Unassociated Document

Access Pharmaceuticals, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

ASSETS	December 31, 2006			December 31, 2005
Current assets
Cash and cash equivalents	$	1,194,000		$	349,000
Short term investments, at cost		3,195,000			125,000
Receivables		359,000			4,488,000
Prepaid expenses and other current assets		283,000			197,000
Total current assets		5,031,000			5,159,000

Property and equipment, net		212,000			300,000
Debt issuance costs, net		158,000			-
Patents, net		878,000			1,046,000
Licenses, ne		25,000			75,000
Restricted cash and other assets		122,000			633,000
Total assets	$	6,426,000		$	7,213,000
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued expenses	$	1,226,000		$	2,883,000
Accrued interest payable		581,000			652,000
Deferred revenues		173,000			173,000
Current portion long-term debt, net of discount $2,062,000 in 2006		8,833,000			106,000
Total current liabilities		10,813,000			3,814,000
Long-term debt, net of discount $1,879,000 in 2005		5,500,000			7,636,000
Total liabilities		16,313,000			11,450,000
Commitments and contingencies
Stockholders' deficit
Preferred stock - $.01 par value; authorized 2,000,000 shares; none issued or outstanding		-			-
Common stock - $.01 par value; authorized 100,000,000 shares; issued, 3,535,108 at December 31, 2006 and authorized 50,000,000 shares; issued 3,528,108 at December 31, 2005		35,000			35,000
Additional paid-in capital		68,799,000			62,942,000
Notes receivable from stockholders		(1,045,000	)		(1,045,000	)
Treasury stock, at cost - 163 shares		(4,000	)		(4,000	)
Accumulated deficit		(77,672,000	)		(66,165,000	)
Total stockholders' deficit		(9,887,000	)		(4,237,000	)
Total liabilities and stockholders' deficit	$	6,426,000		$	7,213,000

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

F-3

Access Pharmaceuticals, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

	Year ended December 31,
	2006			2005			2004
Expenses
Research and development	$	2,053,000		$	2,783,000		$	2,335,000
General and administrative		2,813,000			4,638,000			3,199,000
Depreciation and amortization		309,000			333,000			469,000
Write off of goodwill		-			1,868,000			-
Total expenses		5,175,000			9,622,000			6,003,000

Loss from operations		(5,175,000	)		(9,622,000	)		(6,003,000	)

Interest and miscellaneous income		294,000			100,000			226,000
Interest and other expense		(7,436,000	)		(2,100,000	)		(1,385,000	)
Unrealized loss on fair value of warrants and beneficial conversion feature		(1,107,000	)		-			-
		(8,249,000	)		(2,000,000	)		(1,159,000
Loss before discontinued operations and before tax benefit		(13,424,000	)		(11,622,000	)		(7,162,000	)
Income tax benefit		173,000			4,067,000			-
Loss from continuing operations		(13,251,000	)		(7,555,000	)		(7,162,000	)

Discontinued operations, net of taxes of $173,000 in 2006 and $4,067,000 in 2005		377,000			5,855,000			(3,076,000	)
Net loss	$	(12,874,000	)	$	(1,700,000	)	$	(10,238,000	)

Basic and diluted loss per common share
Loss from continuing operations allocable to common stockholders	$	(3.75	)	$	(2.34	)	$	(2.36	)
Discontinued operations		0.11			1.81			(1.02	)
Net loss allocable to common stockholders	$	(3.65	)	$	(0.53	)	$	(3.38	)

Weighted average basic and diluted common shares outstanding		3,531,934			3,237,488			3,032,451

Net loss	$	(12,874,000	)	$	( 1,700,000	)	$	(10,238,000	)
Other comprehensive loss Foreign currency translation adjustment		-			3,000			(17,000	)
Comprehensive loss	$	(12,874,000	)	$	(1,697,000	)	$	(10,255,000	)

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

F-4

Access Pharmaceuticals, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

	Common Stock
	Shares	Amount	Additional paid in capital	Notes receivable from stockholders	Unamortized value of restricted stock grants	Treasury stock	Accumulated other comprehensive income (loss)	Accumulated deficit
Balance, December 31, 2003	2,679,000	$ 27,000	$49,704,000	(1,045,000)	$(294,000)	$(4,000)	$14,000	$(54,227,000)
Common stock issued for cash, net of offering costs	359,000	4,000	9,012,000	-	-	-	-	-
Common stock issued for cash exercise of warrants and options	23,000	-	283,000	-	-	-	-	-
Common stock issued for cashless exercise of warrants	42,000	-	-	-	-	-	-	-
Issuance of restricted stock grants	2,000	-	135,000	-	(135,000)	-	-	-
Other comprehensive loss	-	-	-	-	-	-	(17,000)	-
Amortization of restricted stock grants	-	-	-	-	120,000	-	-	-
Net loss	-	-	-	-	-	-	-	(10,238,000)
Balance, December 31, 2004	3,105,000	31,000	59,134 000	(1,045,000)	(309,000)	(4,000)	(3,000)	(64,465,000)

Common stock issued, net of offering costs	237,000	2,000	1,119,000	-	-	-	-	-
Common stock issued for payment of interest	190,000	2,000	616,000	-	-	-	-	-
Other comprehensive income	-	-	-	-	-	-	3,000	-
Discount on convertible note extension	-	-	2,109,000	-	-	-	-	-
Amortization and forfeiture of restricted stock grants	(4,000)	-	(36,000)	-	309,000	-	-	-
Net loss	-	-	-	-	-	-	-	(1,700,000)
Balance, December 31, 2005	3,528,000	35,000	62,942,000	(1,045,000)	-	(4,000)	-	(66,165,000)

Common stock issued for compensation	7,000	-	77,000	-	-	-	-	-
Warrants issued	-	-	100,000	-	-	-	-	-
Stock option compensation expense	-	-	248,000	-	-	-	-	-
Issuance of convertible debt with warrants	-	-	5,432,000	-	-	-	-	-
Cumulative effect of change in accounting principle	-	-	-	-	-	-	-	1,367,000
Net loss	-	-	-	-	-	-	-	(12,874,000)
Balance, December 31, 2006	3,535,000	$ 35,000	$ 68,799,000	(1,045,000)	$ -	$ (4,000)	$ -	$(77,672,000)

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

F-5

Access Pharmaceuticals, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Year ended December 31,
	2006			2005			2004
Cash flows from operating activities
Net loss	$	(12,874,000	)	$	(1,700,000	)	$	(10,238,000	)
Adjustments to reconcile net loss to net cash used
in operating activities:
Unrealized Loss		1,107,000			-			-
Loss on sale Australia assets		-			208,000			-
Impairment of investment		-			-			112,000
Write off of goodwill		-			1,868,000			-
Amortization of restricted stock grants		-			309,000			120,000
Stock option expense		248,000			-			-
Stock issued for compensation		77,000			42,000			-
Stock issued for interest		-			618,000			-
Depreciation and amortization		309,000			570,000			773,000
Amortization of debt costs and discounts		6,749, 000			695,000			183,000
Gain on sale of assets		(550,000)			(12,891,000	)		-
Change in operating assets and liabilities:
Receivables		4,129,000			622,000			358,000
Inventory		-			104,000			60,000
Prepaid expenses and other current assets		14,000			817,000			(195,000	)
Restricted cash and other assets		127,000			-			-
Accounts payable and accrued expenses		(1,657,000	)		490,000			401,000
Accrued interest payable		363,000			341,000			-
Deferred revenues		-			606,000			15,000
Net cash used in operating activities		(1,958,000	)		(7,301,000	)		(8,411,000	)

Cash flows from investing activities:
Capital expenditures		(3,000	)		(28,000	)		(221,000	)
Proceeds from sale of equipment		-			355,000			-
Proceeds from sale of patents		-			974,000			-
Proceeds from sale of oral/topical care assets		550,000			7,391,000			-
Restricted cash and other assets					684,000			(666,000	)
Redemptions of short-term investments
and certificates of deposit, net		(3,070,000	)		361,000			1,374,000
Net cash provided by (used in) investing activities		(2,523,000	)		9,717,000			487,000

Cash flows from financing activities:
Payments of notes payable		(106,000	)		(407,000	)		(310,000	)
Payment of secured notes payable and convertible notes		-			(6,648,000	)		-
Proceeds from secured notes payable		5,432,000			2,633,000			-
Proceeds from stock issuances, net of costs		-			577,000			9,299,000
Net cash provided by (used in) financing activities		5,326,000			(3,845,000	)		8,989,000

Net increase (decrease) in cash and cash equivalents		845,000			(1,429,000	)		1,065,000
Effect of exchange rate changes on cash and cash equivalents		-			3,000			(17,000	)
Cash and cash equivalents at beginning of year		349,000			1,775,000			727,000
Cash and cash equivalents at end of year	$	1,194,000		$	349,000		$	1,775,000

Cash paid for interest	$	315,000		$	445,000		$	1,073,000

Supplemental disclosure of noncash transactions
Value of restricted stock grants		-			-			135,000
Assets acquired under capital leases		-			-			59,000
Common stock issued for SEDA and
Secured Convertible Notes		-			502,000			-
Discount on convertible note extension		-			2,109,000			-
Debt issuance costs		568,000
Accrued interest capitalized		433,000
Warrants issued per professional agreement of consulting services		100,000
Cumulative change of accounting principle		1,367,000
Issuance of convertible debt with warrants		5,432,000

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

F-6

Access Pharmaceuticals, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Three years ended December 31, 2006

NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Access Pharmaceuticals, Inc. is an emerging pharmaceutical company engaged in the development of novel therapeutics for the treatment of cancer and supportive care of cancer patients. This development work is based primarily on the adaptation of existing therapeutic agents using the Company’s proprietary drug delivery technology. Our efforts have been principally devoted to research and development, resulting in significant losses since inception on February 24, 1988.

A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows.

Principles of Consolidation

The consolidated financial statements include the financial statements of Access Pharmaceuticals, Inc. and our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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. Actual results could differ from those estimates.

We tested intangible assets for impairment based on estimates of fair value. It is at least reasonably possible that the estimates used by us will be materially different from actual amounts. These differences could result in the impairment of all or a portion of our intangible assets, which could have a materially adverse effect on our results of operations.

Cash and Cash Equivalents

We consider all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents for purposes of the statements of cash flows. Cash and cash equivalents consist primarily of cash in banks, money market funds and short-term corporate securities. We invest any excess cash in government and corporate securities. All other investments are reported as short-term investments.

Short-term Investments

Short-term investments consist of certificates of deposit. All short term investments are classified as held to maturity. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. The cost of securities sold is based on the specific identification method.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is provided using the straight-line method over estimated useful lives ranging from three to seven years. Expenditures for major renewals and betterments that extend the useful lives are capitalized. Expenditures for normal maintenance and repairs are expensed as incurred. The cost of assets sold or abandoned and the related accumulated depreciation are eliminated from the accounts and any gains or losses are recognized in the accompanying consolidated statements of operations of the respective period.

F-7

Access Pharmaceuticals, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Three years ended December 31, 2006

NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Research and Development Expenses

Pursuant to SFAS No. 2, “Accounting for Research and Development Costs,” our research and development costs are expensed as incurred. Research and development expenses include, but are not limited to, payroll and personnel expense, lab supplies, preclinical, development cost, clinical trial expense, outside manufacturing and consulting. The cost of materials and equipment or facilities that are acquired for research and development activities and that have alternative future uses are capitalized when acquired.

Fair Value of Financial Instruments

The carrying value of cash, cash equivalents, short-term investments and accounts payable approximates fair value due to the short maturity of these items. It is not practical to estimate the fair value of the Company’s long-term debt because quoted market prices do not exist and there were no available securities with similar terms to use as a basis to value our debt.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets to the extent their realization is in doubt.

Loss Per Share

We have presented basic loss per share, computed on the basis of the weighted average number of common shares outstanding during the year, and diluted loss per share, computed on the basis of the weighted average number of common shares and all dilutive potential common shares outstanding during the year. Potential common shares result from stock options, vesting of restricted stock grants, convertible notes and warrants. However, for all years presented, all outstanding stock options, restricted stock grants, convertible notes and warrants are anti-dilutive due to the losses for the periods. Anti-dilutive common stock equivalents of 12,548,342; 1,730,135; and 1,114,122 were excluded from the loss per share computation for 2006, 2005 and 2004, respectively.

Restricted Cash

Restricted cash is cash that is or may be committed for a particular purpose. We had restricted cash in 2005 as collateral for a note payable of $103,000. The note was paid in full in 2006 and there is no restricted cash in 2006.

Intangible Assets

We expense internal patent and application costs as incurred because, even though we believe the patents and underlying processes have continuing value, the amount of future benefits to be derived therefrom are uncertain. Purchased patents are capitalized and amortized over the life of the patent. We recognize the purchase cost of licenses and amortize them over their estimated useful lives.

The Company operates in a single segment. In 2005, the Company wrote off its goodwill as determined by comparing the Company’s market capitalization with its net asset value resulting in an impairment charge of $1,868,000. In 2005, the Company sold one of its patents for $974,000 and the Company believes the fair value of the remaining patents based on discounted cash flow analysis exceeds the carry value.

F-8

Access Pharmaceuticals, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Three years ended December 31, 2006

NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Intangible assets consist of the following (in thousands):

	December 31, 2006				December 31, 2005				December 31, 2004
	Gross carrying value		Accumulated amortization		Gross carrying value		Accumulated amortization		Gross carrying value		Accumulated amortization
Amortizable intangible assets
Patents	$	1,680	$	802	$	1,680	$	634	$	3,179	$	864
Licenses		500		475		500		425		500		375
Total	$	2,180	$	1,277	$	2,180	$	1,059	$	3,679	$	1,239

Amortization expense related to intangible assets totaled $218,000, $345,000 and $421,000 for the years ended December 31, 2006, 2005 and 2004, respectively. The aggregate estimated amortization expense for intangible assets remaining as of December 31, 2006 is as follows (in thousands):

2007	$	193
2008		168
2009		168
2010		168
2011		168
Thereafter		38

Total	$	903

Stock-Based Compensation

On January 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”), which requires the measurement and recognition of all share-based payment awards made to employees and directors including stock options based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), for periods beginning in fiscal year 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). We applied the provisions of SAB 107 in its adoption of SFAS 123(R).

We adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s 2006 fiscal year. Our consolidated financial statements for the year ended December 31, 2006, reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, our consolidated financial statements for prior periods have not been restated to include the impact of SFAS 123(R). Stock-based compensation expense recognized under SFAS 123(R) for the year ended December 31, 2006 was approximately $248,000. Stock-based compensation expense which would have been recognized under the fair value based method would have been approximately $750,000 during the year ended December 31, 2005.

F-9

Access Pharmaceuticals, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Three years ended December 31, 2006

NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in the company’s Statement of Operations. Prior to the adoption of SFAS 123(R), we accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB No. 25 as allowed under SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value method, no stock-based compensation expense for stock option grants was recognized because the exercise price of our stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant. In 2005, we did recognize stock compensation expense for restricted stock awards based on the fair value of the underlying stock on date of grant and this expense was amortized over the requisite service period. There were no restricted stock awards granted in 2006 and therefore no stock compensation expense is recognized in 2006.

Stock-based compensation expense recognized in our Statement of Operations for the first year ended December 31, 2006 includes compensation expense for share-based payment awards granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123 and compensation expense for the share-based payment awards granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). Stock-based compensation expense recognized in the Company’s Statement of Operations for the year ended December 31, 2006 is based on awards ultimately expected to vest and has been reduced for estimated forfeitures, which currently is nil. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company’s pro forma information required under SFAS 123 for periods prior to fiscal year 2006, forfeitures have been accounted for as they occurred.

We use the Black-Scholes option-pricing model (“Black-Scholes”) as its method of valuation under SFAS 123(R) in fiscal year 2006 and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Black-Scholes was also previously used for our pro forma information required under SFAS 123 for periods prior to fiscal year 2006. The fair value of share-based payment awards on the date of grant as determined by the Black-Scholes model is affected by our stock price as well as other assumptions. These assumptions include, but are not limited to the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.

During 2006, 753,872 stock options were granted and 50,000 stock options were granted during 2005 under the 2005 Equity Incentive Plan. In addition, 49,700 stock options were granted during 2005 under the 1995 Stock Award Program. Assumptions for 2006 are:

·	127% - the expected volatility assumption was based upon a combination of historical stock price volatility measured on a twice a month basis and is a reasonable indicator of expected volatility.

·	4.85% (average) - the risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate for the term of the Company’s employee stock options.

·	None - the dividend yield assumption is based on our history and expectation of dividend payments.

·	1.6 years - the estimated expected term (average of 1.6 years) is based on employee exercise behavior.

At December 31, 2006, the balance of unearned stock-based compensation to be expensed in future periods related to unvested share-based awards, as adjusted for expected forfeitures, is approximately $360,000. The period over which the unearned stock-based compensation is expected to be recognized is approximately three years. We anticipate that we will grant additional share-based awards to employees in the future, which will increase our stock-based compensation expense by the additional unearned compensation resulting from these grants. The fair value of these grants is not included in the amount above, because the impact of these grants cannot be predicted at this time due to the dependence on the number of share-based payments granted. In addition, if factors change and different assumptions are used in the

F-10

Access Pharmaceuticals, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Three years ended December 31, 2006

NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

application of SFAS 123(R) in future periods, stock-based compensation expense recorded under SFAS 123(R) may differ significantly from what has been recorded in the current period.

Our Employee Stock Option Plans have been deemed compensatory in accordance with SFAS 123(R). Stock-based compensation relating to this plan was computed using the Black-Scholes model option-pricing formula with interest rates, volatility and dividend assumptions as of the respective grant dates of the purchase rights provided to employees under the plan. The weighted-average fair value of options existing under all plans during 2006 was $5.00.

The following table summarizes stock-based compensation in accordance with SFAS 123(R) for the year ended December 31, 2006, which was allocated as follows (in thousands):

	Year ended December 31, 2006
Research and development	$	68
General and administrative		180

Stock-based compensation expense included in operating expenses		248

Total stock-based compensation expense		248
Tax benefit		—

Stock-based compensation expense, net of tax	$	248

The following table reflects net income and diluted earnings per share for the year ended December 31, 2006, compared with proforma information for the year ended December 31, 2005, had compensation cost been determined in accordance with the fair value-based method prescribed by SFAS 123(R).

F-11

Access Pharmaceuticals, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Three years ended December 31, 2006

NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

(in thousands)	Year Ended December 31,
		2006			2005
Net loss, as reported under APB 25 for the prior period ⁽¹⁾	$	N/A		$	(1,700	)
Add back stock based employee compensation expense in reported net loss, net of related tax effects		-			-
Subtract total stock-based compensation expense determined under fair value-based method for all awards, net of related tax effects⁽²⁾		(248	)		(750	)
Net loss including the effect of stock-based compensation expense⁽³⁾	$	(12,874	)	$	(2,450	)
Loss per share:
Basic and diluted, as reported for the prior period⁽¹⁾	$	(3.65	)	$	(0.53	)
Basic and diluted, including the effect of stock-based compensation expense⁽³⁾	$	(3.65	)	$	(0.76	)

⁽¹⁾	Net loss and loss per share for periods prior to year 2006 does not include stock-based compensation expense under SFAS 123 because the Company did not adopt the recognition provisions of SFAS 123.

⁽²⁾	Stock-based compensation expense for periods prior to year 2006 was calculated based on the pro forma application of SFAS 123.

⁽³⁾	Net loss and loss per share for periods prior to year 2006 represent pro forma information based on SFAS 123.

Stock compensation expense for options granted to nonemployees has been determined in accordance with SFAS 123 and EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured.

Recent Accounting Pronouncement

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We are evaluating the potential impact of the implementation of SFAS 157 on our financial position and results of operations.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Income Tax Uncertainties” (FIN 48). FIN 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. The recently issued literature also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 also includes guidance concerning accounting for income tax uncertainties in interim periods and increases the level of disclosures associated with any recorded income tax uncertainties. FIN 48 is effective for Access as of January 1, 2007. Any differences between the amounts recognized in the balance sheets prior to the adoption of FIN 48 and the amounts reported after adoption will be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. We are evaluating the potential impact of the implementation of FIN 48 on our financial position and results of operations.

F-12

Access Pharmaceuticals, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Three years ended December 31, 2006

NOTE 2 - LIQUIDITY

The Company incurred significant losses from continuing operations of $13.4 million for the year ended December 31, 2006 and $7.6 million for the year ended December 31, 2005. Additionally, at December 31, 2006, we had negative working capital of $5.8 million. As of December 31, 2006, we did not have sufficient funds to repay our convertible notes at their maturity and support our working capital and operating requirements.

We do not have funds to pay our debt obligations which are due in March, April and September 2007 and will have to raise more funds or attempt to restructure the convertible notes.

SCO Capital Partners LLC Note and Warrant Purchase Agreement

On December 6, 2006, we entered into a note and warrant purchase agreement pursuant to which we sold and issued an aggregate of $500,000 of 7.5% convertible notes due March 31, 2007 and warrants to purchase 386,364 shares of common stock of Access. Net proceeds to Access were $450,000. The notes and warrants were sold in a private placement to a group of accredited investors led by SCO Capital Partners LLC (“SCO”) and affiliates.

On February 16, 2006, we entered into a note and warrant purchase agreement pursuant to which we sold and issued an aggregate of $5,000,000 of 7.5% convertible notes due March 31, 2007 and warrants to purchase an aggregate of 3,863,634 shares of common stock of Access. Net proceeds to Access were $4.5 million. The notes and warrants were sold in a private placement to a group of accredited investors led by SCO and affiliates.

All of the notes mature on March 31, 2007, are convertible into Access common stock at a fixed conversion rate of $1.10 per share, bear interest of 7.5% per annum and are secured by certain assets of Access. Each note may be converted at the option of the noteholder or Access under certain circumstances as set forth in the notes.

Each noteholder received a warrant to purchase a number of shares of common stock of Access equal to 75% of the total number shares of Access common stock into which such holder's note is convertible. Each warrant has an exercise price of $1.32 per share and is exercisable at any time prior to February 16, 2012, October 24, 2012 and December 6, 2012. In the event SCO and its affiliates were to convert all of their notes and exercise all of their warrants, they would own approximately 74.1% of the voting securities of Access.

In connection with its sale and issuance of notes and warrants, Access entered into an investors rights agreement whereby it granted SCO the right to designate two individuals to serve on the Board of Directors of Access while the notes are outstanding, and also granted registration rights with respect to the shares of common stock of Access underlying the notes and warrants.

The Company believes that based on the funds available the Company will have the ability to pay its projected net cash burn rate of $750,000 per month for seven months. We will have to raise more funds to cover future months net cash burn rate and to pay our debt service or attempt to restructure the convertible notes.

F-13

Access Pharmaceuticals, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Three years ended December 31, 2006

NOTE 3 - RELATED PARTY TRANSACTIONS

Stephen B. Howell, M.D., a Director, receives payments for consulting services and reimbursement of direct expenses and has also received warrants for his consulting services. Dr. Howell’s payments for consulting services, expense reimbursements and warrants are as follows:

Year		Consulting Fees		Expense Reimbursement
2006	$	69,000	$	5,000
2005		79,000		5,000
2004		58,000		9,000

In the event SCO Capital Partners LLC (“SCO”) and its affiliates were to convert all of their notes and exercise all of their warrants, they would own approximately 74.1% of the voting securities of Access. During 2006 SCO and affiliates were paid $415,000 in fees for the convertible notes that Access issued and were paid $131,000 in investor relations fees.

See Note 9 for a discussion of our Restricted Stock Purchase Program.

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following:	December 31,
		2006		2005
Laboratory equipment	$	1,090,000	$	1,090,000
Laboratory and building improvements		167,000		167,000
Furniture and equipment		134,000		138,000
		1,391,000		1,395,000
Less accumulated depreciation and amortization		1,179,000		1,095,000
Net property and equipment	$	212,000	$	300,000

Depreciation and amortization on property and equipment was $91,000, $225,000, and $244,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

NOTE 5 - 401(k) PLAN

We have a tax-qualified employee savings and retirement plan (the “401(k) Plan”) covering all our employees. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit ($15,000 in 2006; $14,000 in 2005; and $13,000 in 2004) and to have the amount of such reduction contributed to the 401(k) Plan. We have a 401(k) matching program whereby we contribute for each dollar a participant contributes a like amount, with a maximum contribution of 2% of a participant’s earnings. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code so that contributions by employees or by us to the 401(k) Plan, and income earned on 401(k) Plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that contributions by us, if any, will be deductible by us when made. At the direction of each participant, we invest the assets of the 401(k) Plan in any of 23 investment options. Company contributions under the 401(k) Plan were approximately $11,000 in 2006; $31,000 in 2005; and $46,000 in 2004.

F-14

Access Pharmaceuticals, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Three years ended December 31, 2006

NOTE 6 - DISCONTINUED OPERATIONS

In October 2005 we sold our oral/topical care business to Uluru, Inc. for up to $18.6 million. At the closing of this agreement we received $8.7 million. In addition, due to the Amended Asset Sale Agreement in December 2006, we received $4.9 million and an obligation to receive from Uluru $350,000 on April 8, 2007 for the first and second anniversary payments and settlement of certain milestones. We recorded $550,000 as revenue for the discontinued operations in 2006. Any contingent liabilities arise in the future relating to our former business could reduce future receipts. Additional payments of up to $4.8 million, as amended by the Amended Asset Sale Agreement may be made upon the achievement of certain additional sales milestones.

In September 2005 we closed our Australian laboratory and office, keeping the vitamin B12 technology.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” operating results for assets sold or held for sale are presented as discontinued operations for current and all prior years presented. In accordance with SFAS No. 144 the operating results of these assets, along with the gain on sale, have been presented in discontinued operations for all periods presented.

	2006			2005			2004
Revenues	$	550,000		$	781,000		$	549,000

Expenses
Cost of product sales					(1,012,000	)		(239,000	)
Research and development					(2,501,000	)		(3,082,000	)
Depreciation					(237,000	)		(304,000	)
Total expenses		-			(3,750,000	)		(3,625,000	)

Income/loss from discontinued operations		550,000			(2,969,000	)		(3,076,000	)

Gain on sale of assets		-			12,891,000			-
Tax expense		(173,000	)		(4,067,000	)		-
Discontinued operations	$	377,000		$	5,855,000		$	(3,076,000	)

We previously had licenses for the oral/topical assets. These licenses were sold to Uluru, Inc. in October 2005. In the Asset Sale Agreement between us and Uluru certain refunds and receipts were incurred before the date of sale and were assigned to either us or to Uluru. We have $173,000 recorded as a deferred gain on the sale until such time as approvals are received.

F-15

Access Pharmaceuticals, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Three years ended December 31, 2006

NOTE 7 - DEBT

On September 20, 2000, we completed a $13.5 million convertible note offering. The offering was placed with three investors. One investor was repaid in 2005, $4,015,000. Our other convertible notes are due in two parts. The notes bear interest at 7.7% per annum with $733,000 of interest due annually on September 13th.

$4,015,000 due on April 28, 2007. This investor’s notes have a fixed conversion price of $5.00 per share of common stock and may be converted by the note holder or us under certain circumstances as defined in the note. Upon a change of control, this investor is not required to automatically convert the note unless the amount payable to the investor upon change of control, issuable upon conversion of the note equals or exceeds $7.50. If the notes are not converted we will have to repay the notes on the due dates. The investor’s notes were amended November 3, 2005 extending the term and adjusting the conversion price from $27.50 to $5.00 per common share. The amendment and modification resulted in us recording additional debt discount of $2.1 million, which will be accreted to interest expense to the revised maturity date. The interest due at December 31, 2006 was $92,000.

$5,500,000 due on September 13, 2010. This investor delayed his interest payment which was due in 2005 and 2006 until September 13, 2007 or earlier if the Company raises more than $5.0 million in funds. The capitalized interest was $880,000 and interest on the capitalized interest was $26,000 at December 31, 2006. The interest due on the convertible note was $126,000 at December 31, 2006. This note has a fixed conversion price of $27.50 per share of common stock and may be converted by the note holder or us under certain circumstances as defined in the note. If the notes are not converted we will have to repay the notes on the due dates.

$6,000,000 due on March 31, 2007. The notes were sold in February 2006 in a private placement to a group of accredited investors led by SCO Capital Partners LLC and affiliates. We entered into a note and purchase agreement to which we sold and issued an aggregate of $5 million of 7.5% convertible notes due March 31, 2007 and warrants to purchase 3,863,634 shares of common stock of Access. Net proceeds to Access were $4.5 million.

On October 24, 2006, we entered into a note and warrant purchase agreement pursuant to which we sold and issued an aggregate of $500,000 of 7.5% convertible notes due March 31, 2007 and warrants to purchase 386,364 shares of common stock of Access. Net proceeds to Access were $450,000. On December 6, 2006, we entered into a note and warrant purchase agreement pursuant to which we sold and issued an aggregate of $500,000 of 7.5% convertible notes due March 31, 2007 and warrants to purchase 386,364 shares of common stock of Access. Net proceeds to Access were $450,000. Interest due at December 31, 2006 on all notes with SCO and affiliates was $336,000.

All these notes with SCO and affiliates have a fixed conversion price of $1.10 per share of common stock and may be converted by the note holder or us under certain circumstances as defined in the note. If the notes are not converted we will have to repay the notes on the due dates.

The Secured Convertible Notes include warrants and a conversion feature. Until September 30, 2006 we accounted for the warrants and conversion feature as liabilities and recorded at fair value. From the date of issuance to September 30, 2006, the fair value of these instruments increased resulting in a net unrealized loss of $1.1 million. On October 1, 2006, we adopted the provisions of EITF 00-19-2, “Accounting for Registration Payment Arrangements” (EITF 00-19-2), which requires that contingent obligations to make future payments under a registration payment arrangement be recognized and measured separately in accordance with SFAS No. 5, “Accounting for Contingencies.” Under previous guidance, the fair value of the warrant was recorded as a current liability in our balance sheet, due to a potential cash payment feature in the warrant. Access may be required to pay in cash, up to 2% per month, as defined, as liquidated damages for failure to file a registration statement timely as required by an investor rights agreement. The current liability was marked-to-market at each quarter end, using the Black-Scholes option-pricing model, with the change being recorded to general and administrative expenses. Under the new guidance in EITF 00-19-2, as we believe the likelihood of such a cash payment to

F-16

Access Pharmaceuticals, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Three years ended December 31, 2006

NOTE 7 - DEBT - Continued

not be probable, have not recognized a liability for such obligations. Accordingly, a cumulative-effect adjustment of $1.4 million was made as of October 1, 2006 to accumulated deficit, representing the difference between the initial value of this warrant and its fair value as of this date and recorded to equity.

Subsequent to the adoption of EITF 00-19-2 on October 1, 2006, the Company has accounted for the $6,000,000 notes under EITF Issue No. 00-27, Application of Issue No. 98-5 to Certain Instruments. The value of the warrants was valued using a Black-Scholes option-pricing model with the following assumptions with a weighted average volatility of 120%,

expected life of 6 years, expected yield of 0% and risk free rate of 5.0%. At December 31, 2006, approximately $1.6M of

debt discount related to the warrants and embedded conversion feature had not been amortized to interest expense. This will be amortized over the remaining life of the debt through March 31, 2007.

On September 20, 2001, we completed a $600,000 installment loan with a bank. The note was paid in full in 2006.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

Future maturities of the note payable and other obligations are as follows:

Future Maturities		Debt
2007		10,895,000
2010		5,500,000

The debt of $4,015,000 is discounted and at December 31, 2006 is on the balance sheet as $3,559,000.

The debt of $6,000,000 is discounted and at December 31, 2006 is on the balance sheet as $4,394,000.

Operating Leases

At December 31, 2006, we have commitments under noncancelable operating leases for office and research and development facilities until December 31, 2007 totaling $75,000. Rent expense for the years ended December 31, 2006, 2005 and 2004 was $94,000, $168,000 and $166,000, respectively. We also have two other noncancelable operating leases - one lease for a fire alarm system totaling $12,000 ending in 2008 (expensing $7,000 in 2007 and $5,000 in 2008) and one lease for a copier totaling $48,000 ending in 2011 (with $9,600 expensed each year).

Legal

The Company is not currently subject to any material pending legal proceedings.

NOTE 9 - STOCKHOLDERS' EQUITY

Restricted Stock Purchase Program

On October 12, 2000, the Board of Directors authorized a Restricted Stock Purchase Program. Under the Program, the Company’s executive officers and corporate secretary were given the opportunity to purchase shares of common stock in an individually designated amount per participant determined by the Compensation Committee of the Board of Directors. A total of 38,000 shares were purchased under the Program by four eligible participants at $27.50 per share, the fair market value of the common stock on October 12, 2000, for an aggregate consideration of $1,045,000. The purchase price was paid through the participants’ delivery of a 50%-recourse promissory note payable to the Company for three

F-17

Access Pharmaceuticals, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Three years ended December 31, 2006

NOTE 9 - STOCKHOLDERS' EQUITY - Continued

executive officer participants and a full-recourse promissory note payable to the Company for one participant. Each note bears interest at 5.87% compounded semi-annually and has a maximum term of ten years. The notes are secured by a pledge of the purchased shares to the Company. The Company recorded the notes receivable from participants in this Program of $1,045,000 as a reduction of equity in the Consolidated Balance Sheet. Interest on the notes is neither being collected nor accrued. The stock granted under the Program is fully vested at December 31, 2006.

Warrants

There were warrants to purchase a total of 4,826,517 shares of common stock outstanding at December 31, 2006. All warrants were exercisable at December 31, 2006. The warrants had various prices and terms as follows:

Summary of Warrants	Outstanding		Exercise Price	Expiration Date
2006 convertible note (a)	3,863,634	$	1.32	2/16/12
2006 convertible note (a)	386,364		1.32	10/24/12
2006 convertible note (a)	386,364		1.32	12/06/12
2006 investor relations advisor (b)	50,000		2.70	12/27/11
2004 offering (c)	89,461		35.50	2/24/09
2004 offering (c)	31,295		27.00	2/24/09
2003 financial advisor (d)	14,399		19.50	10/30/08
2002 scientific consultant (e)	2,000		24.80	2/01/09
2001 scientific consultant (f)	3,000		15.00	1/1/08
Total	4,826,517

a)	In connection with the convertible note offerings in 2006, warrants to purchase a total of 4,636,362 shares of common stock were issued. All of the warrants are exercisable immediately and expire six years from date of issue.

During 2006, an investor relations advisor received warrants to purchase 50,000 shares of common stock at an exercise price of $2.70 per share at any time from December 27, 2006 until December 27, 2011, for investor relations consulting services to be rendered in 2007. All of the warrants were exercisable at December 31, 2006. The fair value of the warrants was $2.00 per share on the date of the grant using the Black-Scholes pricing model with the following assumptions: expected dividend yield 0.0%, risk-free interest rate 4.58%, expected volatility 138% and a term of 2.5 years.

c)	In connection with offering of common stock in 2004, warrants to purchase a total of 120,756 shares of common stock were issued. All of the warrants are exercisable and expire five years from date of issuance.

During 2003, financial advisors received warrants to purchase 14,399 shares of common stock at any time until October 30, 2008, for financial consulting services rendered in 2003 and 2004. All the warrants are exercisable. The fair value of the warrants was $14.10 per share on the date of the grant using the Black-Scholes pricing model with the following assumptions: expected dividend yield 0.0%, risk-free interest rate 2.9%, expected volatility 92% and a term of 5 years.

F-18

Access Pharmaceuticals, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Three years ended December 31, 2006

NOTE 9 - STOCKHOLDERS' EQUITY - Continued

During 2002, a director who is also a scientific advisor received warrants to purchase 2,000 shares of common stock at an exercise price of $24.55 per share at any time until February 1, 2009, for scientific consulting services rendered in 2002. The fair value of the warrants was $18.50 per share on the date of the grant using the Black-Scholes pricing model with the following assumptions: expected dividend yield 0.0%, risk-free interest rate 3.90%, expected volatility 81% and a term of 7 years.

During 2001, a director who is also a scientific advisor received warrants to purchase 3,000 shares of common stock at an exercise price of $15.00 per share at any time until January 1, 2008, for scientific consulting services rendered in 2001. The fair value of the warrants was $13.70 per share on the date of the grant using the Black-Scholes pricing model with the following assumptions: expected dividend yield 0.0%, risk-free interest rate 5.03%, expected volatility 118% and a term of 7 years.

2001 Restricted Stock Plan

We have a restricted stock plan, the 2001 Restricted Stock Plan, as amended, under which 80,000 shares of our authorized but unissued common stock were reserved for issuance to certain employees, directors, consultants and advisors. The restricted stock granted under the plan generally vests, 25% two years after the grant date with additional 25% vesting every anniversary date. All stock is vested after five years. At December 31, 2006 there were 27,182 shares issued and 52,818 shares available for grant under the 2001 Restricted Stock Plan.

NOTE 10 - STOCK OPTION PLANS

We have various stock-based employee compensation plans described below:

2005 Equity Incentive Plan

We have a stock awards plan, (the “2005 Equity Incentive Plan”), under which 1,000,000 shares of our authorized but unissued common stock were reserved for issuance to employees of, or consultants to, one or more of the Company and its affiliates, or to non-employee members of the Board or of any board of directors (or similar governing authority) of any affiliate of the Company. The 2005 Equity Incentive Plan replaced the previously approved stock option plan (the 1995 Stock Awards Plan").

For the 2005 Equity Incentive Plan, the fair value of options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in fiscal 2006: dividend yield of 0%; volatility of 127%; risk-free interest rate of 4.85%; and expected lives of 1.6 years. The weighted average fair value of options granted was $0.36 per share during 2006. The assumptions for grants in fiscal 2005 were: dividend yield of 0%; volatility of 113%; risk-free interest rate of 4.71%; and expected lives of four years. The weighted average fair value of options granted was $8.50 per share during 2005.

F-19

Access Pharmaceuticals, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Three years ended December 31, 2006

NOTE 10 - STOCK OPTION PLANS - Continued

Summarized information for the 2005 Equity Incentive Plan is as follows:

		Weighted-
		average
		exercise
	Options	price
Outstanding options at January 1, 2005	-	$ -
Granted, fair value of $8.50 per share	50,000	5.45
Outstanding options at December 31, 2005	50,000	5.45

Granted, fair value of $ 0.36 per share	753,872	1.32
Forfeited	(1,200)	3.15
Outstanding options at December 31, 2006	802,672	1.04

Exercisable at December 31, 2005	14,000	5.45
Exercisable at December 31, 2006	204,718	2.00

The intrinsic value of options under this plan related to the outstanding and exercisable options were $1,554,000 and $281,000, respectively, at December 31, 2006.

Further information regarding options outstanding under the 2005 Equity Incentive Plan at December 31, 2006 is summarized below:

	Number of	Weighted average		Number of	Weighted aververage
	options	Remaining	Exercise	options	Remaining	Exercise
Range of excercise prices	outstanding	life in years	price	exerciseable	life in years	price

$0.63 - 0.85	717,000	9.6	$0.63	129,250	9.6	$0.63
$3.15 - 5.45	85,672	8.9	4.49	75,468	8.9	4.36
	802,672			204,718

2000 Special Stock Option Plan

On February 11, 2000 we adopted the 2000 Special Stock Option Plan and Agreement (the “Plan”). The Plan provides for the award of options to purchase 100,000 shares of the authorized but unissued shares of common stock of the Company. At December 31, 2006, there were no additional shares available for grant under the Plan.

Under the 2000 Special Stock Option Plan, 100,000 options were issued in 2000 and are outstanding at December 31, 2006. All of the options in the 2000 Special Stock Option Plan were exercisable at December 31, 2006, 2005 and 2004. All of the options expire on June 30, 2007 and have an exercise price of $12.50 per share.

1995 Stock Awards Plan

Under the 1995 Stock Awards Plan, as amended, 500,000 shares of our authorized but unissued common stock were reserved for issuance to optionees including officers, employees, and other individuals performing services for us. At December 31, 2006, there were no additional shares available for grant under the 1995 Stock Awards Plan. A total of 360,917 options were outstanding under this plan at December 31, 2006.

Options granted under all the plans generally vest ratably over a four to five year period and are generally exercisable over a ten-year period from the date of grant. Stock options were generally granted with an exercise price equal to the market value at the date of grant.

F-20

Access Pharmaceuticals, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Three years ended December 31, 2006

NOTE 10 - STOCK OPTION PLANS - Continued

Under the 1995 Stock Awards Plan, the fair value of options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in fiscal 2005 and 2004, respectively: dividend yield of 0% for both periods; volatility of 104% and 41%; risk-free interest rates of 4.15% and 3.61%, respectively, and expected lives of four years for all periods. The weighted average fair values of options granted were $6.45 and $10.90 per share during 2005 and 2004, respectively.

Summarized information for the 1995 Stock Awards Plan is as follows:

		Weighted-
		average
		exercise
	Options	price

Outstanding options at January 1, 2004	410,725	$ 17.25
Granted, fair value of $10.90 per share	62,840	28.75
Exercised	(21,939)	11.90
Forfeited	(15,196)	21.05
Outstanding options at December 31, 2004	436,430	18.80

Granted, fair value of $6.45 per share	49,700	12.05
Forfeited	(55,859)	17.30
Outstanding options at December 31, 2005	430,271	18.20

Forfeited	(69,354)	19.12
Outstanding options at December 31, 2006	360,917	18.03

Exercisable at December 31, 2004	334,232	18.20
Exercisable at December 31, 2005	406,760	18.40
Exercisable at December 31, 2006	349,990	18.12

There was no intrinsic value related to outstanding or exercisable options under this plan at December 31, 2006.

Further information regarding options outstanding under the 1995 Stock Awards Plan at December 31, 2006 is summarized below:

Range of	Number of	Weighted average		Number of	Weighted average
exercise	shares	Remaining	Exercise	shares	Remaining	Exercise
prices	outstanding	life in years	price	exercisable	life in years	Price

$10.00 - 12.50	147,640	3.6	$11.15	139,032	3.3	$11.12
$14.05 - 18.65	112,717	1.9	16.61	112,717	1.9	16.61
$20.25 - 34.38	100,560	2.1	29.73	98,241	2.0	29.74

	360,917			349,990

F-21

Access Pharmaceuticals, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Three years ended December 31, 2006

NOTE 11 - INCOME TAXES

Income tax expense differs from the statutory amounts as follows:

	2006			2005			2004

Income taxes at U.S. statutory rate	$	(4,378,000	)	$	(438,000	)	$	(3,442,000	)
Change in valuation allowance		3,972,000			(2,051,000	)		895,000
Change in miscellaneous items		(130,000)			397,000			598,000
Benefit of foreign losses not recognized		58,000			304,000			-
Expenses not deductible		240,000			738,000			7,000
Expiration of net operating loss and general
business credit carryforwards, net of revisions		238,000			1,050,000			1,942,000

Total tax expense	$	-		$	-		$	-

Deferred taxes are provided for the temporary differences between the financial reporting bases and the tax bases of our assets and liabilities. The temporary differences that give rise to deferred tax assets were as follows:

	December 31,
	2006			2005			2004
Deferred tax assets (liabilities)
Net operating loss carryforwards	$ 22,634,000			$ 20,261,000			$ 20,808,000
General business credit carryforwards		2,402,000			2,261,000			2,094,000
Deferred gain on sale of oral/topical care assets		-			(1,490,000	)		-
Property, equipment and goodwill		46,000			78,000			259,000

Gross deferred tax assets		25,082,000			21,110,000			23,161,000
Valuation allowance		(25,082,000	)		(21,110,000	)		(23,161,000	)

Net deferred taxes	$	-		$	-		$	-

At December 31, 2006, we had approximately $66,569,000 of net operating loss carryforwards and approximately $2,402,000 of general business credit carryforwards. These carryforwards expire as follows:

	Net operating loss carryforwards		General business credit carryforwards
2007	$	994,000	$	26,000
2008		4,004,000		138,000
2009		1,661,000		185,000
2010		2,171,000		140,000
2011		4,488,000		13,000
Thereafter		53,251,000		1,900,000
	$	66,569,000	$	2,402,000

As a result of a merger on January 25, 1996, a change in control occurred for federal income tax purposes which limits the utilization of pre-merger net operating loss carryforwards of approximately $3,100,000 to approximately $530,000 per year.

F-22

Access Pharmaceuticals, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Three years ended December 31, 2006

NOTE 12 - QUARTERLY FINANCIAL DATA (UNAUDITED)

Our results of operations by quarter for the years ended December 31, 2006 and 2005 were as follows (in thousands, except per share amounts):

	2006 Quarter Ended
	March 31			June 30			September 30			December 31
Loss from operations	$	(4,856	)	$	(3,331	)	$	(2,015	)	$	(3,222	)
Discontinued operations		-			-			-			550
Net loss	$	(4,856	)	$	(3,331	)	$	(2,015	)	$	(2,672	)
Basic and diluted income/loss per common share	$	(1.38	)	$	(0.94	)	$	(0.57	)	$	(0.76	)


	2005 Quarter Ended
		March 31			June 30			September30			December31
Loss from operations	$	(1,616	)	$	(2,988	)	$	(1,612	)	$	(1,339	)
Discontinued operations		(806	)		(798	)		(451	)		7,910
Net loss/income	$	(2,422	)	$	(3,786	)	$	(2,063	)	$	6,571
Basic and diluted loss per common share	$	(0.78	)	$	(1.21	)	$	(0.65	)	$	2.11

NOTE 13 - SUBSEQUENT EVENTS (UNAUDITED)

On March 30, 2007, Access and SCO Capital Partners LLC and affiliates agreed to extend the maturity date of an aggregate of $6,000,000 of 7.5% convertible notes to April 27, 2007 from March 31, 2007.

On February 21, 2007 we announced we had entered into a non-binding letter of intent to acquire Somanta Pharmaceuticals, Inc. Pursuant to the terms of the non-binding letter of intent, upon consummation of the acquisition, Somanta’s preferred and common shareholders would receive an aggregate of 1.5 million shares of Access’ common shares which would represent approximately 13% of the combined company assuming the conversion of Access’ existing convertible debt under existing terms of conversion. The closing of the transaction is subject to numerous conditions including the execution of a definitive Merger Agreement, receipt of necessary approvals as well as completion of our due diligence investigation. There can be no assurance that the transaction will be consummated or if consummated, that it will be on the terms described herein.

F-23

PART II


Delaware	3841	83-0221517
(State or jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

Title of Each Class of Securities Being Registered	Amount Being Registered	Proposed Maximum Offering Price Per Share	Proposed Maximum Aggregate Offering Price	Amount of Registration Fee
Common Stock, $0.01 par value per share	9,298,170 (1)	$1.18 (2)	$10,971,840	$ 1,173.99 (2)


(1)	86,083 shares and 3,863,634 shares are issuable to selling stockholders upon exercise of warrants for the purchase of shares of the Registrant’s Common Stock and 5,348,453 shares of Common Stock are issuable to selling stockholders upon conversion of notes. All share numbers in this Registration Statement and the accompanying prospectus reflect a one-for-five reverse stock split of the Company’s common Stock which was effected June 5, 2006.

(2)	The registrant previously paid $1,173.99 of the registration fee in connection with the filing of its Form S-1 Registration Statement filed with the Securities and Exchange Commission on July 12, 2006.

TABLE OF CONTENTS	Page

Prospectus Summary	1
Summary Consolidated Financial Information	5
Risk Factors	6
Forward-Looking Statements	13
Use of Proceeds	14
Determination of Offering Price	14
Selling Security Holders	14
Dilution	16
Plan of Distribution	16
Management’s Discussion and Analysis or Plan of Operations	18
Description of Business	27
Description of Property	38
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	38
Directors and Executive Officers	38
Executive Compensation	41
Legal Proceedings	46
Security Ownership of Certain Beneficial Owners and Management	46
Securities Authorized for Issuance Under Equity Compensation Plans	47
Certain Relationships and Related Transactions	48
Market for Common Equity and Related Stockholder Matters	49
Description of Securities	50
Transfer Agent	52
Indemnification	53
Experts	53
Legal Matters	53
How to Get More Information	53
Consolidated Financial Statements	F-1
PART II
Item 24. Indemnification of Directors and Officers	II-1
Item 25. Other Expenses of Issuance and Distribution	II-1
Item 26. Recent Sales of Unregistered Securities	II-1
Item 27. Exhibits	II-1
Item 28. Undertakings	II-3
Signatures	II-5
Power of Attorney	II-5

Compound	Originator	Technology	Indication	FDA Filing	Clinical Stage (1)
Cancer
MuGard™	Access	Mucoadhesive liquid	Mucositis	510(k)	Marketing clearance
ProLindac^TM (Polymer Platinate, AP5346) (2)	Access - U London	Synthetic polymer	Cancer	Clinical Development(3)	Phase II
Oral Insulin	Access	Cobalamin	Diabetes	Research	Pre-Clinical
Oral Delivery System	Access	Cobalamin	Various	Research	Pre-Clinical
Cobalamin-Targeted Therapeutics	Access	Cobalamin	Anti-tumor	Research	Pre-Clinical

		For the Year Ended December 31,
	2006		2005	2004	2003	2002
(in thousands, except per share amounts)
Consolidated Statement of Operations and Comprehensive Loss Data:
Total revenues	$ -		$ -	$ -	$ -	$ 89
Operating loss	(5,175)		(9,622)	(6,003)	(5,426)	(5,925)
Interest and miscellaneous income	294		100	226	279	594
Interest and other expense	(7,436)		(2,100)	(1,385)	(1,281)	(1,278)
Unrealized loss	(1,107)		-	-	-	-
Income tax benefit	173		4,067	-	-	-
Loss from continuing operations	(13,251)		(7,555)	(7,162)	(6,428)	(6,520)

Discontinued operations net of taxes $173 in 2006 and $4,067 in 2005	377		5,855	(3,076)	(507)	(2,864)
Net loss	(12,874)		(1,700)	(10,238)	(6,935)	(9,384)

Common Stock Data: (2)
Net loss per basic and diluted common share	$ (3.65)		$ (0.53)	$ (3.38)	$ (2.61)	$ (3.58)
Weighted average basic and diluted common shares outstanding	3,532		3,237	3,032	2,653	2,621

SCO Capital Partners, LLC	7,982,584	69.3	%	6,636,362	1,346,222	27.6	%
Beach Capital LLC	795,454	18.4	%	795,454	-0-	-0-	%
Lake End Capital LLC	1,222,728	25.7	%	886,363	336,365	8.7	%
Mark J. Alvino	55,525	1.6	%	45,454	10,071	0.3	%
Jeffrey B. Davis	5,820	0.2	%	-0-	5,820	0.2	%
Howard Fisher	54,545	1.5	%	45,454	9,091	0.3	%
Cornell Capital Partners, LP	86,083	2.4	%	86,083	-0-	-0-	%
Oracle Partners, LP	646,000	15.5	%	504,900	141,100	3.8	%
Oracle Institutional Partners, LP	176,680	4.8	%	139,700	36,980	1.0	%
Oracle Associates LLC	136,824	3.7	%	-0-	136,824	3.7	%
Sam Oracle Fund, Inc.	145,000	3.9	%	132,000	13,000	0.4	%
Oracle Offshore, Ltd.	32,800	0.9	%	26,400	6,400	0.2	%
Larry N. Feinberg	3,660	0.1	%	-0-	3,660	0.1	%

Total:	11,343,703	76.2	%	9,298,170	2,045,533	36.7	%

(in thousands)	Twelve Months ended December 31,				Inception To Date (1)
Project	2006		2005		Inception To Date (1)
Polymer Platinate (ProLindac™)	$	2,043	$	2,653	$	19,654
Mucoadhesive Liquid Technology (MLT)		10		-		1,490
Others (2)		-		130		5,044
Total	$	2,053	$	2,783	$	26,188

	Payment Due by Period
		Total		Less Than 1 Year		1-4 Years
Long-Term Debt Obligations	$	16,395,000	$	10,895,000	$	5,500,000
Interest		2,422,000		1,151,000		1,271,000
Lease Obligations		135,000		92,000		43,000
Total	$	18,952,000	$	12,138,000	$	6,814,000

Name	Age	Title
Jeffrey B. Davis	44	Chairman of the Board
Stephen R. Seiler	51	President, Chief Executive Officer, Director
Rosemary Mazanet, M.D., Ph.D.	51	Vice Chairman
Esteban Cvitkovic, M.D.	57	Vice Chairman - Europe
Mark J. Ahn, Ph.D.	44	Director
Mark J. Alvino	39	Director
J. Michael Flinn	73	Director
Stephen B. Howell, M.D.	62	Director
David P. Luci	40	Director
Herbert H. McDade, Jr.	80	Director
John J. Meakem, Jr.	70	Director
David P. Nowotnik, Ph.D.	58	Senior Vice President Research & Development
Phillip S. Wise	48	Vice President, Business Development & Strategy
Stephen B. Thompson	53	Vice President, Chief Financial Officer, Treasurer, Secretary

						Stock			Option	All Other
Name and Principal Position (7)	Year	Salary ($)			Bonus	Awards ($)			Awards ($)		Compensation		Total ($)
		(1)			($)		(2)		(3)		(4)

Rosemary Mazanet⁽⁵⁾ Acting CEO	2006 2005	$	357,385 217,500	$	100,000 30,000	$	- -	$	81,464 168,468	$	2,594 1,297	$	541,443 248,797
Kerry P. Gray⁽⁶⁾ Former President and CEO	2005	$	133,332	$	-	$	-	$	-	$	3,505	$	136,837
David P. Nowotnik, Ph.D. Senior Vice President Research and Development	2006 2005	$	253,620 250,710	$	20,000 25,408	$	- 24,154	$	40,732 67,619	$	7,152 7,094	$	321,504 374,985
Phillip S. Wise⁽⁷⁾ Vice President, Business Development	2006	$	116,667	$	25,000	$	-	$	40,732	$	358	$	182,757
Stephen B. Thompson Vice President, Chief Financial Officer	2006 2005	$	154,080 152,310	$	20,000 15,435	$	- 14,704	$	40,732 42,262	$	4,508 4,455	$	219,320 229,166

Name	Number of Securities Underlying Unexcersised Options (#) Exercisable	Number of Securities Underlying Unexcersised Options (#) Unexercisable	Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)	Option Exercise Price ($)	Option Exercise Date
Rosemary Mazanet⁽²⁾	50,000 39,796 6,000	150,000 10,204	-	0.63 5.45 12.50	08/17/06 11/02/05 05/11/05
Kerry P. Gray⁽³⁾	20,000 28,000 32,000 32,000 20,000 100,000 32,000 32,000	-	-	29.25 11.50 18.65 34.38 27.50 12.50 10.00 15.00	01/23/04 05/19/03 03/22/02 11/20/00 10/12/00 03/01/00 07/20/99 06/18/98
David P. Nowotnik, Ph.D.	25,000 3,167 3,646 6,854 10,000 10,000 10,000 10,000	75,000 4,833 1,354 146	-	0.63 11.60 29.25 10.10 18.65 12.50 10.00 15.00	08/17/06 05/23/05 01/23/04 01/30/03 03/22/02 03/01/00 07/20/99 11/16/98

Common Stock Beneficially Owned
Name of Beneficial Owner	Number of Shares⁽¹⁾	% of Class
Jeffery B. Davis ⁽²	30,820	*
Rosemary Mazanet ⁽³⁾	147,256	4.0%
Mark Ahn ⁽⁴⁾	25,000	*
Mark J. Alvino ⁽⁵⁾	80,525	2.2%
J. Michael Flinn ⁽⁶⁾	84,880	2.4%
Stephen B. Howell, M.D. ⁽⁷⁾	53,839	1.5%
Herbert H. McDade, Jr. ⁽⁸⁾	46,151	1.3%
John J. Meakem, Jr.⁽⁹⁾	53,536	1.5%
David P. Nowotnik, Ph.D. ⁽¹⁰⁾	122,682	3.4%
Phillip S. Wise ⁽¹¹⁾	50,000	1.4%
Stephen B. Thompson ⁽¹²⁾	91,521	2.5%
Larry N. Feinberg ⁽¹³⁾	1,142,964	26.4%
Kerry P. Gray ⁽¹⁴⁾	355,136	9.3%
SCO Capital Partners LLC ⁽¹⁵⁾	4,682,040	57.0%
All Directors and Executive Officers as a group (consisting of 12 persons) ⁽¹⁶⁾	786,211	18.5%

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)	(c)
Equity compensation plans approved by security holders 2005 Equity Incentive Plan 1995 Stock Awards Plan 2001 Restricted Stock Plan	802,672 360,917 -	$ 1.04 $18.03 -	197,328 - 52,818
Equity compensation plans not approved by security holders 2000 Special Stock Option Plan	100,000	$12.50	-
Total	1,263,589	$ 6.80	250,146

		Common Stock

		High		Low
Quarter Ended
First quarter March 31, 2007	$	10.66	$	2.50
Second quarter April 30, 2007		6.75		4.75

		December 31,
	2006		2005	2004	2003	2002
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short term investments	$ 4,389		$ 474	$ 2,261	$ 2,587	$ 9,776
Restricted cash	-		103	1,284	649	468
Total assets	6,426		7,213	11,090	11,811	19,487
Deferred revenue	173		173	1,199	1,184	1,199
Convertible notes, net of discount	8,833		7,636	13,530	13,530	13,530
Total liabilities	16,313		11,450	17,751	17,636	18,998
Total stockholders' equity (deficit)	(9,887)		(4,237)	(6,661)	(5,825)	489


Fiscal Year Ended December 31, 2006
First quarter	$	2.65	$	0.80
Second quarter		1.50		0.10
Third quarter		1.30		0.45
Fourth quarter		3.00		1.05

Fiscal Year Ended December 31, 2005
First quarter	$	18.30	$	11.00
Second quarter		15.05		8.80
Third quarter		9.95		2.80
Fourth quarter		8.65		2.60

	CONSOLIDATED FINANCIAL STATEMENTS


	FINANCIAL INFORMATION	Page


	Report of Registered Independent Registered Public Accounting Firm	F-1
	Report of Registered Independent Registered Public Accounting Firm	F-2
	Consolidated Balance Sheets at December 31, 2006 and 2005	F-3
	Consolidated Statements of Operations and Comprehensive Loss for 2006, 2005 and 2004	F-20
	Consolidated Statements of Stockholders’ Equity (Deficit) for 2006, 2005 and 2004	F-21
	Consolidated Statements of Cash Flows for 2006, 2005 and 2004	F-22
	Notes to Consolidated Financial Statements	F-24

Type of Expense		Amount
Securities and Exchange Commission Registration Fee	$	1,	174
Transfer Agent Fees		2,	500
Printing and Engraving Expenses		15,	000
Accounting Fees and Expenses		5,	000
Legal Fees and Expenses		6,	326
Total	$	30,	000

SIGNATURES


In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on our behalf by the undersigned on April 26, 2007.

	Access Pharmaceuticals, Inc.

Date: May 1, 2007	By	/s/ Stephen R. Seiler
		Stephen R. Seiler
		Chief Executive Officer and President
		(Principal Executive Officer)

Date: May 1, 2007	By	/s/ Stephen B. Thompson
		Stephen B. Thompson
		Chief Financial Officer and Treasurer
		(Principal Financial and Accounting Officer)

Date: May 1, 2007	/s/ Stephen R. Seiler
	Stephen R. Seiler, President and Chief Executive Officer, Director

Date: May 1, 2007	/s/ Mark J. Ahn
	Mark J. Ahn, Director

Date: May 1, 2007	*
	Mark J. Alvino, Director


Date: May 1, 2007	/s/ Esteban Cvitkovic, MD
	Esteban Cvitkovic, MD

Date: May 1, 2007	*
	Jeffrey B. Davis, Director

Date: May 1, 2007	*
	J. Michael Flinn, Director

Date: May 1, 2007	*
	Stephen B. Howell, MD, Director

Date: May 1, 2007	/s/ David P. Luci
	David P. Luci, Director

Date: May 1, 2007	*
	Herbert H. McDade, Jr., Director

Date: May 1, 2007	*
	Rosemary Mazanet, MD, PhD, Director

Date: May 1, 2007	*
	John J. Meakem, Jr., Director