s1a-111210.htm

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Access Pharmaceuticals, Inc.

We have audited the accompanying consolidated balance sheets of Access Pharmaceuticals, Inc. and subsidiaries, as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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 financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Access Pharmaceuticals, Inc. and subsidiaries as of December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

As described in Note 12 to the consolidated financial statements, the Company and MacroChem Corporation were deemed entities under common control related to the acquisition of MacroChem Corporation by the Company on February 25, 2009. The consolidated financial statements as of and for the years ended December 31, 2009 and 2008 have been retroactively restated on a combined basis to reflect the transaction as if it had occurred on January 1, 2008.

As described in Note 9 to the consolidated financial statements, the Company adopted Emerging Issues Task Force Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (Accounting Standards Codification Topic 815, Derivatives and Hedging) effective as of January 1, 2009.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has had recurring losses from operations, negative cash flows from operating activities and has an accumulated deficit. Management’s plans in regard to these matters are also described in Note 2. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

/s/ WHITLEY PENN LLP

Dallas, Texas

March 22, 2010

F-2

Access Pharmaceuticals, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

ASSETS	December 31, 2009	December 31, 2008
		(See Note 12)
Current assets Cash and cash equivalents Receivables Prepaid expenses and other current assets	$ 607,000 36,000 42,000	$ 2,677,000 147,000 175,000
Total current assets	685,000	2,999,000
Property and equipment, net	50,000	95,000
Patents, net	787,000	999,000
Other assets	61,000	78,000
Total assets	$ 1,583,000	$ 4,171,000
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities Accounts payable Accrued expenses Dividends payable Accrued interest payable Notes payable Current portion of deferred revenue	$ 4,094,000 857,000 2,773,000 563,000 - 347,000	$ 3,287,000 1,295,000 1,896,000 145,000 825,000 164,000
Total current liabilities	8,634,000	7,612,000
Derivative liability Long-term deferred revenue Long-term convertible debt	9,708,000 4,730,000 5,500,000	- 2,245,000 5,500,000
Total liabilities	28,572,000	15,357,000
Commitments and contingencies
Stockholders' deficit Convertible preferred stock - $.01 par value; authorized 2,000,000 shares; 2,992.3617 issued at December 31, 2009; 3,242.8617 issued at December 31, 2008 Common stock - $.01 par value; authorized 100,000,000 shares; issued, 13,171,545 at December 31, 2009; issued 9,467,474 at December 31, 2008 Additional paid-in capital Notes receivable from stockholders Treasury stock, at cost – 163 shares	- 132,000 215,735,000 (1,045,000) (4,000)	- 95,000 225,753,000 (1,045,000) (4,000)
Accumulated deficit	(241,807,000)	(235,985,000)
Total stockholders' deficit	(26,989,000)	(11,186,000)
Total liabilities and stockholders' deficit	$ 1,583,000	$ 4,171,000

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

F-3

Access Pharmaceuticals, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

	December 31,
	2009			2008
				(See Note 12)
Revenues
License revenues	$	315,000		$	118,000
Royalties		37,000			-
Sponsored research and development		-			173,000
Total revenues		352,000			291,000

Expenses
Research and development		2,657,000			23,235,000
General and administrative		7,112,000			7,463,000
Depreciation and amortization		259,000			324,000
Total expenses		10,028,000			31,022,000

Loss from operations		(9,676,000	)		(30,731,000	)

Interest and miscellaneous income		29,000			211,000
Interest and other expense		(539,000	)		(911,000	)
Loss on change in fair value of derivative		(7,154,000	)		-
		(7,664,000	)		(700,000	)
Net loss		(17,340,000	)		(31,431,000	)

Less preferred stock dividends		(1,886,000	)		(3,358,000	)
Net loss allocable to common stockholders	$	(19,226,000	)	$	(34,789,000	)


Basic and diluted loss per common share
Net loss allocable to common stockholders	$	(1.63	)	$	(4.16	)

Weighted average basic and diluted common shares outstanding		11,818,530			8,354,031

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

F-4

Access Pharmaceuticals, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

(See Note 12)

	Common Stock			Preferred Stock								Notes
									Additional			receivable from
	Shares			Shares					paid-in			stockholders			Treasury			Accumulated
									capital						stock			deficit
Access-MacroChem as if combined at January 1, 2008	6,085,000	$	61,000	3,227.3617		$	-	$	213,782,000		$	(1,045,000	)	$	(4,000	)	$	(199,892,000	)
Common stock issued for services	10,000		-	-			-		27,000			-			-			-
Warrants issued for services	-		-	-			-		350,000			-			-			-
Common stock issued for cash exercise of options	25,000		-	-			-		15,000			-			-			-
Stock option compensation expense	-		-	-			-		922,000			-			-			-
Preferred stock issuances	-		-	272.5000			-		1,687,000			-			-			-
Warrants issued with preferred stock	-		-	-			-		1,142,000			-			-			-
Costs of stock issuances	-		-	-			-		(385,000	)		-			-			-
Preferred stock dividend beneficial conversion feature	-		-	-			-		1,308,000			-			-			(1,308,000	)
Common stock and warrants issued to Somanta shareholders	1,500,000		15,000	-			-		4,916,000			-			-			-
Common stock and warrants issued to Somanta creditors	538,000		5,000	-			-		1,571,000			-			-			-
Preferred stock converted into common stock	857,000		9,000	(257.0000	)		-		(9,000	)		-			-			-
Common stock issued for preferred dividends	452,000		5,000	-			-		427,000			-			-			-
Preferred dividends	-		-	-			-		-			-			-			(3,358,000	)
Net loss	-		-	-			-		-			-			-			(31,427,000	)

Balance, December 31, 2008	9,467,000	95,000	3,242.8617		-	225,753,000		(1,045,000	)	(4,000	)	(235,985,000	)

Cumulative effect of a change in accounting principle (See Note 9)	-	-	-		-	(15,957,000	)	-		-		13,404,000
Restricted common stock issued for services	687,000	8,000	-		-	2,199,000		-		-		-
Warrants issued for services	-	-	-		-	796,000		-		-		-
Common stock issued for cash exercise of options	250,000	2,000	-		-	177,000		-		-		-
Common stock issued for cashless warrant exercises	33,000	-	-		-	-		-		-		-
Preferred stock converted into common stock	836,000	9,000	(250.5000	)	-	(9,000	)	-		-		-
Common stock issued for preferred dividends	915,000	9,000	-		-	918,000		-		-		-
Stock option compensation expense	-	-	-		-	811,000		-		-		-
Common stock issued to MacroChem noteholders for notes and accrued interest	859,000	8,000	-		-	851,000		-		-		-
Common stock issued to former MacroChem executives	125,000	1,000	-		-	196,000		-		-		-
Preferred dividends	-	-	-		-	-		-		-		(1,886,000	)
Net loss	-	-	-		-	-		-		-		(17,340,000	)

Balance, December 31,

2009

13,172,000

132,000

2,992.3617

215,735,000

(1,045,000

)

(4,000

)

(241,807,000

)

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,
	2009			2008
				(See Note 12)
Cash flows from operating activities:
Net loss	$	(17,340,000	)	$	(31,431,000	)
Adjustments to reconcile net loss to net cash used
in operating activities:
Stock option compensation expense		811,000			922,000
Stock and warrants issued for services		3,200,000			533,000
Acquired in-process research & development		-			18,540,000
Amortization of debt discount and beneficial conversion feature		-			263,000
Loss on change in fair value of derivative		7,154,000			-
Depreciation and amortization		259,000			317,000
Change in operating assets and liabilities:
Receivables		111,000			(112,000	)
Prepaid expenses and other current assets		133,000			(19,000	)
Other assets		17,000			(66,000	)
Accounts payable and accrued expenses		369,000			260,000
Dividends payable		(82,000	)		19,000
Accrued interest payable		452,000			15,000
Deferred revenue		2,668,000			1,435,000
Net cash used in operating activities		(2,248,000	)		(9,324,000	)

Cash flows from investing activities:
Capital expenditures		(2,000	)		(31,000	)
Proceeds from sale of asset		1,000			13,000
Redemption of short-term investments and certificate
of deposits		-			759,000
Virium acquisition by MacroChem, net of cash acquired		-			(240,000	)
Somanta acquisition, net of cash acquired		-			(65,000	)
Net cash provided by (used in) investing activities		(1,000	)		436,000

Cash flows from financing activities:
Proceeds from debt issuance		-			400,000
Payments of notes payable		-			(639,000	)
Proceeds from exercise of stock options		179,000			15,000
Proceeds from preferred stock issuances, net of costs		-			2,444,000
Net cash provided by financing activities		179,000			2,220,000

Net decrease in cash and cash equivalents		(2,070,000	)		(6,668,000	)
Cash and cash equivalents at beginning of year		2,677,000			9,345,000
Cash and cash equivalents at end of year	$	607,000		$	2,677,000

Supplemental cash flow information:
Cash paid for interest	$	1,000		$	568,000

Supplemental disclosure of noncash transactions
Shares issued for payables, notes payable and accrued interest		859,000			1,576,000
Shares issued for dividends on preferred stock		927,000			432,000
Warrants issued for placement agent fees		-			104,000
Preferred stock dividends in dividends payable		1,886,000			3,358,000
Beneficial conversion feature -
February 2008 preferred stock dividends		-			857,000
November 2007 preferred stock dividends		-			451,000
Preferred stock issuance costs paid in cash		-			281,000
Debt discount related to MacroChem convertible debt issuance		-			93,000

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

F-6

Access Pharmaceuticals, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Two years ended December 31, 2009

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.

The consolidated balance sheet as of December 31, 2008, contains financial information taken from the audited Access financial statements as of that date and is combined with the audited financial data from MacroChem, as discussed further in Note 12.

On February 25, 2009, we closed our acquisition of MacroChem Corporation through the issuance of an aggregate of approximately 2.5 million shares of our common stock. Prior to our acquisition of MacroChem, SCO, an investment company, held a majority of Access’ and MacroChem’s voting stock. Specifically, SCO owned 53% of the voting stock of Access and 63% of the voting stock of MacroChem. A non-controlling interest of 37% existed at the merger date of MacroChem. In addition, certain members of SCO’s management serve on the board of directors of both Access and MacroChem. Based on these facts, Access and MacroChem were deemed under the common control of SCO. As the entities were deemed under common control, the acquisition was recorded using the pooling-of-interest method and the financial information for all periods presented reflects the financial statements of the combined companies in accordance with Financial Accounting Standards Board standards on business combinations for entities under common control. See also Note 12.

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.

Reclassifications

Certain reclassifications to the consolidated financial statements for all prior periods presented have been made to conform to the 2009 presentation.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported period. Our significant estimates include primarily those required in the valuation of impairment analysis of intangible assets, fair value of financila instruments, property and equipment, revenue recognition, allowances for doubtful accounts, stock-based compensation and valuation of other equity instruments, valuation allowances for deferred tax assets and tax accruals. Although we believe that adequate accruals have been made for unsettled issues, additional gains or losses could occur in future years from resolutions of outstanding matters. Actual results could differ materially from original estimates.

F-7

Segments

The Company operates in a single segment.

Cash and Cash Equivalents

We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. At December 31, 2009 and 2008, we had no such investments. We maintain deposits primarily in two financial institutions, which may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation (FDIC). We have not experienced any losses related to amounts in excess of FDIC limits.

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.

Research and Development Expenses

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, receivables, accounts payable and accruals approximate fair value due to the short maturity of these items. The carrying value of the convertible long-term debt is at book value which approximates the fair value as the interest rate is at market value.

We consider the conversion options and warrants related to its Series A Cumulative Convertible Preferred Stock to be derivatives, and we record the fair value of the derivative liabilities in our consolidated balance sheets. Changes in fair value of the derivative liabilities are included in loss on change in fair value of derivative in the consolidated statements of operations.

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.

We account for income taxes in accordance with FASB ASC 740, Income Taxes. Interest costs and penalties related to income taxes are classified as interest expense and general and administrative costs, respectively, in our consolidated financial statements. For the years ended December 31, 2009 and 2008, we did not recognize any interest or penalty expense related to income taxes. It is determined not to be reasonably likely for the amounts of unrecognized tax benefits to significantly increase or decrease within the next 12 months. We are currently subject to a three year statute of limitations by major tax jurisdictions. We and our subsidiaries file income tax returns in the U.S. federal jurisdiction.

F-8

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, preferred stock 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 years. Anti-dilutive common stock equivalents of 21,658,171 and 22,051,685 were excluded from the loss per share computation for 2009 and 2008, respectively.

Patents

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.

Intangible assets consist of the following (in thousands):

	December 31, 2009				December 31, 2008
	Gross carrying value		Accumulated amortization		Gross carrying value		Accumulated amortization
Amortizable intangible assets - Patents	$	2,624	$	1,837	$	2,624	$	1,625

Amortization expense related to intangible assets totaled $212,000 and $229,000 for the years ended December 31, 2009 and 2008, respectively. The aggregate estimated amortization expense for intangible assets remaining as of December 31, 2009 is as follows (in thousands):

2010	$	212
2011		212
2012		82
2013		44
2014		44
Thereafter		193
Total	$	787

Revenues

Our revenues are generated from licensing and research and development agreements. We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104 (SAB 104), Revenue Recognition. License revenue is recognized over the remaining life of the underlying patent. Research and development revenues are recognized as services are performed.

Stock-Based Compensation

We account for stock based compensation expense in accordance with FASB ASC 718, Stock Based Compensation. We have several stock-based compensation plans under which incentive and non-incentive qualified stock options and restricted shares may be granted to employees, directors and consultants. We measure the cost of the employee/director/consultant services received in exchange for an award of equity instruments based on the grant date fair value of the award. We use the Black-Sholes option pricing model to value our options.

During 2009 and 2008, 565,000 stock options and 305,000 stock options, respectively, were granted under the 2005 Equity Incentive Plan. Assumptions for 2009 and 2008 are:

F-9

	2009	2008
Expected volatility assumption was based upon a combination of historical stock price volatility measured on a weekly basis and is considered a reasonable indicator of expected volatility.	115%	133%
Risk-free interest rate assumption is based upon U.S. Treasury bond interest rates appropriate for the term of the our employee stock options.	2.37%	2.97%
Dividend yield assumption is based on our history and expectation of dividend payments.	None	None
Estimated expected term (average of number years) is based on the simplified method as prescribed by SAB 107/110 as we do not have sufficient information to calculate an expected term.	5.5 years	6.2 years

At December 31, 2009, 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 $632,000. The weighted-average 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.

The weighted-average fair value of options existing under all plans during 2009 was $2.92 at December 31, 2009.

The following table summarizes stock-based compensation for the years ended December 31, 2009 and 2008 which was allocated as follows (in thousands):

	Year ended December 31, 2009		Year ended December 31, 2008
Research and development	$	381	$	108
General and administrative		430		814
Stock-based compensation expense included in operating expense		811		922

Total stock-based compensation expense		811		922
Tax benefit		-		-
Stock-based compensation expense, net of tax	$	811	$	922

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (FASB) established the FASB Accounting Standards Codification (ASC) as the source of authoritative accounting principles recognized by the FASB to be applied in preparation of financial statements in conformity with U.S. GAAP. As the issuance of ASC does not change U.S. GAAP, its adoption did not have any impact on our 2009 Financial Statements.

In June 2009, the FASB issued accounting guidance that eliminates the exemption from consolidation for qualifying special-purpose entities, effective for financial asset transfers occurring after the beginning of an entity's first fiscal year that begins after November 15, 2009. We currently do not have any of these entities.

F-10

In June 2009, the FASB issued accounting guidance that assists in determining whether an enterprise has a controlling financial interest in a variable interest entity. This guidance is effective as of the beginning of the first fiscal year that begins after November 15, 2009. We currently do not have any such arrangements.

In October 2009, the FASB issued new accounting guidance related to revenue arrangements with multiple deliverables that provides principles for allocation of consideration among an arrangement's multiple-elements, allowing more flexibility in identifying and accounting for separate deliverables. The guidance introduces an estimated selling price method for valuing the elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available, and significantly expands related disclosure requirements. This guidance is effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Alternatively, adoption may be on a retrospective basis, and early application is permitted. We are currently evaluating the impact of adopting this guidance on our financial statements.

NOTE 2 – LIQUIDITY

The accompanying consolidated financial statements have been prepared assuming that we are a going concern. We incurred a net loss in the years ended December 31, 2009 and 2008.

Management believes that our current cash and expected license fees should fund our expected burn rate into the first quarter of 2011. We will require additional funds to continue operations. These funds are expected to come from the future sales of equity and/or license agreements.

NOTE 3 - RELATED PARTY TRANSACTIONS

On February 12, 2008, our Board of Directors elected Steven H. Rouhandeh as director and Chairman of the Board effective as of March 4, 2008. Mr. Rouhandeh is Chief Investment Officer of SCO Capital Partners, L.P.

In the event SCO Capital Partners LLC (SCO) and its affiliates were to convert all of their shares of Series A Preferred Stock and exercise all of their warrants, they would own approximately 56.7% of the voting securities of Access. During 2008 SCO and affiliates were paid $191,000 in placement agent fees relating to the issuance of preferred stock and were issued warrants to purchase our 39,667 shares of our common stock. SCO and affiliates also were paid $300,000 in investor relations fees in 2009 and $232,000 in investor relations fees in 2008.

In connection with the sale and issuance of Series A Preferred Stock and warrants, we entered into a Director Designation Agreement whereby we agreed to continue SCO’s right to designate two individuals to serve on the Board of Directors of Access.

Dr. Esteban Cvitkovic, a Director, has served as a consultant and Senior Director, Oncology Clinical Research & Development, since August 2007. Dr. Cvitkovic receives payments for consulting expenses, office expenses and reimbursement of direct expenses. Dr. Cvitkovic also has received the following warrants and options for his consulting. In May 2009, Dr. Cvitkovic received options to purchase 75,000 shares of our Common Stock at $1.38 with all options currently vested and can be exercised until January 4, 2012. In January 2008, Dr. Cvitkovic received warrants to purchase 200,000 shares of our Common Stock at $3.15 per share that can be exercised until January 4, 2012. The warrants vest over two years in 50,000 share blocks with vesting on July 4, 2008, January 4, 2009, July 4, 2009, and the remaining warrants on January 4, 2010. All of the warrants are currently vested. Dr. Cvitkovic’s payments for consulting services and expense reimbursements are as follows:

							Fair Value
							of exercisable
	Consulting		Office		Expense		Options /
Year	Fees		Expenses		Reimbursement		Warrants
2009	$	132,000	$	18,000	$	10,000	$	86,000
2008	$	320,000	$	30,000	$	71,000	$	164,000

F-11

Stephen B. Howell, M.D., a Director, received payments for consulting services and reimbursement of direct expenses. His consulting agreement expired in March 1, 2008. Dr. Howell’s payments for consulting services and expense reimbursements are as follows:

	Consulting		Expense
Year	Fees		Reimbursement
2008	$	31,000	$	3,000

See Note 10 for a discussion of our Restricted Stock Purchase Program.

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following:	December 31,
	2009		2008
Laboratory equipment	$	786,000	$	831,000
Laboratory and building improvements		58,000		58,000
Furniture and equipment		567,000		568,000
		1,411,000		1,457,000
Less accumulated depreciation and amortization		1,361,000		1,362,000
Net property and equipment	$	50,000	$	95,000

Depreciation and amortization on property and equipment was $47,000 and $96,000 for the years ended December 31, 2009 and 2008, 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 ($15,500 in 2009 and 2008) and to have the amount of such reduction contributed to the 401(k) Plan. We had a 401(k) matching program whereby we contributed for each dollar a participant contributes a like amount, with a maximum contribution of 4% of a participant’s earnings in the first five months of 2009 and all twelve months in 2008. The Company suspended matching on June 1, 2009. 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 62 investment options. Company contributions under the 401(k) Plan were approximately $16,000 in 2009 and $39,000 in 2008.

NOTE 6 – DEBT

$5,500,000 due on September 13, 2011. The unsecured convertible note bears interest at 7.7% per annum with $423,500 of interest due annually on September 13th. During 2009, this investor delayed his interest payments which were due in 2009 until February 1, 2010 or earlier if the Company raised funds in an offering. We raised $6.2 million in the January 2010 offering and paid the investor interest of $440,000. At December 31, 2009 in addition to the note of $5,500,000 an additional $436,000 of interest was due. 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.

NOTE 7 – COMMITMENTS AND CONTINGENCIES

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

Future
Maturities		Debt
2011		5,500,000

F-12

Operating Leases

At December 31, 2009, we had commitments under non-cancelable operating leases for office and research and development facilities until December 31, 2010 totaling $77,000. Rent expense for the years ended December 31, 2009 and 2008 was $111,000 and $107,000, respectively. We also have one non-cancelable operating lease – for a copier with future obligations totaling approximately $19,000 ending in 2011 (with $9,600 expensed each year).

Legal

We are not currently subject to any material pending legal proceedings.

NOTE 8 - FAIR VALUE MEASUREMENTS

Effective January 1, 2008, we adopted fair value measurement guidance issued by the FASB related to financial assets and liabilities which define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. This guidance establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

·	Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar valuation techniques that use significant unobservable inputs.

The guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

We have segregated all financial assets and liabilities that are measured at fair value on a recurring basis (at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below.

Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 and December 31, 2008 are summarized below:

(in thousands)	December 31, 2009						December 31, 2008
	Level 1		Level 2		Total		Level 1		Level 2		Total
Assets:
Cash	$	607	$	-	$	607	$	2,677	$	-	$	2,677

Liabilities:
Derivative liability	$	-	$	9,708	$	9,708	$	-	$	-	$	-

The adoption of this guidance related to financial assets and liabilities on January 1, 2008 and non-financial assets and liabilities on January 1, 2009 did not have a material impact on our consolidated financial statements.

F-13

NOTE 9 – PREFERRED STOCK

On November 7, 2007, and February 4, 2008, we entered into securities purchase agreements (the Purchase Agreements) with accredited investors to sell shares of a newly created series of our preferred stock, designated “Series A Cumulative Convertible Preferred Stock”, par value $0.01 per share, for an issue price of $10,000 per share, (the Series A Preferred Stock) and agreed to issue warrants to purchase shares of our common stock at an exercise price of $3.50 per share. The shares of Series A Preferred Stock are convertible into common stock at the initial conversion price of $3.00 per share.

As a condition to closing, we entered into an Investor Rights Agreement with each of the investors purchasing shares of Series A Preferred Stock, and our Board of Directors approved with respect to the shareholder rights plan any action necessary under our shareholder rights plan to accommodate the issuance of the Series A Preferred Stock and warrants without triggering the applicability of the shareholder rights plan.

The issued and outstanding shares of Series A Preferred Stock grants the holders of such preferred stock anti-dilution, dividend and liquidations rights that are superior to those held by the holders of our common stock. Under these terms, should Access issue additional shares of common stock, in certain circumstances, for a price below $3.00 per share, the conversion price of the Series A Preferred Stock will be lowered to the lowest subsequent issue price below $3.00 per share until the shares are converted or redeemed. This will have the effect of diluting the holders of our common stock. Under the terms of the Purchase Agreement, should Access issue additional shares of common stock, in certain circumstances, for a price below $3.50 per share, the exercise price of the warrants will be lowered to the lowest subsequent issue price below $3.50 per share until the warrants are exercised or expire. Additionally, as discussed below, if we are unable to maintain an effective registration statement related to the Series A Preferred Stock, we would be required to pay liquidating damages.

November 7, 2007 Preferred Stock

On November 7, 2007, we entered into the Purchase Agreements with accredited investors whereby we agreed to sell 954.0001 shares of a newly created series of our Series A Preferred Stock and agreed to issue warrants to purchase 1,589,999 shares of our common stock at an exercise price of $3.50 per share, for an aggregate purchase price for the Series A Preferred Stock and Warrants of $9,540,001. The shares of Series A Preferred Stock are convertible into common stock at the initial conversion price of $3.00 per share.

As a condition to closing, SCO Capital Partners LLC and affiliates, along with the other holders of an aggregate of $6,000,000 Secured Convertible Notes, also exchanged their notes and accrued interest for an additional 1,836.0512 shares of Series A Preferred Stock and were issued warrants to purchase 1,122,031 shares of our common stock at an exercise price of $3.50 per share, and Oracle Partners LP and affiliates, along with the other holders of an aggregate of $4,015,000 Convertible Notes also exchanged their notes and accrued interest for 437.3104 shares of the Series A Preferred Stock and were issued warrants to purchase 728,850 shares of our common stock at an exercise price of $3.50 per share. In connection with the exchange of the notes, all security interests and liens relating thereto were terminated.

The conversion of debt into equity resulted in a loss on extinguishment of debt of $11,628,000. This represented the difference between the fair value of the equity interest granted, based on recent sales of identical equity instruments, and the carrying amount of the debt and interest settled.

In connection with the preferred stock offering, we issued warrants for placement agent fees, to purchase a total of 209,000 shares of common stock. All of the warrants are exercisable immediately and expire six years from date of issue. The fair value of the warrants was $2.59 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 3.84%, expected volatility 110% and a term of 6 years.

February 4, 2008 Preferred Stock

F-14

On February 4, 2008, we entered into Purchase Agreements with accredited investors whereby we agreed to sell 272.50 shares of our Series A Preferred Stock and agreed to issue warrants to purchase 454,167 shares of our common stock at an exercise price of $3.50 per share, for an aggregate purchase price for the Series A Preferred Stock and Warrants of $2,725,000. Proceeds, net of cash issuance costs from the sale were $2,444,000. The shares of Series A Preferred Stock are convertible into common stock at the initial conversion price of $3.00 per share.

The shares of Series A Preferred Stock are initially convertible into common stock at $3.00 per share. Based on the price of our common stock on February 4, 2008 and the fair value attributed to the attached warrants, a new conversion price was calculated for accounting purposes. As a result of the change in conversion price for accounting purposes the preferred stock was considered to be “in the money”. This resulted in a beneficial conversion feature. The preferred stockholder has the right at any time to convert all or any lesser portion of the Series A Preferred Stock into common stock. This resulted in an intrinsic value of the preferred stock. The difference between the implied value of the preferred stock and the beneficial conversion option was treated as preferred stock dividends of $857,000.

An additional $451,000 in preferred stock dividends was recorded in the first quarter of 2008 as a result of a prior year correction. The change was due to preferred stock dividends and the beneficial conversion features associated with the warrants issued in connection with the November 2007 preferred stock agreement. We determined that the adjustment would have an immaterial effect to our consolidated financial statements for the years ended December 31, 2008, based on management’s qualitative and quantitative analysis relative to its materiality consistent with the applicable accounting guidance.

In connection with the preferred stock offering, we issued warrants for placement agent fees to purchase a total of 45,417 shares of common stock. All of the warrants are exercisable immediately and expire six years from the date of issue. The fair value of the warrants was $2.29 per share on the date of grant using the Black-Scholes option pricing model with the following assumptions: expected dividend yield 0.0%, risk-free interest rate 2.75%, expected volatility 110% and an expected term of 6 years.

Change in Accounting Principle

Effective January 1, 2009, we adopted the provisions of FASB ASC 815, “Derivatives and Hedging” (FASB ASC 815) (previously EITF 07-5, “Determining Whether an Instrument (or an Embeded Feature) is Indexed to an Entity’s Own Stock”). As a result of adopting FASB ASC 815, warrants to purchase 3,895,047 of our common stock previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment. These warrants have an exercise price of $3.50 and expire on November 10, 2013 and February 24, 2014. Effective January 1, 2009, we reclassified the fair value of these common stock warrants, from equity to liability status, as if these warrants were treated as a derivative liability since origination.

We determined that the anti-dilution provision built into the preferred shares and warrants issued should be considered for derivative accounting. FASB ASC 815 requires freestanding contracts that are settled in a company’s own stock to be designated as an equity instrument, assets or liability. Under the provisions of FASB ASC 815, a contract designated as an asset or liability must be initially recorded and carried at fair value until the contract meets the requirements for classification as equity, until the contract is exercised or until the contract expires. We determined that the anti-dilution provision associated with the November 2007 and February 2008 preferred shares and warrants no longer met the criteria for equity accounting through the revised criteria in FASB ASC 815. FASB ASC 815 provides for transition guidance whereby a cumulative effect of a change in accounting principle should be recognized as an adjustment to retained earnings and other impacted balance sheet items as of January 1, 2009. The cumulative-effect adjustment is the difference between the amounts recognized prior to adoption and amounts recognized at adoption assuming this guidance had been applied from the issuance date of the preferred stock and warrants.

Accordingly, at January 1, 2009, we determined that the warrants and the preferred stock conversion feature should be accounted for as derivative liabilities. The preferred stock conversion feature was determined to have no fair market value at both issuance dates as well as each reporting period since management asserts that the likelihood of issuing any new equity at a price that would trigger the anti-dilution effect to be nil. We will reevaluate this in future reporting periods to determine if a derivative liability should be recorded. The warrants were valued at issuance and each reporting period since using the Black-Scholes model. Both of these derivatives will continue to be marked to market in accordance with FASB ASC 815.

F-15

On January 1, 2009 we reclassified the fair value of the warrants from equity to liability as if these warrants were treated as a derivative liability since their issue date. Additionally, we reclassified $15,957,000 of previously recorded beneficial conversion features recorded under the previous accounting that related to the preferred stock and warrants. The impact of adoption was a decrease in Additional paid-in capital of $15,957,000, a decrease in accumulated deficit of $13,404,000 and an increase in derivative liability of $2,553,000.

The resulting accounting leads to derivative liability of $2,553,000 as of January 1, 2009 and $9,708,000 as of December 31, 2009. We recorded derivative expense of $7,154,000 for the year ended December 31, 2009.

The fair value of the derivative liability was calculated using the Black-Scholes option pricing model. The assumptions that were used to calculate fair value were as follows.

	January 1, 2009			December 31, 2009
Risk-free interest rate		1.55	%		2.69	%
Expected volatility		116.31	%		117.43	%
Expected life (in years)		4.88			3.88
Dividend yield		0.00	%		0.00	%

As noted above, we were required to adopt this guidance effective January 1, 2009, however we did not apply this guidance to its 2009 Form 10-Q’s as required and instead recorded the adoption impact and current year activity in the fourth quarter. The impact, if recorded in the appropriate quarterly period would have been an increase in expense and derivative liability of $2,104,000, $2,036,000 and $1,929,000 for the three months ended March 31, June 30, and September 30, 2009, respectively. Additionally, our Form 10-Q’s for 2009 do not reflect the cumulative impact of the change in accounting principle which resulted in a decrease in additional paid-in capital of $15,957,000, a decrease in accumulated deficit of $13,404,000 and an increase in derivative liability of $2,553,000 on January 1, 2009.

Liquidated Damages

Pursuant to the terms of an Investor Rights Agreement with the Purchasers of Series A Preferred Stock, we are required to maintain an effective registration statement. The Securities and Exchange Commission declared the registration statement effective November 13, 2008 relating to a portion of such securities, and as a result, we accrued $857,000 in potential liquidated damages as of December 31, 2009 and $675,000 in potential liquidated damages as of December 31, 2008. Potential liquidated damages are capped at 10% of each holder's investment. However, pursuant to the terms of the Investor Rights Agreement, we may not be required to pay such liquidated damages if such shares are saleable without restriction pursuant to Rule 144 of the Securities Act of 1933.

Preferred Stock Dividends

Preferred stock dividends of $2,773,000 were accrued through December 31, 2009, plus interest. Dividends are required to be paid semi-annually in either cash or common stock.

NOTE 10 – 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 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 Sheets. Interest on the notes is neither being collected nor accrued. The stock granted under the Program is fully vested.

F-16

Warrants

There were warrants to purchase a total of 9,835,479 shares of common stock outstanding at December 31, 2009. All warrants were exercisable at December 31, 2009, except for warrants to acquire 155,000 shares of common stock. The warrants had various exercise prices and terms as follows:

	Warrants		Exercise		Expiration
Summary of Warrants	Outstanding		Price		Date
2009 investor relations advisor (a)		30,000	$	3.45	9/15/12
2009 business consultant (b)		150,000		2.07	7/23/14
2009 investor relations advisor (c)		50,000		6.00	8/27/12
2009 investor relations advisor (d)		60,000		1.85	7/14/12
2008 preferred stock offering (e)		499,584		3.50	2/24/14
2008 Somanta accounts payable (f)		246,753		3.50	1/04/14
2008 warrants assumed on acquisition (g)		191,991		18.55-69.57	6/9/10-1/31/12
2008 investor relations advisor (h)		50,000		3.15	1/3/13
2008 investor relations advisor (i)		40,000		3.00	9/1/13
2008 scientific consultant (j)		200,000		3.15	1/4/12
2007 preferred stock offering (k)		3,649,880		3.50	11/10/13
2006 convertible note (l)		3,853,634		1.32	2/16/12
2006 convertible note (l)		386,364		1.32	10/24/12
2006 convertible note (l)		377,273		1.32	12/06/12
2006 investor relations advisor (m)		50,000		2.70	12/27/11
Total		9,835,479

During 2009, an investor relations advisor received warrants to purchase 30,000 shares of common stock at an exercise price of $3.45 per share at any time until September 15, 2012, for investor relations consulting services rendered from October 2009 through March 2010. 15,000 of the warrants were exercisable on December 31, 2009 and 15,000 of the warrants will be exercisable – 5,000 on January 31, 2010, 5,000 on February 28, 2010 and 5,000 on March 31, 2010. The fair value of the warrants was $1.55 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 1.43%, expected volatility 0.87% and a term of 3 years. The expense recorded for the year ended December 31, 2009 was $24,000.

During 2009, a business consultant received warrants to purchase 150,000 shares of common stock at an exercise price of $2.07 per share at any time until July 23, 2014, for business consulting services rendered in 2009. 60,000 of the warrants were exercisable on December 31, 2009. The remaining 90,000 warrants may vest in 30,000 share increments with our stock price reaching specified trading prices. The remaining warrants will expire July 23, 2010 if our stock does not reach these specified trading prices. The expense recorded for the year ended December 31, 2009 was $238,000.

During 2009, an investor relations advisor received warrants to purchase 50,000 shares of common stock at an exercise price of $6.00 per share at any time until August 27, 2012, for investor relations consulting services rendered in 2009. All 50,000 of the warrants were exercisable at December 31, 2009. The fair value of the warrants was $2.04 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 1.58%, expected volatility 119% and a term of 3 years. The expense recorded for the year ended December 31, 2009 was $102,000.

During 2009, an investor relations advisor received warrants to purchase 60,000 shares of common stock at an exercise price of $1.85 per share at any time until July 14, 2012, for investor relations consulting services rendered in 2009. All 60,000 of the warrants were exercisable on December 31, 2009. The expense recorded for the year ended December 31, 2009 was $233,000.

F-17

In connection with the preferred stock offering in February 2008, warrants to purchase a total of 499,584 shares of common stock were issued. All of the warrants are exercisable immediately and expire six years from date of issue. The fair value of the warrants was $2.29 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 2.75%, expected volatility 110% and a term of 6 years.

f)	In connection with our acquisition of Somanta Pharmaceuticals, Inc. (Somanta) we exchanged for $1,576,000 due to Somanta vendors, 538,508 shares of our common stock and warrants to purchase 246,753 shares of common stock at $3.50. The warrants expire January 4, 2014.

g)	We assumed three warrants in the Somanta acquisition:

-Warrant #1 – 323 shares of our common stock at $69.57 per share and expires June 9, 2010.

-Warrant #2 – 31,943 shares of our common stock at $18.55 per share and expires January 31, 2012.

-Warrant #3 – 159,725 shares of our common stock at $23.19 per share and expires January 31, 2012.

During 2008, an investor relations advisor received warrants to purchase 50,000 shares of common stock at an exercise price of $3.15 per share at any time until January 3, 2013, for investor relations consulting services rendered in 2008. 25,000 of the warrants were exercisable on July 3, 2008 and 25,000 of the warrants will be exercisable January 3, 2009. The fair value of the warrants was $2.24 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 3.13%, expected volatility 127% and a term of 5 years.

During 2008, an investor relations advisor received warrants to purchase 40,000 shares of common stock at an exercise price of $3.00 per share at any time until September 1, 2013, for investor relations consulting services. All of the warrants are exercisable. The fair value of the warrants was $2.61 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 2.37%, expected volatility 132% and a term of 5 years.

During 2008, a director who is also a scientific advisor received warrants to purchase 200,000 shares of common stock at an exercise price of $3.15 per share at any time until January 4, 2012, for scientific consulting services rendered in 2008. The warrants vest over two years in 50,000 share blocks with vesting on July 4, 2008, January 4, 2009, July 4, 2009 and the remaining shares on January 4, 2010. The fair value of the warrants was $1.78 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 2.01%, expected volatility 92% and a term of 4 years.

In connection with the preferred stock offering in November 2007, warrants to purchase a total of 3,649,880 shares of common stock were issued. All of the warrants are exercisable immediately and expire six years from date of issue. The fair value of the warrants was $2.50 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 3.84%, expected volatility 114% and a term of 6 years.

l)	In connection with the convertible note offerings in 2006, warrants to purchase a total of 4,617,271 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 rendered in 2007. All of the warrants are exercisable.

F-18

Also, during 2009, an investor relations advisor received warrants for investor relations consulting services rendered in 2009. All of the warrants were exercised into 20,415 shares of common stock. The warrants were exercisable at $1.85 per share and would have expired July 14, 2012. The expense recorded for the year ended December 31, 2009 was $36,000.

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, 2009 there were 27,182 shares issued and 52,818 shares available for grant under the 2001 Restricted Stock Plan. All the issued shares are vested.

NOTE 11 - STOCK OPTION PLANS

Our 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 3,150,000 shares of our authorized but unissued common stock were reserved for issuance to employees, consultants, or to non-employee members of the Board or to 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 2009: dividend yield of 0%; volatility of 115%; risk-free interest rate of 2.37%; and expected lives of 5.5 years. The weighted average fair value of options granted was $1.38 per share during 2009. The assumptions for grants in fiscal 2008 were: dividend yield of 0%; volatility of 133%; risk-free interest rate of 2.97%; and expected lives of 6.2 years. The weighted average fair value of options granted was $2.73 per share during 2008.

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

			Weighted-
			average
			exercise
	Options		price
Outstanding options at January 1, 2008	926,386	$	1.59
Granted, fair value of $ 2.73 per share	305,000		3.00
Exercised	(25,250)		0.63
Expired	(69,316)		3.17
Outstanding options at December 31, 2008	1,136,820		1.90

Granted, fair value of $ 1.38 per share	565,000		1.38
Exercised	(249,916)		0.73
Expired	(16,667)		3.00
Outstanding options at December 31, 2009	1,435,237		1.99

Exercisable at December 31, 2009	1,215,238		1.80

F-19

The intrinsic value of options under this plan related to the outstanding and exercisable options were $2,112,000 and $2,050,000 at December 31, 2009, respectively. The intrinsic value of options under this plan related to the outstanding and exercisable options were $229,000 at December 31, 2008.

The total intrinsic value of options exercised during 2009 was $642,000 and during 2008 was $60,000.

Further information regarding options outstanding under the 2005 Equity Incentive Plan at December 31, 2009 is summarized below:

	Number of	Weighted average		Number of	Weighted-average
	options	Remaining	Exercise	options	Remaining	Exercise
Range of exercise prices	outstanding	life in years	price	exercisable	life in years	price

$0.63 - 0.85	412,500	7.0	$0.64	412,500	7.0	$0.64
$1.38	460,000	10.0	$1.38	460,000	10.0	$1.38
$2.90 - 7.23	562,737	8.7	$3.47	342,738	8.2	$3.75
	1,435,237			1,215,238

2007 Special Stock Option Plan

In January 2007 we adopted the 2007 Special Stock Option Plan and Agreement (the Plan). The Plan provides for the award of options to purchase 450,000 shares of the authorized but unissued shares of common stock of the Company. At December 31, 2009, there were 350,000 additional shares available for grant under the Plan.

Under the 2007 Special Stock Option Plan, 450,000 options were issued in 2007 and 350,000 were forfeited. 100,000 options were outstanding at December 31, 2009 and 2008. 100,000 options in the 2007 Special Stock Option Plan were exercisable at December 31, 2009 and 2008. All of the options had an exercise price of $2.90 per share and expire March 12, 2010.

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, 2009, there were no additional shares available for grant under the 1995 Stock Awards Plan. A total of 103,000 options were outstanding under this plan at December 31, 2009.

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.

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

				Weighted-
				average
				exercise
	Options			price
Outstanding options at January 1, 2008		162,417		$	15.53
Expired		(44,417	)		16.57
Outstanding options at December 31, 2008		118,000			15.14

Expired		(15,000	)		10.00
Outstanding options at December 31, 2009		103,000			15.89

Exercisable at December 31, 2009		103,000			15.89

There was no intrinsic value related to outstanding or exercisable options under this plan at December 31, 2009 or 2008.

F-20

Further information regarding options outstanding under the 1995 Stock Awards Plan at December 31, 2009 is summarized below:

	Number of	Weighted average		Number of	Weighted-average
	options	Remaining	Exercise	options	Remaining	Exercise
Range of exercise prices	outstanding	life in years	price	exercisable	life in years	price

$10.10 - 12.50	60,640	3.8	$11.74	60,640	3.8	$11.74
$14.05 - 18.65	22,800	2.8	$16.82	22,800	2.8	$16.82
$20.25 – 29.25	19,560	4.1	$26.58	19,560	4.1	$26.58
	103,000			103,000

Two directors, who retired from our board of directors May 21, 2008, were granted two years until May 21, 2010 to exercise their vested stock options. This modification resulted in $100,000 in stock option expense that was recognized in year ended December 31, 2008.

NOTE 12 – MACROCHEM, SOMANTA AND VIRIUM ACQUISITIONS

MacroChem Corporation Acquisition

On February 25, 2009, the Company issued approximately 2,500,000 shares of its common stock in exchange for 100% of the outstanding stock and warrants of MacroChem Corporation (MacroChem). MacroChem’s principal activities were to develop and seek to commercialize pharmaceutical products using its proprietary drug delivery technologies. Its portfolio of proprietary product candidates was based on its drug delivery technologies: Soft Enhancement of Percutaneous Absorption (SEPA), MacroDerm and DermaPass. Its SEPA topical drug delivery technology enhances the efficiency and rate of diffusion of drugs into and through the skin. MacroChem had two clinical stage investigational new drugs: EcoNail, for the treatment of fungal infections of the nails and Pexiganan, for the treatment of mild diabetic foot infection (DFI).

Prior to our acquisition of MacroChem, SCO, an investment company, held a majority of Access’ and MacroChem’s voting stock. Specifically, SCO owned 53% of the voting stock of Access and 63% of the voting stock of MacroChem. A non-controlling interest of 37% existed at the merger date of MacroChem. In addition, certain members of SCO’s management serve on the board of directors of both Access and MacroChem. Based on these facts, Access and MacroChem were deemed under the common control of SCO. As the entities were deemed under common control, the acquisition was recorded similar to the pooling-of-interest method and the financial information for all periods presented reflects the financial statements of the combined companies in accordance with Financial Accounting Standards Board standards on business combinations for entities under common control.

Upon acquisition, all outstanding warrants and any other dilutive instruments in MacroChem’s stock were cancelled. The in-the-money warrants were converted with the common stock. In addition to the merger, the noteholders of MacroChem agreed to exchange their notes and interest due on the notes in the total amount of $859,000 for 859,000 restricted shares of the Access’ common stock. The value of the shares issued was determined based on the carrying value of the debt, which was established to be the more readily determinable fair value.

In addition, we issued 125,000 shares of Access common stock to former executives of MacroChem for the settlement of employment agreements.

In connection with the exchange of equity interests, $106,000 in merger costs were expensed.

The income statement for all periods presented reflects the combined carrying amount of revenue and expenses. Below is a reconciliation of summary financial data for the year ended December 31, 2009 and the combined MacroChem financial data for the year ended December 31, 2008. The balance sheet as of December 31, 2008 also reflects the combined entities.

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Following is a summary balance sheet at December 31, 2008:


	Access Pharmaceuticals			MacroChem Corporation			Combined
Current assets	$	3,550,000		$	84,000		$	2,999,000
Total assets		4,257,000			549,000			4,171,000
Current liabilities		4,906,000			3,346,000			7,612,000
Long-term deferred revenue		2,245,000			24,000			2,245,000
Long-term debt		5,500,000			-			5,500,000
Stockholders’ deficit		(8,394,000	)		(2,925,000	)		(11,186,000	)

Intercompany receivables/payables of $635,000 and intercompany deferred revenue of $29,000 were eliminated.

Following is a summary statement of combined operations for the year ended December 31, 2009 and December 31, 2008:

	For the year ended December 31, 2009									For the year ended December 31, 2008
	Access Pharmaceuticals			MacroChem Corporation			Combined			Access Pharmaceuticals			MacroChem Corporation			Combined
Total revenues	$	352,000		$	-		$	352,000		$	291,000		$	-		$	291,000

Expenses
Research and development		2,645,000			12,000			2,657,000			12,613,000			10,622,000			23,235,000
General and administrative		6,932,000			180,000			7,112,000			4,340,000			3,123,000			7,463,000
Depreciation and amortization		207,000			52,000			259,000			253,000			71,000			324,000
Total expenses		9,784,000			244,000			10,028,000			17,206,000			13,816,000			31,022,000

Loss from operations		(9,432,000	)		(244,000	)		(9,676,000	)		(16,915,000	)		(13,816,000	)		(30,731,000	)

Interest and miscellaneous Income		29,000			-			29,000			178,000			33,000			211,000
Interest and other expense		(513,000	)		(26,000	)		(539,000	)
Change in fair value of derivative		(7,154,000	)		-			(7,154,000	)		(478,000	)		(433,000	)		(911,000	)
		(7,638,000	)		(26,000	)		(7,664,000	)		(300,000	)		(400,000	)		(700,000	)
Loss from operations		(17,070,000	)		(270,000	)		(17,340,000	)		(17,215,000	)		(14,216,000	)		(31,431,000	)
Less preferred stock Dividends		(1,886,000	)		-			(1,886,000	)		(3,358,000	)		-			(3,358,000	)
Net loss allocable to common stockholders	$	(18,956,000	)	$	(270,000	)	$	(19,226,000	)	$	(20,573,000	)	$	(14,216,000	)	$	(34,789,000	)

Basic and diluted loss per common share
Net loss allocable to common stockholders		-			-		$	(1.63	)		-			-		$	(4.16	)
Weighted average basic and diluted common shares outstanding		-			-			11,818,530			-			-			8,354,031

Somanta Pharmaceuticals, Inc. Acquisition

On January 4, 2008, we acquired all the outstanding shares of Somanta Pharmaceuticals, Inc (“Somanta”). Somanta was engaged in the pharmaceutical development business. We anticipate that the acquisition will add additional product pipelines and complement our existing product pipelines. Total consideration paid in connection with the acquisition included:

·	Approximately 1.5 million shares of Access common stock were issued to the common and preferred shareholders of Somanta as consideration having a value of approximately $4,650,000 (the value was calculated using Access’ stock price on January 4, 2008, times the number of shares issued);

exchange of all outstanding warrants for Somanta common stock for warrants to purchase 191,991 shares of Access common stock at exercise prices ranging between $18.55 and $69.57 per share. The warrants were valued at approximately $281,000. All of the warrants are exercisable immediately and expire approximately four years from date of issue. The weighted average fair value of the warrants was $1.46 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 3.26%, expected volatility 114% and an expected term of approximately 4 years;

F-22

·	paid an aggregate of $475,000 in direct transaction costs; and

·	cancelled receivable from Somanta of $931,000.

The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of the acquisition (in thousands) based on a valuation.

Cash	$	1
Prepaid expenses		25
Office equipment		14
Accounts payable		(2,582	)
In-process research & development		8,879
	$	6,337

Approximately $8,879,000 of the purchase price represents the estimated fair value of the acquired in-process research and development projects that have no alternative future use. Accordingly this amount was immediately expensed as research and development in the consolidated statement of operations upon the acquisition date.

Operating results of Somanta have been included in our consolidated financial statements since January 4, 2008.

The following unaudited pro forma information presents the 2008 results of the Company as if the acquisition had occurred on January 1, 2008. The unaudited pro forma results are not necessarily indicative of results that would have occurred had the acquisition been in effect for the periods presented, nor are they necessarily indicative of future results. No significant operations occurred after October 31, 2007 until the acquisition on January 4, 2008. Amounts are shown in thousands.

	Twelve months ended December 31, 2008
Net loss allocable to common stockholders	$	(20,573	)

Net loss per common shares (basic and diluted)	$	(3.51	)

Weighted average common shares outstanding (basic and diluted)		5,854

Virium Pharmaceuticals, Inc. Acquisition by MacroChem Corporation

On April 18, 2008, the MacroChem acquired Virium Pharmaceuticals Inc. (“Virium”), a privately held biotechnology company focused primarily on oncology based technology, pursuant to the terms of an Agreement and Plan of Merger (the Merger Agreement) dated as of April 18, 2008 by and among the Company, VRM Acquisition, LLC, a Delaware limited liability company and a direct wholly-owned subsidiary of the Company (VRM Acquisition), Virium and Virium Holdings, Inc., a non-public Delaware corporation (Holdings) and the parent of Virium. On the Effective Date, VRM Acquisition merged with and into Virium with Virium continuing as the surviving company and a wholly-owned subsidiary of the Company (the Merger). Pursuant to the Merger Agreement, each share of Virium common stock outstanding at the Effective Time was converted into the right to receive 0.89387756 shares of MacroChem’s common stock (the Merger Consideration) resulting in an aggregate of 22,898,386 shares of MacroChem common stock being issued in the Merger. The fair value of the shares issued on the closing date to the stockholders of Virium was $6,870,000.

Virium had a pipeline of oncology products that target a variety of niche cancer indications. Virium’s product pipeline included a next generation nucleoside analogue (small molecule) which it had licensed from the Southern Research Institute in August 2007. This class of compounds has demonstrated proven efficacy in certain hematological cancer indications.

As described in more detail below, MacroChem assumed convertible notes of Virium.

F-23

On April 23, 2008, MacroChem assumed all obligations under the convertible promissory note in the aggregate principal amount of $500,000 issued to Strategic Capital Resources, Inc. by Virium on May 30, 2007 (the First Convertible Note). The First Convertible Note was due to mature on April 25, 2008. The First Convertible Note had a 12% annual interest rate until November 30, 2007, which increased to 15% thereafter. MacroChem paid to Strategic Capital Resources, Inc. $45,000 in cash which represents all accrued and unpaid interest on such note through the date of consummation of the Merger plus $10,000. MacroChem made this payment in consideration of Strategic Capital Resources, Inc.’s prior agreement with Virium to extend the maturity date on its note from March 26, 2008 to April 25, 2008.

On June 6, 2008, MacroChem repaid a principal amount of $400,000 to the holder of the First Convertible Note together with accrued and unpaid interest thereon. Further, on June 23, 2008, the Company repaid the unpaid principal balance of $100,000 together with accrued and unpaid interest thereon to the remaining holder of the First Convertible Note. Additionally, the First Convertible Note was repaid, in part, with funds from new holders of convertible promissory notes whose notes mature on December 6, 2008. The new promissory notes have a principal amount of $400,000 and a warrant to purchase 100,000 shares of common stock at $.01. The fair value of the warrants issued of $24,000 is recorded as debt discount and is being amortized to interest expense over the term of the debt. The notes have a 12% interest rate with accrued interest due on or prior to the 5th day of each calendar month. These notes are due to mature on the earlier of 1) closing of the next financing by MacroChem or 2) December 6, 2008. The default status of these notes triggered the convertibility of 50% of the principal at a rate of $0.018, which is 50% of the average market price for five days preceding the triggering event. This resulted in a beneficial conversion feature with a value of $188,000 recorded to interest expense and additional paid-in capital. The principal amount of $400,000 in notes was outstanding at December 31, 2008 and continued to accrue interest until February 25, 2009, the date of the acquisition by Access.

MacroChem also assumed on the Effective Date all obligations under convertible promissory notes in the aggregate principal amount of $500,000 issued by Virium on December 12, 2007 (the Second Convertible Notes). The Second Convertible Notes were to mature on the earlier of (a) the closing of any equity financing by MacroChem or (b) June 12, 2008. The Second Convertible Notes have a 12% annual interest rate with all accrued interest due at maturity. Upon written consent to the borrower, simultaneously with the next round of financing, the holders have the ability to convert the entire outstanding principal and all accrued interest into shares. The conversion price will be equal to 50% of the qualified offering price.

In June 2008, a principal amount of $425,000 of the Second Convertible Notes were extended to a maturity of December 31, 2008, subject to certain conditions and the Company repaid holders of the Second Convertible Notes a principal amount of $75,000 and accrued interest of $5,000. To induce the holders to extend the maturity, MacroChem issued 212,500 warrants to purchase common stock at $.01. The fair value of the warrants issued of $51,053 is recorded as debt discount and will be amortized to interest expense over the term of the debt. The principal amount of $425,000 in notes was outstanding at December 31, 2008 and continued to accrue interest until February 25, 2009, the date of the acquisition by Access.

The acquisition of Virium on April 18, 2008 was accounted for by MacroChem under the purchase method of accounting in accordance with SFAS No. 141 “Business Combinations”. Under the purchase method, assets acquired and liabilities assumed by MacroChem were recorded at their estimated fair values at the date of acquisition and the results of operations of the acquired company were consolidated with those of MacroChem from the date of acquisition. Virium is included in the Statement of Operations from the acquisition date on April 18, 2008.

The total purchase price of $9,661,000, has been primarily allocated to be in-process research and development and is comprised of $6,870,000 related to the calculated value of MacroChem’s common stock issued of $0.30 per share, $2,404,000 of liabilities MacroChem assumed in addition to $147,000 of warrants issued to certain debt holders. Additionally, MacroChem incurred $240,000 in professional fees.

The components of the purchase price, which we have allocated to in-process research and development, are summarized as follows:

F-24

Common stock issued		6,870,000
Liabilities assumed		2,404,000
Warrants related to debt assumed		147,000
Transaction costs		240,000
Total purchase price		9,661,000

The following unaudited pro forma information presents the 2008 results of MacroChem as if the acquisition had occurred on January 1, 2008. The unaudited pro forma results are not necessarily indicative of results that would have occurred had the acquisition been in effect for the periods presented, nor are they necessarily indicative of future results.

		2008
		(unaudited)
Net income (loss)		(10,564,000)

Net income (loss) per common share (basic and diluted)		(0.23)
Weighted average common shares outstanding (basic and diluted)		45,754,492

NOTE 13 - INCOME TAXES

Income tax expense differs from the statutory amounts as follows:

	2009			2008

Income taxes at U.S. statutory rate	$	(6,537,000	)	$	(10,477,000	)
Change in valuation allowance		5,182,000			6,987,000
Benefit of foreign losses not recognized		57,000			59,000
Expenses not deductible		623,000			2,874,000
Expiration of net operating loss and general
business credit carryforwards, net of revisions		675,000			557,000

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,
	2009			2008
Deferred tax assets
Net operating loss carryforwards	$	62,358,000		$	59,939,000
General business credit carryforwards		2,371,000			2,472,000
State credits		3,126,000			3,138,000
Property, equipment and goodwill		51,000			54,000
Stock options		773,000			497,000
Derivatives		2,432,000			-
Deferred revenue		748,000			324,000
Intangible assets		383,000			383,000
Accrued interest		-			253,000
Other		270,000			270,000

Gross deferred tax assets		72,512,000			67,330,000
Valuation allowance		(72,512,000	)		(67,330,000	)

Net deferred taxes	$	-		$	-

At December 31, 2009, we had approximately $183,404,000 of net operating loss carryforwards and approximately $2,371,000 of general business credit carryforwards. These carryforwards expire as follows:

F-25

	Net operating		General business
	loss carryforwards		credit carryforwards
2010	$	2,171,000	$	140,000
2011		4,488,000		13,000
2012		4,212,000		77,000
2013		3,324,000		112,000
2014		3,306,000		95,000
Thereafter		165,903,000		1,934,000
	$	183,404,000	$	2,371,000

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.

Additionally, we acquired MacroChem Corporation on February 25, 2009 and Somanta Pharmaceuticals, Inc. on January 4, 2008. Both corporations were loss companies at the time of the acquisition. Therefore, the net operating losses related to those acquisitions may be subject to annual limitations as provided by IRC Sec. 382.

NOTE 14 – SUBSEQUENT EVENTS (UNAUDITED)

On January 22, 2010, we announced the sale of approximately 2.10 million shares of our common stock and warrants to purchase approximately 1.05 million shares of our common stock for gross proceeds of approximately $6.3 million. We sold the shares and warrants for $3.00 per unit (each unit consisting of one share of common stock and a warrant to purchase 0.5 shares of common stock). The exercise price of the warrants is $3.00 per share.

F-26

Access Pharmaceuticals, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

	September 30, 2010	December 31, 2009
ASSETS	(unaudited)
Current assets Cash and cash equivalents Receivables Prepaid expenses and other current assets	$ 1,496,000 40,000 29,000	$ 607,000 36,000 42,000
Total current assets	1,565,000	685,000
Property and equipment, net	38,000	50,000
Patents, net	627,000	787,000
Other assets	49,000	61,000
Total assets	$ 2,279,000	$ 1,583,000
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities Accounts payable Accrued expenses Dividends payable Accrued interest payable Short-term debt Current portion of deferred revenue	$ 3,383,000 857,000 3,950,000 446,000 5,500,000 347,000	$ 4,094,000 857,000 2,773,000 563,000 - 347,000
Total current liabilities	14,483,000	8,634,000
Derivative liability warrants Derivative liability preferred stock Long-term deferred revenue Long-term debt	3,324,000 10,455,000 4,470,000 -	9,708,000 - 4,730,000 5,500,000
Total liabilities	32,732,000	28,572,000
Commitments and contingencies
Stockholders' deficit Convertible Series A preferred stock - $.01 par value; authorized 2,000,000 shares; 2,985.3617 shares issued at September 30, 2010 and 2,992.3617 shares issued at December 31, 2009 Common stock - $.01 par value; authorized 100,000,000 shares; issued, 15,899,227 at September 30, 2010 and 13,171,545 at December 31, 2009 Additional paid-in capital Notes receivable from stockholders Treasury stock, at cost – 163 shares Accumulated deficit	- 159,000 223,424,000 (1,045,000) (4,000) (252,987,000)	- 132,000 215,735,000 (1,045,000) (4,000) (241,807,000)
Total stockholders' deficit	(30,453,000)	(26,989,000)
Total liabilities and stockholders' deficit	$ 2,279,000	$ 1,583,000

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

F-27

Access Pharmaceuticals, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(unaudited)

	Three months ended September 30,		Nine months ended September 30,

	2010	2009	2010	2009
Revenues
License revenues	$107,000	$124,000	$ 281,000	$228,000
Royalties	20,000	20,000	53,000	20,000
Total revenues	127,000	144,000	334,000	248,000

Expenses
Research and development	1,199,000	561,000	2,718,000	1,830,000
General and administrative	1,165,000	3,458,000	3,316,000	6,212,000
Depreciation and amortization	59,000	65,000	179,000	197,000
Total expenses	2,423,000	4,084,000	6,213,000	8,239,000

Loss from operations	(2,296,000)	(3,940,000)	(5,879,000)	(7,991,000)

Interest and miscellaneous income	38,000	2,000	554,000	18,000
Interest and other expense	(152,000)	(133,000)	(444,000)	(395,000)
Gain on change in fair value of derivative warrants Loss on change in fair value of derivative preferred stock	146,000 (10,455,000)	- -	6,384,000 (10,455,000)	- -
	( 10,423,000)	(131,000)	(3,961,000)	(377,000)
Net loss	(12,719,000)	(4,071,000)	(9,840,000)	(8,368,000)

Less preferred stock dividends	452,000	471,000	1,340,000	1,434,000
Net loss allocable to common stockholders	$(13,171,000)	$(4,542,000)	$(11,180,000)	$(9,802,000)

Basic/diluted net loss per common share
Net loss allocable to common stockholders	$ (0.83)	$ (0.37)	$ (0.73)	$ (0.86)

Weighted average basic and diluted common shares outstanding	15,774,273	12,204,696	15,337,453	11,375,793

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

F-28

Access Pharmaceuticals, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders' Deficit

(unaudited)

	Common Stock				Preferred Stock
	Shares		Amount		Shares			Amount		Additional paid-in capital		Notes receivable from stockholders			Treasury stock			Accumulated deficit
Balance December 31, 2009		13,172,000	$	132,000		2,992.3617		$	-	$	215,735,000	$	(1,045,000	)	$	(4,000	)	$	(241,807,000	)
Restricted common stock issued for services		73,000		1,000		-			-		17,000		-			-			-
Warrants issued for services		-		-		-			-		19,000		-			-			-
Preferred stock converted into common stock		23,000		-		(7.0000	)		-		-		-			-			-
Stock option compensation expense		-		-		-			-		114,000		-			-			-
Common stock issued for cash exercise of options		10,000		-		-			-		14,000		-			-			-
Common stock issued for cashless warrant exercise		20,000		-		-			-		-		-			-			-
Common stock issued $3.00 share, net of costs		2,083,000		21,000		-			-		5,827,000		-			-			-
Preferred dividends		-		-		-			-		-		-			-			(442,000	)
Net income		-		-		-			-		-		-			-			1,089,000
Balance at March 31, 2010		15,381,000		154,000		2,985.3617			-		221,726,000		(1,045,000	)		(4,000	)		(241,160,000	)

Restricted common stock issued for services		106,000		1,000		-			-		248,000		-			-			-
Stock option compensation expense		-		-		-			-		440,000		-			-			-
Common stock issued for cash exercise of options		105,000		1,000		-			-		125,000		-			-			-
Common stock issued for preferred dividends		80,000		1,000		-			-		190,000		-			-			-
Preferred dividends		-		-		-			-		-		-			-			(446,000	)
Net income		-		-		-			-		-		-			-			1,790,000
Balance at June 30, 2010		15,672,000		157,000		2,985.3617			-		222,729,000		(1,045,000	)		(4,000	)		(239,816,000	)

Restricted common stock issued for services		133,000		1,000		-			-		269,000		-			-			-
Stock option compensation expense		-		-		-			-		284,000		-			-			-
Common stock issued for cash exercise of options		38,000		-		-			-		52,000		-			-			-
Common stock issued for preferred dividends		56,000		1,000							90,000		-			-			-
Preferred dividends		-		-		-			-		-		-			-			(452,000	)
Net loss		-		-		-			-		-		-			-			(12,719,000	)
Balance at September 30, 2010		15,899,000	$	159,000		2985.3617		$	-	$	223,424,000	$	(1,045,000	)	$	(4,000	)	$	(252,987,000	)

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

F-29

Access Pharmaceuticals, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Nine Months ended September 30,
	2010			2009
Cash flows from operating activities:
Net loss	$	(9,840,000	)	$	(8,368,000	)
Adjustments to reconcile net income (loss) to cash used in operating activities:
Gain on change in fair value of derivative warrants		(6,384,000	)		-
Loss on change in fair value of derivative preferred stock		10,455,000			-
Gain on negotiated accounts payable		(509,000	)		-
Depreciation and amortization		179,000			197,000
Stock option compensation expense		838,000			593,000
Stock and warrants issued for services		556,000			2,852,000
Change in operating assets and liabilities:
Receivables		(4,000	)		124,000
Prepaid expenses and other current assets		13,000			130,000
Other assets		12,000			12,000
Accounts payable and accrued expenses		(202,000	)		318,000
Dividends payable		119,000			(109,000	)
Accrued interest payable		(117,000	)		334,000
Deferred revenue		(260,000	)		2,755,000
Net cash used in operating activities		(5,144,000	)		(1,162,000	)

Cash flows from investing activities:
Capital expenditures		(7,000	)		(2,000	)
Proceeds from sale of asset		-			1,000
Net cash used in investing activities		(7,000	)		(1,000	)

Cash flows from financing activities:
Proceeds from exercise of stock options		192,000			158,000
Proceeds from common stock issuances, net of costs		5,848,000			-
Net cash provided by financing activities		6,040,000			158,000

Net increase (decrease) in cash and cash equivalents		889,000			(1,005,000	)
Cash and cash equivalents at beginning of period		607,000			2,677,000
Cash and cash equivalents at end of period	$	1,496,000		$	1,672,000

Supplemental cash flow information:
Cash paid for interest	$	440,000		$	-

Supplemental disclosure of noncash transactions:
Shares issued for payables, notes payable and accrued interest		-			859,000
Shares issued for dividends on preferred stock		282,000			927,000
Preferred stock dividends in dividends payable		1,340,000			1,434,000

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

F-30

Access Pharmaceuticals, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2010 and 2009

(unaudited)

(1) Interim Financial Statements

The consolidated balance sheet as of September 30, 2010, the consolidated statements of operations for the three and nine months ended September 30, 2010 and 2009, the consolidated statements of stockholders deficit for the three and nine months ended September 30, 2010, and the consolidated statements of cash flows for the nine months ended September 30, 2010 and 2009, were prepared by management without audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, except as otherwise disclosed, necessary for the fair presentation of the financial position, results of operations, and changes in financial position for such periods, have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these interim financial statements be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009. The results of operations for the period ended September 30, 2010 are not necessarily indicative of the operating results which may be expected for a full year. The consolidated balance sheet as of December 31, 2009 contains financial information taken from the audited Access financial statements as of that date.

The report of our independent registered public accounting firm for the fiscal year ended December 31, 2009, contained a fourth explanatory paragraph to reflect its significant doubt about our ability to continue as a going concern as a result of our history of losses and our liquidity position, as discussed herein and in this Form 10-Q. We expect that our capital resources and expected receipts due under our license agreements will be adequate to fund our current level of operations into the first quarter of 2011. If we are unable to obtain adequate capital funding in the future or enter into future license agreements for our products, we may not be able to continue as a going concern, which would have an adverse effect on our business and operations, and investors’ investment in us may decline.

On February 25, 2009, we closed our acquisition of MacroChem Corporation through the issuance of an aggregate of approximately 2.5 million shares of our common stock. Prior to our acquisition of MacroChem, SCO, an investment company, held a majority of Access’ and MacroChem’s voting stock. Specifically, SCO owned 53% of the voting stock of Access and 63% of the voting stock of MacroChem. A non-controlling interest of 37% existed at the merger date of MacroChem. In addition, certain members of SCO’s management serve on the board of directors of both Access and MacroChem. Based on these facts, Access and MacroChem were deemed under the common control of SCO. As the entities were deemed under common control, the acquisition was recorded similar to the pooling-of-interest method and the financial information for all periods presented reflects the financial statements of the combined companies in accordance with Financial Accounting Standards Board standards on business combinations for entities under common control.

F-31

(2) Intangible Assets

Intangible assets consist of the following (in thousands):

	September 30, 2010		December 31, 2009
	Gross carrying value	Accumulated amortization	Gross carrying value	Accumulated Amortization
Amortizable intangible assets Patents	$ 2,624	$ 1,997	$ 2,624	$ 1,837

Amortization expense related to intangible assets totaled $53,000 and $159,000 for each of the three and nine months ended September 30, 2010 and totaled $53,000 and $159,000 for each of the three and nine months ended September 30, 2009. The aggregate estimated amortization expense for intangible assets remaining as of September 30, 2010 is as follows (in thousands):

2010	$	53
2011		212
2012		82
2013		44
2014		44
over 5 years		192

Total	$	627

(3) Liquidity

The Company generated net loss allocable to common stockholders of $11,180,000 for the nine months ended September 30, 2010 and a loss of $19,226,000 for the year ended December 31, 2009. At September 30, 2010, our working capital deficit was $12,918,000. We expect that our capital resources and receipts due under our license agreements will be adequate to fund our current level of operations into the first quarter of 2011. However, our ability to fund operations over this time could change significantly depending upon changes to future operational funding obligations or capital expenditures. As a result we will be required to seek additional financing sources and enter into future licensing agreements for our products. If we are unable to obtain adequate capital funding in the future or enter into future license agreements for our products, we may not be able to continue as a going concern, which would have an adverse effect on our business and operations, and investors’ investment in us may decline.

(4) Fair Value of Financial Instruments

F-32

·	Level 1 – Quoted prices in active markets for identical assets or liabilities.

We have no Level 3 financial assets or liabilities. The guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009 are summarized below:

(in thousands)	September 30, 2010						December 31, 2009
	Level 1		Level 2		Total		Level 1		Level 2		Total
Assets:
Cash	$	1,496	$	-	$	1,496	$	607	$	-	$	607

Liabilities:
Derivative liability warrants	$	-	$	3,324	$	3,324	$	-	$	9,708	$	9,708
Derivative liability preferred stock	$	-	$	10,455	$	10,455	$	-	$	-	$	-

(5) Stock Based Compensation

For the three and nine months ended September 30, 2010, we recognized stock-based compensation expense of $284,000 and $838,000. For the three and nine months ended September 30, 2009 we recognized stock-based compensation expense of $285,000 and $593,000.

The following table summarizes stock-based compensation for the three and nine months ended September 30, 2010:

	Three months ended September 30,				Nine months ended September 30,
	2010		2009		2010		2009
Research and development	$	210,000	$	130,000	$	575,000	$	250,000
General and administrative		74,000		155,000		263,000		343,000
Stock-based compensation expense included in operating expense	$	284,000	$	285,000	$	838,000	$	593,000

For the three months ended September 30, 2010 and 2009 no options were granted. For the nine months ended September 30, 2010 we granted 640,000 stock options. For the nine months ended September 30, 2009 we granted 475,000 stock options. MacroChem options were cancelled upon acquisition by Access and are no longer outstanding.

F-33

Our weighted average Black-Scholes fair value assumptions used to value the 2010 and 2009 first nine months grants are as follows:


	9/30/10			9/30/09
Expected life(b)		5.7 yrs			5.5 yrs
Risk free interest rate		2.3	%		2.4	%
Expected volatility(a)		123	%		114	%
Expected dividend yield		0.0	%		0.0	%

(a)	Reflects movements in our stock price over the most recent historical period equivalent to the expected life.
(b)	Based on the simplified method.

(6) Stockholders’ Deficit

On January 26, 2010, we completed the sale of approximately 2.10 million shares of our common stock and warrants to purchase approximately 1.05 million shares of our common stock at an exercise price of $3.00 per share for an aggregate purchase price of $6.3 million. Proceeds, net of cash issuance costs from the sale, were $5.8 million.

In connection with the sale we issued warrants for placement agent fees to purchase a total of 125,109 shares of our common stock at an exercise price of $3.75 per share. All of the warrants are exercisable immediately and expire five years from the date of issue. The fair value of the warrants was $2.19 per share on the date of grant using the Black-Scholes pricing model with the following assumptions: expected yield 0.0%, risk-free interest rate 2.38%, expected volatility 119% and an expected term of 5 years.

(7) Deriviatave Liability Preferred Stock

November 7, 2007 Preferred Stock

F-34

February 4, 2008 Preferred Stock

On September 30, 2010 our preferred stock outstanding was 2,985.3617 shares convertible into 9,951,198 shares of the Company’s common stock.

Change In Accounting Principle

We determined that the anti-dilution provision built into the preferred shares issued should be considered for derivative accounting. FASB ASC 815 requires freestanding contracts that are settled in a company’s own stock to be designated as an equity instrument, assets or liability. Under the provisions of FASB ASC 815, a contract designated as an asset or liability must be initially recorded and carried at fair value until the contract meets the requirements for classification as equity, until the contract is exercised or until the contract expires. We determined that the anti-dilution provision associated with the November 2007 and February 2008 preferred shares no longer met the criteria for equity accounting through the revised criteria in FASB ASC 815. FASB ASC 815 provides for transition guidance whereby a cumulative effect of a change in accounting principle should be recognized as an adjustment to retained earnings and other impacted balance sheet items as of January 1, 2009. The cumulative-effect adjustment is the difference between the amounts recognized prior to adoption and amounts recognized at adoption assuming this guidance had been applied from the issuance date of the preferred stock.

Accordingly, at January 1, 2009, we determined that the preferred stock conversion feature should be accounted for as derivative liabilities. The preferred stock conversion feature was determined to have no fair market value at both issuance dates as well as each reporting period since management asserted that the likelihood of issuing any new equity at a price that would trigger the anti-dilution effect to be nil.

During the third quarter of 2010 we were actively raising capital. With our stock price below $3.00 a share there was a possibility that we would sell shares below the $3.00 price. This would require an adjustment to our convertible preferred stock. Accordingly as of September 30, 2010 the resulting accounting leads to a derivative liability preferred stock of $10,455,000. We recorded derivative expense of $10,455,000 for the quarter ended September 30, 2010.

The derivative preferred stock liability will continue to be reviewed quarterly in accordance with FASB ASC 815.

The derivative warrants liability will also continue to be marked to market in accordance with FASB ASC 815 as discussed in the Form 10K for December 31, 2009.

F-35

Delaware	3841	83-0221517
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification No.)
2600 Stemmons Freeway, Suite 176 Dallas, Texas 75207 (214) 905-5100 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
Stephen B. Thompson Chief Financial Officer Access Pharmaceuticals, Inc. 2600 Stemmons Freeway, Suite 176 Dallas, Texas 75207 (214) 905-5100 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

Title of each class of securities to be registered	Proposed maximum aggregate offering price		Amount of registration fee(1)
Units, each unit consisting of ___ share of Common Stock, $0.01 par value, and warrants to purchase ___ share of Common Stock	$	25,000,000	$	1,782.50
Common Stock included in the Units	$	—	$	—
Warrants included in the Units	$	—		—	(3)
Common Stock issuable upon exercise of the warrants included in the Units (2)	$	—		—	(3)
Series A Junior Participating Preferred Stock Purchase Rights (4)
Total	$	25,000,000	$	1,782.50	(5)

	Per Unit	Total
Offering Price per Unit	$	$
Placement Agent’s Fees	$	$
Offering Proceeds before expenses	$	$

TABLE OF CONTENTS

		Page

PROSPECTUS SUMMARY		1
	ABOUT THIS PROSPECTUS	1
	ABOUT ACCESS	1
	SUMMARY OF THE OFFERING	5
	SUMMARY CONDENSED CONSOLIDATED FINANCIAL INFORMATION	6

RISK FACTORS		7
FORWARD-LOOKING STATEMENTS		17
USE OF PROCEEDS		18
DILUTION		19
PRICE RANGE OF OUR COMMON STOCK		20
DIVIDEND POLICY		22
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS		23
DESCRIPTION OF BUSINESS		35
DESCRIPTION OF PROPERTY		50
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS		51
LEGAL PROCEEDINGS		59
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT		59
TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS		61
DESCRIPTION OF SECURITIES		63
PLAN OF DISTRIBUTION		67
EXPERTS		69
LEGAL MATTERS		69
WHERE YOU CAN FIND MORE INFORMATION		69
FINANCIAL STATEMENTS		F-1

Compound	Originator	Technology	Indication	Clinical Stage (1)

MuGard™	Access	Mucoadhesive liquid	Mucositis	(510k) Marketing clearance received
ProLindacTM (Polymer Platinate, AP5346) (2)	Access / Univ of London	Synthetic polymer	Cancer	Phase 2
Thiarabine (4-thio Ara-C) (3)	Southern Research Institute	Small molecule	Cancer	Phase 1/2
Oral Insulin	Access	Cobalamin	Diabetes	Pre-clinical
CobOral™ Delivery System	Access	Cobalamin	Various	Pre-clinical
CobaCyte™-Targeted Therapeutics	Access	Cobalamin	Anti-tumor	Pre-clinical

(in thousands, except per share amounts)	For the Nine Months Ended September 30,		For the Year Ended December 31,
	2010	2009	2009	2008

Total revenues	$	334		$	248		$	352		$	291
Loss from operations		(5,879	)		(7,991	)		(9,676	)		(30,731	)
Interest and miscellaneous income		554			18			29			211
Interest and other expense		(444	)		(395	)		(539	)		(911	)
Gain (loss) on change in fair value of derivative warrants		6,384			-			(7,154	)		-
Loss on change in fair value of derivative preferred stock		(10,455	)		-			-			-
Net loss		(9,840	)		(8,368	)		(17,340	)		(31,431	)

Preferred stock dividends		(1,340	)		(1,434	)		(1,886	)		(3,358	)
Net loss allocable to common stockholders	$	(11,180	)	$	(9,802	)	$	(19,226	)	$	(34,789	)

Common Stock Data:
Basic and diluted net loss per common share Net loss allocable to common stockholders	$	(0.73	)	$	(0.86	)	$	(1.63	)	$	(4.16	)
Weighted average basic and diluted common shares outstanding		15,337			11,376			11,819			8,354


Consolidated Balance Sheet Data:
Cash and cash equivalents	$	1,496		$	1,672		$	607		$	2,677
Total assets		2,279			2,705			1,583			4,171
Deferred revenue		4,817			5,164			5,077			2,409
Notes payable		-			-			-			825
Derivative liability warrants		3,324			-			9,708			-
Derivative liability preferred stock		10,455			-			-			-
Convertible notes		5,500			5,500			5,500			5,500
Total liabilities		32,732			18,304			28,572			15,357
Total stockholders' deficit		(30,453	)		(15,599	)		(26,989	)		(11,186	)

	Common Stock
	High	Low
Fiscal Year 2010 Year-to date

First quarter	$ 3.29	$ 2.44

Second quarter	2.80	1.96

Third quarter	2.20	1.80

Fourth quarter (through November 12, 2010)	3.17	2.15

Fiscal Year Ended December 31, 2009

First quarter	$ 1.85	$ 0.77

Second quarter	2.25	1.25

Third quarter	4.70	1.84

Fourth quarter	3.50	2.80

Fiscal Year Ended December 31, 2008

First quarter	$ 3.50	$ 1.35

Second quarter	3.30	1.40

Third quarter	3.49	2.50

Fourth quarter	2.75	0.80

			Number of securities
			remaining available
			for future issuance
	Number of securities to	Weighted-average	under equity
	be issued upon exercise	exercise price of	compensation plans
	of outstanding options	outstanding options	(excluding securities
Plan Category	warrants and rights	warrants and rights	reflected in column (a))
	(a)	(b)	(c)

Equity compensation plans
approved by security
holders:
2005 Equity Incentive Plan	1,738,733	$2.13	2,802,304
1995 Stock Awards Plan	59,500	15.74	-
2001 Restricted Stock Plan	-	-	52,818

Equity compensation plans
not approved by security
holders:
2007 Special Stock Option Plan	-	-	450,000
Total	1,798,233	$2.61	3,305,122

(in thousands)	Twelve Months ended December 31,		Inception To Date (1)
Project	2009	2008
Polymer Platinate (ProLindac™)	$ 2,507	$ 3,402	$ 28,126
Mucoadhesive Liquid Technology (MLT)	107	-	1,618
Others (2)	43	332	5,437
Total	$ 2,657	$ 3,734	$ 35,181

Name	Age	Title
Steven H. Rouhandeh	53	Chairman of the Board*
Jeffrey B. Davis	47	Chief Executive Officer, Director*
Esteban Cvitkovic, M.D.	60	Vice Chairman – Europe
Mark J. Ahn, Ph.D.	47	Director
Mark J. Alvino	43	Director
Stephen B. Howell, M.D.	65	Director
David P. Nowotnik, Ph.D.	61	Senior Vice President Research & Development
Frank A. Jacobucci	48	Vice President, Sales and Marketing
Phillip S. Wise	52	Vice President, Business Development & Strategy
Stephen B. Thompson	57	Vice President, Chief Financial Officer, Treasurer,
		Secretary

Name and Principal Position	Year	Salary ($) (1)	Option Awards ($) (2)	All Other Compensation (3)	Total ($)
Jeffrey B. Davis Chief Executive Officer	2009 2008	$170,000 266,076	$ - -	$ - -	$170,000 266,076

David P. Nowotnik, Ph.D. Senior Vice President Research and Development	2009 2008	$175,675 253,620	$ 87,117 136,977	$ 6,307 12,225	$269,099 402,822

Phillip S. Wise Vice President, Business Development	2009 2008	$ 200,000 200,000	$ - 136,977	$ 5,209 9,876	$205,209 346,853

Jeffrey B. Davis (2)	25,000	-	-	0.63	08/17/16
David P. Nowotnik, Ph.D. (3)	75,000 19,791 100,000 8,000 5,000 7,000 10,000	- 30,209 - - - - -	-	1.38 3.00 0.63 11.60 29.25 10.10 18.65	05/27/19 05/21/18 08/17/16 05/23/15 01/23/14 01/30/13 03/22/12
Phillip S. Wise (4)	19,791 100,000	30,209 -	-	3.00 0.63	05/21/18 08/17/16

Name	Fees earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)(1)	All Other Compensation ($)	Total ($)
Mark J. Ahn, PhD (2)	-	-	40,000	-	40,000
Mark J. Alvino (3)	-	-	40,000	-	40,000
Esteban Cvitkovic, MD (4)	-	-	115,000	132,000	247,000
Jeffrey B. Davis (5)	-	-	-	-	-
Stephen B. Howell, MD (6)	-	-	40,000	-	40,000
David P. Luci (7)	-	265,000	52,000	83,000	400,000
Steven H. Rouhandeh (8)	-	-	-	-	-

	(1)		The value listed represents the fair value of the options recognized as expense under ASC 718 during 2009, including unvested options granted before 2009 and those granted in 2009. Fair value is calculated as of the grant date using a Black-Scholes (“Black-Scholes”) option-pricing model. The determination of the fair value of share-based payment awards made on the date of grant is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. Our assumptions in determining fair value are described in note 11 to our audited financial statements for the year ended December 31, 2009, included in our Annual Report on Form 10-K.
	(2)		Represents expense recognized in 2009 in respect of options to purchase 35,000 shares of our Common Stock based on a grant date fair value of $40,000. Dr. Ahn has options to purchase 66,000 shares of our Common Stock at December 31, 2009.
	(3)		Represents expense recognized in 2009 in respect of options to purchase 35,000 shares of our Common Stock based on a grant date fair value of $40,000. Mr. Alvino has options to purchase 66,000 shares of our Common Stock at December 31, 2009.
	(4)		Represents expense recognized in 2009 in respect of options to purchase 100,000 shares of our Common Stock based on a grant date fair value of $115,000. Includes $132,000 Dr. Cvitkovic received for scientific consulting services in 2009. Dr. Cvitkovic has options to purchase 156,000 shares of our Common Stock and warrants to purchase 200,000 of our Common Stock at December 31, 2009.
	(5)		Mr. Davis served as our CEO during 2009 and did not receive board fees or options. Mr. Davis’ salary and employment agreement are discussed in the Summary Compensation Table and Compensation Pursuant to Agreements and Plans – Employment Agreements – President and Chief Executive Officer. Mr. Davis has options to purchase 25,000 shares of our Common Stock at December 31, 2009.
	(6)		Represents expense recognized in 2009 in respect of options to purchase 35,000 shares of our Common Stock based on a grant date fair value of $40,000. Dr. Howell has options to purchase 79,700 shares of our Common Stock at December 31, 2009.

	(7)		Represents expense recognized in 2009 in respect to 66,667 shares of Common Stock received on June 1, 2009 based on a fair value of $181,000 per Mr. Luci’s consulting agreement. Also represents expense recognized in 2009 in respect to 60,000 shares of Common Stock received due to the termination of his employment agreement with MacroChem Corporation based on a fair value of $84,000. Represents expense recognized in 2009 in respect of options to purchase 45,000 shares of our Common Stock based on a grant date fair value of $52,000. Includes $83,000 Mr. Luci received for business consulting services to Access in 2009. Mr. Luci has options to purchase 76,000 shares of our Common Stock at December 31, 2009. He also has warrants to purchase 4,167 shares of our Common Stock at December 31, 2009. Mr. Luci resigned as director February 12, 2009.
	(8)		Mr. Rouhandeh does not have any options or warrants outstanding at December 31, 2009. See also the Security Ownership of Certain Beneficial Owners and Management.

Steven H. Rouhandeh(2)	-	*	-	*	-	*
Jeffery B. Davis (3)	36,000	*	-	*	36,000	*
Mark J. Ahn, Ph. D. (4)	106,000	*	-	*	106,000	*
Mark J. Alvino (5)	36,000	*	-	*	36,000	*
Esteban Cvitkovic, M.D. (6)	342,949	2.1%	-	*	342,949	1.3%
Stephen B. Howell, M.D. (7)	118,422	*	-	*	118,422	*
David P. Nowotnik, Ph.D. (8)	254,810	1.6%	-	*	254,810	*
Phillip S. Wise (9)	157,294	*	-	*	157,294	*
SCO Capital Partners LLC, SCO Capital Partners LP, and Beach Capital LLC (10)	9,535,087	43.2%	7,077,100	71.1%	16,612,187	51.9%
Larry N. Feinberg (11)	1,222,443	7.3%	1,457,699	14.7%	2,680,142	10.1%
Lake End Capital LLC (12)	1,059,601	6.3%	793,067	8.0%	1,852,668	6.9%
All Directors and Executive Officers as a group (consisting of 8 persons) (13)	1,051,475	6.2%	-	*	1,051,475	3.9%

	PAGE

Report of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets at December 31, 2009 and 2008	F-3

Consolidated Statements of Operations for 2009 and 2008	F-4

Consolidated Statements of Stockholders' Equity (Deficit) for 2009 and 2008	F-5

Consolidated Statements of Cash Flows for 2009 and 2008	F-6

Notes to Consolidated Financial Statements (Two years ended December 31, 2009)	F-7

Condensed Consolidated Balance Sheets at September 30, 2010 (unaudited)	F-27

Condensed Consolidated Statements of Operations for September 30, 2010 and 2009 (unaudited)	F-28

Condensed Consolidated Statements of Stockholders’ Deficit for September 30, 2010 (unaudited)	F-29

Condensed Consolidated Statements of Cash Flows for September 30, 2010 and 2009 (unaudited)	F-30

Notes to Condensed Consolidated Financial Statements (Three and Nine Months Ended September 30, 2010 and 2009) (unaudited)	F-31

SEC Registration Fee	$	1,783
Printing and Engraving Expenses	$	1,000
Legal Fees and Expenses	$	15,000
Accountants' Fees and Expenses	$	10,000
Miscellaneous Costs	$	10,000
Total	$	37,783


Date November 15, 2010	By:	/s/ Jeffrey B. Davis
		Jeffrey B. Davis
		Chief Executive Officer
		(Principal Executive Officer)

Date November 15, 2010	By:	/s/ Stephen B. Thompson
		Stephen B. Thompson
		Vice President, Chief Financial
		Officer and Treasurer
		(Principal Accounting Officer)


Date November 15, 2010	By:	/s/ Jeffrey B. Davis
		Jeffrey B. Davis, Director,
		Chief Executive Officer

Date November 15, 2010	By:	*
		Mark J. Ahn, Director

Date November 15, 2010	By:	*
		Mark J. Alvino, Director

Date November 15, 2010	By:	*
		Esteban Cvitkovic, Director

Date November 15, 2010	By:	*
		Stephen B. Howell, Director

Date November 15, 2010	By:	*
		Steven H. Rouhandeh, Chairman of
		the Board