting all of the issued and outstanding Series A-1 Stock. The Series A-1 Stock was initially convertible into shares of Common Stock at the option of the holder at a price per share of $1.00, subject to adjustment for stock splits, combinations or similar events and subject to customary weighted average anti-dilution adjustments.

Under the terms of the Series A-1 Exchange Agreement, the Company issued and delivered to the Series A-1 Holders, in exchange for the cancellation of the Series A-1 Stock, 1,078,828 shares of Common Stock. The Series A-1 Exchange Agreement states that, if, as a result of this exchange transaction, any Series A-1 Holder or any of its affiliates, individually or in the aggregate, would beneficially own more than the Threshold Amount, the Series A-1 Holder would receive Common Stock rounded to the nearest whole share, up to the Threshold Amount, and the remaining Common Stock would be exchanged for Series C Stock convertible into the number of shares of Common Stock equal to the difference between the aggregate number of shares of Common Stock to be issued to the Series A-1 Holder and the actual number of shares of Common Stock issued. As a result of this provision, one Series A-1 Holder received 280.993 shares of Series C Stock instead of 280,993 shares of Common Stock. The remaining Series A-1 Holders received 797,835 shares of Common Stock.

As a result of the Series A-1 Exchange Agreement, the Company does not have any shares of Series A-1 Stock issued and outstanding.

In 2009, the Company recorded a deemed dividend on the beneficial conversion equal to the incremental fair value resulting from the reduction in the conversion price, or approximately $415,000. This deemed dividend is included in the Statements of Operations in arriving at Net Loss Applicable to Common Shareholders.

Series A-2 Preferred Stock Financing and Exchange

On April 8, April 24, April 28 and May 31, 2009, the Company entered into an Amended and Restated Stock and Warrant Purchase Agreement dated as of April 2, 2009 (the “A-2 Purchase Agreement”) with certain strategic institutional and accredited investors (the “A-2 Investors”) in connection with the private placement (the “A-2 Financing”) of 1,200,000 shares of our Series A-2 Convertible Preferred Stock (the “Series A-2 Stock”) at a price of $0.50 per share together with warrants to purchase a number of shares of Common Stock equal to (i) thirty-five percent (35%), or (ii) for investments of $250,000 or more, fifty percent (50%), of the number of shares of Series A-2 Stock purchased by each A-2 Investor (the “A-2 Warrants”) in the A-2 Financing. The Company received gross proceeds of $700,000 from the A-2 Financing and used the net proceeds for working capital and general corporate purposes.

Pursuant to the A-2 Purchase Agreement, the Company issued A-2 Warrants to the A-2 Investors to purchase up to 640,000 shares of Common Stock. The A-2 Warrants were immediately exercisable at a price per share of $0.75, subject to adjustment for stock splits, combinations or similar events, and will expire no later than February 28, 2014. The A-2 Warrants allow for cashless exercise. In addition, the Company has the option to redeem the A-2 Warrants, in whole but not in part, upon satisfaction of certain conditions, including (i) the availability of an effective registration statement or Rule 144 exemption for any resale by the holder, (ii) the shares of Common Stock trading at a price per share in excess of 200% of the then-applicable exercise price for ten (10) trading days out of a period of fifteen (15) consecutive trading days prior to the redemption, and (iii) an average daily trading volume during such fifteen (15) consecutive trading days of at least 50,000 shares of Common Stock. Finally, an exercise under the A-2 Warrants may not result in the holder beneficially owning more than 4.99% or 9.99%, as applicable, of all of the Common Stock outstanding at the time; provided, however, that a holder may waive the foregoing provision upon sixty-one (61) days’ advance written notice to us.

As of June 29, 2009 the Series A-2 Stock was exchanged for Common Stock (see below).

On June 29, 2009, the Company entered into an Exchange Agreement (the “A-2 Exchange Agreement”) with all of the holders of the A-2 Investors. The A-2 Investors held an aggregate of 1,422,436 shares of the Series A-2 Stock, including paid-in-kind dividends accrued through June 29, 2009, constituting all of the issued and outstanding Series A-2 Stock.

F- 15

Under the terms of the A-2 Exchange Agreement, the Company issued and delivered to the A-2 Investors, in exchange for the cancellation of the Series A-2 Stock, 1,422,436 shares of Common Stock. The A-2 Exchange Agreement states that, if, as a result of this exchange transaction, any A-2 Investor or any of its affiliates, individually or in the aggregate, would beneficially own more than the Threshold Amount, the A-2 Investor would receive Common Stock rounded to the nearest whole share, up to the Threshold Amount, and the remaining Common Stock would be exchanged for Series C Stock convertible into the number of shares of Common Stock equal to the difference between the aggregate number of shares of Common Stock to be issued to the A-2 Investor and the actual number of shares of Common Stock issued. As a result of this provision, one A-2 Investor received 508.986 shares of Series C Stock instead of 508,986 shares of Common Stock.

As a result of the A-2 Exchange Agreement, the Company does not have any shares of Series A-2 Stock issued and outstanding. The remaining A-2 Investors received 913,450 shares of Common Stock.

Series B Perpetual Redeemable Preferred Stock and Warrant Financing

The Company has authorized 40,000 shares of non-convertible Series B Stock, $0.01 par value, of which 154.3940 and 141.2281 shares were issued and outstanding as of December 31, 2010 and 2009, respectively. The Series B Stock was issued on June 30, 2009.

On July 7, 2009, the Company entered into a Stock Purchase Agreement as of June 30, 2009 (the “Series B Agreement”) with Platinum in connection with the Company’s private placement (the “Series B Financing”) of 200.6031 shares (10,000 to 1 conversion) of Series B Stock, together with 1,205,016 shares of Common Stock, for an aggregate price of $2,006,031. The Company received payment of the purchase price in the form of the extinguishment of the Platinum Note (see Note 5) in the amount of $2,006,031, which amount included principal and interest accrued through June 30, 2009. As the Platinum Note was not originally convertible, the Company recognized a loss on the extinguishment of this debt of approximately $1,820,000 which represents the excess of the fair value of the Series B Stock and the Series C Stock over the carrying value of the Platinum Note.

The Series B Agreement states that the Series B Financing may not result in a purchaser or any of its affiliates, individually or in the aggregate, beneficially owning more than the Threshold Amount; provided, however, that a purchaser may waive the foregoing provision upon sixty-one (61) days’ advance written notice to the Company. If the Series B Financing would result in a purchaser owning Common Stock in excess of the Threshold Amount, then the purchaser would receive Common Stock rounded to the nearest whole share, up to the Threshold Amount, and the remaining Common Stock would be exchanged for Series C Stock convertible into the number of shares of Common Stock equal to the difference between the aggregate number of shares of Common Stock to be issued to the purchaser and the actual number of shares of Common Stock issued. As a result of this provision, Platinum received 1,205.016 shares (1,000 to 1 conversion) of Series C Stock instead of 1,205,016 shares of Common Stock that it otherwise would have received pursuant to the Series B Agreement.

Pursuant to the terms of the Company’s Certificate of Designation, Preference and Rights of Series B Perpetual Preferred Stock (the “Series B Certificate”), the Series B Stock is redeemable under certain circumstances.

The Series B Stock will yield a quarterly dividend, at an initial annual rate of 8%, which is payable in cash or in kind at the option of the Company. If the Series B Stock is outstanding on the twelve month anniversary of the Issuance Date (as defined in the Series B Certificate), the dividend rate shall increase to 10% per annum and, if the Series B Stock is outstanding on the eighteen month anniversary of the Issuance Date, then the dividend rate shall increase to 12% per annum.

In the event of any Liquidation Event (as defined in the Series B Certificate) the holders of the Series B Stock will be entitled to receive (subject to the rights of any securities designated as senior to the Shares) a liquidation preference equal to the Face Amount thereof plus any accrued but unpaid dividends thereon. The Company cannot create or issue any security senior to the Series B Stock without the prior approval of the holders of at least 67% of the Company’s outstanding Series B Stock.

In accordance with redemption requirements, during the year ended December 31, 2009, the Company redeemed 59.3750 shares of Series B Stock at a cost of $593,750 in connection with the financings dated November 13, and December 3, 2009. Of this amount, $450,000 was satisfied by offsetting proceeds owed in connection with the 2009 November Financing (see Note 9) and $143,750 was included in Accrued Expenses.

On January 19, 2010, the Company entered into a letter agreement with the sole holder of Series B Stock (the “Series B Holder”) regarding the payment to the Series B Holder of $143,750 (the “Redemption Amount”) for the redemption of 14.375 shares of Series B Stock in connection with the 2009 November financing and 2009 December financing. The Series B Holder waived payment of the Redemption Amount until the Company has a net cash balance in excess of $3,000,000. In consideration for the deferral, the Company agreed that, upon the closing of its next equity offering with gross proceeds of less than $5,000,000, it would use 25% of the gross proceeds to redeem Series B Stock (the “25% Redemption”).

F- 16

On March 16, 2010, the Company entered into an additional agreement with the Series B Holder pursuant to which the Series B Holder waived both the 25% Redemption identified in the January 19, 2010 letter and the redemption required by the Series B Certificate with respect to amounts received in the February 2010 financing through March 16, 2010. Accordingly, redemption in the amount of approximately $614,000 was waived by the Series B Holder in connection with the February 2010 financing.

On November 10, 2010, the Company entered into a letter agreement (the “November Letter”) with the Series B Holder pursuant to which the Series B Holder waived the 25% Redemption triggered by the November 2010 Financing (see Note 9) and any subsequent equity or equity-linked financing conducted by the Company up to an aggregate of $1,000,000 of gross proceeds from all such financings.  In consideration for the waiver in the November Letter, the Company issued to the Series B Holder 125,000 Series-1 Warrants and 125,000 Series-2 Warrants with a combined fair value of $185,000 which was recorded as non-cash stock issuance cost.

On December 29, 2010, the Company entered into a letter agreement (the “December Letter”) with the Series B Holder pursuant to which the Series B Holder waived the 25% Redemption triggered by the November 2010 Financing and any subsequent closings of the November 2010 Financing.

The Company paid approximately $132,000 of dividends by issuing approximately 13 shares of Series B Stock during 2010. This dividend is included in the Statements of Operations in arriving at Net Loss Applicable to Common Shareholders.  In accordance with the Series B Preferred Stock Agreement there were no dividends due for the year ended December 31, 2009.

Series C Preferred Stock

The Company has authorized 10,000 shares of Series C Stock, $0.01 par value, of which 4,918.1 shares were issued and outstanding as of December 31, 2010 and 2009, respectively. The Series C Stock was created on June 30, 2009.  Pursuant to the terms of the Certificate of Designation, Preference and Rights of Series C Preferred Stock (the “Series C Certificate”), each share of Series C Stock is initially convertible into one thousand shares of Common Stock, subject to adjustment for stock splits, combinations or similar events. Each holder who receives Series C Stock may convert its Series C Stock at any time following its issuance. In the event of any Liquidation Event (as defined in the Series C Certificate), the holders of Series C Stock will be entitled to receive (subject to the rights of any securities designated as senior to the Series C Stock) a per share liquidation preference equal to an amount calculated by taking the total amount available for distribution to holders of all the Company’s outstanding Common Stock before deduction of any preference payments for the Series C Stock, divided by the total of (x) all of the then outstanding shares of Common Stock, plus (y) all of the shares of Common Stock into which all of the outstanding shares of the Series C Stock can be converted, in each case prior to any distribution to the holders of Common Stock or any other securities designated as junior to the Series C Stock.

(9) COMMON STOCK

The Company has authorized 100,000,000 shares of Common Stock, $0.01 par value per share, of which 31,126,245 and 27,045,792 shares were issued and outstanding as of December 31, 2010 and 2009, respectively.

November 2009 Common Stock and Warrant Financing

On November 13, 2009, the Company entered into a Common Stock and Warrant Purchase Agreement (the “November Agreement”) with certain strategic institutional and accredited investors in connection with the private placement (the “November Financing”) of shares of Common Stock at a price of $1.25 per share (the “November Shares”). Under the terms of the November Agreement, each investor shall receive warrants to purchase a number of shares of Common Stock with an exercise price of $2.00 per share equal to (i) seventy percent (70%) of the number of November Shares purchased by such investor or, (ii) for those investors who purchased November Shares for a purchase price of at least $750,000, one hundred percent (100%) of the number of November Shares purchased by such investor (the “November Warrants”). In addition, each investor who purchased November Shares for a purchase price of at least $1,000,000 shall receive November Warrants with an exercise price of $1.60 per share.

F- 17

The Company received proceeds of $3,211,320 in connection with the November Financing. The Company received payment of a portion of the proceeds in the form of the extinguishment of Promissory Notes (together with additional notes issued as payment for accrued interest) in the approximate amount of $355,000, which amount included principal and interest accrued through November 13, 2009 (see Note 5). A portion of one investor’s purchase price was comprised of the investment of $450,000 of the funds payable to such investor by the Company for the redemption of a portion of the Series B Stock owned by such investor upon the closing of the November Financing. Of the total proceeds, the Company received approximately $2,461,000 for the issuance of 1,969,056 shares of Common Stock and $750,000 for 600 shares of Series C stock issued to an investor due to ownership limitations.

Pursuant to the Purchase Agreement, the Company issued November Warrants to purchase an aggregate of 2,398,339 shares of Common Stock to the investors, of which 1,598,339 shares have an exercise price equal to $2.00 per share and 800,000 shares have an exercise price equal to $1.60 per share. The Company issued warrants to purchase 256,906 shares at $0.50 per share to the placement agent and its assignees. The warrants are immediately exercisable and expire no later than November 13, 2014. The exercise price is subject to adjustment for stock splits, combinations or similar events. The November Warrants allow for cashless exercise. An exercise under the November Warrants may not result in the holder beneficially owning more than 4.99% or 9.99%, as applicable, of all of the Common Stock outstanding at the time; provided, however, that a holder may waive the foregoing provision upon sixty-one (61) days’ advance written notice to the Company.

December 2009 Common Stock and Warrant Financing

On December 3, 2009, the Company closed on a financing pursuant to a Common Stock and Warrant Purchase Agreement dated as of November 30, 2009 (the “December Agreement”) with certain strategic institutional and accredited investors in connection with the private placement (the “December Financing”) of shares of Common Stock at a price of $1.25 per share (the “December Shares”). Under the terms of the December Agreement, each investor shall receive warrants to purchase a number of shares of Common Stock with an exercise price of $2.00 per share equal to (i) seventy percent (70%) of the number of December Shares purchased by such investor or, (ii) for those investors who purchased December Shares for a purchase price of at least $750,000, one hundred percent (100%) of the number of December Shares purchased by such investor (the “December Warrants”). In addition, the December Warrants issued to each investor who purchased December Shares for a purchase price of at least $1,000,000 have an exercise price of $1.60 per share.

The Company received proceeds of $562,500 in connection with the December Financing.

Pursuant to the December Agreement, the Company issued 450,000 shares of common stock, an aggregate of 315,000 December Warrants to the investors and 45,000 warrants to the placement agent and its assignees. The December Warrants are immediately exercisable and expire no later than December 3, 2014. The exercise price is subject to adjustment for stock splits, combinations or similar events. The December Warrants allow for cashless exercise. An exercise under the December Warrants may not result in the holder beneficially owning more than 4.99% or 9.99%, as applicable, of all of the Common Stock outstanding at the time; provided, however, that a holder may waive the foregoing provision upon sixty-one (61) days’ advance written notice to the Company.

February 2010 Common Stock and Warrant Financing

On February 4, 2010, the Company entered into a Common Stock and Warrant Purchase Agreement (the “February Agreement”) with certain strategic institutional and accredited investors in connection with the Company’s private placement (the “February Financing”) of shares of its Common Stock, at a price of $1.50 per share (the “February Shares”). Under the terms of the February Agreement, each investor received warrants to purchase a number of shares of Common Stock with an exercise price of $2.25 per share equal to fifty percent (50%) of the number of February Shares purchased by such investor (the “February Warrants”).  The Company issued 1,636,739 shares of Common Stock and received gross proceeds of approximately $2,455,000 in connection with the February Financing. Total cost to issue the shares was $361,111 which included non-cash costs of $217,141.

Pursuant to the February Agreement, the Company issued an aggregate of 818,362 February Warrants to the investors and 128,899 warrants to the placement agent and its assignees. The February Warrants are immediately exercisable and expire no later than five (5) years from the date of issuance. The exercise price is subject to adjustment for stock splits, combinations or similar events. The February Warrants allow for cashless exercise. An exercise under the February Warrants may not result in the holder beneficially owning more than 4.99% or 9.99%, as applicable, of all of the Common Stock outstanding at the time; provided, however, that a holder may waive the foregoing provision upon sixty-one (61) days’ advance written notice to the Company.

F- 18

November 2010 Common Stock and Warrant Financings

In November 2010, the Company initiated a private placement (the “November 2010 Financing”) of up to 120 units (each, a “Unit” and together, the “Units”) or partial Units at a price per Unit of $25,000.  Each Unit consists of (i) 25,000 shares of the Company’s Common Stock, (ii) Series-1 warrants to purchase 12,500 shares of the Company’s Common Stock with an exercise price of $1.50 per share (the “Series-1 Warrants”), and (iii) Series-2 warrants to purchase 12,500 shares of Common Stock with an exercise price of $2.50 per share (the “Series-2 Warrants”).

Through December 31, 2010, the Company had entered into subscription agreements with certain strategic institutional and accredited investors in connection with the November 2010 Financing for a total of 68.8units.  The Company received gross proceeds from these subscriptions in the amount of $1,720,000.   The Company received proceeds of $100,000 in the form of extinguishment of a Short-Term Note issued by the Company on September 28, 2010 (see Note 5), which included principal and interest.  Additionally, the Company had received a commitment for an additional 11.4 Units for which the expected proceeds of $285,000 had not been received as of December 31, 2010.  This was treated as a stock subscription receivable as of December 31, 2010.  The proceeds of $285,000 were received in January and February 2011.

As of December 31, 2010, the Company issued an aggregate of 1,720,000 shares of Common Stock and under commitments for an additional 11.4 Units is obligated to issue an additional 285,000 shares and an aggregate of 1,002,500 Series-1 Warrants and 1,002,500 Series-2 Warrants to the Investors.   These warrants are immediately exercisable and expire three years after issuance. The exercise price is subject to adjustment for stock splits, combinations or similar events.  An exercise under these warrants may not result in the holder beneficially owning more than 4.99% or 9.99%, as applicable, of all of the Common Stock outstanding at the time; provided, however, that a holder may waive the foregoing provision upon sixty-one (61) days’ advance written notice to the Company.

As of December 31, 2010, the November 2010 Financing remained open.  Additional Units were sold in 2011 (see Note 14).

Burnham Hill Partners Engagement Letters

On June 30, 2009, the Company entered into an engagement letter with Burnham Hill Partners LLC (“BHP LLC”) pursuant to which BHP LLC provided placement agent services to the Company in connection with the Series B Financing (see Note 8). The Company agreed to pay BHP LLC a cash fee of $200,000 (the “Series B Fee”) which was due and payable upon the earlier of (i) the Company having a net cash balance in excess of $2,000,000 or (ii) October 1, 2009; and (b) warrants to acquire 400,000 shares of Common Stock, with a term of five years, an exercise price per share equal to 105% of the closing bid price of Common Stock on June 30, 2009. On September 30, 2009, the Company and BHP LLC entered into a letter agreement (the “Letter”) extending the due date of the Series B Fee. The Letter provides that the Fee is due and payable by the Company upon the earlier of (i) the Company having a cash balance in excess of $2,000,000 or (ii) March 31, 2010. On March 16, 2010, BHP LLC agreed that the Company does not owe BHP any fees that may have been payable pursuant to any and all previous agreements between BHP and the Company. Accordingly, the Company recorded a gain on extinguishment of financing fee payable of $200,000 in 2010.  As a result of the Series B Financing, the Company issued to BHP LLC and/or its designees and assignees warrants to purchase 400,000 shares of Common Stock at an exercise price of $1.59. The fair value of these warrant shares was determined to be approximately $557,000 as of June 30, 2009 which was recorded as both a debit and credit to additional paid-in capital as a stock issuance cost.

On October 13, 2009, the Company entered into an engagement letter with BHP LLC pursuant to which BHP LLC provided placement agent services to the Company in connection with the November Financing. BHP LLC received a cash placement fee of $168,438 and the Company issued to BHP LLC and/or its designees and assignees warrants to purchase 256,906 shares of Common Stock at an exercise price of $1.50. The fair value of these warrant shares was determined to be approximately $263,000 as of November 13, 2009 which was recorded as both a debit and credit to additional paid-in capital as a stock issuance cost.

On February 4, 2010, the Company entered into an engagement letter with BHP LLC pursuant to which BHP LLC provided placement agent services to the Company in connection with the February Financing.  The Company agreed to pay BHP LLC for its services as follows: (a) a cash fee equal to seven percent (7%) of the gross cash proceeds received by the Company in connection with the February Financing from investors BHP LLC directly introduced to the February Financing; and (b) warrants to acquire a number of shares of Common Stock equal to 10% of the number of Shares issued to the investors directly introduced to the February Financing by BHP LLC at a per share exercise price equal to the exercise price of the Warrants and with such other terms and conditions as are equal or substantially similar to those included in the Warrants.  The Company also agreed to pay BHP LLC’s reasonable out of pocket expenses incurred in connection with the February Financing in an amount not to exceed $5,000. BHP LLC received a cash placement fee of $29,925 and the Company issued to BHP LLC and/or its designees and assignees warrants to purchase 28,500 shares of Common Stock. The fair value of these warrant shares was determined to be approximately $48,000 as of February 3, 2010 which was recorded as both a debit and credit to additional paid-in capital as a stock issuance cost.

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Boenning & Scattergood Engagement Letter

On October 13, 2009, the Company entered into an engagement letter with Boenning & Scattergood, Inc. (“Boenning”) pursuant to which Boenning provided placement agent services to the Company in connection with the December Financing. The Company agreed to pay Boenning for its services as follows: (a) a cash fee equal to seven percent (7%) of the gross cash proceeds received by the Company in connection with the December Financing; and (b) warrants to acquire a number of shares of Common Stock equal to 10% of the number of December Shares issued to the investors at a per share exercise price equal to the greater of (i) 110% of the purchase price of the December Shares issued or (ii) the closing price of the Common Stock on the closing date. As a result of the December Financing, Boenning received a cash placement fee of $39,375 and the Company issued to Boenning and/or its designees and assignees warrants to purchase 45,000 shares of Common Stock at an exercise price of $1.38. The fair value of these warrant shares was determined to be approximately $49,950 as of December 3, 2009 which was recorded as both a debit and credit to additional paid-in capital as a stock issuance cost.

On February 4, 2010, the Company entered into an engagement letter with Boenning pursuant to which Boenning provided placement agent services to the Company in connection with the February Financing.  The Company agreed to pay Boenning for its services as follows: (a) a cash fee equal to seven percent (7%) of the gross cash proceeds received by the Company in connection with the February Financing from investors Boenning directly introduced to the February Financing; and (b) warrants to acquire a number of shares of Common Stock equal to 10% of the number of Shares issued to the investors directly introduced to the February Financing by Boenning at a per share exercise price equal to the exercise price of the Warrants and with such other terms and conditions as are equal or substantially similar to those included in the Warrants.  The Company also agreed to pay Boenning’s reasonable out of pocket expenses incurred in connection with the February Financing in an amount not to exceed $5,000.  Boenning received a cash placement fee of $110,410 and the Company issued to Boenning and/or its designees and assignees warrants to purchase 100,399 shares of Common Stock. The fair value of these warrant shares was determined to be approximately $169,000 as of February 3, 2010 which was recorded as both a debit and credit to additional paid-in capital as a stock issuance cost.

LifeTech Capital Engagement Letter

As of September 15, 2010, the Company retained LifeTech Capital, a division of Aurora Capital, LLC, as a placement agent (“LifeTech”).  The Company agreed to pay LifeTech for its services as follows: (a) a cash fee equal to seven percent (7%) of the gross cash proceeds in excess of $150,000 received by the Company in connection with the November 2010 Financing from investors introduced to the November 2010 Financing by LifeTech; and (b) warrants to acquire a number of shares of Common Stock equal to 10% of the securities sold to investors introduced to the November 2010 Financing by LifeTech.  The warrants are identical to those issued to the investors in the November 2010 Financing, except that they include a cashless exercise provision.  LifeTech also received an up-front cash fee of $10,000 for financial advisory services.  In connection with the November 2010 Financing, the Company issued LifeTech warrants to purchase 13,750 shares of Common Stock at an exercise price of $1.50 per share and 13,750 shares of Common Stock at an exercise price of $2.50 per share with a combined fair value of approximately $25,000 which was recorded as non-cash stock issuance cost.

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Monarch Capital Group Engagement Letter

In December 2010, the Company also retained Monarch Capital Group, LLC, as a placement agent (“Monarch”).  The Company agreed to pay Monarch for its services as follows: (a) a cash fee equal to seven percent (7%) of the gross cash proceeds received by the Company in connection with the November 2010 Financing from investors introduced to the November 2010 Financing by Monarch; and (b) warrants to acquire a number of shares of Common Stock equal to 10% of the securities sold to investors introduced to the November 2010 Financing by Monarch.  The warrants are identical to those issued to the investors in the November 2010 Financing.  The Company has issued Monarch warrants to purchase 21,250 shares of Common Stock at an exercise price of $1.50 per share and 21,250 shares of Common Stock at an exercise price of $2.50 per share pursuant to this arrangement with a combined fair value of approximately $42,000 which was recorded as  non-cash stock issuance cost.

2010 Exercise of Common Stock Warrants

During 2010, warrants to purchase 143,793 shares of Common Stock were voluntarily exercised per a cashless process, resulting in the issuance of 35,714 common shares of the Company.

Common Stock Reserves

As of December 31, 2010, the Company had the following reserves established for the future issuance of Common Stock as follows:

Reserve for exercise of warrants	10,336,292
Reserve for the issuance of stock options outside of a qualified plan	1,650,000
Reserve for the exercise of stock options	6,518,138
Total Reserves	18,504,430

(10) STOCK OPTION PLANS

In 1997, the Company adopted its 1997 Long-Term Incentive and Stock Option Plan (the “1997 Plan”). Pursuant to the 1997 Plan, the Company’s Board of Directors (or committees and/or executive officers delegated by the Board of Directors) may grant incentive and nonqualified stock options to the Company’s employees, officers, directors, consultants and advisors. As of December 31, 2010, there were options to purchase an aggregate of 25,000 shares of Common Stock outstanding under the 1997 Plan and no shares available for future grants under the 1997 Plan.

In connection with the Company’s strategic merger with ChoiceTel in 2002, the Company assumed all outstanding options under the 1999 Sontra Medical, Inc. Stock Option and Incentive Plan (the “1999 Plan”). The Company may not grant any additional options under the 1999 Plan. The Company assumed options to purchase an aggregate of 86,567 shares of Common Stock under the 1999 Plan. As of December 31, 2009, there were options to purchase an aggregate of 5,780 shares of Common Stock outstanding under the 1999 Plan and none available for future grants.

In March 2003, the Company’s shareholders approved its 2003 Stock Option and Incentive Plan (the “2003 Plan”). Pursuant to the 2003 Plan, the Company’s Board of Directors (or committees and/or executive officers delegated by the Board of Directors) may grant incentive and nonqualified stock options, restricted stock and other stock-based awards to the Company’s employees, officers, directors, consultants and advisors. As of December 31, 2010, the maximum aggregate number of shares that may be authorized for issuance under the 2003 Plan for all periods is 1,600,000. As of December 31, 2010, there were restricted shares of Common Stock and options to purchase an aggregate of 1,529,500 shares of Common Stock outstanding under the 2003 Plan and 57,500 shares available for future grants under the 2003 Plan.

On May 20, 2008, the Company’s shareholders approved the Echo Therapeutics, Inc. 2008 Equity Compensation Plan (the “2008 Plan”). The 2008 Plan provides for grants of incentive stock options to employees and nonqualified stock options and restricted Common Stock to employees, consultants and non-employee directors of the Company. On July 12, 2010, the shareholders of the Company voted in favor of the Board of Directors’ recommendation to increase the number of shares authorized for issuance under the 2008 Plan from 2,700,000 shares to 4,700,000 shares. As of December 31, 2010, the number of shares authorized for issuance under the 2008 Plan was 4,700,000 shares. As of December 31, 2010, there were restricted shares of Common Stock and options to purchase an aggregate of 1,919,750 shares of Common Stock outstanding under the 2008 Plan and 2,780,250 shares available for future grants under the 2008 Plan.

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Share-Based Compensation - Options

For options issued and outstanding during the years ended December 31, 2010 and 2009, the Company recorded additional paid-in capital and non-cash compensation expense of $164,810 and $1,298,789, respectively, each net of estimated forfeitures

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Common Stock using historical periods consistent with the expected term of the options. The Company uses historical data, as well as subsequent events occurring prior to the issuance of the consolidated financial statements, to estimate option exercise and employee termination within the valuation model. The expected term of options granted under the Company’s stock plans, all of which qualify as “plain vanilla,” is based on the average of the contractual term (generally 10 years) and the vesting period (generally 24 — 42 months) as permitted under SEC Staff Accounting Bulletin Nos. 107 and 110. The risk-free rate is based on the yield of a U.S. Treasury security with a term consistent with the option. Restricted stock grants are valued based on the closing market price for the Common Stock on the grant date.

The assumptions used principally for options granted to employees in the years ended December 31, 2010 and 2009 were as follows

	2010			2009
Risk-free interest rate		2.43% - 3.96	%		2.43% - 2.78	%
Expected dividend yield		—			—
Expected term (employee grants)	6.75 years			6 years
Forfeiture rate (excluding fully vested options)		0%-37	%		12.54	%
Expected volatility		142% - 150	%		150% - 151	%

A summary of option activity under the Company’s stock plans and options granted to officers of the Company outside any plan as of December 31, 2010 and changes during the year then ended is presented below:

Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2010		2,924,530		$	0.90
Granted		125,000		$	1.56
Exercised		—		$	—
Forfeited or expired		(20,500	)	$	9.60
Outstanding at December 31, 2010		3,029,030		$	0.87	6.82 years	$	2,756,550
Exercisable at December 31, 2010		2,841,516		$	0.86	6.85 years	$	2,624,732

The weighted-average grant-date fair value of options granted during the year ended December 31, 2010 was $1.56 per share. As of December 31, 2010, there was approximately $122,000 of total unrecognized compensation expense related to non-vested share-based option arrangements. With the exception of the unrecognized share-based compensation related to certain restricted stock grants to officers and employees that contain performance conditions  related to United States Food and Drug Administration (“FDA”) approval for Symphony or the sale of substantially all of the stock or assets of the Company, unrecognized compensation is expected to be recognized over the next 12 months.

In the year ended December 31, 2010, the Company issued options to purchase a total of 125,000 shares of Common Stock at prices between $1.00 and $1.70 to vendors for investor relations services.  The fair value of these options was approximately $178,000.  During the year ended December 31, 2010, the Company recorded approximately $60,000 of selling, general and administrative expense related to these options.

On February 20, 2009, the Compensation Committee of the Board of Directors of the Company approved a reduction of the exercise price of options for certain officers of the Company to purchase an aggregate of 1,300,000 shares of Common Stock to $0.55 per share. Prior to the repricing, the exercise price of such options was $1.39 per share. The Company also repriced options held by certain employees and consultants for the purchase of 550,000 shares of Common Stock with original exercise prices of between $0.61 and $2.25 to an exercise price of $0.40. All other terms of the options remained the same. In addition, the Compensation Committee also approved the cancellation of stock options for certain officers of the Company to purchase 1,250,000 shares of Common Stock that were granted on September 14, 2007 at an exercise price per share equal to $2.39. The excess of the fair value of the modified options over the fair value of the original options immediately prior to modification, or approximately $35,000, will be charged to expense over the remaining vesting period of the options.

F- 22

On June 3, 2009, the Compensation Committee of the Board of Directors of the Company approved a reduction of the exercise price of options for a certain consultant of the Company to purchase 25,000 shares of Common Stock to $0.80 per share. Prior to the repricing, the exercise price of such options was $1.95 per share. All other terms of the options remained the same. The incremental fair value resulting from the repricing was immaterial.

Share-Based Compensation – Restricted Stock

For restricted stock issued and outstanding during the years ended December 31, 2010 and 2009, the Company incurred non-cash compensation expense of $393,249 and $309,758, respectively, each net of estimated forfeitures

As of December 31, 2010, the Company had outstanding restricted stock grants (including 601,250 shares issued and outstanding under the 2003 Plan) amounting to 2,446,094 shares at a weighted-average grant-date fair value of $1.20 per share. Of the outstanding restricted stock grants, 806,500 shares have not been registered. A summary of the status of the Company’s nonvested restricted stock grants as of December 31, 2010, and changes during the year ended December 31, 2010, is presented below:

Nonvested Shares	Shares			Weighted- Average Grant-Date Fair Value
Nonvested at January 1, 2010		1,779,594		$	1.13
Granted		363,000		$	1.03
Vested		(513,000	)	$	1.17
Forfeited		-		$      -
Nonvested at December 31, 2010		1,629,594		$	1.12
Vested at December 31, 2010		816,500		$	1.36

As of December 31, 2010, there was approximately $2,298,000 of total unrecognized compensation expense related to nonvested share-based restricted stock arrangements granted under the Company’s stock plans. As of December 31, 2010, the Company cannot estimate the timing of completion of performance vesting requirements required by these restricted stock grant arrangements.

During  2009, the Company granted an aggregate of 1,569,750 restricted shares of the Company’s Common Stock with a fair value of approximately $1,750,000 to certain employees, officers and directors of the Company pursuant to Restricted Stock Agreements under the 2003 Plan (225,000 shares) and the 2008 Plan (1,344,750 shares) (the “Restricted Share Grants”). Subject to the terms and conditions of the Restricted Stock Agreements, the restricted shares will vest upon the first to occur of (i) FDA approval of Symphony; or (ii) the sale of all or substantially all of the assets of the Company or all or substantially all of the outstanding capital stock of the Company in exchange for Liquid Proceeds.  For the purposes of the Restricted Share Grants, “Liquid Proceeds” means (a) cash; (b) securities which can be sold immediately on NYSE or NASDAQ; (c) securities which are or will be registered such that they can be sold upon on NYSE or NASDAQ upon termination of a lock-up period not to exceed one hundred eighty (180) days; or (d) or a combination of cash and the foregoing securities.  The Restricted Share Grants were effected under Section 4(2) of the Securities Act.

F- 23

Compensation expense related to the Restricted Share Grants will be recognized when the Company concludes that achievement of the performance vesting conditions is probable. Through December 31, 2010, the Company has not concluded that achievement of the performance conditions related to the Restricted Share Grants was probable.

During 2009, the Company issued 125,000 shares of its unregistered common stock with the fair value of approximately $189,100, to vendors in consideration for investor relations and other services. The issuance of the shares outside any stock option plan was made in a transaction not involving any public offering pursuant to an exemption from registration under Section 4(2) of the Securities Act.

During October 2009, the Company issued 37,500 shares of its unregistered common stock with the fair value of approximately $54,000, to three lenders for interest on the 2009 Promissory Demand Notes (see Note 5).  The fair value was recorded as a non-cash interest expense in the consolidated financial statements.   The issuance of the shares outside any stock option plan was made in a transaction not involving any public offering pursuant to an exemption from registration under Section 4(2) of the Securities Act.

On December 4, 2009, the Company issued 200,000 shares of its unregistered common stock with a fair value of approximately $250,000 to a vendor in consideration for investor relations services.  Under the terms of the agreement, only 50,000 shares vested as of December 31, 2009 with a fair value of approximately $63,000, and the remaining shares vested in 2010.  The issuance of the shares outside any stock option plan was made in a transaction not involving any public offering pursuant to an exemption from registration under Section 4(2) of the Securities Act.

On December 11, 2009, the Company issued 64,844 shares of its unregistered common stock with a fair value of approximately $83,000 to a member of the Company’s Board of Directors in consideration for past services to the Company.  Under the terms of the agreement, the shares vest when the Company concludes that achievement of the performance vesting conditions is probable.  The issuance of the shares outside of any stock option plan was made in a transaction not involving any public offering pursuant to an exemption from registration under Section 4(2) of the Securities Act.

In the year ended December 31, 2010, the Company issued 363,000 of fully vested Common Stock with a fair value of approximately $171,000 to vendors for various services.  Included in these amounts are 50,000 shares of Common Stock with a fair value of approximately $49,000 issued in payment of accrued interest in the Short-term Notes (see Note 5) and 23,000 shares of Common Stock with a fair value of approximately $23,000 issued to a vendor in lieu of a cash payment for previously provided services.   In April 2010, the Company considered as vested 150,000 shares of previously granted restricted common stock, with a fair value of approximately $222,000 to a vendor in consideration for investor relations services.

In January 2010, the Company issued 60,000 shares of its common stock with a fair value of approximately $113,000 as a charitable contribution which was charged to selling, general and administrative expense. The shares were issued in a transaction not involving any public offering pursuant to an exemption from registration under Section 4(2) of the Securities Act.

In January 2010, the Company issued 265,000 shares of its common stock with a fair value of approximately $466, 000 to three vendors in consideration for various consulting services. The fair value of these common shares is charged to selling, general and administrative expenses. A total of 165,000 and 100,000 shares were issued under the 2003 Plan and 2008 Plan, respectively.

(11) WARRANTS

The Company uses valuation methods and assumptions that consider among other factors the fair value of the underlying stock, risk-free interest rate, volatility, expected life and dividend rates in estimating fair value for the warrants considered to be derivative instruments.  The following assumptions were utilized by the Company:

	2010			2009
Risk-free interest rate		2.58% -3.71	%		2.87% - 3.80	%
Expected dividend yield		—			—
Expected term (contractual term)	2 - 5 years			3 - 5 years
Forfeiture rate		0	%		0	%
Expected volatility		141% - 150	%		150% - 153	%

Expected volatilities are based on historical volatility of the Common Stock using historical periods consistent with the expected term of the warrant. The risk-free rate is based on the yield of a U.S. Treasury security with a term consistent with the warrant.

In the years ended December 31, 2010 and 2009, the Company issued warrants with a fair value of approximately $617,000 and $174,000, respectively.  Included in the 2010 warrant fair value are warrants with a fair value of approximately $469,000 recorded as a debit and credit to additional paid-in capital as stock issuance costs related to the February 2010 Financing and November 2010 Financing (see Note 9).  The warrants issued in the years ended December 31, 2010 and 2009 generally have a term of two (2) to five (5) years, a non-redeemable feature and a cashless exercise provision. Certain warrants have a standard weighted average anti-dilution protection and piggy back registration rights.

F- 24

At December 31, 2010, the Company had the following outstanding warrants:

	Number of Shares Exercisable		Exercise Price		Date of Expiration
Granted to investors and placement agent in private placement.		476,830	$	5.80	3/07/2011
Granted to investors and placement agent in private placement.		419,250	$	1.32	6/15-7/16/2012
Granted to investors and placement agent in private placement.		180,000	$	0.75	6/15/2012
Granted to financial investment advisor		6,000	$	1.43	7/25/2012
Granted to financial advisor in connection with an acquisition		80,750	$	1.86	9/14/2012
Granted to financial investment advisor		39,978	$	1.34	2/11/2013
Granted to investors in private placement		733,412	$	0.50	2/11/2013
Granted to investors in private placement		655,321	$	1.58	3/24/2013
Granted to investors in private placement of preferred stock		121,663	$	0.75	9/30/2013
Granted to investors in private placement of preferred stock		32,249	$	1.00	9/30/2013
Granted to investors in private placement of preferred stock		198,333	$	1.50	10/28/2013
Granted to investors in private placement of preferred stock		70,000	$	0.75	10/31/2013
Granted to investors in private placement of preferred stock		640,000	$	0.75	2/28/2014
Granted to vendor		50,000	$	0.70	3/2/2012
Granted to vendor		60,000	$	0.60	3/15/2014
Granted to investors in private placement		400,000	$	1.59	6/30/2014
Granted to investors in private placement		1,598,339	$	2.00	11/13/2014
Granted to investors in private placement		800,000	$	1.60	11/13/2014
Granted to placement agent in private placement		256,906	$	1.50	11/13/2014
Granted to vendor		50,000	$	2.00	12/1/2012
Granted to investors in private placement		315,000	$	2.00	12/3/2014
Granted to placement agent in private placement		45,000	$	1.38	12/3/2014
Granted to investors in private placement		811,987	$	2.25	2/9/2015
Granted to placement agent in private placement		100,399	$	2.25	2/9/2015
Granted to placement agent in private placement		28,500	$	2.25	2/9/2015
Granted to investors in private placement		6,375	$	2.25	3/18/2015
Granted to vendor		100,000	$	1.50	2/10/2013
Granted to placement agent in private placement		20,000	$	2.00	3/3/2013
Granted to investors in private placement		200,000	$	1.50	11/5/2012
Granted to investors in private placement		200,000	$	2.50	11/5/2012
Granted to placement agent in private placement		5,000	$	1.50	11/5/2012
Granted to placement agent in private placement		5,000	$	2.50	11/5/2012
Granted to investors in private placement		35,000	$	1.50	11/26/2012
Granted to investors in private placement		35,000	$	2.50	11/26/2012
Granted  for waiver of Series B Perpetual Redeemable Preferred Stock redemption		125,000	$	1.50	12/8/2012
Granted  for waiver of Series B Perpetual Redeemable Preferred Stock redemption		125,000	$	2.50	12/8/2012
Granted to investors in private placement		625,000	$	1.50	12/29/2012
Granted to investors in private placement		625,000	$	2.50	12/29/2012
Granted to placement agent in private placement		30,000	$	1.50	12/29/2012
Granted to placement agent in private placement		30,000	$	2.50	12/29/2012
Total		10,336,292
Weighted average
exercise price			$	1.82
Weighted average duration in years					2.81 years

A summary of warrant activity in the year ended December 31, 2010 is as follows:

F- 25

Warrants	Shares			Weighted- Average Exercise Price
Outstanding at January 1, 2010		7,356,502		$	1.71
Granted		3,123,583		$	2.06
Exercised		(143,793	)	$	1.50
Forfeited or expired		0		$	0
Outstanding at December 31, 2010		10,336,292		$	1.82

(12) INCOME TAXES

No provision or benefit for federal or state income taxes has been recorded, as the Company has incurred a net loss for all periods presented, and has provided a valuation allowance against its deferred tax assets.

At December 31, 2010, the Company had federal net operating loss carryforwards of approximately $48,000,000, which will expire in varying amounts beginning in 2018. The Company also had research and development tax credit carryforwards of approximately $1,518,000 which will begin to expire in 2018 unless previously utilized. The United States Tax Reform Act of 1986 contains provisions that may limit the Company’s net operating loss carryforwards available to be used in any given year in the event of significant changes in the ownership interests of significant stockholders, as defined.

Significant components of the Company’s net deferred tax asset are as follows:

	December 31,
	2010			2009
Deferred Tax Assets/(Liabilities)
Net operating loss carryforwards	$	17,594,000		$	17,001,000
Research credit carryforward		1,518,000			1,378,000
Acquired intangible assets, net		(3,781,000	)		(3,814,000	)
Other temporary differences		141,000			117,000
Total deferred tax assets, net		15,472,000			14,682,000
Valuation allowance		(15,472,000	)		(14,682,000	)
Net deferred tax asset	$	—		$	—

The Company has maintained a full valuation allowance against its deferred tax items in both 2010 and 2009. A valuation allowance is required to be recorded when it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Since the Company cannot be assured of realizing the net deferred tax asset, a full valuation allowance has been provided.

The Company has no unrecognized tax benefits at December 31, 2010 that would affect its effective tax rate. The Company does not anticipate a significant change in the amount of unrecognized tax benefits over the next twelve months.

Income taxes computed using the federal statutory income tax rate differs from the Company’s effective tax rate primarily due to the following:

	Years Ended December 31,
	2010			2009
Income taxes benefit (expense) at statutory rate		35.0	%		35.0	%
State income tax, net of federal benefit		(0.5	)%		0.9	%
Permanent Differences
Derivative loss		3.1	%		(13.1	)%
Loss on extinguishment of debt		1.6	%		(6.4	)%
Stock compensation expense		(1.4	)%		(4.3	)%
Stock for Services		(8.6	)%		-
Other		(3.5	)%		(2.6	)%
R&D credits		2.5	%		1.1	%
Change in valuation allowance		(28.2	)%		(10.6	)%
		0.0	%		0.0	%

F- 26

(13) LICENSING AND OTHER REVENUE AND RELATED ACCOUNTS RECEIVABLE

Ferndale License of Prelude™ SkinPrep System — On May 27, 2009, the Company entered into a License Agreement with Ferndale pursuant to which the Company granted Ferndale a license in North America and the United Kingdom to develop, assemble, use, market, sell and export Prelude for skin preparation prior to the application of a topical analgesic or anesthetic cream for local dermal anesthesia or analgesia prior to a needle insertion or IV procedure (the “Ferndale License”). The Ferndale License has a minimum term of 10 years from the date of the first commercial sale of Prelude product components in North America or the United Kingdom.

The Company received a licensing fee of $750,000 upon execution of the Ferndale License. In addition, the Company will receive a payment of $750,000 within ninety (90) days after receipt of the FDA’s 510(k) medical device clearance of Prelude. Ferndale will pay the Company an escalating royalty on net sales of Prelude product components. The Company will also receive milestone payments based on Ferndale’s achievement of certain net sales targets of the product components, as well as guaranteed minimum annual royalties.

The Company recognizes the upfront, nonrefundable payments as revenue on a straight-line basis over the contractual or estimated performance period. Accordingly, the Company determined that approximately $105,000 and $404,000 of the non-refundable license revenue was recognizable in the years ended December 31, 2010 and 2009, respectively. Approximately $241,000 is recognizable over the next 12 months and is shown as current deferred revenue.

Other Revenue — The Company has retained contract engineering services in connection with product development pursuant to the Ferndale License and the Company is reimbursed by Ferndale for the cost of product development engineering services. Other Revenue of approximately $203,000 and $795,000 relates to product development costs incurred during the years ended December 31, 2010 and 2009, respectively, and received from Ferndale. The expenses billed to the Company are included in Research and Development expenses on the Statements of Operations. There was no markup on these expenses.

Handok License of Symphony™ tCGM System — On June 15, 2009, the Company entered into a License Agreement with Handok pursuant to which the Company granted Handok a license to develop, use, market, sell and import Symphony for continuous glucose monitoring for use by medical facilities and/or individual consumers in South Korea (the “Handok License”). The Handok License has a minimum term of 10 years from the date of the first commercial sale of Symphony in South Korea.

The Company received a licensing fee of approximately $500,000 upon execution of the Handok License. In addition, the Company will receive milestone payments upon receipt of the FDA’s clearance of Symphony and upon the first commercial sale of Symphony in South Korea. Handok will also pay the Company a royalty on net sales of Symphony. The Company also will receive milestone payments based on Handok’s achievement of certain other targets.

The Company recognizes the upfront, nonrefundable payments as revenue on a straight-line basis over the contractual or estimated performance period. Accordingly, the Company determined that approximately $121,000 and $133,000 of the non-refundable license revenue was recognizable in the years ended December 31, 2010 and 2009, respectively. Approximately $164,000 is recognizable over the next 12 months and is shown as current deferred revenue.  The approximately $82,000 that remains is recognizable as revenue beyond the 12 month period and is classified as non-current.

 (14) SUBSEQUENT EVENTS

November 2010 Common Stock and Warrant Financing

Subsequent to December 31, 2010, the Company entered into a Subscription Agreement with certain strategic institutional and accredited investors in connection with the November 2010 Financing for a total of 35.66Units.  The Company received proceeds from these subscriptions in the amount of $891,500.   The Company received proceeds of $25,000 in the form of extinguishment of a 2010 Short Term Promissory Note issued by the Company on September 24, 2010 (see Note 5), which included principal and interest

F- 27

Pursuant to the November 2010 Financing closings that occurred after December 31, 2010, the Company issued an aggregate of 445,750 Series-1 Warrants and 445,750 Series-2 Warrants to the investors.

In addition, the Company issued an additional 11.40 Units related to the Stock Subscriptions Receivable of $285,000 at December 31, 2010.

8% Senior Promissory Note

On January 5, 2011, the Company issued an 8% Senior Promissory Note to Platinum Montaur Life Sciences, LLC (“Montaur”) in the amount of $1,000,000.  The outstanding principal balance of this Note, together with all accrued and unpaid interest, was due and payable in full on February 1, 2011 and later extended to February 8, 2011 by agreement of the parties (see below).

Series D Convertible Preferred Stock Purchase

On February 8, 2011 the Company entered into a Series D Convertible Preferred Stock Purchase Agreement (the “Series D Agreement”) dated as of February 7, 2011 with Montaur and certain other strategic accredited investors (each, an “Investor” and collectively, the “Investors”) in connection with the Company’s private placement (the “Series D Financing”) of Series D Convertible Preferred Stock (“Series D Stock”) at a price per share of $1.00. For every $100,000 face value of Series D Stock purchased in the Series D Financing, the Investor was issued (i) Series 1 warrants to purchase 50,000 shares of Common Stock with an exercise price of $1.50 per share (the “Series 1 Warrants”), and (ii) Series 2 warrants to purchase 50,000 shares of Common Stock with an exercise price of $2.50 per share (the “Series 2 Warrants” and, together with the Series 1 Warrants, the “Warrants”).

On February 8, 2011, there was a closing in connection with the Series D Agreement and the Company received cash proceeds of $2,500,000 for the purchase of 2,500,000 shares of Series D Stock. The Company issued 1,006,000 shares of Series D Stock in exchange for the extinguishment of an 8% Senior Promissory Note issued by the Company on January 5, 2011 in the principal amount of $1,000,000, plus interest accrued through February 8, 2011 in the amount of $6,000. The Company intends to use the net proceeds of the Series D Financing primarily for working capital and general corporate purposes.

The Company issued an aggregate of 1,753,000 Series 1 Warrants and 1,753,000 Series 2 Warrants to the Investors pursuant to the Agreement.  The Warrants are immediately exercisable and expire on February 7, 2013; however, if the Warrants are not exercised in full by February 7, 2013 by virtue of the application of a beneficial ownership blocker (described below), then the term of the Warrants shall be extended for thirty (30) days past the date on which the beneficial ownership blocker is no longer applicable. The exercise price is subject to adjustment for stock splits, business combinations or similar events.  An exercise under the Warrants may not result in the holder beneficially owning more than 4.99% or 9.99%, as applicable, of all of the Common Stock outstanding at the time; provided, however, that a holder may waive the foregoing provision upon sixty-one (61) days’ advance written notice to the Company.

Pursuant to the Certificate of Designation, Preferences and Rights of Series D Convertible Preferred Stock, the shares of Series D Stock are initially convertible into shares of Common Stock at a price per share equal to $1.00, subject to adjustment for stock splits, business combinations or similar events, and shall have a liquidation preference equal to their stated value.  Each holder who receives Series D Stock may convert it at any time following its issuance.   The Series D Stock does not pay a dividend and is not redeemable.

In accordance with (i) the Certificate of Designation, Rights and Preferences of the Series B Stock and (ii) a letter agreement dated January 19, 2010 between the Company and the sole holder of the Company’s Series B Perpetual Preferred Stock, the Company was obligated to use 25% of the gross proceeds from the Series D Financing to redeem Series B Stock. On February 4, 2011, the Company entered into a letter agreement (the “Letter”) with the sole holder of the Company’s Series B Perpetual Preferred Stock pursuant to which the Series B share holder waived the redemption of shares of the Company’s Series B Perpetual Preferred Stock triggered by the Series D Financing.

Appointment of New Directors

On February 8, 2011, the Board of Directors (the “Board”) of the Company appointed William F. Grieco and James F. Smith as members of the Board.   The Company granted each Director 20,000 restricted shares of Common Stock with a combined fair value of approximately $136,000. One-quarter of the stock shall vest each year for the next four years on the anniversary date of their appointment to the Board.

F- 28

Exercise of Common Stock Warrants

Subsequent to December 31, 2010, various investors chose to exercise their warrants to purchase shares of the Company’s common stock.  During 2011 and through March 16, 2011, the Company issued 388,338 shares of common stock upon exercise of warrants to purchase 799,914 shares through a cashless exercise provision and warrants to purchase 230,048 shares were exercised for cash providing gross proceeds to us of $465,279.

Common Stock Issued for Services

Subsequent to December 31, 2010, the Company issued 60,000 shares of common stock with a fair value of $173,000 to a vendor for investor relations services.  Expenses associated with this transaction will be included in selling, general and administrative expenses in 2011.

Grant of Restricted Stock

During 2011 and through March 16, 2011, the Company granted an aggregate of 575,000 restricted shares of the Company’s Common Stock and stock options to purchase 450,000 shares of common stock to certain employees, officers and directors of the Company.  The grants were issued under the 2008 Equity Compensation Plan. The stock options had an exercise price equal to the market price on day of grant.  The fair value of the restricted stock grants was approximately $1,962,000.

The restricted share grants are subject to the terms and conditions of the Restricted Stock Agreements, the restricted shares will vest upon the first to occur of (i) FDA approval of Symphony; or (ii) the sale of all or substantially all of the assets of the Company or all or substantially all of the outstanding capital stock of the Company in exchange for Liquid Proceeds. For the purposes of the Restricted Share Grants, “Liquid Proceeds” means (a) cash; (b) securities which can be sold immediately on NYSE or NASDAQ; (c) securities which are or will be registered such that they can be sold upon on NYSE or NASDAQ upon termination of a lock-up period not to exceed one hundred eighty (180) days; or (d) or a combination of cash and the foregoing securities. The Restricted Share Grants were effected under Section 4(2) of the Securities Act.  Compensation expense related to the Restricted Share Grants will be recognized when the Company concludes that achievement of the performance vesting conditions is probable.

Facilities Lease

  As of March 9, 2011, the Company entered into a lease for approximately 5,400 square feet of corporate office space in a single facility located in Philadelphia, Pennsylvania. The lease is for a period through April 30, 2014 with a monthly lease obligation of approximately $10,000.

F- 29

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

We have carried out an evaluation, under the supervision and the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2010. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of that period, our disclosure controls and procedures are effective in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (b) such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Control over Financial Reporting

We evaluate the effectiveness of our internal control over financial reporting in order to comply with Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires us to evaluate annually the effectiveness of our internal controls over financial reporting as of the end of each fiscal year, and to include a management report assessing the effectiveness of our internal control over financial reporting in all annual reports. We have not made any changes in our internal control over financial reporting during our fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

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

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

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

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework.

Following our assessment, management has concluded that, as of December 31, 2010, our internal control over financial reporting is effective based on those criteria.

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

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.

Incorporated by reference to the portions of our Definitive Proxy Statement entitled “Election of Directors,” “Directors and Executive Officers,” “The Board of Directors and its Committees,” “Audit Committee Financial Expert” and “Section 16(a) Beneficial Ownership Reporting Compliance.”

33

We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees, including our principal executive officer and principal financial officer. A copy of our Code of Business Conduct and Ethics is posted on our website at www.echotx.com.

ITEM 11. EXECUTIVE COMPENSATION.

Incorporated by reference to the portions of our Definitive Proxy Statement entitled “Executive Compensation,” “Outstanding Equity Awards at Fiscal Year-End”, “Compensation Committee Interlocks and Insider Participation”, “Compensation Committee Report”, and “Director Compensation.”

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Incorporated by reference to the portion of our Definitive Proxy Statement entitled “Securities Ownership of Certain Beneficial Owners and Management,” “Executive Compensation,” and Equity Compensation Plans.”

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Incorporated by reference to the portions of our Definitive Proxy Statement entitled “Certain Relationships and Related Transaction,” “Independence of Members of Board of Directors” and “The Board of Directors and its Committees.”

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

Incorporated by reference to the portions of our Definitive Proxy Statement entitled “Independent Registered Public Accounting Firm” and “Audit Committee Policy on Pre-Approval of Services of Independent Registered Public Accounting Firm.”

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

The Exhibits listed in the Exhibit Index immediately preceding such Exhibits are filed with or incorporated by reference in this report.

34

SIGNATURES

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

ECHO THERAPEUTICS, INC.
By:	/s/ Patrick T. Mooney
Name:	Patrick T. Mooney, M.D.
Title:	President and Chief Executive Officer

Date: March 18, 2011

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 18, 2011.

By:	/s/ Patrick T. Mooney	By:	/s/ Shawn K. Singh
Name:	Patrick T. Mooney, M.D.	Name:	Shawn K. Singh, J.D.
Title:	President, Chief Executive Officer and	Title:	Director
	Chairman of the Board
	(Principal Executive Officer)

By:	/s/ Harry G. Mitchell	By:	/s/ Vincent D. Enright
Name:	Harry G. Mitchell	Name:	Vincent D. Enright
Title:	Chief Operating Officer,	Title:	Director
	Chief Financial Officer and Treasurer
	(Principal Financial Officer and Principal
	Accounting Officer)

By:	/s/ James F. Smith	By:	/s/ William F. Grieco
Name:	James F. Smith	Name:	William F. Grieco
Title:	Director	Title:	Director

35

EXHIBIT INDEX

Exhibit Number	Description of Document
3.1	Certificate of Incorporation of the Registrant is incorporated herein by reference to Exhibit 3.1 of the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2009.
3.2	Certificate of Designation, Rights and Preferences of Series B Preferred Stock is incorporated herein by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K dated July 7, 2009.
3.3	Certificate of Designation, Rights and Preferences of Series C Preferred Stock is incorporated herein by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K dated June 29, 2009.
3.4	Certificate of Designation, Rights and Preferences of Series D Preferred Stock is incorporated herein by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K dated February 8, 2011.
3.5	Bylaws of the Registrant is incorporated herein by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K dated June 9, 2008.
10.1*	1997 Long-Term Incentive and Stock Option Plan, as amended, is incorporated herein by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-QSB for the period ended June 30, 2002.
10.2*	1999 Stock Option and Incentive Plan is incorporated herein by reference to Exhibit 10.31 of the Registrant’s Registration Statement on Form S-4 filed on April 24, 2002.
10.3	Lease Agreement between the Registrant and Forge Park Investors LLC dated January 24, 2003 is incorporated herein by reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
10.4*	2003 Stock Option and Incentive Plan, as amended, is incorporated herein by reference to Appendix I of the Registrant’s Definitive Schedule 14A filed on April 17, 2007.
10.5*	Form of Restricted Stock Agreement for use under the Registrant’s 2003 Stock Option and Incentive Plan is incorporated herein by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K dated August 14, 2006.
10.6	Common Stock and Warrant Purchase Agreement dated as of January 2, 2007 by and among the Registrant, Sherbrooke Partners, LLC and the purchasers named therein is incorporated herein by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K dated January 1, 2007.
10.7	Form of Warrant to Purchase Shares of Common Stock is incorporated herein by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K dated January 1, 2007.
10.8	Form of Warrant to Purchase Shares of Common Stock is incorporated herein by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K dated June 15, 2007.
10.9*	Employment Agreement by and between the Registrant and Patrick T. Mooney dated as of September 14, 2007 is incorporated herein by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K dated September 14, 2007 (including Nonqualified Stock Option Agreement).
10.10*	Employment Agreement by and between the Registrant and Harry G. Mitchell dated as of September 14, 2007 is incorporated herein by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K dated September 14, 2007 (including Nonqualified Stock Option Agreement).
10.11	Form of Warrant to Purchase Shares of Common Stock is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-QSB for the period ended September 30, 2007.
10.12*	Form of Nonqualified Stock Option Agreement is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December 22, 2007.
10.13	First Amendment to Lease dated February 11, 2008 by and between the Registrant and CRP-2 Forge, LLC, as successor in interest to Forge Park Investors LLC, is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated March 13, 2008.
10.14	Form of Warrant is incorporated herein by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K dated February 11, 2008.
10.15	Form of Warrant is incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated March 24, 2008.

36

Exhibit Number	Description of Document
10.16*	Nonqualified Stock Option Agreement by and between the Registrant and Vincent D. Enright dated as of March 25, 2008 is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated March 25, 2008.
10.17*	2008 Equity Incentive Plan is incorporated herein by reference to Appendix B to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on April 30, 2009.
10.18	Form of Restricted Stock Agreement is incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated May 20, 2008.
10.19	Form of Warrant to Purchase Common Stock is incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated September 30, 2008.
10.20	Form of Warrant to Purchase Common Stock is incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated October 28, 2008.
10.21	Letter agreement between the Registrant and Imperium Master Fund, Ltd. dated March 23, 2009 is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated March 23, 2009.
10.22	Amended and Restated Stock and Warrant Purchase Agreement by and among the Company and the Investors named therein, dated as of April 2, 2009, is incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated April 14, 2009.
10.23	Form of Warrant to Purchase Common Stock is incorporated herein by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K dated April 14, 2009.
10.24	Letter agreement between the Company and Imperium Master Fund, Ltd. dated April 23, 2009 is incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 24, 2009.
10.25	Amended and Restated Stock and Warrant Purchase Agreement by and among the Company and the Investors named therein, dated as of April 2, 2009, is incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated April 14, 2009.
10.26	Letter agreement between the Company and Imperium Master Fund, Ltd. dated April 23, 2009 is incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 24, 2009.
10.27	License Agreement between the Company and Ferndale Pharma Group, Inc. dated as of May 27, 2009 is incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 27, 2009.
10.28	License Agreement between the Company and Handok Pharmaceuticals Co., Ltd. dated as of June 15, 2009 is incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 15, 2009.
10.29	Form of Exchange Agreement between the Company and Series A Holders, Series A-1 Holders and Series A-2 Holders dated June 29, 2009 is incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 29, 2009.
10.30	Stock Purchase Agreement by and between the Company and Platinum dated as of June 30, 2009 is incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated July 7, 2009.
10.31	Common Stock and Warrant Purchase Agreement by and among the Company and the Investors named therein, dated as of November 13, 2009, is incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated November 17, 2009.
10.32	Form of Common Stock Purchase Warrant incorporated herein by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K dated November 17, 2009.
10.33	Common Stock and Warrant Purchase Agreement by and among the Company and the Investors named therein, dated as of November 30, 2009 is incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated November 30, 2009.
10.34	Form of Warrant to Purchase Common Stock incorporated herein by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K dated November 30, 2009.
10.35	Common Stock and Warrant Purchase Agreement by and among the Company and the Investors named therein, dated as of February 4, 2010 is incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 4, 2010.

37

Exhibit Number	Description of Document
10.36	Form of Warrant to Purchase Common Stock incorporated herein by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K dated February 4, 2010.
10.37	Subscription Agreement by and among the Company and the Investors named therein, dated as of November 4, 2010, is incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated November 10, 2010.
10.38	Form of Series-1 Common Stock Purchase Warrant is incorporated herein by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K dated November 10, 2010.
10.39	8% Senior Promissory Note issued by the Company to Montaur on January 5, 2011 is incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated January 5, 2011.
10.40	Term Sheet for Series D Convertible Preferred Stock and Warrants by and between the Company and Montaur dated as of January 5, 2011 is incorporated herein by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K dated January 5, 2011.
10.41	Series D Convertible Preferred Stock Purchase Agreement by and among the Company and the Investors named therein dated as of February 7, 2011 is incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated February 8, 2011.
10.42	Form of Series 1 Common Stock Purchase Warrant is incorporated herein by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K dated February 8, 2011.
10.43	Office Lease between the Company and 8 Penn Center Owner, L.P. dated as of March 9, 2011  **
21	Subsidiaries of the Registrant.
23	Consent of Wolf & Company, P.C.
31.1	Certification of the Chief Executive Officer and Chairman of the Board pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of 1934 as adopted under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Operating Officer, Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of 1934 as adopted under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer and Chairman of the Board pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Operating Officer, Chief Financial Officer and Treasurer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Management contract or compensatory plan or arrangement filed in response to Item 13 of Form 10-K.

** Exhibits have been omitted but will be provided to the Commission upon request.

38

EX-10.43

Exhibit 10.43

OFFICE LEASE

between

8 Penn Center Owner, L.P.

a Pennsylvania Limited Partnership

(Landlord)

and

Echo Therapeutics, Inc., a Delaware Corporation,

(Tenant)

Echo Therapeutics, a Delaware Corporation

OFFICE LEASE

8 Penn Center

1628 JFK Boulevard

Philadelphia, Pennsylvania 19103

THIS OFFICE LEASE ("Lease"), dated March 9, 2011, is made and entered into by and between 8 Penn Center Owner, L.P., a Pennsylvania Limited Partnership ("Landlord") and Echo Therapeutics, Inc., a Delaware Corporation ("Tenant") upon the following terms and conditions:

ARTICLE I - DEFINITIONS

Unless the context otherwise specifies or requires, the follow­ing terms shall have the meanings specified herein;

1.01.          Building.  The term "Building" shall mean that certain office building located at 8 Penn Center, in Philadelphia, Pennsylvania, commonly known as 8 Penn Center together with all related land, improvements, parking facilities, common areas, driveways, sidewalks and landscaping.

1.02           Premises.  The term "Premises" shall mean that certain space known as Suite 300 on the third (3rd) floor in the Building, as more particularly outlined on the drawing attached hereto as Exhibit A and incorporated herein by reference.  As used herein, "Premises" shall not include any storage area in the Building, which shall be leased or rented pursuant to separate agreement.

1.03           Rentable Area of the Premises.  The term "Rentable Area of the Premises" shall mean approximately 5,436 square feet, which Landlord and Tenant have stipulated as the Rentable Area of the Premises.

1.04           Lease Term.  The term "Lease Term" shall mean the period between the Commencement Date and the Expiration Date (as such terms are hereinafter defined), unless sooner terminated or renewed as otherwise provided in this Lease.

1.05           Commencement Date.  Subject to adjustment as provided in Article 3, the term "Occupancy Date" shall mean the later of April 15, 2011 or substantial completion of the tenant improvements hereinafter set forth. The Rent Commencement Date shall mean the later of April 15, 2011 or substantial completion of the tenant improvements hereinafter set forth.

1.06           Expiration Date.  The term "Expiration Date" shall mean April 30, 2014.

1.07           Base Rent.  Subject to adjustment as provided in Article 4, the term "Base Rent" shall be as follows:

Period	Rate		SF		Annual		Monthly
Commencement Date – 4/30/2012	$	21.50		5436	$	116,874.00	$	9,739.50	*
5/1/2012 – 4/30/2013	$	22.00		5436	$	119,592.00	$	9,966.00
5/1/2013 – 4/30/2014	$	22.50		5436	$	122,310.00	$	10,192.50

*Provided no Event of Default has occurred and is then continuing under any of the terms and provisions of this Lease, the first (1st) full months Base Rent shall be abated.

All payable on the first day of each and every month during the Lease Term. Subject to Section 4.02, the Base Rent constitutes the full rent except for electricity charges which Tenant shall pay its sub-metered share, any late fees or charges and any additional rent which may be due pursuant to the terms of this Lease. During the Lease Term, Tenant shall be responsible for all electric consumption with the Premises.

1.08           Tenant's Percentage Share.  The term "Tenant's Percen­tage Share" for Property Taxes (as such term is hereinafter defined) shall mean 2.30% with respect to increases in Property Taxes.  The term "Tenant's Percentage Share for Operating Expenses" (as such term is hereinafter defined) shall mean 2.30% with respect to increases in Operating Expenses and with respect to Tenant's law compliance obligations under Section 7.02(C) of this Lease.  Tenant's Percentage Share for Property Taxes and Tenant's Percentage Share for Operating Expenses are sometimes referred to together as "Tenant's Percentage Shares".

1.09           Security Deposit.  The term "Security Deposit" shall mean $9,739.50 representing one (1) months of Base Rent and is to be paid to Landlord upon the execution of this Lease.

1.10           Tenant's Permitted Use.  The term "Tenant's Permitted Use" shall mean the Premises are to be used and occupied by Tenant solely for office purposes and for no other purpose or use without the prior written consent of Landlord.

1.11           Business Hours.  The term "Business Hours" shall mean the hours of 8:00 A.M. to 6:00 P.M., Monday through Friday, and 8:00 A.M. to 1:00 P.M., Saturdays (federal and state holidays excepted).

1.12           Landlord's Address For Notices.  The term "Landlord's Address for Notices" shall mean ASI Management, 100 South Broad Street, Suite 1300, Philadelphia, PA 19910 Attn: Property Manager, with a copy to:  Philip B. Trost, Esq., 330 West 42nd Street – Suite 1700, New York, NY 10036.

1.13           Tenant's Address For Notices.  The term "Tenant's Address for Notices" shall mean 8 Penn Center, 1628 JFK Boulevard – Suite 300, Philadelphia, PA 19103.

1.14           Brokers. The term "Broker" shall mean MS Fox Real Estate Group.

1.15           Guarantors.   None

ARTICLE II - PREMISES

2.01           Lease of Premises.  Landlord hereby leases the Premises to Tenant, and Tenant hereby leases the Premises from Landlord, upon all of the terms, covenants and conditions contained in this Lease. Landlord shall at its sole cost and expense subject to its building standard furnish and install the improvements outlined on the plan by Partridge Architects marked as Exhibit “B” attached hereto and made a part hereof.

2.02           Acceptance of Premises.  Tenant acknowledges that Land­lord has not made any representation or warranty with respect to the condition of the Premises or the Building or with respect to the suitability or fitness of either for the conduct of Tenant's Permitted Use or for any other purpose. Subject to Landlord’s completion of the work referred to in Section 2.01 above and except as to latent defects, if any, Tenant accepts the Premises in its “as-is” condition.

ARTICLE III - TERM

3.01           Except as otherwise provided in this Lease, the Lease Term shall be for the period described in Section 1.04 of this Lease, commencing on the Commencement Date described in Section 1.05 of this Lease and ending on the Expiration Date described in Section 1.06 of this Lease; provided, however, that, if, for any reason, Landlord is unable to deliver possession of the Premises on the date described in Section 1.05 of this Lease, Landlord shall not be liable for any damage caused thereby, nor shall the Lease be void or void­able, but, rather, the Lease Term shall commence upon, and the Commencement Date shall be, the date that possession of the Premises is so tendered to Tenant (except for Tenant-caused delays which shall not be deemed to delay commence­ment of the Lease Term), and the Expiration Date described in Sec­tion 1.06 of this Lease shall be extended by an equal number of days.  Notwithstanding anything contained herein to the contrary, in the event that Landlord is unable to deliver possession of the Premises on or before May 31, 2011, Tenant shall have the right to terminate this Lease by providing Landlord with written notice of such termination after May 31, 2011 and prior to Landlord’s delivery of possession of the Premises to Tenant.

ARTICLE IV - RENTAL

4.01           Definitions.  As used herein,

   (A)           "Base Year" shall mean calendar year 2011.

   (B)           "Property Taxes" shall mean all payments and related expenses paid or incurred by Landlord with respect to taxes or assessments affecting the Building or the Premises, including with­out limitation, any form of real property tax, assessment, rapid transit tax or assessment, benefit assessment, business or license fee or tax, commercial rental tax, assessment for Center City District services, and any tax or similar imposi­tion in substitution for any of the foregoing imposed by any govern­mental or quasi-governmental authority, including but not limited to any increases in any such tax as a result of any sale, transfer, financing, refinancing or exchange of the Building, or any part thereof, and any reasonable attorneys' fees, accounting and appraisal fees and other costs incurred in connection with any proceedings to contest or deter­mine any taxes or assessments. There shall be excluded from Property Taxes all income taxes, capital stock, inheritance, estate, gift or any other taxes imposed upon or measured by Landlord's gross income or profits unless the same shall be imposed in lieu of real estate taxes or other ad valorem taxes.

   (C)           "Operating Expenses" shall mean all costs, fees, disbursements and expenses paid or incurred by or on behalf of Landlord in the operation, ownership, maintenance, insurance, management, replacement and repair of the Building (excluding Property Taxes) including without limitation:

   (i)           Premiums for property, casualty, liability, rent interruption or other types of insurance carried by Landlord.

   (ii)           Salaries, wages and other amounts paid or payable for personnel including the Building manager, super­inten­dent, operation and maintenance staff, and other employees of Land­lord involved in the maintenance and operation of the Building, includ­ing contributions and premiums towards fringe benefits, unemploy­ment, disability and worker's compensation insurance, pen­sion plan contributions and similar premiums and contributions and the total charges of any independent contractors or property man­agers engaged in the operation, repair, care, maintenance and clean­ing of any portion of the Building.

   (iii)           Cleaning expenses, including without limi­ta­tion janitorial services, window cleaning, and garbage and refuse removal.

   (iv)           Landscaping expenses, including without limitation irrigating, trimming, mowing, fertil­iz­ing, seeding, and replacing plants.

   (v)           Heating, ventilating, air conditioning and steam/utilities expenses, including fuel, gas, electricity, water, sewer, tele­phone, and other services.

   (vi)           Subject to the provisions of Sec­tion 4.01(C)(xii) below, the cost of maintaining, operating, repair­ing and replacing components of equipment or machinery, including without limi­tation heating, refrigeration, ventilation, electrical, plumbing, mechanical, elevator, escalator, sprinklers, fire/life safety, security and energy management systems, including service contracts, maintenance contracts, supplies and parts.

   (vii)           Other items of repair or maintenance of elements of the Building.

   (viii)           The costs of polic­ing, security and supervision of the Building.

   (ix)           Fair market rental and other costs with respect to the manage­ment office for the Building.

   (x)           The cost of the rental of any machinery or equipment and the cost of supplies used in the maintenance and operation of the Building.

   (xi)           Audit fees and the cost of accounting services incurred in the prepara­tion of statements referred to in this Lease and financial state­ments, and in the computation of the rents and charges payable by tenants of the Building.

   (xii)           The costs of improvements, repairs, or replace­ments to the Building or the equipment or machinery used in connection with the Building if the capital improvement is made after the date of this Lease and is intended to reduce Operating Expenses; provided, however, any such costs which are prop­erly charged to a capital account shall not be included in Oper­ating Expenses in a single year but shall instead be amortized over their useful lives, as determined by the Landlord in accordance with generally accepted accounting principles, and only the annual amortization amount shall be included in the Operat­ing Expenses for a particular year.

   (xiii)           Legal fees and expenses, including, but not limited to, such expenses that relate to seeking or obtaining reductions in or refunds of Property Taxes, or components thereof.

   (xiv)           A fee for the administration and management of the Building appropriate to the first class nature of the Building as reasonably determined by the Landlord from time to time.

Operating Expenses shall not include costs of alteration of the premises of tenants of the Building, depreciation charges, interest and principal payments on mortgages, ground rental payments, real estate brokerage and leasing commissions, expenses incurred in enforcing obligations of tenants of the Building, salaries and other compensation of executive officers of the managing agent of the Building senior to the Building manager, costs of any special service provided to any one tenant of the Building but not to tenants of the Building generally, and costs of marketing or advertising the Building.

If the Building does not have ninety-five percent (95%) occupancy during an entire calendar year, including the Base Year, then the variable cost component of "Property Taxes" and "Operating Expenses" shall be equitably adjusted so that the total amount of Property Taxes and Operating Expenses equals the total amount which would have been paid or incurred by Landlord had the Building been ninety-five percent (95%) occupied for the entire calendar year.  In no event shall Landlord be entitled to receive from Tenant and any other tenants in the Building an aggregate amount in excess of actual Operating Expenses as a result of the foregoing provision.

4.02           Base Rent.  During the Lease Term, Tenant shall pay to Landlord as rental for the Premises the Base Rent described in Sec­tion 1.07 above, subject to the following adjustments (herein called the "Rent Adjustments"):

   (A)                 During each calendar year subsequent to the Base Year, the Base Rent payable by Tenant to Landlord shall be increased by (collectively, the "Tax and Operating Expense Adjustment"):  (i) Tenant's Percentage Share for Property Taxes of the total dollar increase, if any, in Property Taxes paid or incurred by Landlord during such year over Property Taxes for the Base Year; and (ii) Tenant's Percentage Share for Operating Expenses of the total dollar increase, if any, in Operating Expenses paid or incurred by Landlord during such year over Operating Expenses paid or incurred by Landlord during the Base Year.

4.03           Adjustment Procedure; Estimates.  The Tax and Operating Expense Adjustment specified in Section 4.02(A) shall be determined and paid as follows:

   (A)          During each calendar year subsequent to the Base Year, Landlord shall give Tenant written notice of its estimate of any increased amounts payable under Section 4.02(A) for that calen­dar year.  On or before the first day of each calendar month during the calendar year, Tenant shall pay to Landlord one-twelfth (1/l2th) of such estimated amounts; provided, however, that, not more often than quarterly, Landlord may, by written notice to Tenant, revise its estimate for such year, and subsequent payments by Tenant for such year shall be based upon such revised estimate.

   (B)           Within ninety (90) days after the close of each calendar year or as soon thereafter as is practicable, Landlord shall deliver to Tenant a statement of that year's Property Taxes and Operating Expenses, and the actual Tax and Operating Expense Adjustment to be made pursu­ant to Section 4.02(A) for such calendar year, as determined by Landlord (the "Land­lord's Statement") and such Landlord's Statement shall be binding upon Landlord and Tenant, except as provided in Section 4.04 below.  If the amount of the actual Tax and Operating Expense Adjustment is more than the estimated payments for such calendar year made by Tenant, Tenant shall pay the deficiency to Landlord upon receipt of Landlord's Statement.  If the amount of the actual Tax and Operating Expense Adjustment is less than the estimated payments for such calendar year made by Tenant, any excess shall be credited against Rent (as hereinafter defined) next payable by Tenant under this Lease or, if the Lease Term has expired, any excess shall be paid to Tenant.  No delay in providing the statement described in this subpara­graph (B) shall act as a waiver of Landlord's right to payment under Section 4.02(A) above.

   (C)           If this Lease shall terminate on a day other than the end of a calendar year, the amount of the Tax and Operating Expense Adjustment to be paid pursuant to Section 4.02(A) that is applicable to the calen­dar year in which such termination occurs shall be prorated on the basis that the number of days from January 1 of the calendar year to the termination date bears to 365.  The termination of this Lease shall not affect the obligations of Landlord and Tenant pur­su­ant to Section 4.03(B) to be performed after such termination.

4.04           Review of Landlord's Statement.  Provided that Tenant is not then in default beyond any applicable cure period of its obligations to pay Base Rent, additional rent described in Section 4.02(A), or any other payments required to be made by it under this Lease and provided further that Tenant strictly complies with the provisions of this Section 4.04, Tenant shall have the right, once each calendar year, to reasonably review supporting data for any portion of a Landlord's Statement (provided, however, Tenant may not have an audit right to all documentation relating to Building operations as this would far exceed the relevant information necessary to properly document a pass-through billing statement, but real estate tax statements, and information on utilities, repairs, maintenance and insurance will be available), in accordance with the following procedure:

   (A)           Tenant shall, within ten (10) business days after any such Landlord's Statement is delivered, deliver a written notice to Landlord specifying the portions of the Landlord's State­ment that are claimed to be incorrect, and Tenant shall simul­tane­ously pay to Landlord all amounts due from Tenant to Landlord as specified in the Landlord's Statement.  Except as expressly set forth in subsection (C) below, in no event shall Tenant be entitled to withhold, deduct, or offset any monetary obligation of Tenant to Landlord under the Lease (including without limitation, Tenant's obligation to make all payments of Base Rent and all payments of Tenant's Tax and Operating Expense Adjustment) pending the completion of and regardless of the results of any review of records under this Section 4.04.  The right of Tenantunder this Section 4.04 may only be exercised once for any Landlord's Statement, and if Tenant fails to meet any of the above conditions as a prerequisite to the exercise of such right, the right of Tenant under this Section 4.04 for a particular Land­lord's Statement shall be deemed waived.

   (B)           Tenant acknowledges that Landlord maintains its records for the Building at Landlord's manager's corporate offices, presently located at the address set forth in Section 1.12, and Tenant agrees that any review of records under this Section 4.04 shall be at the sole expense of Tenant and shall be conducted by an independent firm of certified public accountants of national standing.  Tenant acknowledges and agrees that any records reviewed under this Section 4.04 constitute confidential information of Landlord, which shall not be disclosed to anyone other than the accountants performing the review and the principals of Tenant who receive the results of the review.  The disclosure of such information to any other per­son, whether or not caused by the conduct of Tenant, shall consti­tute a material breach of this Lease.

   (C)           Any errors disclosed by the review  shall be promptly corrected by Landlord, provided, however, that if Landlord disagrees with any such claimed errors, Landlord shall have the right to cause another review to be made by an independent firm of certified public accountants of national standing.  In the event of a disagreement between the two accounting firms, the review that discloses the least amount of deviation from the Landlord's State­ment shall be deemed to be correct.  In the event that the results of the review of records (taking into account, if applicable, the results of any additional review caused by Landlord) reveal that Tenant has overpaid obligations for a preceding period, the amount of such overpayment shall be credited against Tenant's subsequent installment obligations to pay the estimated Tax and Operating Expense Adjustment.  In the event that such results show that Tenant has underpaid its obligations for a preceding period, Tenant shall be liable for Landlord's actual accounting fees, and the amount of such underpayment shall be paid by Tenant to Landlord with the next succeeding installment obligation of estimated Tax and Operating Expense Adjustment.

4.05           Payment.  On the Commencement Date, Tenant shall pay Landlord Base Rent for any partial calendar month of the Lease Term that begins on the Commencement Date and ends on the last day of the calendar month in which the Commencement Date occurs.  Thereafter the Base Rent described in Section 1.07, as adjusted in accordance with Section 4.02, shall be payable in advance on the first day of each calendar month, subject to the one (1) month rent abatement provided for in Section 1.07.  If the Commencement Date is other than the first day of a calendar month, the prepaid Base Rent for such partial month shall be prorated in the pro­portion that the number of days this Lease is in effect during such partial month bears to the total number of days in the calen­dar month.  All Rent, and all other amounts payable to Landlord by Tenant pursuant to the provisions of this Lease, shall be paid to Landlord, without notice, demand, abatement, deduction or off­set, in lawful money of the United States at Landlord's office in the Building or to such other person or at such other place as Land­lord may designate from time to time by written notice given to Tenant.  No payment by Tenant or receipt by Landlord of a lesser amount than the correct Rent due hereunder shall be deemed to be other than a payment on account; nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed to effect or evidence an accord and satisfaction; and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance or pursue any other remedy in this Lease or at law or in equity provided.

4.06           Late Charge; Interest.  Tenant acknowledges that the late payment of Base Rent or any other amounts payable by Tenant to Land­lord hereunder (all of which shall constitute additional rental to the same extent as Base Rent) will cause Landlord to incur admin­istrative costs and other damages, the exact amount of which would be impracticable or extremely difficult to ascertain.  Land­lord and Tenant agree that if Landlord does not receive any such payment on or before ten (10) days after the date the payment is due, Tenant shall pay to Landlord, as additional rent, (a) a late charge equal to five percent (5%) of the overdue amount to cover such additional administrative costs; and (b) interest on the delinquent amounts at the lesser of the maximum rate permitted by law if any or twelve percent (12%) per annum from the date due to the date paid.

4.07           Additional Rental.  For purposes of this Lease, all amounts payable by Tenant to Landlord pursuant to this Lease, whether or not denominated as such, shall constitute additional rental hereunder.  Such additional rental, together with the Base Rent and Rent Adjustments, shall sometimes be referred to in this Lease as "Rent".

ARTICLE V - ADDITIONAL TAXES

5.01           In addition to the Base Rent and other charges to be paid by Tenant hereunder, Tenant shall reimburse Landlord upon demand for any and all taxes payable by or imposed upon Landlord upon or with respect to:  any fixtures or personal property located in the Premises; any leasehold improvements made in or to the Premises by or for Tenant; the Rent payable here­under, including, without limitation, any gross receipts tax, license fee or excise tax levied by any governmental authority; the posses­sion, leasing, operation, management, maintenance, alteration, repair, use or occupancy of any portion of the Premises (including without limitation any applicable possessory interest taxes); or this transaction or any document to which Tenant is a party creat­ing or transferring an interest or an estate in the Premises. If applicable to Tenant, Tenant agrees to pay Landlord, as additional rent, hereunder, within 15 days after demand therefor, the Philadelphia Business Use and Occupancy tax applicable to the Premises. In the event that Tenant fails to make such payment within such period, and penalties, costs, interest or charges shall have accrued on such unpaid amount, then, without limitation of any other remedies which may be available to Landlord under this Lease or at law or in equity, Tenant shall be obligated to pay to Landlord any penalties, costs, interest and charges incurred by Landlord or by reason of Tenant's failure to pay or remit such tax.

ARTICLE VI - SECURITY DEPOSIT

6.01           Upon the execution of this Lease, Tenant shall deposit with Landlord the Security Deposit described in Section 1.09 above.  The Security Deposit is made by Tenant to secure the faithful per­for­mance of all the terms, covenants and conditions of this Lease to be performed by Tenant.  If Tenant shall default with respect to any covenant or provision hereof, Landlord may use, apply or retain all or any portion of the Security Deposit to cure such default or to compensate Landlord for any loss or damage which Landlord may suffer thereby.  If Landlord so uses or applies all or any portion of the Security Deposit, Tenant shall immediately upon written demand deposit cash with Landlord in an amount sufficient to restore the Security Deposit to the full amount hereinabove stated.  Landlord shall not be required to keep the Security Deposit sepa­rate from its general accounts and Tenant shall not be entitled to interest on the Security Deposit.  Within thirty (30) days after the expiration of the Lease Term and the vacation of the Premises by Tenant, the Security Deposit, or such part as has not been applied to cure the default, shall be returned to Tenant.

ARTICLE VII - USE OF PREMISES

7.01           Tenant's Permitted Use.  Tenant shall use the Premises only for Tenant's Permitted Use as set forth in Section 1.09 above and shall not use or permit the Premises to be used for any other purpose without the prior written consent of Landlord.  Tenant shall, at its sole cost and expense, obtain all governmental licenses and permits required to allow Tenant to conduct Tenant's Permitted Use.  Landlord disclaims any warranty that the Premises are suitable for Tenant's use and Tenant acknowledges that it has had a full opportunity to make its own determination in this regard.

7.02           Compliance With Laws and Other Requirements.

   (A)           Landlord shall, at its own expense, deliver the Premises to Tenant in full and complete compliance with all Applicable Laws (hereinafter defined) in effect as of the Commencement Date and applicable to the Premises or Tenant’s Permitted Use thereof.  Thereafter, Tenant shall cause the Premises to comply in all material respects with all laws, ordinances, regulations and directives of any governmental authority having jurisdiction including without limitation any certificate of occupancy and any law, ordinance, regulation, covenant, condition or restriction affecting the Building or the Premises which in the future may become applicable to the Premises (collectively "Applicable Laws").") pertaining to Tenant’s use and occupancy of the Premises or regarding the physical condition of the Premises but only to the extent that such Applicable Laws pertain to the Premises on account of the particular manner in which Tenant conducts its business on the Premises.

   (B)           Tenant shall not use the Premises, or permit the Premises to be used, in any manner which: (a) violates any Applicable Law; (b) causes or is reasonably likely to cause damage to the Building or the Premises; (c) violates a requirement or condition of any fire and extended insurance policy covering the Building and/or the Premises, or increases the cost of such policy; (d) constitutes or is reasonably likely to constitute a nuisance, annoyance or inconvenience to other tenants or occupants of the Building or its equipment, facilities or systems; (e) interferes with, or is reasonably likely to interfere with, the transmission or reception of microwave, television, radio, telephone, or other communication signals by antennae or other facilities located in the Building; or (f) violates the Rules and Regulations described in Article XX.

   (C)           In addition to any other amounts payable by Tenant to Landlord hereunder, Tenant shall pay to Landlord, as and when billed to Tenant and as additional rent, Tenant's Percentage Share of the cost of any improvements, capital expenditures, repairs, or replacements to the Building, or any equipment or machinery used in connection with Building, if any such item is required under any Applicable Law which was not applicable to the Building at the time the Building was constructed; provided, however, that any such costs which are properly charged to a capital account shall not be payable in a single year but shall instead be amortized over their useful lives, as determined by the Landlord in accordance with generally acceptable accounting principles, and only the annual amortization amount (prorated based on the number of days of the Lease term in the calendar year) shall be payable by the Tenant with respect to any calendar year.

7.03            Hazardous Materials.

   (A)           No Hazardous Materials, as defined herein, shall be Handled, as also defined herein, upon, about, above or beneath the Premises or any portion of the Building by or on behalf of Tenant, its subtenants or its assignees, or their respective contractors, clients, officers, directors, employees, agents, or invitees.  Any such Hazardous Materials so Handled shall be known as Tenant's Hazardous Materials.  Notwithstanding the foregoing, normal quantities of those Hazardous Materials customarily used in the conduct of general administrative and executive office activities (e.g., copier fluids and cleaning supplies) may be used and stored at the Premises without Landlord's prior written consent, but only in compliance with all applicable Environmental Laws, as defined herein and with the highest prevailing industry standards.

   (B)           Notwithstanding the obligation of Tenant to indemnify Landlord pursuant to this Lease, Tenant shall, at its sole cost and expense, promptly take all actions required by any federal, state or local governmental agency or political subdivision, or necessary for Landlord to make full economic use of the Premises or any portion of the Building, which requirements or necessity arises from the Handling of Tenant's Hazardous Materials upon, about, above or beneath the Premises or any portion of the Building.  Such actions shall include, but not be limited to, the investigation of the environmental condition of the Premises or any portion of the Building, the preparation of any feasibility studies or reports and the performance of any cleanup, remedial, removal or restoration work.  Tenant shall take all actions necessary to restore the Premises or any portion of the Building to the condition existing prior to the introduction of Tenant's Hazardous Materials, notwithstanding any less stringent standards or remediation allowable under applicable Environmental Laws.  Tenant shall nevertheless obtain Landlord's written approval prior to undertaking any actions required by this Section, which approval shall not be unreasonably withheld so long as such actions would not potentially have a material adverse long-term or short-term effect on the Premises or any portion of the Building.

   (C)           "Environmental Laws" means and includes all now and hereafter existing statutes, laws, ordinances, codes, regulations, rules, rulings, orders, decrees, directives, policies and requirements by any federal, state or local governmental authority regulating, relating to, or imposing liability or standards of conduct concerning public health and safety or the environment.

   (D)           "Hazardous Materials" means:  (a) any material or substance:   (i) which is defined or becomes defined as a "hazardous substance", "hazardous waste," "infectious waste," "chemical mixture or substance," or "air pollutant" under Environmental Laws; (ii) containing petroleum, crude oil or any fraction thereof; (iii) containing polychlorinated biphenyls (PCB's); (iv) containing asbestos; (v) which is radioactive; (vi) which is infectious; or (b) any other material or substance displaying toxic, reactive, ignitable or corrosive characteristics, as all such terms are used in their broadest sense, and are defined, or become defined by Environmental Laws; or materials which cause a nuisance upon or waste to the Premises or any portion of the Building.

   (E)           "Handle," "Handled," or "Handling" shall mean any installation, handling, generation, storage, treatment, use, disposal, discharge, release, manufacture, refinement, presence, migration, emission, abatement, removal, transportation, or any other activity of any type in connection with or involving Hazardous Materials.

ARTICLE VIII - UTILITIES AND SERVICES

8.01           Building Services.  As long as Tenant is not in default under this Lease, Landlord agrees to furnish or cause to be furnished to the Premises the following utilities and services, sub­ject to the conditions and standards set forth herein:

   (A)           Non-attended automatic elevator service for passengers on a twenty-four (24) hour basis and freight elevator service during Business Hours.  Such normal elevator service, passenger or freight, if furnished at other times shall be optional with Landlord and shall never be deemed a continuing obligation.  Furniture, freight and other large or heavy articles may be brought into the Building only at times and in the manner designated by Landlord and always at Tenant's sole responsibility.  Such objects shall be taken to or from the Premises by the freight elevator and Tenant shall pay for freight elevator service at rates established by the Landlord.  The Landlord, however, shall provide limited passenger elevator service daily at all times such normal passenger service is not furnished.

   (B)           During Business Hours, such air conditioning, heating and ventilation as, in Landlord's judgment, are required for the comfortable use and occupancy of the Premises; provided, however, that if Tenant shall require heating, ventilation or air conditioning in excess of that which Landlord shall be required to provide hereunder, Landlord may provide such additional heating, ventilation or air conditioning at such rates and upon such addi­tional conditions as shall be determined by Landlord from time to time.

   (C)           At all reasonable times, electric current as required for building standard lighting and fractional horsepower office machines; provided, however, that: (i) without Landlord's consent, Tenant shall not install, or permit the installation, in the Premises of any computers, word processors, electronic data processing equipment or other type of equipment or machines which will increase Tenant's use of electric current in excess of that which Landlord is obligated to provide hereunder (provided, how­ever, that the foregoing shall not preclude the use of personal computers or similar office equipment); (ii) if Tenant shall require electric current which may disrupt the provision of elec­trical service to other tenants, Landlord may refuse to grant its consent and (iii) if Tenant's increased elec­trical requirements will materially affect the temperature level in the Premises or the Building, Landlord's consent may be conditioned upon Tenant's requirement to pay such amounts as will be incurred by Landlord to install and operate any machinery or equipment neces­sary to restore the temperature level to that otherwise required to be provided by Landlord, including but not limited to the cost of modifications to the air conditioning system.  Tenant shall pay Landlord monthly for all electric current provided in connection with the Premises, as additional rent, the then prevailing rates (the General Services Commercial Rate or any successor rate) (and at the prevailing terms and classification which would be charged by the supplying public utility to Tenant for such electric current used), according to a meter installed by the Landlord at Tenant's expense measuring the supply.  Without being liable to Tenant therefor or abating or lessening any of Tenant's obligations hereunder, Landlord may discontinue the furnishing of electric current upon giving Tenant thirty (30) days' written notice of Landlord's intention so to do and Tenant shall thereupon have the right to make an individual contract with the public utility servicing the Building, for the furnishing of electric current at Tenant's expense, and shall have the right to use Landlord's wires and conduits then serving the Premises, if necessary, and to the extent then available, suitable, and safely capable therefor.  Landlord shall not be liable for the failure of any supply in the electric current not arising from Landlord's negligence.  Tenant shall purchase from Landlord all light bulbs, fluorescent tubes, ballasts, or starters used in the Premises.  Rigid conduit only will be allowed.  Landlord shall not, in any way be liable or responsible to Tenant for any loss or damage or expense which Tenant may incur or sustain if, for any reasons beyond Landlord's reasonable control, either the quantity or character of electric service is changed or is no longer available or suitable for Tenant's requirements.  Any riser or risers (and all other equipment proper or necessary in connection therewith) required after the commencement of the Lease Term to supply Tenant's electrical requirement will, upon Tenant's written request (and at its sole expense as additional rent), be installed by Landlord if, in Landlord's sole judgment, the same is necessary and will not cause permanent damage or injury to or adversely affect the appearance of the Building or Premises or create a dangerous or hazardous condition or entail excessive or unreasonable alterations, repairs, or expense or interfere with or disturb other tenants or occupants.  Tenant covenants that at all times its use of electric current shall never exceed the capacity of the feeders, risers or electrical installations of the Building.  If any tax be imposed upon Landlord's receipts from the sale or resale of electrical energy or gas or telephone service to Tenant by any governmental authority, Tenant covenants that, where permitted by law, Tenant's pro rata share of such taxes shall be paid by Tenant to Landlord.  If sub-metering of electricity in the Building will not be permitted under future laws or regulations, the Base Rent will then be equitably and periodically adjusted to include an additional payment to Landlord reflecting the cost to Landlord for furnishing electricity to Tenant in the Premises.

   (D)           Water for drinking and rest room purposes.

   (E)           Reasonable janitorial and cleaning services substantially as set forth on Exhibit "C" attached to this Lease, pro­vided that the Premises are used exclusively for office purposes and are kept reasonably in order by Tenant.  If the Premises are not used exclusively as offices, or if the Tenant elects and Land­lord consents, the Premises shall be kept clean and in order by Tenant, at Tenant's expense, to the satisfaction of Landlord and by persons approved by Landlord; and, in all events, Tenant shall pay to Landlord the cost of removal of Tenant's refuse and rubbish, to the extent that the same exceeds the refuse and rubbish attendant to normal office usage.

Any amounts which Tenant is required to pay to Landlord pur­su­ant to this Section 8.01 shall be payable upon demand by Landlord and shall constitute additional rent.

8.02            Interruption of Services.  Landlord shall not be liable for any failure to furnish, stoppage of, or interruption in fur­nish­ing any of the services or utilities described in Section 8.01, when such failure is caused by accident, breakage, repairs, strikes, lockouts, labor disputes, labor disturbances, governmental regulation, civil disturbances, acts of war, moratorium or other governmental action, or any other cause beyond Landlord's reasonable control, and, in such event, Tenant shall not be entitled to any damages nor shall any failure or interruption abate or suspend Tenant's obligation to pay Base Rent and additional rental required under this Lease or constitute or be construed as a constructive or other eviction of Tenant.  Further, in the event any governmental authority or public utility promulgates or revises any law, ordinance, rule or regulation, or issues mandatory con­trols or voluntary controls relating to the use or conservation of energy, water, gas, light or electricity, the reduction of auto­mo­bile or other emissions, or the provision of any other utility or service, Landlord may take any reasonably appropriate action to comply with such law, ordinance, rule, regulation, mandatory con­trol or voluntary guideline without affecting Tenant's obligations hereunder.  Tenant recognizes that any security services provided by Landlord at the Building are for the protection of Landlord's property and under no circumstances shall Landlord be responsible for, and Tenant waives any rights with respect to, providing security or other protection for Tenant or its employees, invitees or property in or about the Premises or the Building.

ARTICLE IX - MAINTENANCE AND REPAIRS

9.01           Landlord's Obligations.  Except as provided in Sec­tions 9.02 and 9.03 below, Landlord shall maintain the Building in reasonable order and repair throughout the Lease Term; provided, however, that Landlord shall not be liable for any failure to make any repairs or to perform any maintenance unless such failure shall persist for an unreasonable time after written notice of the need for such repairs or maintenance is given to Landlord by Tenant.  Except as provided in Article XII, there shall be no abatement of Rent, nor shall there be any liability of Landlord, by reason of any injury or inconvenience to, or interference with, Tenant's busi­ness or operations arising from the making of, or failure to make, any maintenance or repairs in or to any portion of the Bui­lding.

9.02           Tenant's Obligations.  During the Lease Term, Tenant shall, at its sole cost and expense, maintain the Premises in good order and repair.  Further, Tenant shall be responsible for, and upon demand by Landlord shall promptly reimburse Landlord for, any damage to any portion of the Building or the Premises caused by (a) Tenant's activities in the Building or the Premises; (b) the performance or existence of any alterations, additions or improve­ments made by Tenant in or to the Premises; (c) the installation, use, operation or movement of Tenant's property in or about the Building or the Premises; or (d) any act or omission by Tenant or its officers, partners, employees, agents, contractors or invitees.

9.03           Landlord's Rights.  Landlord and its contractors shall have the right, at all reasonable times, to enter upon the Premises to make any repairs to the Premises or the Building reasonably required or deemed reasonably necessary by Landlord and to erect such equipment, including scaffolding, as is reasonably necessary to effect such repairs.

ARTICLE X - ALTERATIONS, ADDITIONS AND IMPROVEMENTS

10.01          Landlord's Consent; Conditions.  Tenant shall not make or permit to be made any alterations, additions, or improvements in or to the Premises ("Alterations") without the prior written con­sent of Landlord.  Landlord may impose as a condition to such con­sent such requirements as Landlord in its sole discretion deems neces­sary or desirable including without limitation:  Tenant's sub­mis­sion to Landlord, for Landlord's prior written approval, of all plans and specifications relating to the Alterations; Landlord's prior written approval of the time or times when the Alterations are to be performed; Landlord's prior written approval of the con­trac­tors and subcontractors performing work in connection with the Alterations; Tenant's receipt of all necessary permits and approvals from all governmental authorities having jurisdiction over the Premises prior to the construction of the Alterations; Tenant's written notice of whether the Alterations include the Handling of any Hazardous Materials, pursuant to Section 7.03; Tenant's delivery to Landlord of such bonds and insurance as Landlord shall reasonably require; and Tenant's payment to Landlord of all costs and expenses incurred by Landlord because of Tenant's Alterations, including but not limited to costs incurred in reviewing the plans and specifica­tions for, and the progress of, the Alterations.

10.02          Performance of Alterations Work.  All work relating to the Alterations shall be performed in compliance with the plans and specifications approved by Landlord, all applicable laws, ordin­ances, rules, regulations and directives of all governmental auth­or­ities having jurisdiction and the requirements of all carriers of insurance on the Premises and the Building, the Board of Underwriters, Fire Rating Bureau, or similar organization.  All work shall be performed in a diligent, first class manner and so as not to unreasonably interfere with any other tenants or occupants of the Building.  All work shall be performed by reputable contractors and workmen who are members of or affiliated with AFL-CIO Union. All costs incurred by Landlord relating to the Alterations shall be payable to Landlord by Tenant as additional rent upon demand.

10.03          Liens.  Tenant shall pay when due all costs for work performed and materials supplied to the Premises.  Tenant shall keep Landlord, the Premises and the Building free from all liens, stop notices and violation notices relating to the Alterations or any other work performed for, materials furnished to or obligations incurred by Tenant and Tenant shall protect, indemnify, hold harm­less and defend Landlord, the Premises and the Building of and from any and all loss, cost, damage, liability and expense, including attorneys' fees, arising out of or related to any such liens or notices.  Further, Tenant shall give Landlord not less than seven (7) business days prior written notice before commencing any Alter­ations in or about the Premises to permit Landlord to post appro­pri­ate notices of non-responsibility.  Tenant shall also secure, prior to commencing any Alterations, at Tenant's sole expense, a completion and lien indemnity bond satisfactory to Landlord for such work.  During the progress of such work, Tenant shall, upon Landlord's request, furnish Landlord with sworn contractor's statements and lien waivers covering all work theretofore performed.  Tenant shall satisfy or other­wise discharge all liens, stop notices or other claims or encum­brances within ten (10) days after Landlord notifies Tenant in writing that any such lien, stop notice, claim or encumbrance has been filed.  If Tenant fails to pay and remove such lien, claim or encumbrance within such ten (10) days, Landlord, at its election, may pay and satisfy the same and in such event the sums so paid by Landlord, with interest from the date of payment at the rate set forth in Section 4.06 hereof for amounts owed Landlord by Tenant shall be deemed to be additional rent due and payable by Tenant at once without notice or demand.

10.04          Lease Termination.  Except as provided in this Sec­tion 10.04, upon expiration or earlier termination of this Lease Tenant shall surrender the Premises to Landlord in the same condition as when received, subject to reasonable wear and tear.  All Alterations shall become a part of the Premises and shall become the property of Landlord upon the expiration or earlier termination of this Lease, unless Landlord shall, by written notice given to Tenant, require Tenant to remove some or all of Tenant's Alterations, in which event Tenant shall promptly remove the designated Alterations and shall promptly repair any resulting damage, all at Tenant's sole expense.  All business and trade fixtures, machinery and equipment, furni­ture, movable partitions and items of personal property owned by Tenant or installed by Tenant at its expense in the Premises shall be and remain the property of Tenant; upon the expiration or earlier termination of this Lease, Tenant shall, at its sole expense, remove all such items and repair any damage to the Premises or the Building caused by such removal.  If Tenant fails to remove any such items or repair such damage promptly after the expiration or earlier termination of the Lease, Landlord may, but need not, do so with no liability to Tenant, and Tenant shall pay Landlord the cost thereof upon demand.

ARTICLE XI - INDEMNIFICATION AND INSURANCE

11.01          Indemnification.

   (A)           Tenant agrees to protect, indemnify, hold harmless and defend Landlord and any mortgagee or ground lessor, and each of their respective partners, directors, officers, agents and employees, successors and assigns (except to the extent of the losses described below are caused by the negligence or willful act or omission of Landlord, its agents, employees or contractors), from and against:

   (i)           any and all loss, cost, damage, liability or expense as incurred (including but not limited to reasonable attorneys' fees and legal costs) arising out of or related to any claim, suit or judgment brought by or in favor of any person or persons for damage, loss or expense due to, but not limited to, bodily injury, including death, or property damage sustained by such person or persons which arises out of, is occa­sioned by or is in any way attributable to the use or occupancy of the Premises by Tenant or the negligence or willful act or omission of Tenant or its agents, employees, contractors, clients, invitees or subten­ants except that caused by the gross negligence or willful act or omission of Landlord or its agents, employees or contractors.  Such loss or damage shall include, but not be limited to, any injury or damage to, or death of, Landlord's employees or agents or damage to the Premises or any portion of the Building.

   (ii)           any and all environmental damages which arise from:  (i) the Handling of any Tenant's Hazardous Materials, as defined in Section 7.03 or (ii) the breach of any of the provisions of this Lease.  For the purpose of this Lease, "environmental damages" shall mean (a) all claims, judgments, damages, penalties, fines, costs, liabilities, and losses (including without limitation, diminution in the value of the Premises or any portion of the Building, damages for the loss of or restriction on use of rentable or usable space or of any amenity of the Premises or any portion of the Building, and from any adverse impact of Landlord's marketing of space); (b) all reasonable sums paid for settlement of claims, reasonable attorneys' fees, consultants' fees and experts' fees; and (c) all costs incurred by Landlord in connection with investigation or remediation relating to the Handling of Tenant's Hazardous Materials, whether or not required by Environmental Laws, necessary for Landlord to make full economic use of the Premises or any portion of the Building, or otherwise required under this Lease.  To the extent that Landlord is held strictly liable by a court or other governmental agency of competent jurisdiction under any Environmental Laws, Tenant's obligation to Landlord and the other indemnities under the foregoing indemnification shall likewise be without regard to fault on Tenant's part with respect to the violation of any Environmental Law which results in liability to the indemnitee.  Tenant's obligations and liabilities pursuant to this Section 11.01 shall survive the expiration or earlier termination of this Lease.

   (B)           Landlord agrees to protect, indemnify, hold harmless and defend Tenant and its partners, directors, officers, agents and employees, successors and assigns from and against any and all loss, cost, damage, liability or expense as incurred, (including but not limited to reasonable attorneys' fees and legal costs) arising out of or related to any claim, suit or judgment brought by or in favor of any person or persons for damage, loss or expense due to, but not limited to, bodily injury, including death, or property damage sustained by such person or persons which arises out of, is occa­sioned by or is in any way attributable to the gross negligence or willful act or omission of Landlord or its agents, employees or contractors.

   (C)           Notwithstanding anything to the contrary contained herein, nothing shall be interpreted or used in any way affect, limit, reduce or abrogate any insurance coverage provided by any insurers to either Tenant or Landlord.

   (D)           Notwithstanding anything to the contrary contained in this Lease, nothing herein shall be construed to infer or imply that Tenant is a partner, joint venturer, agent, employee, or otherwise acting by or at the direction of Landlord.

11.02          Property Insurance.

(A)          At all times during the Lease Term, Tenant shall procure and maintain, at its sole expense, "all-risk" property insur­ance, in an amount not less than one hundred percent (100%) of the replacement cost covering (a) all leasehold improve­ments in and to the Premises which are made at the expense of Tenant; and (b) Tenant's trade fixtures, equipment and other per­sonal property from time to time situated in the Premises.  The proceeds of such insurance shall be used for the repair or replace­ment of the property so insured, except that if not so applied or if this Lease is terminated following a casualty, the proceeds applicable to the leasehold improvements shall be paid to Landlord and the proceeds applicable to Tenant's personal property shall be paid to Tenant.

   (B)          At all times during the Lease Term, Tenant shall procure and maintain business interruption insurance in such amount as will reimburse Tenant for direct or indirect loss of earnings attributable to all perils insured against in Section 11.02(A).

11.03          Liability Insurance.  At all times during the Lease Term, Tenant shall procure and maintain, at its sole expense, general liability insur­ance applying to the use and occupancy of the Premises and the busi­ness operated by Tenant.  Such insurance shall have a minimum combined single limit of liability of at least $1,000,000 per occur­rence and a general aggregate limit of at least $2,000,000.  All such policies shall be written to apply to all bodily injury, property damage, personal injury losses and shall be endorsed to include Landlord and its agents, beneficiaries, partners, employees, and any deed of trust holder or mortgagee of Landlord or any ground lessor as additional insureds.  Such liability insurance shall be written as primary policies, not excess or contributing with or secondary to any other insurance as may be available to the additional insureds.

   (B)           Prior to the sale, storage, use or giving away of alcoholic beverages on or from the Premises by Tenant or another person, Tenant, at its own expense, shall obtain a policy or policies of insurance issued by a responsible insurance company and in a form acceptable to Landlord saving harmless and protecting Landlord and the Premises against any and all damages, claims, liens, judgments, expenses and costs, including actual attorneys' fees, arising under any present or future law, statute, or ordinance of the State of Pennsylvania or other governmental authority having jurisdiction of the Premises, by reason of any storage, sale, use or giving away of alcoholic beverages on or from the Premises.  Such policy or policies of insurance shall have a minimum combined single limit of $1,000,000 per occurrence and shall apply to bodily injury, fatal or nonfatal; injury to means of support; and injury to property of any person.  Such policy or policies of insurance shall name the Landlord and its agents, beneficiaries, partners, employees and any mortgagee of Landlord or any ground lessor of Landlord as additional insureds.

11.04          Workers' Compensation Insurance.  At all times during the Lease Term, Tenant shall procure and maintain Workers' Compen­sa­tion Insurance in accordance with the laws of the Commonwealth of Pennsylvania, and Employer's Liability insurance with a limit not less than $1,000,000 Bodily Injury Each Accident; $1,000,000 Bodily Injury By Disease - Each Person; and $1,000,000 Bodily Injury to Disease - Policy Limit.

11.05          Policy Requirements.  All insurance required to be maintained by Tenant shall be issued by insurance companies auth­or­ized to do insurance business in the Commonwealth of Pennsylvania and rated not less than A-VII in Best's Insurance Guide.  A certificate of insurance (or, at Landlord's option, copies of the applicable policies) evidencing the insurance required under this Article XI shall be delivered to Landlord not less than thirty (30) days prior to the Commencement Date.  No such policy shall be subject to can­cella­tion or modification without thirty (30) days prior written notice to Landlord and to any deed of trust holder, mortgagee or ground lessor designated in writing (including a mailing address for such person) by Landlord to Tenant.  Tenant shall furnish Landlord with a replace­ment certificate with respect to any insurance not less than thirty (30) days prior to the expiration of the current policy.  Tenant shall have the right to provide the insurance required by this Article XI pursuant to blanket policies, but only if such blanket policies expressly provide coverage to the Premises and the Landlord as required by this Lease.

11.06          Waiver of Subrogation.  Each party hereby waives any right of recovery against the other for injury or loss due to haz­ards covered by insurance, to the extent of the injury or loss covered thereby.  Any policy of insurance to be provided by Tenant pursuant to this Article XI shall contain a clause denying the applicable insurer any right of subrogation against the other party.

11.07          Failure to Insure.  If Tenant fails to maintain any insur­ance which Tenant is required to maintain pursuant to this Article XI, Tenant shall be liable to Landlord for any loss or cost resulting from such failure to maintain.  Landlord shall have the right, in its sole discretion, to procure and maintain such insurance which Tenant is required to maintain hereunder and the cost thereof shall be deemed additional rental due and payable by Tenant.  Tenant may not self-insure against any risks required to be covered by insurance with­out Landlord's prior written consent.

ARTICLE XII - DAMAGE OR DESTRUCTION

12.01          Total Destruction.  Except as provided in Section 12.03 below, this Lease shall automatically terminate if the Premises are totally destroyed.

12.02          Partial Destruction of Premises.  If the Premises are damaged by any casualty and, in Landlord's opinion, the Premises (exclusive of any Alterations made to the Premises by Tenant) can be restored to its pre-existing condition within one hundred eighty (180) days after the date of the damage or destruction, Landlord shall, upon written notice from Tenant to Landlord of such damage, except as provided in Section 12.03, promptly and with due diligence repair any damage to the Premises (exclusive of any Alterations to the Premises made by Tenant, which shall be promptly repaired by Tenant at its sole expense) and, until such repairs are completed, the Rent shall be abated from the date of damage or destruction in the same proportion that the rent­able area of the portion of the Premises which is unusable by Tenant in the conduct of its business bears to the total rentable area of the Premises.  If such repairs cannot, in Landlord's opin­ion, be made within said one hundred eighty (180) day period, then Landlord may, at its option, exercisable by written notice given to Tenant within thirty (30) days after the date of the damage or destruction, elect to make the repairs within a reasonable time after the damage or des­truc­tion, in which event this Lease shall remain in full force and effect but the Rent shall be abated as provided in the preceding sentence; if Landlord does not so elect to make the repairs, then either Landlord or Tenant shall have the right, by written notice given to the other within sixty (60) days after the date of the dam­age or destruction, to terminate this Lease as of the date of the damage or destruction.

12.03          Exceptions to Landlord's Obligations.  Notwithstanding anything to the contrary contained in this Article XII, Landlord shall have no obligation to repair the Premises if either: (a) the Building in which the Premises are located is so damaged as to require repairs to the Building exceeding twenty percent (20%) of the full insurable value of the Building; or (b) Landlord elects to demolish the Building in which the Premises are located; or (c) the damage or destruction occurs less than two (2) years prior to the Termination Date, exclusive of option periods.  Further, Ten­ant's Rent shall not be abated if either (i) the damage or destruc­tion is repaired within five (5) business days after Landlord receives writ­ten notice from Tenant of the casualty, or (ii) Tenant, or any officers, partners, employees, agents or invitees of Tenant, or any assignee or subtenant of Tenant, is, in whole or in part, respon­sible for the damage or destruction.  If Landlord elects not to repair the Premises pursuant to this Section 12.03, then Landlord shall give Tenant written notice of such election within thirty (30) days after the date of the damage or destruction, and Tenant shall have the right, by written notice given to Landlord within thirty (30) days after Tenant’s receipt of Landlord’s election not to repair, to terminate this Lease as of the date of the damage or destruction.

12.04          Waiver.  The provisions contained in this Lease shall supersede any contrary laws now or hereafter in effect relating to damage or destruction.

ARTICLE XIII - CONDEMNATION

13.01          Taking.  If the entire Premises or so much of the Prem­ises as to render the balance unusable by Tenant shall be taken by condemnation, sale in lieu of condemnation or in any other manner for any public or quasi-public purpose (collectively "Condemna­tion"), this Lease shall terminate on the date that title or pos­ses­sion to the Premises is taken by the condemning authority, which­ever is earlier.

13.02          Award.  In the event of any Condemnation, the entire award for such taking shall belong to Landlord, except that Tenant shall be entitled to independently pursue a separate award relating to the loss of, or damage to, Tenant's personal property and trade fix­tures and Tenant's relocation costs directly associated with the tak­ing.  Tenant shall have no claim against Landlord or the award for the value of any un-expired term of this Lease or otherwise.

13.03          Temporary Taking.  Except as specifically set forth herein, no temporary taking of the Premises shall terminate this Lease or entitle Tenant to any abatement of the Rent payable to Landlord under this Lease; provided, further, that any award for such temporary taking shall belong to Tenant to the extent that the award applies to any time period during the Lease Term and to Landlord to the extent that the award applies to any time period outside the Lease Term.  Notwithstanding anything contained herein to the contrary, if such temporary taking continues for a period in excess of one hundred eighty (180) days, then Tenant shall have the right, by written notice given to Landlord within thirty (30) days after a determination is made that the temporary taking will exceed the one hundred eighty (180) day period, to terminate this Lease as of the date of the temporary taking.

ARTICLE XIV - RELOCATION

14.01          Relocation.  Landlord shall have the right, at its option upon not less than sixty (60) days prior written notice to Tenant, to relocate Tenant and to substitute for the Premises des­cribed above other space in the Building containing at least as much rentable area as the Premises and otherwise comparable to the Premises, described in Section 1.02 above.  If Tenant is already in occupancy of the Premises, then Land­lord shall also reimburse Tenant for Tenant's reasonable moving and telephone relocation expenses and for reasonable quantities of new stationery upon submission to Landlord of receipts for such expenditures incurred by Tenant.

ARTICLE XV - ASSIGNMENT AND SUBLETTING

15.01          Restriction.  Without the prior written consent of Landlord which consent shall not be unreasonably withheld or delayed, Tenant shall not, either voluntarily or by operation of law, assign, encumber, or otherwise transfer this Lease or any interest herein, or sublet the Premises or any part thereof, or permit the Premises to be occupied by anyone other than Tenant or Tenant's employees.  An assignment, subletting or other action in violation of the foregoing shall be void and, at Landlord's option, shall constitute a material breach of this Lease.  Notwithstanding anything to the contrary herein, any restrictions in this Lease for subletting or assignment shall not apply to a transfer of all of the stock or substantially all of the assets of Tenant provided that such transfer is to a transferee, which has a net worth equal to or greater than Tenant.

15.02          Notice to Landlord.  If Tenant desires to assign this Lease or any interest herein, or to sublet all or any part of the Premises, then at least twenty (20) business days prior to the effective date of the proposed assignment or subletting, Tenant shall submit to Landlord in connection with Tenant's request for Landlord's consent:

    (A)         A statement containing (i) the name and address of the proposed assignee or subtenant; (ii) such financial information with respect to the proposed assignee or subtenant as Landlord shall reasonably require; (iii) the type of use proposed for the Premises; and (iv) all of the principal terms of the proposed assignment or subletting; and

    (B)          Four (4) originals of the assignment or sublease on a form approved by Landlord and four (4) originals of the Landlord's Consent to Sublease or Assignment and Assumption of Lease and Consent.

15.03          Intentionally Deleted.

15.04          Landlord's Consent; Standards.  Landlord's consent shall not be unreasonably withheld; but, in addition to any other grounds for denial, Landlord's consent shall be deemed reasonably withheld if, in Landlord's good faith judgment:  (i) the proposed assignee or subtenant does not have the financial strength to perform its obligations under this Lease or any proposed sublease; (ii) the business and operations of the proposed assignee or subtenant are not of comparable quality to the business and operations being conducted by other tenants in the Building; (iii) the proposed assignee or subtenant intends to use any part of the Premises for a purpose not permitted under this Lease; (iv) either the proposed assignee or subtenant, or any person which directly or indirectly controls, is controlled by, or is under common control with the proposed assignee or subtenant occupies space in the Building, or is negotiating with Landlord to lease space in the Building; (v) the proposed assignee or subtenant is disreputable; or (vi) the use of the Premises or the Building by the proposed assignee or subtenant would, in Landlord's reasonable judgment, significantly increase the pedestrian traffic in and out of the Building or would require any alterations to the Building to comply with applicable laws.

15.05          Additional Rent.  If Landlord consents to any such assignment or subletting, all sums or other economic consideration received by Tenant in connection with such assignment or subletting, whether denominated as rental or otherwise, which exceeds, in the aggregate, the total sum which Tenant is obligated to pay Landlord under this Lease (prorated to reflect obligations allocable to less than all of the Premises under a sublease) shall be paid to Landlord as additional rent under the Lease without affecting or reducing any other obligation of Tenant hereunder.

15.06          Landlord's Costs.  If Tenant shall assign this Lease or shall sublet all or any part of the Premises or shall request the consent of Landlord to any assignment, subletting or other act, Tenant shall pay to Landlord as additional rent Landlord's costs related thereto, including Landlord's reasonable attorneys' fees and a minimum fee to Landlord of Five Hundred Dollars ($500.00).

15.07          Continuing Liability of Tenant.  Notwithstanding any assignment or sublease, Tenant shall remain as fully and primarily liable for the payment of Rent and for the performance of all other obligations of Tenant contained in this Lease to the same extent as if the assignment or sublease had not occurred; provided, however, that any act or omission of any assignee or subtenant, other than Landlord, that violates the terms of this Lease shall be deemed a violation of this Lease by Tenant.

15.08          Non-Waiver.  The consent by Landlord to any assignment or subletting shall not relieve Tenant, or any person claiming through or by Tenant, of the obligation to obtain the consent of Landlord, pursuant to this Article XV, to any further assignment or subletting.  In the event of an assignment or subletting, Landlord may collect rent from the assignee or the subtenant without waiving any rights hereunder and collection of the rent from a person other than Tenant shall not be deemed a waiver of any of Landlord's rights under this Article XV, an acceptance of assignee or subtenant as Tenant, or a release of Tenant from the performance of Tenant's obligations under this Lease.

ARTICLE XVI - DEFAULT AND REMEDIES

16.01          Events of Default By Tenant.  The occurrence of any of the following shall constitute an "Event of Default" and breach of this Lease by Tenant:

   (A)          The failure or refusal by Tenant to pay any installment of the Base Rent hereby reserved or other sum of money payable hereunder or under any other agreement between Landlord and Tenant when due and such failure or refusal shall continue for five (5) days after written notice from  Landlord.

   (B)           The abandonment of the Premises by Tenant or the vacation of the Premises by Tenant for thirty (30) consecutive days (without the payment of Rent).

   (C)           The failure by Tenant to observe or perform any other provision of this Lease to be observed or performed by Ten­ant, other than those described in Sections 16.01(A) and 16.01(B) above, if such failure continues for ten (10) days after written notice thereof by Landlord to Tenant; provided, however, that if the nature of the default is such that it cannot be cured within the ten (10) day period, no default shall exist if Tenant commences the curing of the default within the ten (10) day period and there­after diligently prosecutes the same to completion.  The ten (10) day notice described herein shall be in lieu of, and not in addition to, any notice required under any law now or hereafter in effect requiring that notice of default be given prior to the commencement of an unlawful detainer or other legal proceeding.

   (D)           The making by Tenant of any general assignment for the benefit of creditors, the filing by or against Tenant of a peti­tion under any federal or state bankruptcy or insolvency laws (unless, in the case of a petition filed against Tenant, the same is dismissed within thirty (30) days after filing); the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets at the Premises or Tenant's interest in this Lease or the Premises, when possession is not restored to Tenant within thirty (30) days; or the attachment, execution or other seizure of substantially all of Tenant's assets located at the Premises or Tenant's interest in this Lease or the Premises, if such seizure is not discharged within thirty (30) days.

16.02          Payment of Balance Due.  If there shall occur an Event of Default in Section 16.01 above, then and in that event:

   (A)          The whole Rent for the balance of the Lease Term, as hereinafter computed, or any part thereof at the option of the Landlord, shall immediately without notice, become due and payable as if by the terms of this Lease the same were payable in advance; and

   (B)           Landlord may immediately proceed to distrain, collect or bring action for the whole Rent or such part thereof as aforesaid, as being Rent in arrears; or may enter judgment thereof as herein elsewhere provided for in case of Rent in arrears; or may file a Proof of Claim in any bankruptcy or insolvency proceeding for such Rent; or Landlord may institute any other proceedings, whether similar to the foregoing or not, to enforce payment thereof.

16.03          Computation of Accelerated Rent.  Rent for each year for the balance of the Lease Term after the occurrence of any Event of Default for the purpose of computing the Rent reserved hereunder for the un-expired portion of the Lease Term under Section 16.02 hereof shall be computed as equal to the yearly average of the Base Rent and additional rent payable by Tenant for the last three (3) full calendar years immediately preceding said Event of Default.  If three (3) full calendar years have not preceded the occurrence of said Event of Default, then the annual average of Base Rent and additional rent payable by Tenant theretofore required to be paid by Tenant shall be used in the computation of the annual Rent.

16.04          Repossession of Premises.  As long as the whole Rent or any part thereof as aforesaid remains unpaid, then Landlord may at any time thereafter re-enter and repossess the Premises and any part thereof and attempt to relet all or any parts of the Premises for the account of Tenant for and upon such terms and to such persons, firms or corporations and for such period or periods as Landlord, in its sole discretion, shall determine, including a term beyond the termination of this Lease.  Landlord shall not be required to accept any tenant offered by Tenant; or observe any instruction given by Tenant about such reletting; or do any act or exercise any care or diligence with respect to such reletting or the mitigation of damages.  For the purpose of such reletting,  Landlord may decorate or make repairs, changes, alterations, or additions in or to the Premises to the extent deemed by Landlord to be desirable or convenient; and the costs of such decoration, repairs, changes, alterations or additions shall be charged to and be payable by Tenant as additional rent hereunder, as well as any reasonable brokerage and legal fees expended by Landlord.  Any sums collected by Landlord from any new tenant obtained on account of the Tenant shall be credited against the balance of the Rent due hereunder as aforesaid.

16.05          Termination of Lease.  At any time after any Event of Default shall occur, Landlord, at its option, may serve notice upon Tenant that this Lease and the Lease Term hereof shall cease and expire and become absolutely void on the date specified in such notice, to be not less than five (5) days after the date of such notice; and thereupon, and at the expiration of the time limited in such notice, this Lease and the Lease Term, as well as all of the right, title and interest of the Tenant hereunder, shall wholly cease and expire and become void in the same manner and with the  same force and effect (except as to Tenant's liability) as if the date fixed in such notice were the date herein specified for expiration of the Lease Term.  Thereupon, Tenant shall immediately quit and surrender to Landlord the Premises, and Landlord may enter into and repossess the Premises by summary proceedings, detainer, ejectment or otherwise, and remove all occupants thereof and, at Landlord's option, any property thereon without being liable to indictment, prosecution or damage therefor.

16.06          Liquidated Damages.  In the event of termination of this Lease pursuant to the provisions of Section 16.05 above, Tenant shall pay to Landlord all Base Rent and additional rent which are due and unpaid to the date of termination, together with liquidated damages in an amount equal to twenty-five percent (25%) of the balance of the Base Rent, additional rent, and other charges required to be paid under this Lease from the date of said termination to the end of the Lease Term (if the same had not been terminated), the said Rent for the balance of the Lease Term and other charges to be computed in the same manner as provided in Section 16.03 above.  In the event any judgment has been entered against Tenant for any amount in excess of the total amount required to be paid by Tenant to Landlord hereunder, then the damages assessed under said judgment shall be re-assessed and a credit granted to the extent of such excess.  The parties hereto have agreed to the liquidated damages as provided herein in order to avoid extended litigation in the event of default by Tenant and termination of this lease.

16.07          Re-entry by Landlord.  Upon the occurrence of any Event of Default, then Landlord or any person acting under Landlord:

   (A)          May enter the Premises and without further demand, proceed by distress and sale of the goods there found to be credited against the Rent and all other charges herein payable as Rent, and all costs and officers' commissions, including storage costs and watchmen's wages.  In such case, all costs, officers' commissions and other charges shall immediately attach and become part of the claim of Landlord for Rent and any tender of Rent without said costs made after the issue of warrant of distress shall not be sufficient to satisfy the claim of Landlord.  Tenant hereby expressly waives the benefit of all laws now made or that may hereafter be made regarding and limitation in which distress is to be made after removal of goods.  Tenant waives in favor of Landlord all rights under the Pennsylvania Landlord and Tenant Act of 1951 and all supplements and amendments thereto that have been or may hereafter be passed (the "Act"), and authorizes the sale of any goods distrained upon for Rent at any time after (5) days from said distraint without any appraisement and/or condemnation thereof; and/or

   (B)          May re-enter and repossess the Premises, breaking open locked doors, if necessary, and may use as much force as necessary to effect the manner thereof, and Landlord shall not be liable for any injury to the Premises caused thereby, nor shall Landlord be liable for the loss of any property upon the Premises.

16.08          Waivers of Notice.  If proceedings shall be commenced by Landlord to recover possession under the Acts of Assembly, either at the end of the Lease Term or upon occurrence of any Event of Default, Tenant expressly waives all right to notice in excess of five (5) days required by the Act, and agrees that in either or any such case, five (5) days notice shall be sufficient.  Without limitation of or by the foregoing, the Tenant hereby waives any and all demand, notices of intention and notices of action or proceedings which may be required by law to be given or taken prior to any entry or re-entry by summary proceedings, ejectment or otherwise, by Landlord, except as hereinbefore expressly provided with respect to the five (5) days notice; and provided further that this shall not be construed as a waiver by Tenant of any notices to which this Lease expressly provides that Tenant is entitled.

16.09          Waiver of Recovery by Tenant.  In the event of a termination of this Lease, prior to the date of expiration herein originally fixed, whether by reason of service of a notice as provided herein terminating this Lease, or by reason of entry or re-entry, summary proceedings, ejectment or other operation of law, Tenant hereby waives all right to recover or regain possession of the Premises, to save forfeiture by payment of Rent due or by other performance of the conditions, terms or provisions hereof, if such termination occurred by reason of any failure in performance hereof.  Without limitation of or by the foregoing, Tenant waives all right to reinstate or redeem this Lease, notwithstanding any provisions of any statute, law or decision now or hereafter in force or effect.  Tenant further waives all right to any second or further trial in summary proceedings, ejectment or in any other action provided by any statute or decision now or hereafter in force of effect.

16.10          Entry and Re-entry Defined.  The words "entry" and "re-entry" as used in this Lease shall not be deemed restricted to their technical legal meaning.

16.11          Breach by Tenant/Right of Landlord to Injunction.  In the event of a breach or threatened breach by Tenant of any of the agreements, conditions, covenants or terms hereof, Landlord shall have the right of injunction to restrain the same, and the right to invoke any remedy allowed by law or in equity, whether or not other remedies, indemnity or reimbursements are herein provided.  The rights and remedies given to Landlord in this Lease are distinct, separate and cumulative remedies, and no one of them, whether or not exercised by Landlord, shall be deemed to be the exclusion of any of the others.

16.12          Intentionally Deleted.

16.13          Confession of Judgment/Ejectment.  In the event that, and when this Lease shall be determined by term, covenant, limitation or condition broken, as aforesaid, during the Lease Term, and also when and as soon as the Lease Term hereby created shall have expired, it shall be lawful for any attorney, as attorney for Tenant to confess judgment in ejectment in any competent court against Tenant and all persons claiming under Tenant for the recovery by Landlord of possession of the Premises, without any liability on the part of the said attorney, for which this Lease shall be a sufficient warrant; whereupon, if Landlord so desires, a writ of possession with clauses for costs may issue forthwith with or without any prior writ or proceeding whatsoever.  If for any reason after such action has been commenced, the same shall be determined and the possession of the Premises remains in or is restored to Tenant, the Landlord shall have the right in the event of any subsequent default or defaults to confess judgment in ejectment against Tenant in the manner and form hereinbefore set forth, to recover possession of the Premises for such subsequent default.  No such determination of this Lease nor recovering possession of the Premises shall deprive Landlord of any remedies or action against Tenant for Rent or for damages due or to become due for the breach of any condition or covenant; nor the resort to any waiver of the right to insist upon the forfeiture, and to obtain possession in the manner provided herein.

16.14          Affidavit Required.  In any action of ejectment or for Rent in arrears, Landlord shall first cause to be filed in such action an affidavit made by it or someone acting for it setting forth the facts necessary to authorize the entry of judgment of which facts such affidavit shall be conclusive evidence; and if a true copy of this Lease is filed in such action, it shall not be necessary to file the original as a warrant of attorney, any rule of court, custom or practice to the contrary notwithstanding.

16.15          Judgment Final.  Any judgment, order or decree entered against Tenant by or in any court or Magistrate by virtue of the powers of attorney contained in this Lease, or otherwise, shall be final; and Tenant will not take an appeal, certiorari, writ of error, exception or objection to same; or file a motion or rule to strike off or open or to stay execution of the same.  Tenant releases to Landlord and to any and all attorneys who may appear for Tenant, all errors in the said proceedings.  Tenant expressly waives the benefits of laws, now or hereafter in force, exempting any goods on the Premises, or elsewhere, from distraint, levy or sale in any legal proceeding taken by the Landlord to enforce any rights under this Lease.

16.16          Tenant Waiver of Writ of Replevin.  Tenant waives the right to issue a Writ of Replevin under the Pennsylvania Rules of Civil Procedure, under the laws of the Commonwealth of Pennsylvania, or under any law previously enacted and now in force or which hereinafter may be enacted, for the recovery of any articles of any nature whatsoever seized under a distress for Rent, or levy upon an execution for Rent, liquidated damages or otherwise.  Tenant waives the right to delay execution on any real estate levied upon to collect any amount which may become due under the terms and conditions of this Lease, and authorizes the prothonotary to enter a Writ of Execution or other process upon Tenant's voluntary waiver, and further agrees that the said real estate may be sold on a Writ of Execution or other process.

16.17          Landlord's Remedies Cumulative.  All Remedies provided to Landlord herein shall be cumulative.

16.18          Default by Landlord.  Landlord's failure to perform or observe any of its obligations under this Lease shall constitute a default by Landlord under this Lease only if such failure shall continue for period of thirty (30) days (or the additional time, if any, that is reasonably necessary to promptly and diligently to cure the failure) after Landlord receives written notice from Tenant specifying the default.  The notice shall give in reasonable detail the nature and extent of the failure and shall identify the Lease provision(s) containing the obligation(s).  If Landlord shall default in the performance of any of its obligations under this Lease (after notice and opportunity to cure as provided herein), Tenant may pursue any remedies available to it under law and this Lease.

16.19          Default Under Other Leases.  If the term of any lease, other than this Lease, heretofore or hereafter made by Tenant for any space in the Building shall be terminated or terminable after the making of this Lease because of any default by Tenant under such other lease, such fact shall empower Landlord, at Landlord's sole option, to terminate this Lease by notice to Tenant or to exercise any of the rights or remedies set forth in this Article XVI.

ARTICLE XVII - ATTORNEYS FEES: COSTS OF SUIT

17.01          Attorneys Fees.  If either Landlord or Tenant shall commence any action or other proceeding against the other arising out of, or relating to, this Lease or the Premises, the prevailing party shall be entitled to recover from the losing party, in addi­tion to any other relief, its actual attorneys fees irrespective of whether or not the action or other proceeding is prosecuted to judg­ment and irrespective of any court schedule of reasonable attorneys' fees.  In addition, Tenant shall reimburse Landlord, upon demand, for all reasonable attorneys' fees incurred in collecting Rent or otherwise seeking enforcement against Tenant, its sublessees and assigns, of Tenant's obligations under this Lease.

17.02          Indemnification.  Should Landlord be made a party to any litigation instituted by Tenant against a party other than Landlord, or by a third party against Tenant, Tenant shall indem­nify, hold harmless and defend Landlord from any and all loss, cost, liability, damage or expense incurred by Landlord, including attorneys' fees, in connection with the litigation.

ARTICLE XVIII - SUBORDINATION AND ATTORNMENT

18.01          Subordination.  This Lease, and the rights of Tenant here­under, are and shall be subordinate to the interests of (i) all present and future ground leases and master leases of all or any part of the Building; (ii) present and future mortgages and deeds of trust encumbering all or any part of the Building; (iii) all past and future advances made under any such mortgages or deeds of trust; and (iv) all renewals, modifications, replacements and exten­sions of any such ground leases, master leases, mortgages and deeds of trust; provided, however, that any lessor under any such ground lease or master lease or any mortgagee or beneficiary under any such mortgage or deed of trust shall have the right to elect, by written notice given to Tenant, to have this Lease made superior in whole or in part to any such ground lease, master lease, mortgage or deed of trust.  Upon demand, Tenant shall execute, acknowledge and deliver any instruments reasonably requested by Landlord or any such lessor, mortgagee or beneficiary to effect the purposes of this Sec­tion 18.01.  Such instruments may contain, among other things, provisions to the effect that such lessor, mortgagee or beneficiary (hereafter, for the purposes of this Section 18.01, a "Successor Landlord") shall (i) not be liable for any act or omission of Landlord or its predecessors, if any, prior to the date of such Successor Landlord's succession to Landlord's interest under this Lease; (ii) not be subject to any offsets or defenses which Tenant might have been able to assert against Landlord or its predecessors, if any, prior to the date of such Successor Landlord's succession to Landlord's interest under this Lease; (iii) not be liable for the return of any security deposit under the Lease unless the same shall have actually been deposited with such Successor Landlord; and (iv) be entitled to receive notice of any Landlord default under this Lease plus a reasonable opportunity to cure such default prior to Tenant having any right or ability to terminate this Lease as a result of such Landlord default. Notwithstanding anything to the contrary herein set forth, Tenant’s duty to subordinate to Landlord’s or lessor’s mortgagee is conditioned upon receipt by Tenant of a Non-disturbance Agreement from said mortgagee in customary form and one which obligates the mortgagee in the event the mortgagee takes possession of the real estate to be bound and to perform all of Landlord’s affirmative obligations subsequent to such possession, as may be set forth in this Lease. Such Non-disturbance Agreement shall also provide that in the event the mortgagee takes possession, this Lease would continue to be valid and honored by the mortgagee as long as Tenant is not in default.

18.02          Attornment.  If requested to do so, Tenant shall attorn to and recognize as Tenant's landlord under this Lease any superior lessor, superior mortgagee or other purchaser or person taking title to the Building by reason of the termination of any superior lease or the foreclosure of any superior mortgage or deed of trust, and Tenant shall, upon demand, execute any documents reasonably requested by any such person to evidence the attornment described in this Section 18.02.

18.03          Mortgage and Ground Lessor Protection.  Tenant agrees to give any holder of any mortgage and any ground lessor, by registered or certified mail, a copy of any notice of default served upon the Landlord by Tenant, provided that prior to such notice Tenant has been notified in writing (by way of service on Tenant of a copy of Assignment of Rents and Leases, or otherwise) of the address of such mortgage holder or ground lessor (hereafter the "Notified Party").  Tenant further agrees that if Landlord shall have failed to cure such default within twenty (20) days after such notice to Landlord (or if such default cannot be cured or corrected within that time, then such additional time as may be necessary if Landlord has commenced within such twenty (20) days and is diligently pursuing the remedies or steps necessary to cure or correct such default), then the Notified Party shall have an additional thirty (30) days within which to cure or correct such default (or if such default cannot be cured or corrected within that time, then such additional time as may be necessary if the Notified Party has commenced within such thirty (30) days and is diligently pursuing the remedies or steps necessary to cure or correct such default).  Until the time allowed, as aforesaid, for the Notified Party to cure such default has expired without cure, Tenant shall nave no right to, and shall not, terminate this Lease on account of Landlord's default.

ARTICLE XIX - QUIET ENJOYMENT

19.01          Provided that Tenant performs all of its obliga­tions hereunder, Tenant shall have and peaceably enjoy the Premises dur­ing the Lease Term, subject to all of the terms and conditions contained in this Lease.

ARTICLE XX - RULES AND REGULATIONS

20.01          The Rules and Regulations attached hereto as Exhibit D are hereby incorporated by reference herein and made a part hereof.  Tenant shall abide by, and faithfully observe and comply with the Rules and Regulations and any reasonable and non-discriminatory amend­ments, modifications and/or additions thereto as may hereafter be adopted and published by written notice to tenants by Landlord for the safety, care, security, good order and/or cleanliness of the Premises and/or the Building.  Landlord shall not be liable to Tenant for any violation of such rules and regulations by any other tenant or occupant of the Building.

ARTICLE XXI - ESTOPPEL CERTIFICATES

21.01          Tenant agrees at any time and from time to time upon not less than ten (10) days' prior written notice from Landlord to execute, acknowledge and deliver to Landlord a statement in writing addressed and certify­ing to Landlord, or to the holder or assignee of any existing or prospective mortgage encumbering the Building or any part thereof (hereafter a "Mortgagee"), or to the lessor, or existing or prospective assignee of the lessor's position, under any existing or prospective ground lease of the land underlying the Building (hereafter a "Ground Lessor"), or to any prospective purchaser of the land, improvements or both comprising the Building, that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications); that Tenant has accepted possession of the Premises, which are acceptable in all respects, and that any improvements required by the terms of this Lease to be made by Landlord have been completed to the satisfaction of Tenant;  that Tenant is in full occupancy of the Premises; that no rent has been paid more than thirty (30) days in advance; that the first month's Base Rent has been paid; that Tenant is entitled to no free rent or other concessions except as stated in this Lease; that Tenant has not been notified of any previous assignment of Landlord's or any predecessor landlord's interest under this Lease; the dates to which Base Rent, additional rental and other charges have been paid; that Tenant, as of the date of such certificate, has no charge, lien or claim of setoff under this Lease or otherwise against Base Rent, additional rental or other charges due or to become due under this Lease; and that Landlord is not in default in performance of any covenant, agreement or condition contained in this Lease or any other matter relating to this Lease or the Premises or, if so, specifying each such default.  In addition, in the event that such certificate is being given to any Mortgagee or Ground Lessor, such statement may contain any other provisions customarily required by such Mortgagee or Ground Lessor including, without limitation, an agreement on the part of Tenant to furnish to such Mortgagee or Ground Lessor, as applicable, written notice of any Landlord default and a reasonable opportunity for such Mortgagee or Ground Lessor to cure such default prior to Tenant being able to terminate this Lease.  Any such state­ment delivered pursuant to this Section may be relied upon by Landlord or any Mortgagee, Ground Lessor or prospective purchaser to whom it is addressed and such statement, if required by its addressee, may so specifically state.  If Tenant does not execute, acknowledge and deliver to Landlord the statement as and when required herein, Landlord is hereby granted an irrevocable power-of-attorney, coupled with an interest, to execute such statement on Tenant's behalf, which statement shall be binding on Tenant to the same extent as if executed by Tenant.

ARTICLE XXII - ENTRY BY LANDLORD

22.01          Landlord may enter the Premises at all reasonable times to: inspect the same; exhibit the same to prospective purchasers, lenders or tenants; determine whether Tenant is complying with all of its obligations under this Lease; supply janitorial and other services to be provided by Landlord to Tenant under this Lease; post notices of non-responsibility; and make repairs or improve­ments in or to the Building or the Premises; provided, however, that all such work shall be done as promptly as reasonably possible and so as to cause as little interference to Tenant as reasonably possible.  Tenant hereby waives any claim for damages for any injury or inconvenience to, or interference with, Tenant's busi­ness, any loss of occupancy or quiet enjoyment of the Premises or any other loss occasioned by such entry.  Landlord shall at all times have and retain a key with which to unlock all of the doors in, on or about the Premises (excluding Tenant's vaults, safes and similar areas designated by Tenant in writing in advance), and Land­lord shall have the right to use any and all means by which Landlord may deem proper to open such doors to obtain entry to the Premises, and any entry to the Premises obtained by Landlord by any such means, or otherwise, shall not under any circumstances be deemed or construed to be a forcible or unlawful entry into or a detainer of the Premises or an eviction, actual or constructive, of Tenant from any part of the Premises.  Such entry by Landlord shall not act as a termination of Tenant's duties under this Lease.  If Landlord shall be required to obtain entry by means other than a key provided by Ten­ant, the cost of such entry shall be payable by Tenant to Landlord as additional rent.

ARTICLE XXIII

LANDLORD'S LEASE UNDERTAKINGS-EXCULPATION FROM PERSONAL LIABILITY;

TRANSFER OF LANDLORD'S INTEREST

23.01          Landlord's Lease Undertakings.  Notwithstanding any­thing to the contrary contained in this Lease or in any exhibits, Riders or addenda hereto attached (collectively the "Lease Docu­ments"), it is expressly understood and agreed by and between the parties hereto that: (a) the recourse of Tenant or its successors or assigns against Landlord with respect to the alleged breach by or on the part of Landlord of any representation, warranty, coven­ant, undertaking or agreement contained in any of the Lease Docu­ments (collectively, "Landlord's Lease Undertakings") shall extend only to Landlord's interest in the real estate of which the Prem­ises demised under the Lease Documents are a part ("Landlord's Real Estate") and not to any other assets of Landlord or its constituent partners; and (b) except to the extent of Land­lord's interest in Landlord's Real Estate, no personal liability or personal responsibility of any sort with respect to any of Land­lord's Lease Undertakings or any alleged breach thereof is assumed by, or shall at any time be asserted or enforceable against Landlord or against any of its res­pec­tive directors, officers, attorneys, employees, agents, constituent partners, beneficiaries, trustees or representatives.

23.02          Transfer of Landlord's Interest.  Landlord and each successor to Landlord shall be fully released from the performance of Landlord's obligations subsequent to their transfer of Land­lord's interest in the Landlord's Real Estate.  Landlord shall not be liable for any obligation hereunder after a transfer of its interest in the Landlord's Real Estate.

ARTICLE XXIV - HOLDOVER TENANCY

24.01          If tenant holds possession of the Premises after the expiration or termination of the Lease Term, by lapse of time or otherwise, Tenant shall become a tenant at sufferance upon all of the terms contained herein, except as to Lease Term and Rent.  During such holdover period, Tenant shall pay to Landlord a monthly rental equivalent to two hundred percent (200%) of the Rent payable by Tenant to Landlord with respect to the last month of the Lease Term.  The monthly rent payable for such holdover period shall in no event be construed as a penalty or as liquidated damages for such retention of possession.  Without limiting the foregoing, Tenant hereby agrees to indemnify, defend and hold harmless Landlord, its beneficiary, and their respective agents, contractors and employees, from and against any and all claims, liabilities, actions, losses, damages (including without limitation, direct, indirect, incidental and consequential) and expenses (including, without limitation, court costs and reasonable attorneys' fees) asserted against or sustained by any such party and arising from or by reason of such retention of possession, which obligations shall survive the expiration or termination of the Lease Term.

ARTICLE XXV - NOTICES

25.01          All notices which Landlord or Tenant may be required, or may desire, to serve on the other may be served, as an alter­na­tive to personal service, by mailing the same by registered or cer­ti­fied mail, postage prepaid, addressed to the Landlord at the address for Landlord set forth in Section 1.12 above and to Tenant at the address for Tenant set forth in Section 1.13 above, or, from and after the Commencement Date, to the Tenant at the Premises whether or not Tenant has departed from, abandoned or vacated the Premises, or addressed to such other address or addresses as either Landlord or Tenant may from time to time designate to the other in writing.  Any notice shall be deemed to have been served at the time the same was posted.

ARTICLE XXVI - BROKERS

26.01          The parties recognize as the broker(s) who procured this Lease the firm(s) specified in Section 1.14 and agree that Landlord shall be solely responsible for the payment of any broker­age commissions to said broker(s), and that Tenant shall have no responsibility therefor unless written provision to the contrary has been made a part of this Lease.  If Tenant has dealt with any other person or real estate broker in respect to leasing, subleas­ing or renting space in the Building, Tenant shall be solely res­pon­sible for the payment of any fee due said person or firm and Tenant shall protect, indemnify, hold harmless and defend Landlord from any liability in respect thereto.

ARTICLE XXVII - MISCELLANEOUS

27.01          Entire Agreement.  This Lease contains all of the agree­ments and understandings relating to the leasing of the Prem­ises and the obligations of Landlord and Tenant in connection with such leasing.  Landlord has not made, and Tenant is not relying upon, any warranties, or representations, promises or statements made by Landlord or any agent of Landlord, except as expressly set forth herein.  This Lease supersedes any and all prior agreements and understandings between Landlord and Tenant and alone expresses the agreement of the parties.

27.02          Amendments.  This Lease shall not be amended, changed or modified in any way unless in writing executed by Landlord and Tenant.  Landlord shall not have waived or released any of its rights hereunder unless in writing and executed by the Landlord.

27.03          Successors.  Except as expressly provided herein, this Lease and the obligations of Landlord and Tenant contained herein shall bind and benefit the successors and assigns of the parties hereto.

27.04          Force Majeure.  Landlord shall incur no liability to Tenant with respect to, and shall not be responsible for any fail­ure to perform, any of Landlord's obligations hereunder if such fail­ure is caused by any reason beyond the control of Landlord including, but not limited to, strike, labor trouble, govern­mental rule, regulations, ordinance, statute or interpretation, or by fire, earthquake, civil commotion, or failure or disruption of utility services.  The amount of time for Land­lord to perform any of Landlord's obligations shall be extended by the amount of time Landlord is delayed in performing such obli­ga­tion by reason of any force majeure occurrence whether similar to or different from the foregoing types of occurrences.

27.05          Survival of Obligations.  Any obligations of Tenant accruing prior to the expiration of the Lease shall survive the termination of the Lease, and Tenant shall promptly perform all such obligations whether or not this Lease has expired.

27.06          Light and Air.  No diminution or shutting off of any light, air or view by any structure now or hereafter erected shall in any manner affect this Lease or the obligations of Tenant here­under, or increase any of the obligations of Landlord hereunder.

27.07          Governing Law.  This Lease shall be governed by, and construed in accordance with, the laws of the Commonwealth of Pennsylvania.

27.08          Severability.  In the event any provision of this Lease is found to be unenforceable, the remainder of this Lease shall not be affected, and any provision found to be invalid shall be enforce­able to the extent permitted by law.  The parties agree that in the event two different interpretations may be given to any provision hereunder, one of which will render the provision unenforce­able, and one of which will render the provision enforce­able, the interpretation rendering the provision enforceable shall be adopted.

27.09          Captions.  All captions, headings, titles, numerical refer­ences and computer highlighting are for convenience only and shall have no effect on the interpretation of this Lease.

27.10          Interpretation.  Tenant acknowledges that it has read and reviewed this Lease and that it has had the opportunity to con­fer with counsel in the negotiation of this Lease.  Accordingly, this Lease shall be construed neither for nor against Landlord or Tenant, but shall be given a fair and reasonable interpretation in accordance with the meaning of its terms and the intent of the parties.

27.11          Independent Covenants.  Each covenant, agreement, obli­ga­tion or other provision of this Lease to be performed by Tenant are separate and independent covenants of Tenant, and not dependent on any other provision of the Lease.

27.12          Number and Gender.  All terms and words used in this Lease, regardless of the number or gender in which they are used, shall be deemed to include the appropriate number and gender, as the context may require.

27.13          Time is of the Essence.  Time is of the essence of this Lease and the performance of all obligations hereunder.

27.14          Joint and Several Liability.  If Tenant comprises more than one person or entity, or if this Lease is guaranteed by any party, all such persons shall be jointly and severally liable for payment of rents and the performance of Tenant's obligations here­under.

27.15          Exhibits.  Exhibits A (Floor Plan of Premises), B (Work Letter Agreement), C (Janitorial and Cleaning Services) and D (Rules and Regulations) are incorporated into this Lease by reference and made a part hereof.

27.16          Offer to Lease.  The submission of this Lease to Tenant or its broker or other agent, does not constitute an offer to Ten­ant to lease the Premises.  This Lease shall have no force and effect until it is executed and delivered by Tenant to Landlord and (b) it is fully reviewed and executed by Landlord; provided, however, that, upon execution of this Lease by Tenant and delivery to Landlord, such execution and delivery by Tenant shall, in consideration of the time and expense incurred by Landlord in reviewing the Lease and Tenant's credit, constitute an offer by Tenant to Lease the Premises upon the terms and conditions set forth herein (which offer to Lease shall be irrevocable for twenty (20) business days following the date of delivery).

27.17          No Counterclaim; Choice of Laws.  It is mutually agreed that in the event Landlord commences any summary proceeding for non-payment of Rent, Tenant will not interpose any counterclaim of whatever nature or description in any such proceeding.  In addition, Tenant hereby submits to local jurisdiction in the Commonwealth of Pennsylvania and agrees that any action by Tenant against Landlord shall be instituted in the Commonwealth of Pennsylvania and that Landlord shall have personal jurisdiction over Tenant for any action brought by Landlord against Tenant in the Commonwealth of Pennsylvania.

27.18          Rights Reserved by Landlord.  Landlord reserves the following rights exercisable without notice (except as otherwise expressly provided to the contrary in this Lease) and without being deemed an eviction or disturbance of Tenant's use or possession of the Premises or giving rise to any claim for set-off or abatement of Rent:   (i) to change the name or street address of the Building; (ii) to install, affix and maintain all signs on the exterior and/or interior of the Building; (iii) to designate and/or approve prior to installation, all types of signs, window shades, blinds, drapes, awnings or other similar items, and all internal lighting that may be visible from the exterior of the Premises and, notwithstanding the provisions of Article X, the design, arrangement, style, color and general appearance of the portion of the Premises visible from the exterior, and contents thereof, including, without limitation, furniture, fixtures, signs, art work, wall coverings, carpet and decorations, and all changes, additions and removals thereto, shall, at all times have the appearance of premises having the same type of exposure and used for substantially the same purposes that are generally prevailing in first class office buildings in the area.  Any violation of this provision shall be deemed a material breach of this Lease; (iv) to display the Premises and/or the Building to mortgagees, prospective mortgagees, prospective purchasers and ground lessors at reasonable hours upon reasonable advance notice to Tenant; (v) to change the arrangement of entrances, doors, corridors, elevators and/or stairs in the Building, provided no such change shall materially adversely affect access to the Premises; (vi) to grant any party the exclusive right to conduct any business or render any service in the Building, provided such exclusive right shall not operate to prohibit Tenant from using the Premises for the purposes permitted under this Lease; (vii) to prohibit the placement of vending or dispensing machines of any kind in or about the Premises other than for use by Tenant's employees; (viii) to prohibit the placement of video or other electronic games in the Premises; (ix) to have access for Landlord and other tenants of the Building to any mail chutes and boxes located in or on the Premises according to the rules of the United States Post Office and to discontinue any mail chute business in the Building; (x) to close the Building after normal business hours, except that Tenant and its employees and invitees shall be entitled to admission at all times under such rules and regulations as Landlord prescribes for security purposes; (xi) to install, operate and maintain security systems which monitor, by closed circuit television or otherwise, all persons entering or leaving the Building; (xii) to install and maintain pipes, ducts, conduits, wires and structural elements located in the Premises which serve other parts or other tenants of the Building; and (xiii) to retain at all times master keys or pass keys to the Premises.

27.19          Tenant's Option to Terminate the Lease. Provided no Event of Default has occurred and is then continuing under any of the terms and provisions of this Lease after the expiration of eighteen (18) months from Commencement Date of this Lease, Tenant shall have a one time right to terminate this Lease provided Tenant gives Landlord at least ninety (90) days prior written notice of its intention to terminate and together with such notice pays Landlord, in bank funds, an amount equal to Forty Two Thousand Two Hundred Twenty-Eight and No/100 Dollars ($42,228.00).

IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the date first above written.

LANDLORD:
8 Penn Center Owner, L.P.,
a Pennsylvania Limited Partnership
By: 8 Penn Center Owner- GP, LLC
By:	/s/ Alex Schwartz
	Alex Schwartz,

TENANT:
Echo Therapeutics, Inc., a Delaware Corporation
By:	/s/ Patrick T. Mooney
	Patrick T. Mooney
	President and CEO

EXHIBIT A

FLOOR PLAN OF PREMISES

EXHIBIT B

WORK LETTER AGREEMENT

EXHIBIT C

JANITORIAL AND CLEANING SERVICES

EXHIBIT D

RULES AND REGULATIONS

EX-21

Exhibit 21

SUBSIDIARIES OF THE REGISTRANT

Name	Jurisdiction of Incorporation
Sontra Medical, Inc.	Delaware

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements of Echo Therapeutics, Inc. on Form S-8 (File Nos. 333-164510, 333-152138, 333-92414, 333-101517, 333-106201, 333-122893, 333-134674, 333-143145 and 333-146607), of our report dated March 18, 2011, relating to the consolidated financial statements for the years ended December 31, 2010 and 2009, which is part of this Form 10-K.

/s/ Wolf & Company, P.C.

Boston, Massachusetts

March 18, 2011

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Patrick T. Mooney, certify that:

1.      I have reviewed this annual report on Form 10-K of Echo Therapeutics, Inc.;

2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.      The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)           Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.      The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ Patrick T. Mooney
	Patrick T. Mooney, M.D.
	President, Chief Executive Officer and Chairman of the Board
Date: March 18, 2011

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Harry G. Mitchell, certify that:

1.      I have reviewed this annual report on Form 10-K of Echo Therapeutics, Inc.;

2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.      The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)           Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.      The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ Harry G. Mitchell
	Harry G. Mitchell
	Chief Operating Officer, Chief Financial Officer and
	Treasurer
Date: March 18, 2011

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Echo Therapeutics, Inc. (the “Company”) for the fiscal year ended December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Patrick T. Mooney, President, Chief Executive Officer and Chairman of the Board of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/ Patrick T. Mooney
	Patrick T. Mooney, M.D.
	President, Chief Executive Officer and Chairman of the Board
March 18, 2011

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Echo Therapeutics, Inc. (the “Company”) for the fiscal year ended December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Harry G. Mitchell, Chief Operating Officer, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/ Harry G. Mitchell
	Harry G. Mitchell
	Chief Operating Officer, Chief Financial Officer and
	Treasurer
March 18, 2011