**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 
| **ý** | ** ** | **Annual Report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                               |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                              |
| ** ** | ** ** | **for the fiscal year ended  December 31, 2005**                                                                                                                        |
|       |       |                                                                                                                                                                    |
| **or**     |
|       |
| **o**      |       | **Transition Report pursuant to  Section 13 or 15 (d) of the Securities Exchange Act of 1934**                                                                          |
| ** ** |       | ** **                                                                                                                                                              |
| ** ** |       | **for the transition period from               to           ** |

 

**Commission File Number 0-9314**

 

**ACCESS PHARMACEUTICALS, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                      |       | **83-0221517**              |
|---------------------------------------------------|------------|-----------------------------|
| (State of  Incorporation)                         |       | (I.R.S. Employer  I.D. No.) |
|                                              |       |                        |
| **2600  Stemmons Freeway, Suite 176, Dallas, TX** | ** ** | **75207**                   |
| (Address of  Principal Executive Offices)         |       | (Zip Code)                  |

 

Registrant’stelephone number, including area code: **(214) 905-5100**

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 

| **None**         |   | **None**                                     |
|------------------|--------|----------------------------------------------|
| (Title of Class) |   | (Name of each  exchange on which registered) |

 

Securitiesregistered pursuant to Section 12(g) of the Act:

 

**CommonStock, One Cent ($0.01) Par Value Per Share**

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes  o    No  ý

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Exchange Act. Yes  o    No  ý

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days. Yes  ý    No  o

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K. o

 

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

 

| Large  accelerated filer  o |   | Accelerated  filer  o |   | Non-accelerated  filer  ý |
|---------------------------------------|--------|---------------------------------|--------|------------------------------------------|

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes  o    No  ý

 

The aggregatemarket value of the outstanding voting stock held by non-affiliates of theregistrant as of June 30, 2005 was approximately $28,278,000.

 

As of March 30,2006 there were 17,651,040 shares of Access Pharmaceuticals, Inc. Common Stockissued and outstanding.

 

**DOCUMENTSINCORPORATED BY REFERENCE:** Portions of Registrant’s Definitive Proxy Statement filed with theCommission pursuant to Regulation 14A in connection with the 2006 AnnualMeeting are incorporated herein by reference into Part III of this report.Other references incorporated are listed in the exhibit list in Part IV of thisreport.

 

 

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**PARTI**

 

### **ITEM1.   BUSINESS**

 

This Form 10-K (includingthe information incorporated by reference) contains forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties including, but not limited to theuncertainties associated with research and development activities, clinicaltrials, our ability to raise capital, the timing of and our ability to achieveregulatory approvals, dependence on others to market our licensed products,collaborations, future cash flow, the timing and receipt of licensing andmilestone revenues, the future success of our marketed products and products indevelopment, our ability to manufacture amlexanox products in commercialquantities, our sales projections, and the sales projections of our licensingpartners, our ability to achieve licensing milestones and other risks describedbelow as well as those discussed elsewhere in this 10-K, documents incorporatedby reference and other documents and reports that we file periodically with theSecurities and Exchange Commission. These statements include, withoutlimitation, statements relating to our ability to continue as a going concern, anticipatedpayments to be received from Uluru, anticipated product approvals and timingthereof, product opportunities, clinical trials and U.S. Food and DrugAdministration (“FDA”) applications, as well as our drug development strategy,our clinical development organization expectations regarding our rate oftechnological developments and competition, our plan not to establish aninternal marketing organization, our expectations regarding minimizingdevelopment risk and developing and introducing technology, the terms of futurelicensing arrangements, our ability to secure additional financing for ouroperations and our expected cash burn rate. These statements relate to futureevents or our future financial performance. In some cases, you can identifyforward-looking statements by terminology such as “may,” “will,” “should,” “expects,”“plans,” “could,” “anticipates,” “believes,” “estimates,” “predicts,” “potential”or “continue” or the negative of such terms or other comparable terminology.These statements are only predictions and involve known and unknown risks,uncertainties and other factors, including the risks outlined In Item 1A “RiskFactors,” that may cause our or our industry’s actual results, levels ofactivity, performance or achievements to be materially different from anyfuture results, levels or activity, performance or achievements expressed orimplied by such forward-looking statements.

 

Although we believe thatthe expectations reflected in the forward-looking statements are reasonable, wecannot guarantee future results, levels of activity, performance orachievements. We are under no duty to update any of the forward-lookingstatements after the date of filing this Form 10-K to conform such statementsto actual results.

 

### **Business**

 

Access Pharmaceuticals,Inc. (“Access” or the “Company”) is a Delaware corporation. We are an emergingpharmaceutical company developing unique polymer linked cytotoxics for use inthe treatment of cancer and other diseases states. Our lead product AP5346 isin Phase II clinical testing. The Company also has other advanced drug deliverytechnologies including vitamin-mediated targeted delivery and oral care drugdelivery.

 

Together with oursubsidiaries, we have proprietary patents or rights to four drug deliverytechnology platforms:

 

•      syntheticpolymer targeted delivery,

•      vitaminmediated targeted delivery

•      vitaminmediated oral delivery, and

•      mucoadhesiveliquid technology.

 

### **KeyDevelopments**

 

On February 16, 2006, we entered into anote and warrant purchase agreement pursuant to which we sold and issued anaggregate of $5,000,000 of 7.5% convertible notes due March 31, 2007 andwarrants to purchase an aggregate of 19,318,184 shares of common stock ofAccess. Net proceeds to Access were $4.557 million. The notes and warrants weresold in a private placement to a group of accredited investors led by SCOCapital Partners LLC (“SCO”) and its affiliates.

 

The notes mature on March 31, 2007, areconvertible into Access common stock at a fixed conversion rate of $0.22 pershare, bear interest of 7.5% per annum and are secured by certain assets ofAccess. Each note may be converted at the option of the noteholder or Accessunder certain circumstances as set forth in the notes.

 

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Each noteholder received a warrant topurchase a number of shares of common stock of Access equal to 75% of the totalnumber shares of Access common stock into which such holder’s note isconvertible.  Each warrant has anexercise price of $0.264 per share and is exercisable at any time prior toFebruary 16, 2012.  In the event SCO andits affiliates were to convert all of their notes and exercise all of theirwarrants, they would own approximately 73% of the voting securities of Access.

 

In connection with the sale and issuanceof notes and warrants, Access entered into an investors rights agreement wherebyit granted SCO the right to designate two individuals to serve on the Board ofDirectors of Access while the notes are outstanding, and also grantedregistration rights with respect to the shares of common stock of Accessunderlying the notes and warrants. SCO designated Jeffrey B. Davis and Mark J.Alvino to the Board of Directors, and on March 13, 2006 Messrs, Davis andAlvino were appointed to the Board of Directors.

 

On January 31, 2006 weannounced that we had received notice denying the Company’s appeal of anAmerican Stock Exchange (“AMEX”) Staff Determination on December 12, 2005 whichfound that the Company failed to comply with AMEX’s continued listing standardsdue to losses from continuing operations and/or net losses in two of its mostrecent fiscal years with shareholders’ equity of less than $2 million, as setforth in Section 1003(a)(i) of the AMEX “Company Guide”; due to losses fromcontinuing operations and/or net losses in three of its most recent fiscalyears with shareholders’ equity of less than $4 million, as set forth inSection 1003(a)(ii) of the Company Guide; and due to losses from continuingoperations and/or net losses in four of its most recent fiscal years withshareholders’ equity of less than $6 million, as set forth in Section1003(a)(iii) of the Company Guide. As a result, the Company’s common stock wasdelisted from AMEX effective with the open of business on Wednesday, February1, 2006. Quotations for our common stock appears in the “Pink Sheets” under thetrading symbol “AKCA”.

 

On October 12, 2005, wesold our oral care and dermatology business unit to Uluru, Inc, a privateDelaware corporation, for up to $20.6 million to focus on our technologies inoncology and oral drug delivery. The products and technologies sold to Uluruinclude amlexanox 5% paste (marketed under the trade names Aphthasol® andAptheal®), OraDiscTM, Zindaclin® and Residerm® and all of our assetsrelated to these products. In addition, we have licensed to Uluru ournanoparticle hydrogel aggregate technology which could be used for applicationssuch as local drug delivery and tissue filler in dental and soft tissueapplications. The CEO of Uluru is Kerry P. Gray, the former CEO of the Company.In conjunction with the sale transaction, we received a fairness opinion from anationally recognized investment banking firm.

 

Uluru assumed eightemployees of the Company, and five employees remained with Access after thesale transaction. Through a transition period, Uluru leased space from theCompany at its Dallas, TX headquarters.

 

At the closing of thisagreement we received $8.7 million. In addition, at the one year anniversary ofthe agreement we will receive $3.7 million, and we will receive an additional$1 million within 24 months after closing or earlier upon the achievement of amilestone. Any contingent liabilities that arise in the future relating to ourformer business could reduce the $3.7 million receipt. Additional payments ofup to $7.2 million may be made upon the achievement of certain additionalmilestones.

 

The upfrontpayment of this transaction allowed Access to immediately retire our $2.6million of Secured Convertible Notes held by Cornell Capital Partners and itsaffiliate and the various agreements relating to these notes. Such notes weresecured by all of our assets. In addition, the elimination of the manufacturingand regulatory costs associated with the oral care business, as well asrequired employees for these marketed products and product candidates willallow us to reduce our burn rate substantially.

 

On November 9,2005 we announced the restructuring and repayment of a portion of our 7.0%convertible promissory notes due September 13, 2005.

 

One holder of $4 million worth of convertible notes(Oracle Partners LP and related funds) agreed to amend their notes to a newmaturity date, April 28, 2007, with the conversion price being reduced from$5.50 per share to $1.00 per share. In addition, the Company may cause amandatory conversion of the notes into common stock if the common stock tradesat a price of at least 1.5 times the conversion price for a minimum number oftrading days. There is also a provision to allow for a minimum price forconversion in the event of a change of control of the Company.

 

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The Company was unable to reach a conversion agreementwith the second holder of $4 million worth of notes (Philip D. Kaltenbacher),so settled his claim by paying him this amount plus expenses and interest asoutlined in the terms of the note.

 

The third noteholder,holding $5.5 million worth of convertible notes agreed to amend its notes to anew maturity date, September 13, 2010 and elected to have the 2005 interest of$423,000 to be paid on September 13, 2006. The delayed interest will earninterest at a rate of 7.7%.

 

On May 11, 2005, weannounced that Kerry P. Gray resigned as our President and Chief ExecutiveOfficer, effective as of May 10, 2005. Mr. Gray resigned from our Board of Directors and from all otherpositions held with us, effective as of May 10, 2005.  We entered into a Separation Agreement withMr. Gray dated as of May 10, 2005. Pursuant to the terms of the SeparationAgreement, Mr. Gray agreed to provide us with certain post-terminationassistance. He also agreed to maintain the confidentiality of our proprietaryinformation and to a customary mutual release of claims with us.  The Separation Agreement provides for animmediate cash payment to Mr. Gray of $225,000 and payments of $33,333 eachmonth for a period of 18 months, which payments are secured by a lien on ourassets.  We are required to issue 3,500shares of our common stock to Mr. Gray each month for a period of 18 monthsfollowing May 10, 2005. The Separation Agreement also provides that all of Mr.Gray’s outstanding stock options and shares of restricted stock be immediatelyand fully vested and all options remain exercisable for a period of two years.

 

On May 11, 2005, we announcedthat Rosemary Mazanet, M.D., Ph.D, had been named by the Board of Directors asour Acting Chief Executive Officer, effective as of May 11, 2005. The agreementis memorialized in a Letter Agreement with us, dated May 10, 2005.  Dr. Mazanet’s title will be Acting ChiefExecutive Officer and she will report directly to, and be subject to thedirection of,  our Board of Directors.

 

**On March 30, 2005 the Company executed a StandbyEquity Distribution Agreement (“SEDA”) with Cornell Capital Partners. Under theSEDA, the Company may issue and sell to Cornell Capital Partners common stockfor a total purchase price of up to $15,000,000. The purchase price for theshares is equal to their market price, which is defined in the SEDA as 98% ofthe lowest volume weighted average price of the common stock during a specifiedperiod of trading days following the date notice is given by the Company thatit desires to access the SEDA. Further, we agreed to pay Cornell CapitalPartners 3.5% of the proceeds that we receive under the Equity Line of Credit.The amount of each draw down is subject to a maximum amount of $1,000,000. Theterms of the SEDA do not allow us to make draw downs if the draw down wouldcause Cornell Capital Partners to own in excess of 9.9% of our outstandingshares of common stock. Upon closing of the transaction, Cornell CapitalPartners received a one-time commitment fee of 146,500 shares of the our commonstock. On the same date, the Company entered into a Placement Agent Agreementwith Newbridge Securities Corporation, a registered broker-dealer. Pursuant tothe Placement Agent Agreement, upon closing of the transaction the Company paida one-time placement agent fee of 3,500 shares of common stock. The sharesissued were valued at $500,000 and recorded as Debt issuance costs and suchcosts are amortized as the SEDA is accessed. As of December 31, 2005 we haveaccessed $600,000 of the SEDA and $20,000 of the Debt issuance costs werecharged to additional paid-in capital. The Company currently cannot access theSEDA until a post-effective amendment to our registration statement is filedwith, and declared effective by, the SEC. The SEDA is effective through March30, 2007.**

 

In addition, on March 30, 2005, the Company executed aSecurities Purchase Agreement with Cornell Capital Partners and Highgate HouseFunds. Under the Securities Purchase Agreement, Cornell Capital Partners andHighgate House Funds purchased an aggregate of $2,633,000 principal amount ofSecured Convertible Debentures from the Company (net proceeds to the Company of$2,360,000). The Secured Convertible Debentures accrued interest at a rate of7% per year and were to mature 12 months from the issuance date with scheduledmonthly repayment commencing on November 1, 2005 to the extent that the SecuredConvertible Debenture had not been converted to common stock. The SecuredConvertible Debenture was convertible into the Company’s common stock at theholder’s option any time up to maturity at a conversion price equal to $4.00.The Secured Convertible Debentures were secured by all of the assets of theCompany. The Company had the right to redeem the Secured Convertible Debenturesupon 3 business days notice for 110% of the amount redeemed. Pursuant to theSecurities Purchase Agreement, the Company issued to the holders an aggregateof 50,000 shares of common stock of the Company.  The Secured Convertible Notes were paid infull on October 12, 2005 in conjunction with the sale of our oral care assets.

 

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We were incorporated inWyoming in 1974 as Chemex Corporation, and in 1983 we changed our name toChemex Pharmaceuticals, Inc. We changed our state of incorporation from Wyomingto Delaware on June 30, 1989. In 1996 we merged with Access Pharmaceuticals,Inc., a private Texas corporation, and changed our name to AccessPharmaceuticals, Inc. Our principal executive office is located at 2600Stemmons Freeway, Suite 176, Dallas, Texas 75207; our telephone number is (214)905-5100.

 

### **Products**

 

We have used our drugdelivery technology platforms to develop the following products and productcandidates:

 

**Productsin Development Status**

 

**PolymerPlatinate (AP 5346) DACH Platinum**

 

Chemotherapy, surgery andradiation are the major components in the clinical management of cancerpatients. Chemotherapy is increasingly used as an adjunct to radiation andsurgery to improve their effectiveness and serves as the primary therapy forsome solid tumors and metastases. For chemotherapeutic agents to be effectivein treating cancer patients, however, the agent must reach the target cells ineffective quantities with minimal toxicity in normal tissues.

 

The current optimalstrategy for chemotherapy involves exposing patients to the most intensivecytotoxic regimens that they can tolerate and clinicians attempt to design acombination of chemotherapeutic drugs, a dosing schedule and a method ofadministration to increase the probability that cancerous cells will bedestroyed while minimizing the harm to healthy cells. Notwithstandingclinicians’ efforts, most current chemotherapeutic drugs have significantshortcomings that limit the efficacy of chemotherapy. For example, certaincancers are inherently unresponsive to chemotherapeutic agents. Alternatively,other cancers may initially respond, but subgroups of cancer cells acquireresistance to the drug during the course of therapy and the resistant cells maysurvive and cause a relapse. Serious toxicity, including bone marrowsuppression, renal toxicity, neuropathy, or irreversible cardiotoxicity, aresome of the limitations of current anti-cancer drugs that can preventtheir administration in curative doses.

 

Oxaliplatin form of DACHplatinum was initially approved in France and in Europe in 1999 for thetreatment of colorectal cancer. It is now also being marketed in the UnitedStates and is generating worldwide sales in excess of $1.5 billion annually.Carboplatin and Cisplatin, two approved platinum chemotherapy drugs, are notindicated for the treatment of metastatic colorectal cancer. Oxaliplatin, incombination with 5-flurouracil and folinic acid is indicated for the first-linetreatment of metastatic colorectal cancer in Europe and the U.S. The colorectalcancer market is a significant opportunity as there are over 940,000 reportednew cases annually worldwide, increasing at a rate of approximately threepercent per year, and 500,000 deaths.

 

Currently, platinumcompounds are one of the largest selling categories of chemotherapeutic agents,with annual sales in excess of $2.0 billion. As is the case with allchemotherapeutic drugs, the use of such compounds is associated with serioussystemic side effects. The drug delivery goal therefore is to enhance deliveryof the drug to the tumor and minimize the amount of drug affecting normalorgans in the body.

 

Utilizing thebiocompatible water-soluble polymer HPMA as a drug carrier, AP5346 links DACHplatinum to a polymer in a manner which permits the selective release ofplatinum in tumors. The polymer capitalizes on the biological differences inthe permeability of blood vessels at tumor sites versus normal tissue. In thisway, tumor selective delivery and platinum release is achieved. The ability toinhibit tumor growth has been evaluated in more than ten preclinical models. Comparedwith the marketed product Oxaliplatin, AP5346 showed superiority in a number ofthese models. Preclinical studies of the delivery of platinum to tumors in ananimal model have shown that, compared with oxaliplatin at equitoxic doses,AP5346 delivers in excess of 16 times more platinum to the tumor. An analysisof tumor DNA, which is the main target for anti-cancer platinum agents, hasshown that AP5346 delivers approximately 14 times more platinum to tumor DNA.Results from preclinical efficacy studies conducted in the B16 and other tumormodels have also shown that AP5346 is superior to oxaliplatin in inhibiting thegrowth of tumors. An extensive preclinical package has been developedsupporting the development of AP5346.

 

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In the first quarter of2005 we completed a Phase I clinical study in a multi-center study conducted inEurope, enrolled 26 patients. The study was reported at the AACR-NCI-EORTCconference in Philadelphia in November 2005. The European trial was designed to identify the maximum tolerated dose,dose limiting toxicities, the pharmacokinetics of the platinum in plasma andthe possible antitumor activity of AP5346. The open-label, non-randomized,dose-escalation Phase I study was performed at two European centers. AP5346 wasadministered as an intravenous infusion over one hour, once a week on days 1, 8and 15 of each 28-day cycle to patients with solid progressive tumors. We haveobtained results in 26 patients with a broad cross-section of tumor types, withdoses ranging from 80-1,280 mg Pt/m2.

 

Of the 26 patients, 10were not evaluable for tumor response, principally due to withdrawal from thestudy prior to completing the required cycle. Of the 16 evaluable patients, 2demonstrated a partial response and 4 experienced stable disease. One of thepatients who attained a partial response had a melanoma with lung metastasis; aCT scan revealed a tumor decrease of greater than 50%. The other patient whoresponded had ovarian cancer; she had a reduction in lymph node metastasis andremission of a liver metastasis. Also of note, a patient with cisplatinresistant cervical cancer showed a short lasting significant reduction in lungmetastasis after 3 doses. However, due to toxicity, the patient could not beretreated to determine whether the partial response could be maintained.

 

We received clearance inJanuary 2005 from the US Food and Drug Administration for our IND for AP5346allowing the Company to proceed with a Phase I clinical trial for this drugcandidate. We plan to initiate a study of AP5346 in combination withfluorouracil and leucovorin to evaluate drug safety and to establish a startingdose for future Phase II studies utilizing this combination. Upon thesuccessful completion of this Phase I study, we plan to initiate a Phase IIstudy to determine the efficacy of AP5346 in combination with fluorouracil andleucovorin in colorectal cancer patients compared with theoxaliplatin/fluorouracil/leucovorin combination, which is used extensively totreat colorectal cancer.

 

We have provided AP5346to the Moores Cancer Center at the University of California, San Diego toconduct a Phase II clinical study in patients with head and neck cancer under aphysician-sponsored IND. The primary aim of the study is to demonstrate theability of the tumor-targeting polymer system to deliver more platinum totumors than can be attained with oxaliplatin, the approved DACH platinumcompound. The injection of the first patient was announced on February 23,2006.

 

We have planned a newEuropean Phase II AP5346 trial in ovarian cancer patients who have relapsedafter first line platinum therapy. Our product is near the end of themanufacturing process and we have signed on a CRO to begin these clinicaltrials. We expect to inject our first patient in the second quarter of 2006.

 

**MucoadhesiveLiquid Technology (MLT) – ViporTM**

 

Mucositis is adebilitating condition involving extensive inflammation of mouth tissue thataffects an estimated 550,000 cancer patients in the United States undergoingchemotherapy and radiation treatment. Any treatment that would acceleratehealing and/or diminish the rate of appearance would have a significantbeneficial impact on the quality of life of these patients and may allow for moreaggressive chemotherapy.

 

We filed an IND with theFDA in December 1999 and developed a Phase II protocol to investigate amouthwash formulation of a mucoadhesive liquid for the prevention and treatmentof mucositis in head and neck cancer patients treated with radiation with orwithout chemotherapy. Over 90% of head and neck cancer patients treated withradiation and chemotherapy experience mucositis. This study commenced in thefirst quarter of 2000. We enrolled 58 patients in the initial study which wasperformed at multiple sites throughout the United States.

 

In July 2001, weannounced results from our Phase II randomized clinical study of the preventionand treatment of mucositis. The data developed confirmed that the product usingour mucoadhesive liquid technology (MLT) could represent an importantadvancement in the management and prevention of mucositis. We named thisproduct ViporTM.

 

The data wereretrospectively compared with two historical patient databases to evaluate thepotential advantages that this technology may represent in the prevention,treatment and management of mucositis. The patient evaluation was conductedusing the oral mucositis assessment scale, which qualifies the disease severityon a scale of 0-5. Key highlights of the comparison with the historical patientdatabases are as follows:

 

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•      theaverage severity of the disease was reduced by approximately 40%;

•      themaximum intensity of the mucositis was approximately 35% lower; and

•      themedian peak intensity was approximately 50% lower.

 

Given the resultsachieved with ViporTM, and the fact that in the study an amlexanox rinse showedno additional benefit, we discontinued the program to evaluate amlexanox as apreventative product candidate for mucositis. Following the completion of thePhase II study we conducted additional formulation development work to optimizethe MLT technology. The topical application of ViporTMwas tested for its abilityto attenuate the course of radiation-induced oral mucositis in an establishedhamster model. The study results clearly indicate the ability to prevent theonset of ulcerative mucositis, or delay the onset and reduce the severity ofmucositis.

 

We plan to move thisproduct forward in 2006 towards commercialization by preparing a 510(k) deviceapplication and submitting this application to the FDA in second quarter of2006.

 

### **DrugDevelopment Strategy**

 

A part of our integrateddrug development strategy is to form creative alliances with centers ofexcellence in order to obtain alternative lead compounds while minimizing theoverall cost of research. For example, certain of our polymer platinatetechnology has resulted in part from a research collaboration with The Schoolof Pharmacy, University of London.

 

Our strategy is to focuson our polymer therapeutic program for the treatment of cancer while continuingto develop technologies such as MLT and vitamin-mediated oral drug deliverywhich could provide us with a revenue stream in the short term throughcommercialization or outlicensing to fund our longer-term polymer developmentprogram. To reduce financial risk and equity financing requirements, we aredirecting our resources to the preclinical and early clinical phases ofdevelopment. Where the size of the necessary clinical studies and costassociated with the later clinical development phases are significant, we planto outlicense to, or co-develop with, marketing partners our currentpolymer therapeutic product candidates.

 

We will continue to expandour internal core capabilities of chemistry, formulation, analytical methodsdevelopment, clinical development, biology and project management to maximizeproduct opportunities in a timely manner. We will, however, contract certainresearch and development, manufacturing and manufacturing scaleup, certainpreclinical testing and product production to research organizations, contractmanufacturers and strategic partners. We will continue to evaluate the mostcost-effective methods to advance our programs and may build the infrastructureto do the work ourselves in order to achieve cost savings. Given the currentcost containment and managed care environment both in the United States andoverseas and the difficulty for a small company to effectively market itsproducts, we do not currently plan to become a fully integrated pharmaceuticalcompany.

 

Consequently, we expectto form strategic alliances for product development and to outlicense thecommercial rights to development partners. By forming strategic alliances withmajor pharmaceutical and diagnostic companies, we believe that our technologycan be more rapidly developed and successfully introduced into the marketplace.

 

### **ScientificBackground**

 

The ultimate criteria foreffective drug delivery is to control and optimize the localized release of thedrug at the target site and rapidly clear the non-targeted fraction.Conventional drug delivery systems such as controlled release, sustainedrelease, transdermal systems and others are designed for delivering activeproduct into the systemic circulation over time with the objective of improvingpatient compliance. These systems do not address the biologically relevantissues such as site targeting, localized release and clearance of drug. Themajor factors that impact the achievement of this ultimate drug delivery goalare the physical characteristics of the drug and the biological characteristicsof the disease target sites. The physical characteristics of the drug affectsolubility in biological systems, its biodistribution throughout the body, andits interactions with the intended pharmacological target sites and undesiredareas of toxicity. The biological characteristics of the diseased area impactthe ability of the drug to selectively interact with the intended target siteto allow the drug to express the desired pharmacological activity.

 

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We believe that our drugdelivery technology platforms are differentiated from conventional drugdelivery systems in that they seek to apply a disease-specific approach toimprove the drug delivery process with formulations to significantly enhancethe therapeutic efficacy and reduce toxicity of a broad spectrum of products.

 

### **CoreDrug Delivery Technology Platforms**

 

Our current drug deliverytechnology platforms for use in cancer chemotherapy, dermatology and oraldisease are:

 

•      Synthetic Polymer Targeted Drug DeliveryTechnology;

 

•      VitaminMediated Targeted Delivery Technology;

 

•      VitaminMediated Oral Delivery Technology; and

 

•      MucoadhesiveLiquid Technology.

 

Eachof these platforms is discussed below:

 

### **SyntheticPolymer Targeted Drug Delivery Technology**

 

In collaboration with TheSchool of Pharmacy, University of London, we have developed a synthetic polymertechnology, which utilizes hydroxypropylmethacrylamide with platinum, designedto exploit enhanced permeability and retention, or EPR, at tumor sites toselectively accumulate drug and control drug release. Many solid tumors possessvasculature that is hyperpermeable, or leaky, to macromolecules. In addition tothis enhanced permeability, tumors usually lack effective lymphatic and/orcapillary drainage. Consequently, tumors selectively accumulate circulatingmacromolecules, including, for example, up to 10% of an intravenous dose inmice. This effect has been termed EPR, and is thought to constitute themechanism of action of styrene-maleic/anhydride-neocarzinostatin, or SMANCS,which is in regular clinical use in Japan for the treatment of hepatoma. Thesepolymers take advantage of endothelial permeability as the drug carryingpolymers are trapped in tumors and then taken up by tumor cells. Linkagesbetween the polymer and drug can be designed to be cleaved extracellularly orintracellularly. The drug is released inside the tumor mass while polymer/drugnot delivered to tumors is renally cleared from the body. Data generated inanimal studies have shown that the polymer/drug complexes are far less toxicthan free drug alone and that greater efficacy can be achieved. Thus, thesepolymer complexes have demonstrated significant improvement in the therapeuticindex of anti-cancer drugs, including, for example, platinum.

 

### **VitaminMediated Targeted Delivery Technology**

 

Most drugs are effective only when they reach a certainminimum concentration in the region of disease, yet are well distributedthroughout the body contributing to undesirable side effects. It is thereforeadvantageous to alter the natural biodistribution of a drug to have it morelocalized where it is needed. Our vitamin mediated targeted delivery technologyutilizes the fact that in many diseases where there is rapid growth and/or celldivision, the demand for certain vitamins increases. By coupling the drug to anappropriate vitamin, the vitamin serves as a carrier to increase the amount ofdrug at the disease site relative to its normal distribution.

 

One application of thistechnology is in tumor targeting. The use of cytotoxic drugs is one of the mostcommon methods for treating a variety of malignancies including solid andnon-solid tumors. The drawbacks of chemotherapeutic treatments, which includetumor resistance, cancer relapse and toxicity from severe damage to healthytissues, has fuelled a scientific quest for novel treatments that are specificallytargeted to malignant cells thus reducing damage to collateral tissues.

 

The design of targetedtherapies involves exploitation of the difference between the structure andfunction of normal cells compared with malignant cells. Differences include theincreased levels of surface molecules on cancer cells, which makes them moresensitive to treatment regimes that target surface molecules and differences inblood supply within and around tumor cells compared with normal cells.

 

Two basic types oftargeting approaches are utilized, passive tumor targeting and active tumortargeting.

 

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•      passivetumor targeting involves transporting anti-cancer agents through thebloodstream to tumor cells using a “carrier” molecule. Many different carriermolecules, which can take a variety of forms (micelles, nanoparticles,liposomes and polymers), are being investigated as each provides advantagessuch as specificity and protection of the anti-cancer drug from degradation dueto their structure, size (molecular weights) and particular interactions withtumor cells. Our polymer platinate program is a passive tumor targetingtechnology.

•      activetumor targeting involves attaching an additional fragment to the anticancerdrug and the carrier molecule to create a new “targeted” agent that willactively seek a complementary surface molecule to which it binds(preferentially located on the exterior of the tumor cells). The theory is thatthe targeting of the anti-cancer agent through active means to the affectedcells should allow more of the anti-cancer drug to enter the tumor cell, thusamplifying the response to the treatment and reducing the toxic effect onbystander, normal tissue.

 

Examples of activetargeting fragments include antibodies, growth factors and vitamins. Ourscientists have specifically focused on using vitamin B12 and folate to moreeffectively target anti-cancer drugs to solid tumors.

 

It has been known forsome time that vitamin B12 and folic acid are essential for tumor growth and asa result, receptors for these vitamins are up-regulated in certain tumors.Vitamin B12 receptor over-expression occurs in breast, lung, leukemic cells,lymphoma cells, bone, thyroid, colon, prostate and brain cancers and some othertumor lines, while folate receptor over-expression occurs in breast, lung,ovarian, endometrial, renal, colon, brain and cancers of myeloid hemotopoieticcells and methotrexate-sensitive tumors.

 

### **VitaminMediated Oral Delivery Technology**

 

Oral delivery is thepreferred method of administration of drugs where either long-term or daily use(or both) is required. However many therapeutics, including peptide and proteindrugs, are poorly absorbed when given orally. With more and more peptide andprotein based biopharmaceuticals entering the market, there is an increasingneed to develop an effective oral delivery system for them, as well as forlong-standing injected drugs such as insulin.

 

The difficulty inadministering proteins orally is their susceptibility to degradation bydigestive enzymes, their inability to cross the intestinal wall and their rapidexcretion by the body. Over the years, many different methodologies for makingprotein drugs available orally have been attempted. Most of the oral protein deliverytechnologies involve protecting the protein degradation in the intestine. Morerecently, strategies have been developed that involve attaching the protein orpeptide to a molecule that transports the protein across the gut wall. However,the field of oral drug delivery of proteins and peptides has yet to achievesuccessful commercialization of a product (although positive results have beenachieved in early clinical trials for some products under development).

 

Many pharmaceutically active compounds such as proteins,peptides and cytotoxic agents cannot be administered orally due to theirinstability in the gastrointestinal tract or their inability to be absorbed andtransferred to the bloodstream. A technology that would allow many of theseactives to be taken orally would greatly enhance their acceptance and value.Several technologies for the protection of sensitive actives in thegastro-intestinal tract and/or enhancement of gastro-intestinal absorption havebeen explored and many have failed.

 

Our proprietary technology for oral drug delivery utilizesthe body’s natural vitamin B12 (VB12) transport system in the gut. Theabsorption of VB12 in the intestine occurs by way of a receptor-mediatedendocytosis. Initially, VB12 binds to intrinsic factor (IF) in the smallintestine, and the VB12-IF complex then binds to the IF receptor on the surfaceof the intestine. Receptor-mediated endocytosis then allows the transport ofVB12 across the gut wall. After binding to another VB12-binding protein, transcobalaminII (TcII), VB12 is transferred to the bloodstream.

 

Our scientists discovered that VB12 will still betransported by this process even when drugs, macromolecules, or nanoparticlesare coupled to VB12.  Thus VB12 serves asa carrier to transfer these materials from the intestinal lumen to thebloodstream. For drugs and macromolecules that are stable in thegastro-intestinal tract, the drug or macromolecule can be coupled directly (orvia a linker) to VB12. If the capacity of the VB12 transport system isinadequate to provide an effective blood concentration of the active, transportcan be amplified by attaching many molecules of the drug to a polymer, to thatVB12 is also attached. A further option, especially for drugs andmacromolecules that are unstable in the intestine, is to formulate the drug ina nanoparticle which is then coated with

 

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VB12. Once in the bloodstream, the active is released bydiffusion and/or erosion of the nanoparticle. Utilization of nanoparticles alsoserves to ‘amplify’ delivery by transporting many molecules at one time due tothe inherently large surface area.

 

Our proprietary position in this technology involves theconjugation of vitamin B12 and/or folic acid (or their analogs) to a polymer towhich is also attached the drug to be delivered, or attached to a nanoparticlein which the drug is incorporated. Since many molecules of the drug areattached to a single polymer strand, or are incorporated in a singlenanoparticle, disease targeting is amplified compared to simpler conjugatesinvolving one molecule of the vitamin with one drug molecule. However, insituations when such a simple conjugate might be preferred, our patents alsoencompass these VB12-drug conjugates.

 

Research Projects, Products and Products inDevelopment

 

**ACCESS DRUG PORTFOLIO**
| **Compound**                    | ** ** | **Originator**         | ** ** | **Licensing****Partner** | ** ** | **Indication**              | ** ** | **FDA Filing**          | ** ** | **Clinical  Stage****(1)** |
|---------------------------------|------------|------------------------|------------|--------------------------|------------|-----------------------------|------------|-------------------------|------------|----------------------------|
| Cancer                          |       |                   |       |                     |       |                        |       |                    |       |                       |
| Polymer Platinate  (AP5346) (2) |       | Access – U London |       | —                   |       | Ovarian,  Colorectal cancer |       | Clinical Development(3) |       | Phase II                   |
| Vitamin Targeted  Therapeutics  |       | Access                 |       | —                   |       | Anti-tumor                  |       | Research                |       | Pre-Clinical               |
| Other Products                  |       |                   |       |                     |       |                        |       |                    |       |                       |
| MLT (ViporTM)               |       | Access                 |       | —                   |       | Mucositis                   |       | 510(k) (4)              |       | Phase III                  |
| Oral Delivery System            |       | Access                 |       | — (5)               |       | Various                     |       | Research                |       | Pre-Clinical               |

 

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(1)   For moreinformation, see “Government Regulation” for description of clinical stages.

 

(2)   Licensed from theSchool of Pharmacy, The University of London. Subject to a 1% royalty andmilestone payments on sales.

 

(3)   Clinical studiesbeing conducted in Europe and US.

 

(4)   The product isconsidered as a device by the FDA. The 510(k) approval process provides forrapid approval based upon the prior approval of a predicate device.

 

(5)   Researchcollaboration agreement with Celltech Group plc., Hunter-Fleming Ltd., and a UScorporation.

 

We begin the productdevelopment effort by screening and formulating potential product candidates,selecting an optimal active component, developing a formulation, and developingthe processes and analytical methods. Pilot stability, toxicity and efficacytesting are conducted prior to advancing the product candidate into formalpreclinical development.  Specializedskills are required to produce these product candidates utilizing ourtechnology. We have a limited core internal development capability withsignificant experience in developing these formulations, but also depend uponthe skills and expertise of our contractors.

 

Once the productcandidate has been successfully screened in pilot testing, our scientists,together with external consultants, assist in designing and performing thenecessary preclinical efficacy, pharmacokinetic and toxicology studies requiredfor IND submission. External investigators and scaleup manufacturing facilitiesare selected in conjunction with our consultants. The initial Phase I and PhaseII studies are conducted by institutions and investigators supervised andmonitored by our employees and contract research organizations. We do not planto have an extensive clinical development organization as we plan to have theadvance phases of this process

 

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conducted by adevelopment partner. Should we conduct Phase III clinical studies we expect toengage a contract research organization to perform this work.

 

We contract with thirdparty contract research organizations to complete our large clinical trials andfor data management of all of our clinical trials. Generally, we manage thesmaller Phase I and II trials ourselves. Currently, we have one Phase I trialin process, one planned Phase I trial and two Phase II trials planned for thisyear subject to preliminary findings in other trials.

 

With all of our productdevelopment candidates, we cannot assure you that the results of the in vitroor animal studies are or will be indicative of the results that will beobtained if and when these product candidates are tested in humans. We cannotassure you that any of these projects will be successfully completed or thatregulatory approval of any product will be obtained.

 

We expended approximately$2,783,000, $2,335,000 and $2,549,000 on research and development continuedoperations during the years 2005, 2004 and 2003, respectively.

 

**Patents**

 

We believe that the valueof technology both to us and to our potential corporate partners is establishedand enhanced by our broad intellectual property positions. Consequently, wehave already been issued and seek to obtain additional U.S. and foreign patentprotection for products under development and for new discoveries. Patentapplications are filed with the U.S. Patent and Trademark Office and, whenappropriate, with the Paris Convention’s Patent Cooperation Treaty (PCT)Countries (most major countries in Western Europe and the Far East) for our inventionsand prospective products.

 

Two U.S. patents and twoEuropean patents have issued and two U.S. patent and two European patentapplications are pending for polymer platinum compounds. The two patents andpatent applications are the result in part of our collaboration with The Schoolof Pharmacy, University of London, from which the technology has been licensedand include a synthetic polymer, hydroxypropylmethacrylamide incorporatingplatinates, that can be used to exploit enhanced permeability and retention intumors and control drug release. The patents and patent applications include apharmaceutical composition for use in tumor treatment comprising apolymer-platinum compound through linkages that are designed to be cleavedunder selected conditions to yield a platinum which is selectively released ata tumor site. The patents and patent applications also include methods forimproving the pharmaceutical properties of platinum compounds.

 

We have filed two U.S.patent applications and two European patent applications for our mucoadhesiveliquid technology. Our patent applications cover a range of products utilizingour mucoadhesive liquid technology for the management of the various phases ofmucositis.

 

We have three patentedvitamin-mediated targeted therapeutic technologies:

 

•      folateconjugates of polymer therapeutics, to enhance tumor delivery by targetingfolate receptors, which are upregulated in certain tumor types with two U.S.and two European patent applications;

•      theuse of vitamin B12 to target the transcobalamin II receptor which isupregulated in numerous diseases including cancer, rheumatoid arthritis,certain neurological and autoimmune disorders with two U.S. patents and threeU.S. and four European patent applications; and

•      oraldelivery of a wide variety of molecules which cannot otherwise be orallyadministered, utilizing the active transport mechanism which transports vitaminB12 into the systemic circulation with six U.S. patents and two Europeanpatents and one U.S. and one European patent application.

 

We have a strategy ofmaintaining an ongoing line of patent continuation applications for each majorcategory of patentable carrier and delivery technology. By this approach, weare extending the intellectual property protection of our basic targetingtechnology and initial agents to cover additional specific carriers and agents,some of which are anticipated to carry the priority dates of the originalapplications.

 

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**Government Regulation**

 

We are subject toextensive regulation by the federal government, principally by the FDA, and, toa lesser extent, by other federal and state agencies as well as comparableagencies in foreign countries where registration of products will be pursued.Although a number of our formulations incorporate extensively tested drugsubstances, because the resulting formulations make claims of enhanced efficacyand/or improved side effect profiles, they are expected to be classified as newdrugs by the FDA.

 

The Federal Food, Drugand Cosmetic Act and other federal, state and foreign statutes and regulationsgovern the testing, manufacturing, safety, labeling, storage, shipping andrecord keeping of our products. The FDA has the authority to approve or notapprove new drug applications and inspect research, clinical and manufacturingrecords and facilities.

 

Among the requirementsfor drug approval and testing is that the prospective manufacturer’s facilitiesand methods conform to the FDA’s Code of Good Manufacturing Practicesregulations, which establish the minimum requirements for methods to be usedin, and the facilities or controls to be used during, the production process.Such facilities are subject to ongoing FDA inspection to insure compliance.

 

The steps required beforea pharmaceutical product may be produced and marketed in the U.S. includepreclinical tests, the filing of an IND with the FDA, which must becomeeffective pursuant to FDA regulations before human clinical trials maycommence, numerous phases of clinical testing and the FDA approval of a NDAprior to commercial sale.

 

Preclinical tests areconducted in the laboratory, usually involving animals, to evaluate the safetyand efficacy of the potential product. The results of preclinical tests aresubmitted as part of the IND application and are fully reviewed by the FDAprior to granting the sponsor permission to commence clinical trials in humans.All trials are conducted under International Conference on Harmonization, orICH, good clinical practice guidelines. All investigator sites and sponsorfacilities are subject to FDA inspection to insure compliance. Clinical trialstypically involve a three-phase process. Phase I, the initial clinicalevaluations, consists of administering the drug and testing for safety andtolerated dosages and in some indications such as cancer and HIV, aspreliminary evidence of efficacy in humans. Phase II involves a study toevaluate the effectiveness of the drug for a particular indication and todetermine optimal dosage and dose interval and to identify possible adverseside effects and risks in a larger patient group. When a product is found safe,an initial efficacy is established in Phase II, it is then evaluated in PhaseIII clinical trials. Phase III trials consist of expanded multi-locationtesting for efficacy and safety to evaluate the overall benefit to risk indexof the investigational drug in relationship to the disease treated. The resultsof preclinical and human clinical testing are submitted to the FDA in the formof an NDA for approval to commence commercial sales.

 

The process of formingthe requisite testing, data collection, analysis and compilation of an IND andan NDA is labor intensive and costly and may take a protracted time period. Insome cases, tests may have to be redone or new tests instituted to comply withFDA requests. Review by the FDA may also take considerable time and there is noguarantee that an New Drug Application (“NDA”) will be approved. Therefore, wecannot estimate with any certainty the length of the approval cycle.

 

We are also governed byother federal, state and local laws of general applicability, such as lawsregulating working conditions, employment practices, as well as environmentalprotection.

 

**Competition**

 

The pharmaceutical andbiotechnology industry is characterized by intense competition, rapid productdevelopment and technological change. Competition is intense amongmanufacturers of prescription pharmaceuticals and other product areas where wemay develop and market products in the future. Most of our potentialcompetitors are large, well established pharmaceutical, chemical or healthcarecompanies with considerably greater financial, marketing, sales and technicalresources than are available to us. Additionally, many of our potentialcompetitors have research and development capabilities that may allow suchcompetitors to develop new or improved products that may compete with ourproduct lines. Our potential products could be rendered obsolete or made uneconomicalby the development of new products to treat the conditions to be addressed byour developments, technological advances

 

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affecting the cost ofproduction, or marketing or pricing actions by one or more of our potentialcompetitors. Our business, financial condition and results of operation couldbe materially adversely affected by any one or more of such developments. Wecannot assure you that we will be able to compete successfully against currentor future competitors or that competition will not have a material adverseeffect on our business, financial condition and results of operations. Academicinstitutions, governmental agencies and other public and private researchorganizations are also conducting research activities and seeking patentprotection and may commercialize products on their own or with the assistanceof major health care companies in areas where we are developing productcandidates. We are aware of certain development projects for products to treator prevent certain diseases targeted by us, the existence of these potentialproducts or other products or treatments of which we are not aware, or productsor treatments that may be developed in the future, may adversely affect the marketabilityof products developed by us.

 

Our principal competitorsin the polymer area are Cell Therapeutics, Daiichi, Enzon, PolythericsLtd,  and Inhale which are developingalternate drugs in combination with polymers. We believe we are the only companyconducting clinical studies in the polymer drug delivery of platinum compounds.We believe that the principal current competitors to our polymer targetingtechnology fall into two categories: monoclonal antibodies and liposomes. Webelieve that our technology potentially represents a significant advance overthese older technologies because our technology provides a system with afavorable pharmacokinetic profile.

 

A number of companies aredeveloping or may in the future engage in the development of productscompetitive with the Access polymer delivery system. Several companies areworking on targeted monoclonal antibody therapy including Bristol-Myers Squibb,Centocor (acquired by Johnson & Johnson), GlaxoSmithKline, Imclone andXoma. Currently, liposomal formulations being developed by Gilead Sciences andAlza Corporation (acquired by Johnson & Johnson), are the major competingintravenous drug delivery formulations that deliver similar drug substances.

 

In the area of advanceddrug delivery, which is the focus of our early stage research and developmentactivities, a number of companies are developing or evaluating enhanced drugdelivery systems. We expect that technological developments will occur at arapid rate and that competition is likely to intensify as various alternativedelivery system technologies achieve similar if not identical advantages.

 

Even if our products arefully developed and receive required regulatory approval, of which there can beno assurance, we believe that our products can only compete successfully ifmarketed by a company having expertise and a strong presence in the therapeuticarea. Consequently, we do not currently plan to establish an internal marketingorganization. By forming strategic alliances with major and regionalpharmaceutical companies, management believes that our development risks shouldbe minimized and that the technology potentially could be more rapidlydeveloped and successfully introduced into the marketplace.

 

**Employees**

 

As of March 30, 2006, wehad five full time employees, three of whom have advanced scientific degrees.The number of full time staff represents a reduction from the number twelvemonths earlier. We have never experienced employment-related work stoppages andconsider that we maintain good relations with our personnel. In addition, tocomplement our internal expertise, we have contracts with scientificconsultants, contract research organizations and university researchlaboratories that specialize in various aspects of drug development includingclinical development, regulatory affairs, toxicology, process scale-up andpreclinical testing.

 

### **Web Availability**

 

We make available freeof charge through our web site, www.accesspharma.com, our annual reports onForm 10-K and other reports required under the Securities and Exchange Act of1934, as amended, as soon as reasonably practicable after such reports arefiled with, or furnished to, the Securities and Exchange Commission (the “SEC”).  These documents are also available throughthe SEC’s website at www.sec.gov certain of our corporate governance policies,including the charters for the Board of Directors’ audit, compensation andnominating and corporate governance committees and our code of ethics,corporate governance guidelines and whistleblower policy. We will provide toany person without charge, upon request, a copy of any of the foregoingmaterials. Any such request must be made in writing to Access Pharmaceuticals,Inc., 2600 Stemmons Freeway, Suite 176, Dallas, TX 75207 attn: InvestorRelations.

 

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### **ITEM 1A. RISK FACTORS**

 

**Without obtaining adequatecapital funding, we may not be able to continue as a going concern.**

 

The report of ourindependent registered public accounting firm, Grant Thornton LLP, for thefiscal year ended December 31, 2005 contained a fourth explanatory paragraph toreflect its significant doubt about our ability to continue a going concern asa result of our history of losses and our liquidity position, as discussed inthis Form 10-K. If we are unable to obtain adequate capital funding in thefuture, we may not be able to continue as a going concern, which would have anadverse effect on our business and operations, and investors’ investment in usmay decline.

 

**We have experienced a history oflosses, we expect to incur future losses and we may be unable to obtainnecessary additional capital to fund operations in the future.**

 

We have recorded minimal revenue to date and we have incurred acumulative operating loss of approximately $66.2 million through December 31,2005. Net losses for the years ended 2005, 2004 and 2003 were $1,700,000,$10,238,000 and $6,935,000, respectively. Our losses have resulted principallyfrom costs incurred in research and development activities related to ourefforts to develop clinical drug candidates and from the associatedadministrative costs. We expect to incur additional operating losses over thenext several years. We also expect cumulative losses to increase if we expandresearch and development efforts and preclinical and clinical trials. Our netcash burn rate for the twelve months of 2005 was approximately $700,000 permonth. We project our net cash burn rate for the next twelve months to beapproximately $675,000 per month. Capital expenditures are forecasted to beminor for the next twelve months.

 

We requiresubstantial capital for our development programs and operating expenses, topursue regulatory clearances and to prosecute and defend our intellectualproperty rights. We believe that our existing capital resources, interestincome, product sales, royalties and revenue from possible licensing agreementsand collaborative agreements will be sufficient to fund our currently expectedoperating expenses (other than debt and interest obligations including theapproximately $5million of Senior Convertible notes due March 31, 2007, and approximately $4,015,000of convertible notes which are required to be repaid in April 2007 and interestof $1,189,000 due September 2006) and capital requirements for twelve months.We will need to raise substantial additional capital to support our ongoingoperations and debt obligations.

 

If we do raise additionalfunds by issuing equity securities, further dilution to existing stockholderswould result and future investors may be granted rights superior to those ofexisting stockholders. If adequate funds are not available to us throughadditional equity offerings, we may be required to delay, reduce the scope ofor eliminate one or more of our research and development programs or to obtainfunds by entering into arrangements with collaborative partners or others thatrequire us to issue additional equity securities or to relinquish rights tocertain technologies or drug candidates that we would not otherwise issue orrelinquish in order to continue independent operations. As a result of ourhistory of losses and our liquidity position, our auditors have issued an auditreport expressing significant doubt about our ability to remain a goingconcern.

 

**We do not have operating revenueand we may never attain profitability.**

 

To date, we have fundedour operations primarily through private sales of common stock and convertiblenotes. Contract research payments and licensing fees from corporate alliancesand mergers have also provided funding for our operations. Our ability toachieve significant revenue or profitability depends upon our ability tosuccessfully complete the development of drug candidates, to develop and obtainpatent protection and regulatory approvals for our drug candidates and tomanufacture and commercialize the resulting drugs. We sold our only revenueproducing assets to Uluru, Inc. in October 2005. We are not expecting anyrevenues in the short-term from our other assets. Furthermore, we may not beable to ever successfully identify, develop, commercialize, patent,manufacture, obtain required regulatory approvals and market any additionalproducts. Moreover, even if we do identify, develop, commercialize, patent,manufacture, and obtain required regulatory approvals to market additionalproducts, we may not generate revenues or royalties from commercial sales ofthese products for a significant number of years, if at all. Therefore, ourproposed operations are subject to all the risks inherent in the establishmentof a new business enterprise.  In thenext few years, our revenues may be limited to minimal product sales androyalties, any amounts that we receive under strategic partnerships and researchor drug development collaborations that we may establish and, as a result, wemay be unable to achieve or maintain profitability in the future or to achievesignificant revenues in order to fund our operations.

 

**Our Standby Equity Distribution Agreement may have a dilutiveimpact on our stockholders.**

 

Weare dependent on external financing to fund our operations. Our financial needsmay be partially provided from the SEDA. The issuance of shares of our commonstock under the SEDA will have a dilutive impact on our other stockholders andthe issuance or even potential issuance of such shares could have a negativeeffect on the market price of our common stock. In addition, if we access theSEDA, we will issue shares of our common stock to Cornell Capital Partners at adiscount to the lowest daily volume weighted average of our common stock duringa specified period of trading days after we access the SEDA. Issuing shares ata discount will further dilute the interests of other stockholders and maynegatively affect the market price of our Common Stock.

 

Tothe extent that Cornell Capital Partners sells shares of our common stockissued under the SEDA to third parties, our stock price may decrease due to theadditional selling pressure in the market. The perceived risk of dilution fromsales of stock to or by Cornell Capital Partners may cause holders of ourcommon stock to sell their shares, or it may encourage short sales of ourcommon stock or other similar transactions. This could contribute to a declinein the stock price of our common stock.

 

At this time we are notbe able to draw funds from the SEDA until an amendment to our registrationstatement relating to the SEDA is filed and declared effective by the SEC.

 

**We may not beable to pay our debt and other obligations and our assets may be seized as aresult.**

 

We may not generate the cashflow required to pay our liabilities as they become due. Our outstanding debtincludes approximately $5 million of Senior Convertible notes due March 31,2007, and approximately $9.5 million of our Convertible Subordinated Notes ofwhich $4.0 million is due in April 2007 and $5.5 million due is in September2010.

 

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If our cash flow is inadequate to meet these obligations, we willdefault on the notes. Any default on the notes could allow our note holders toforeclose upon our assets, force us into bankruptcy or our secured note holderscould foreclose on the escrow and pledge of our shares and sell the shares onthe open market, which is likely to cause a significant drop in the price ofour stock. Wemay be unable to repay or repurchase or restructure the convertiblesubordinated notes due in April 2007 and September 2010 and be forced intobankruptcy. In the event of a default, the holders of our secured convertiblenotes have the right to foreclose on all of our assets, which could force us tocurtail or cease our business operations.

 

The holders of ourConvertible Notes may require us to repurchase or prepay all of the outstandingConvertible Notes under certain circumstances. We may not have sufficient cashreserves to repurchase the Convertible Notes at such time, which would cause anevent of default under the Convertible Notes and may force us to declarebankruptcy.

 

**We may not successfullycommercialize our drug candidates.**

 

Our drug candidates are subject to the risks of failure inherent in thedevelopment of pharmaceutical products based on new technologies and ourfailure to develop safe, commercially viable drugs would severely limit ourability to become profitable or to achieve significant revenues. We may beunable to successfully commercialize our drug candidates because:

 

•      someor all of our drug candidates may be found to be unsafe or ineffective orotherwise fail to meet applicable regulatory standards or receive necessaryregulatory clearances;

•      ourdrug candidates, if safe and effective, may be too difficult to develop intocommercially viable drugs;

•      itmay be difficult to manufacture or market our drug candidates on a large scale;

•      proprietaryrights of third parties may preclude us from marketing our drug candidates; and

•      thirdparties may market superior or equivalent drugs.

 

**The success of our research anddevelopment activities, upon which we primarily focus, is uncertain.**

 

Our primary focus is onour research and development activities and the commercialization of compoundscovered by proprietary biopharmaceutical patents and patent applications.Research and development activities, by their nature, preclude definitivestatements as to the time required and costs involved in reaching certainobjectives. Actual research and development costs, therefore, could exceedbudgeted amounts and estimated time frames may require extension. Costoverruns, unanticipated regulatory delays or demands, unexpected adverse sideeffects or insufficient therapeutic efficacy will prevent or substantially slowour research and development effort and our business could ultimately suffer.We anticipate that we will remain principally engaged in research anddevelopment activities for an indeterminate, but substantial, period of time.

 

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**We may be unable to successfullydevelop, market, or commercialize our products or our product candidateswithout establishing new relationships and maintaining current relationships.**

 

Our strategy for theresearch, development and commercialization of our potential pharmaceuticalproducts may require us to enter into various arrangements with corporate andacademic collaborators, licensors, licensees and others, in addition to ourexisting relationships with other parties. Specifically, we may seek to jointventure, sublicense or enter other marketing arrangements with parties thathave an established marketing capability or we may choose to pursue thecommercialization of such products on our own. We may, however, be unable toestablish such additional collaborative arrangements, license agreements, ormarketing agreements as we may deem necessary to develop, commercialize andmarket our potential pharmaceutical products on acceptable terms. Furthermore,if we maintain and establish arrangements or relationships with third parties,our business may depend upon the successful performance by these third partiesof their responsibilities under those arrangements and relationships.

 

Ourability to successfully commercialize, and market our product candidates couldbe limited if a number of these existing relationships were terminated.

 

Furthermore, our strategy with respect to our polymer platinate programis to enter into a licensing agreement with a pharmaceutical company pursuantto which the further costs of developing a product would be shared with ourlicensing partner. Although we have had discussions with potential licensingpartners with respect to our polymer platinate program, to date we have notentered into any licensing arrangement. We may be unable to execute ourlicensing strategy for polymer platinate.

 

**We may be unable to successfullymanufacture our products and our product candidates in clinical quantities orfor commercial purposes without the assistance of contract manufacturers, whichmay be difficult for us to obtain and maintain.**

 

We have limitedexperience in the manufacture of pharmaceutical products in clinical quantitiesor for commercial purposes and we may not be able to manufacture any newpharmaceutical products that we may develop. As a result, we have established,and in the future intend to establish arrangements with contract manufacturersto supply sufficient quantities of products to conduct clinical trials and forthe manufacture, packaging, labeling and distribution of finishedpharmaceutical products if any of our potential products are approved forcommercialization. If we are unable to contract for a sufficient supply of ourpotential pharmaceutical products on acceptable terms, our preclinical andhuman clinical testing schedule may be delayed, resulting in the delay of ourclinical programs and submission of product candidates for regulatory approval,which could cause our business to suffer. Our business could suffer if thereare delays or difficulties in establishing relationships with manufacturers toproduce, package, label and distribute our finished pharmaceutical or othermedical products, if any, market introduction and subsequent sales of suchproducts. Moreover, contract manufacturers that we may use must adhere tocurrent Good Manufacturing Practices, as required by the FDA. In this regard,the FDA will not issue a pre-market approval or product and establishmentlicenses, where applicable, to a manufacturing facility for the products untilthe manufacturing facility passes a pre-approval plant inspection. If we areunable to obtain or retain third party manufacturing on commercially acceptableterms, we may not be able to commercialize our products as planned. Ourpotential dependence upon third parties for the manufacture of our products mayadversely affect our ability to generate profits or acceptable profit marginsand our ability to develop and deliver such products on a timely andcompetitive basis.

 

AP5346 is manufactured bythird parties for our Phase I/II clinical trials. Manufacturing is ongoing forthe current clinical trials. Certain manufacturing steps are conducted by theCompany to enable significant cost savings to be realized.

 

**We are subject to extensivegovernmental regulation which increases our cost of doing business and mayaffect our ability to commercialize any new products that we may develop.**

 

The FDA and comparableagencies in foreign countries impose substantial requirements upon theintroduction of pharmaceutical products through lengthy and detailedlaboratory, preclinical and clinical testing procedures and other costly andtime-consuming procedures to establish their safety and efficacy. All of ourdrugs and drug candidates require receipt and maintenance of governmentalapprovals for commercialization. Preclinical and clinical trials andmanufacturing of our drug candidates will be subject to the rigorous testingand approval processes

 

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of the FDA andcorresponding foreign regulatory authorities. Satisfaction of theserequirements typically takes a significant number of years and can varysubstantially based upon the type, complexity and novelty of the product. Thestatus of our principal products is as follows:

 

•      AP5346is currently commencing a Phase II trial in Europe and has commenced a Phase IItrial in the US.

•      AP5346has been approved for an additional Phase I trial in the US by the FDA.

•      Amucoadhesive liquid technology product, ViporTM, will be the subject of a 510(k)device approval application in 2006.

•      Vitaminmediated delivery technology is currently in the pre-clinical phase.

•      Wealso have other products in the preclinical phase.

 

Due to the time consumingand uncertain nature of the drug candidate development process and thegovernmental approval process described above, we cannot assure you when we,independently or with our collaborative partners, might submit a NDA, for FDAor other regulatory review.

 

Government regulationalso affects the manufacturing and marketing of pharmaceutical products.Government regulations may delay marketing of our potential drugs for aconsiderable or indefinite period of time, impose costly proceduralrequirements upon our activities and furnish a competitive advantage to largercompanies or companies more experienced in regulatory affairs. Delays inobtaining governmental regulatory approval could adversely affect our marketingas well as our ability to generate significant revenues from commercial sales.Our drug candidates may not receive FDA or other regulatory approvals on atimely basis or at all. Moreover, if regulatory approval of a drug candidate isgranted, such approval may impose limitations on the indicated use for whichsuch drug may be marketed. Even if we obtain initial regulatory approvals forour drug candidates, Access, our drugs and our manufacturing facilities wouldbe subject to continual review and periodic inspection, and later discovery ofpreviously unknown problems with a drug, manufacturer or facility may result inrestrictions on the marketing or manufacture of such drug, including withdrawalof the drug from the market. The FDA and other regulatory authoritiesstringently apply regulatory standards and failure to comply with regulatorystandards can, among other things, result in fines, denial or withdrawal ofregulatory approvals, product recalls or seizures, operating restrictions andcriminal prosecution.

 

**The uncertainty associated withpreclinical and clinical testing may affect our ability to successfullycommercialize new products.**

 

Before we can obtainregulatory approvals for the commercial sale of any of our potential drugs, thedrug candidates will be subject to extensive preclinical and clinical trials todemonstrate their safety and efficacy in humans.  Preclinical or clinical trials of any of ourfuture drug candidates may not demonstrate the safety and efficacy of such drugcandidates at all or to the extent necessary to obtain regulatory approvals. Inthis regard, for example, adverse side effects can occur during the clinicaltesting of a new drug on humans which may delay ultimate FDA approval or evenlead us to terminate our efforts to develop the drug for commercial use.Companies in the biotechnology industry have suffered significant setbacks inadvanced clinical trials, even after demonstrating promising results in earliertrials. In particular, polymer platinate has taken longer to progress throughclinical trials than originally planned. This extra time has not been relatedto concerns of the formulations but rather due to the lengthy regulatoryprocess. The failure to adequately demonstrate the safety and efficacy of adrug candidate under development could delay or prevent regulatory approval ofthe drug candidate. A delay or failure to receive regulatory approval for anyof our drug candidates could prevent us from successfully commercializing suchcandidates and we could incur substantial additional expenses in our attemptsto further develop such candidates and obtain future regulatory approval.

 

**We may incur substantial productliability expenses due to the use or misuse of our products for which we may beunable to obtain insurance coverage.**

 

Our business exposes usto potential liability risks that are inherent in the testing, manufacturingand marketing of pharmaceutical products. These risks will expand with respectto our drug candidates, if any, that receive regulatory approval for commercialsale and we may face substantial liability for damages in the event of adverseside effects or product defects identified with any of our products that areused in clinical tests or marketed to the public. We

 

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generally procure productliability insurance for drug candidates that are undergoing human clinicaltrials. Product liability insurance for the biotechnology industry is generallyexpensive, if available at all, and as a result, we may be unable to obtaininsurance coverage at acceptable costs or in a sufficient amount in the future,if at all. We may be unable to satisfy any claims for which we may be heldliable as a result of the use or misuse of products which we have developed,manufactured or sold and any such product liability claim could adverselyaffect our business, operating results or financial condition.

 

**We may incur significantliabilities if we fail to comply with stringent environmental regulations or ifwe did not comply with these regulations in the past.**

 

Our research anddevelopment processes involve the controlled use of hazardous materials. We aresubject to a variety of federal, state and local governmental laws andregulations related to the use, manufacture, storage, handling and disposal ofsuch material and certain waste products. Although we believe that ouractivities and our safety procedures for storing, using, handling and disposingof such materials comply with the standards prescribed by such laws andregulations, the risk of accidental contamination or injury from thesematerials cannot be completely eliminated. In the event of such accident, wecould be held liable for any damages that result and any such liability couldexceed our resources.

 

**Intense competition may limit ourability to successfully develop and market commercial products.**

 

The biotechnology andpharmaceutical industries are intensely competitive and subject to rapid andsignificant technological change. Our competitors in the United States andelsewhere are numerous and include, among others, major multinationalpharmaceutical and chemical companies, specialized biotechnology firms anduniversities and other research institutions.

 

The following productsmay compete with polymer platinate:

 

•      Cisplatin,marketed by Bristol-Myers-Squibb, the originator of the drug, and severalgeneric manufacturers;

•      Carboplatin,marketed by Bristol-Myers-Squibb in the US; and

•      Oxaliplatin,marketed exclusively by Sanofi-Synthelabo.

 

The following companiesare working on therapies and formulations that may be competitive with ourpolymer platinate:

 

•      Antigenicsand Regulon are developing liposomal formulations; and

•      AmericanPharmaceutical Partners, Cell Therapeutics, Daiichi, Enzon and Debio aredeveloping alternate drugs in combination with polymers and other drug deliverysystems.

 

Companies working ontherapies and formulations that may be competitive with our vitamin mediateddrug delivery system are Bristol-Myers-Squibb, Centocor (acquired by Johnson& Johnson), GlaxoSmithKline, Imclone and Xoma which are developing targetedmonoclonal antibody therapy.

 

Amgen, CuraGen, McNeil,MGI Pharma and OSI Pharmaceuticals are developing products to treat mucositisthat may compete with our mucoadhesive liquid technology.

 

BioDelivery, BiovailCorporation, Cellgate, CIMA Labs, Inc., Depomed Inc., Emisphere Technologies,Inc., Eurand, Flamel Technologies, Nobex and Xenoport are developing productswhich compete with our oral drug delivery system.

 

Many of these competitorshave and employ greater financial and other resources, including largerresearch and development, marketing and manufacturing organizations. As aresult, our competitors may successfully develop technologies and drugs thatare more effective or less costly than any that we are developing or whichwould render our technology and future products obsolete and noncompetitive.

 

In addition, some of ourcompetitors have greater experience than we do in conducting preclinical andclinical trials and obtaining FDA and other regulatory approvals. Accordingly,our competitors may succeed in obtaining FDA or

 

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other regulatoryapprovals for drug candidates more rapidly than we do. Companies that completeclinical trials, obtain required regulatory agency approvals and commencecommercial sale of their drugs before their competitors may achieve asignificant competitive advantage. Drugs resulting from our research anddevelopment efforts or from our joint efforts with collaborative partnerstherefore may not be commercially competitive with our competitors’ existingproducts or products under development.

 

**Our ability to successfullydevelop and commercialize our drug candidates will substantially depend uponthe availability of reimbursement funds for the costs of the resulting drugsand related treatments.**

 

The successful commercialization of, and the interestof potential collaborative partners to invest in the development of our drugcandidates, may depend substantially upon reimbursement of the costs of theresulting drugs and related treatments at acceptable levels from governmentauthorities, private health insurers and other organizations, including healthmaintenance organizations, or HMOs. Limited reimbursement for the cost of anydrugs that we develop may reduce the demand for, or price of such drugs, whichwould hamper our ability to obtain collaborative partners to commercialize ourdrugs, or to obtain a sufficient financial return on our own manufacture andcommercialization of any future drugs.

 

**The market may not accept anypharmaceutical products that we successfully develop.**

 

The drugs that we areattempting to develop may compete with a number of well-established drugsmanufactured and marketed by major pharmaceutical companies. The degree ofmarket acceptance of any drugs developed by us will depend on a number offactors, including the establishment and demonstration of the clinical efficacyand safety of our drug candidates, the potential advantage of our drugcandidates over existing therapies and the reimbursement policies of governmentand third-party payers. Physicians, patients or the medical community ingeneral may not accept or use any drugs that we may develop independently orwith our collaborative partners and if they do not, our business could suffer.

 

**Trends toward managed health careand downward price pressures on medical products and services may limit ourability to profitably sell any drugs that we may develop.**

 

Lower prices forpharmaceutical products may result from:

 

•      third-partypayers’ increasing challenges to the prices charged for medical products andservices;

 

•      thetrend toward managed health care in the United States and the concurrent growthof HMOs and similar organizations that can control or significantly influencethe purchase of healthcare services and products; and

 

•      legislativeproposals to reform healthcare or reduce government insurance programs.

 

The cost containmentmeasures that healthcare providers are instituting, including practiceprotocols and guidelines and clinical pathways, and the effect of anyhealthcare reform, could limit our ability to profitably sell any drugs that wemay successfully develop. Moreover, any future legislation or regulation, ifany, relating to the healthcare industry or third-party coverage andreimbursement, may cause our business to suffer.

 

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**We may not be successful inprotecting our intellectual property and proprietary rights.**

 

Our success depends, in part, on our ability to obtainU.S. and foreign patent protection for our drug candidates and processes,preserve our trade secrets and operate our business without infringing theproprietary rights of third parties. Legal standards relating to the validityof patents covering pharmaceutical and biotechnological inventions and thescope of claims made under such patents are still developing and there is noconsistent policy regarding the breadth of claims allowed in biotechnologypatents. The patent position of a biotechnology firm is highly uncertain andinvolves complex legal and factual questions. We cannot assure you that anyexisting or future patents issued to, or licensed by, us will not subsequentlybe challenged, infringed upon, invalidated or circumvented by others. As aresult, although we, together with our subsidiaries, are either the owner orlicensee to 11 U.S. patents and to 11 U.S. patent applications now pending, and4 European patents and 12 European patent applications, we cannot assure youthat any additional patents will issue from any of the patent applicationsowned by, or licensed to, us. Furthermore, any rights that we may have underissued patents may not provide us with significant protection againstcompetitive products or otherwise be commercially viable.

 

Our patents for thefollowing technologies expire in the years and during the date ranges indicatedbelow:

 

•      AP5280in 2021

•      AP5346in 2021

•      Mucoadhesivetechnology, patents are pending

•      Vitaminmediated technology between 2006 and 2019

 

In addition, patents mayhave been granted to third parties or may be granted covering products orprocesses that are necessary or useful to the development of our drugcandidates. If our drug candidates or processes are found to infringe upon thepatents or otherwise impermissibly utilize the intellectual property of others,our development, manufacture and sale of such drug candidates could be severelyrestricted or prohibited. In such event, we may be required to obtain licensesfrom third parties to utilize the patents or proprietary rights of others. Wecannot assure you that we will be able to obtain such licenses on acceptableterms, if at all. If we become involved in litigation regarding ourintellectual property rights or the intellectual property rights of others, thepotential cost of such litigation, regardless of the strength of our legalposition, and the potential damages that we could be required to pay could besubstantial.

 

**Our business could suffer if welose the services of, or fail to attract, key personnel.**

 

We are highly dependentupon the efforts of our senior management and scientific team, including ouracting Chief Executive Officer, Rosemary Mazanet. The loss of the services ofone or more of these individuals could delay or prevent the achievement of ourresearch, development, marketing, or product commercialization objectives.While we have employment agreements with David Nowotnik, PhD our Senior VicePresident Research and Development, and Stephen Thompson, our Vice Presidentand Chief Financial Officer, their employment may be terminated by them or usat any time. Mr. Thompson’s and Dr. Nowotnik’s agreements expire within oneyear and are extendable each year on the anniversary date. Dr. Mazanet is currentlyan employee at will. We do not have employment contracts with our other keypersonnel. We do not maintain any “key-man” insurance policies on any of ourkey employees and we do not intend to obtain such insurance. In addition, dueto the specialized scientific nature of our business, we are highly dependentupon our ability to attract and retain qualified scientific and technicalpersonnel. In view of the stage of our development and our research anddevelopment programs, we have restricted our hiring to research scientists anda small administrative staff and we have made only limited investments inmanufacturing, production, sales or regulatory compliance resources. There isintense competition among major pharmaceutical and chemical companies, specializedbiotechnology firms and universities and other research institutions forqualified personnel in the areas of our activities, however, and we may beunsuccessful in attracting and retaining these personnel.

 

**Aninvestment in our common stock may be less attractive because it is not tradedon a recognized public market.**

 

In February, 2006, ourcommon stock was de-listed from trading on AMEX, and currently trades on the “PinkSheets.”  This is viewed by mostinvestors as a less desirable, and less liquid, marketplace.  As a result, an investor may find it moredifficult to purchase, dispose of or obtain accurate quotations as to the valueof our common stock.

 

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Our common stock issubject to Rules 15g-1 through 15g-9 under the Exchange Act, which imposescertain sales practice requirements on broker-dealers who sell our common stockto persons other than established customers and “accredited investors” (asdefined in Rule 501(c) of the Securities Act).  For transactions covered by this rule, abroker-dealer must make a special suitability determination for the purchaserand have received the purchaser’s written consent to the transaction prior tothe sale.  This rule adversely affectsthe ability of broker-dealers to sell our common stock and purchasers of ourcommon stock to sell their shares of our common stock.

 

Additionally, our commonstock is subject to SEC regulations applicable to “penny stock.” Penny stockincludes any non-Nasdaq equity security that has a market price of less than$5.00 per share, subject to certain exceptions. The regulations require that prior to any non-exempt buy/selltransaction in a penny stock, a disclosure schedule proscribed by the SECrelating to the penny stock market must be delivered by a broker-dealer to thepurchaser of such penny stock.  Thisdisclosure must include the amount of commissions payable to both thebroker-dealer and the registered representative and current price quotationsfor our common stock.  The regulationsalso require that monthly statements be sent to holders of penny stock thatdisclose recent price information for the penny stock and information of thelimited market for penny stocks.  Theserequirements adversely affect the market liquidity of our common stock.

 

**Ownership of our shares isconcentrated, to some extent, in the hands of a few investors which could limitthe ability of our other stockholders to influence the direction of thecompany.**

 

Larry N. Feinberg (OraclePartners LP, Oracle Institutional Partners LP and Oracle Investment ManagementInc.) and Heartland Advisors, Inc. each beneficially owned approximately 26.4%and 10.9%, respectively, of our common stock as of December 31, 2005.  SCO Capital Partners LLC, and its affiliatesbeneficially owned approximately 72.7% of our common stock as at March 30,2006. Accordingly, they collectively may have the ability to significantlyinfluence or determine the election of all of our directors or the outcome ofmost corporate actions requiring stockholder approval. They may exercise thisability in a manner that advances their best interests and not necessarilythose of our other stockholders.

 

**Provisions of our charterdocuments could discourage an acquisition of our company that would benefit ourstockholders and may have the effect of entrenching, and making it difficult toremove, management.**

 

Provisions of ourCertificate of Incorporation, By-laws and Stockholders Rights Plan may make itmore difficult for a third party to acquire control of the Company, even if achange in control would benefit our stockholders. In particular, shares of ourpreferred stock may be issued in the future without further stockholderapproval and upon such terms and conditions, and having such rights, privilegesand preferences, as our Board of Directors may determine, including, forexample, rights to convert into our common stock. The rights of the holders ofour common stock will be subject to, and may be adversely affected by, therights of the holders of any of our preferred stock that may be issued in thefuture. The issuance of our preferred stock, while providing desirableflexibility in connection with possible acquisitions and other corporatepurposes, could have the effect of making it more difficult for a third partyto acquire control of us. This could limit the price that certain investorsmight be willing to pay in the future for shares of our common stock anddiscourage these investors from acquiring a majority of our common stock.Further, the existence of these corporate governance provisions could have theeffect of entrenching management and making it more difficult to change ourmanagement.

 

**Substantial sales of our commonstock could lower our stock price.**

 

The market price for our common stock could drop as a result of salesof a large number of our presently outstanding shares or shares that we may issue orbe obligated to issue in the future. All of the 17,651,040 shares of ourcommon stock that are outstanding as of March 30, 2006, are unrestricted andfreely tradable or tradable pursuant to a resale registration statement orunder Rule 144 of the Securities Act or are covered by a registration rightsagreement.

 

**Failureto achieve and maintain effective internal controls could have a materialadverse effect on our business.**

 

**Effective internal controls are necessary for us toprovide reliable financial reports. If we cannot provide reliable financialreports, our operating results could be harmed. All internal control systems,no matter how well designed,**

** **

**20**

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** **

**have inherent limitations. Therefore, even thosesystems determined to be effective can provide only reasonable assurance withrespect to financial statement preparation and presentation.**

 

While we continue to evaluate and improve our internalcontrols, we cannot be certain that these measures will ensure that weimplement and maintain adequate controls over our financial processes andreporting in the future. Any failure to implement required new or improvedcontrols, or difficulties encountered in their implementation, could harm ouroperating results or cause us to fail to meet our reporting obligations.

 

Failure to achieve and maintain an effective internalcontrol environment could cause investors to lose confidence in our reportedfinancial information, which could have a material adverse effect on our stockprice.

 

**ITEM 1B.  UNRESOLVED STAFF COMMENTS**

 

Not applicable.

 

**ITEM 2.  PROPERTIES**

 

We maintain one facilityof approximately 9,000 square feet for administrative offices and laboratoriesin Dallas, Texas. We have a lease agreement for the facility, which terminatesin December 2006. Adjacent space may be available for expansion which webelieve would accommodate growth for the foreseeable future.

 

We believe that our existingproperties are suitable for the conduct of our business and adequate to meetour present needs.

 

**ITEM 3.  LEGAL PROCEEDINGS**

 

The Company is notcurrently subject to any material pending legal proceedings.

 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

Not applicable.

 

### **EXECUTIVEOFFICERS OF THE REGISTRANT**

 

Dr. Rosemary Mazanet, M.D., Ph.D. 50, has been our acting ChiefExecutive Officer since May 2005. Dr. Mazanet is also CEO of BreakthroughTherapeutics, a privately held cancer company, and she holds other Board andadvisory positions. She is the former Chief Scientific Officer and a GeneralPartner of Oracle Partners, L.P. Prior to joining Oracle, Dr. Mazanet was theDirector of Clinical Research at Amgen, Inc. She has 20 years experience in thepharmaceutical industry, and was trained as a Medical Oncologist/Hematologistin the Harvard Medical System, and holds an M.D. and Ph.D. from University ofPennsylvania.

 

David P. Nowotnik, Ph.D., 57, has been Senior Vice President Researchand Development since January 2003 and had been Vice President Research andDevelopment from 1998. From 1994 until 1998, Dr. Nowotnik had been withGuilford Pharmaceuticals, Inc. in the position of Senior Director, ProductDevelopment and was responsible for a team of scientists developing polymericcontrolled-release drug delivery systems. From 1988 to 1994 he was withBristol-Myers Squibb researching and developing technetium radiopharmaceuticalsand MRI contrast agents. From 1977 to 1988 he was with Amersham Internationalleading the project which resulted in the discovery and development of Ceretec.

 

Mr.Stephen B. Thompson, 52, has been Vice President since 2000 and our ChiefFinancial Officer since 1996. From 1990 to 1996, he was Controller andAdministration Manager of Access Pharmaceuticals, Inc., a private Texascorporation. Previously, from 1989 to 1990, Mr. Thompson was Controller ofRobert E. Woolley, Inc. a hotel real estate company where he was responsible foraccounting, finances and investor relations. From 1985 to 1989, he wasController of OKC Limited Partnership, an oil and gas company where he wasresponsible for accounting, finances and SEC reporting. Between 1975 and 1985he held various accounting and finance positions with Santa Fe InternationalCorporation.

 

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**PART II**

 

### **ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY,RELATED**STOCKHOLDER MATTERSAND ISSUER PURCHASES OF EQUITY SECURITIES

 

**Price Range of Common Stock andDividend Policy**

 

Our common stock tradedon the American Stock Exchange, or AMEX, from March 30, 2000 until January 31,2006 under the trading symbol AKC. The following table sets forth, for theperiods indicated, the high and low closing prices for our common stock asreported by AMEX for fiscal years 2005 and 2004. On February 1, 2006 we begantrading on the “Pink Sheets” under the trading symbol AKCA.

 
| ** **                              | ** ** | **Common Stock** | ** ** |
|-----------------------------------------|------------|------------------|------------|
| ** **                              | ** ** | **High**         | ** ** | **Low** | ** ** |
| **Fiscal Year Ended December 31, 2005** | ** ** | ** **       | ** ** | ** ** | ** ** |
| First quarter                           |       | $                | 3.66       |   | $ | 2.20 |   |
| Second quarter                          |       | 3.01             |       | 1.76 |   |
| Third quarter                           |       | 1.99             |       | 0.56 |   |
| Fourth quarter                          |       | 1.73             |       | 0.52 |   |
|                                    |       |             |       |   |   |
| **Fiscal Year Ended December 31, 2004** | ** ** | ** **       | ** ** | ** ** | ** ** |
| First quarter                           |       | $                | 6.70       |   | $ | 5.01 |   |
| Second quarter                          |       | 8.00             |       | 5.25 |   |
| Third quarter                           |       | 6.55             |       | 2.25 |   |
| Fourth quarter                          |       | 5.90             |       | 2.81 |   |

 

We have never declared orpaid any cash dividends on our preferred stock or common stock and we do notanticipate paying any cash dividends in the foreseeable future. The payment ofdividends, if any, in the future is within the discretion of our Board ofDirectors and will depend on our earnings, capital requirements and financialcondition and other relevant facts. We currently intend to retain all futureearnings, if any, to finance the development and growth of our business.

 

The number of recordholders of Access common stock at March 30, 2006 was approximately 3,000. OnMarch 30, 2006, the closing price for the common stock as quoted on the PinkSheets was $0.29. There were 17,651,040 shares of common stock outstanding atMarch 30, 2006.

 

**RecentSales of Unregistered Securities**

 

None

 

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**EquityCompensation Plan Information**

 

The following table setsforth information as of December 31, 2005 about shares of Common Stockoutstanding and available for issuance under our existing equity compensationplans.

 
| ** **                                                  | ** ** | ** **                  | ** ** | ** **              | ** ** | **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))** | ** ** |
|                                                        |       |                        |       |                    |       |                         |       |
| Equity  compensation plans approved by security holders     |       |                        |       |                    |       |                         |       |
| 2005 Equity  Incentive Plan                                 |       | 250,000                     |       | 1.09                    |       | 450,000                      |       |
| 1995 Stock  Awards Plan                                     |       | 2,151,384                   |       | 3.64                    |       | —                       |       |
| 2001 Restricted  Stock Plan                                 |       | —                      |       | —                  |       | 264,087                      |       |
|                                                        |       |                        |       |                    |       |                         |       |
| Equity  compensation plans not approved by security holders |       |                        |       |                    |       |                         |       |
| 2000 Special  Stock Option Plan                             |       | 500,000                     |       | 2.50                    |       | —                       |       |
| Total                                                       |       | 2,901,384                   |       | 3.22                    |       | 714,087                      |       |

 

**The 2000 Special Stock Option Plan**

 

The 2000 Special StockOption Plan (the “Special Plan”) was adopted by the Board in October 2000. TheSpecial Plan is a non-stockholder approved plan (as permitted under NASD rulesand regulations applicable at the time of adoption by the Board). TheSupplemental Plan is intended to be a broadly based plan within the meaning ofNASD rules and regulations applicable at the time of adoption by the Board. TheSpecial Plan is not intended to be an incentive stock option plan within themeaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”).The Special Plan allows for the issuance of up to 500,000 options to acquirethe Company’s stock all of which have been issued. The purpose of the SpecialPlan is to encourage ownership of Common Stock by employees, consultants,advisors and directors of the Company and its affiliates and to provideadditional incentive for them to promote the success of the Company’s business.The Special Plan provides for the grant of non-qualified stock options toemployees (including officers, directors, advisors and consultants). TheSpecial Plan will expire in October 2010, unless earlier terminated by theBoard.

 

**IssuerPurchases of Equity Securities**

 

None

 

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**ITEM6.  SELECTED FINANCIAL DATA (InThousands, Except for Net Loss Per Share)****(1)**

 

The following datahas been derived from our audited consolidated financial statements and notesthereto appearing elsewhere in this Form 10-K and prior audited consolidatedfinancial statements of Access and notes thereto. The data should be read inconjunction with the “SelectedFinancial Data” and Financial Statements and Notes thereto and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”appearing elsewhere in this Form 10-K.

 
| ** **                                                             | ** ** | **For the Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                             | ** ** | **2005**                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                                                   |       |                                |       |   |   |   |   |   |   |   |   |
| **Consolidated  Statement of Operations and Comprehensive Loss Data:** |       |                                |       |   |   |   |   |   |   |   |   |
| Total revenues                                                         |       | $                                   | —     |   | $ | — |   | $ | — |   | $ | 89 |   | $ | — |   |
| Operating loss                                                         |       | (9,622                              | )          | (6,003 | ) | (5,426 | ) | (5,925 | ) | (4,810 | ) |
| Interest and miscellaneous income                                      |       | 100                                 |       | 226 |   | 279 |   | 594 |   | 1,451 |   |
| Interest and other expense                                             |       | (2,100                              | )          | (1,385 | ) | (1,281 | ) | (1,278 | ) | (1,170 | ) |
| Income tax benefit                                                     |       | 4,067                               |       | — |   | — |   | — |   | — |   |
| Loss from continuing operations                                        |       | (7,555                              | )          | (7,162 | ) | (6,428 | ) | (6,520 | ) | (4,529 | ) |
|                                                                   |       |                                |       |   |   |   |   |   |   |   |   |
| Discontinued  operations net of taxes $4,067 in 2005                   |       | 5,855                               |       | (3,076 | ) | (507 | ) | (2,864 | ) | (1,498 | ) |
| Net loss                                                               |       | (1,700                              | )          | (10,238 | ) | (6,935 | ) | (9,384 | ) | (6,027 | ) |
|                                                                   |       |                                |       |   |   |   |   |   |   |   |   |
| **Common Stock Data:**                                                 | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss per  basic and diluted common share                           |       | $                                   | (0.10      | ) | $ | (0.68 | ) | $ | (0.52 | ) | $ | (0.72 | ) | $ | (0.47 | ) |
| Weighted average  basic and diluted common shares outstanding          |       | 16,187                              |       | 15,162 |   | 13,267 |   | 13,104 |   | 12,857 |   |
|                                                                   |       |                                |       |   |   |   |   |   |   |   |   |
| ** **                                                             | ** ** | **December 31,**                    | ** ** |
| ** **                                                             | ** ** | **2005**                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **Consolidated Balance Sheet Data:**                                   | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash, cash  equivalents and short term investments                     |       | $                                   | 474        |   | $ | 2,261 |   | $ | 2,587 |   | $ | 9,776 |   | $ | 20,126 |   |
| Restricted cash                                                        |       | 103                                 |       | 1,284 |   | 649 |   | 468 |   | 600 |   |
| Total assets                                                           |       | 7,213                               |       | 11,090 |   | 11,811 |   | 19,487 |   | 25,487 |   |
| Deferred revenue                                                       |       | 173                                 |       | 1,199 |   | 1,184 |   | 1,199 |   | 508 |   |
| Convertible notes, net of discount                                     |       | 7,636                               |       | 13,530 |   | 13,530 |   | 13,530 |   | 13,530 |   |
| Total liabilities                                                      |       | 11,450                              |       | 17,751 |   | 17,636 |   | 18,998 |   | 16,409 |   |
| Total stockholders’ equity (deficit)                              |       | (4,237                              | )          | (6,661 | ) | (5,825 | ) | 489 |   | 9,078 |   |
|                                                                        |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1) This data has beenadjusted for discontinued operations and sales of assets. The discontinuedoperations relate to the sale of our oral care and dermatology business toUluru, Inc. and the closing and sale of the our Australian laboratory describedmore fully in “Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations.”

 

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**ITEM 7.****     MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussionshould be read in conjunction with our consolidated financial statements andrelated notes included in this Form 10-K.

 

### **Overview**

 

We are an emergingpharmaceutical company focused on developing both novel product candidatesbased upon our technologies in oncology and oral drug delivery.

 

Together with oursubsidiaries, we have proprietary patents or rights to four drug deliverytechnology platforms:

 

•      syntheticpolymer targeted delivery,

•      vitaminmediated targeted delivery,

•      vitaminmediated oral delivery, and

•      mucoadhesiveliquid technology.

 

Since our inception, wehave devoted our resources primarily to fund our research and developmentprograms. We have been unprofitable since inception and to date have receivedlimited revenues from the sale of products. We cannot assure you that we willbe able to generate sufficient product revenues to attain profitability on asustained basis or at all. We expect to incur losses for the next several yearsas we continue to invest in product research and development, preclinical studies,clinical trials and regulatory compliance. As of December 31, 2005, ouraccumulated deficit was $66,165,000.

 

Subsequent to the end ofthe period being reported on (December 31, 2005), the Company finalized anagreement with SCOand its affiliates. On February16, 2006, we entered into a note and warrant purchase agreement pursuant towhich it sold and issued an aggregate of $5,000,000 of 7.5% convertible notesdue March 31, 2007 and warrants to purchase an aggregate of 19,318,184 sharesof common stock of Access. Net proceeds to Access were $4.557 million. Thenotes and warrants were sold in a private placement to a group of accreditedinvestors led by SCO (see further discussion under “Liquidity andCapital Resources”).

 

On October 12, 2005, wesold our oral care and dermatology business unit to Uluru, Inc, a privateDelaware corporation, for up to $20.6 million to focus on our technologies inoncology and oral drug delivery. The products and technologies sold to Uluruinclude amlexanox 5% paste (marketed under the trade names Aphthasol® andAptheal®), OraDiscTM, Zindaclin® and Residerm® and all of our assetsrelated to these products. In addition, we have licensed to Uluru ournanoparticle hydrogel aggregate technology which could be used for applicationssuch as local drug delivery and tissue filler in dental and soft tissueapplications. The CEO of Uluru is Kerry P. Gray, the former CEO of the Company.In conjunction with the sale transaction, we received a fairness opinion from anationally recognized investment banking firm (see further discussion under “Liquidityand Capital Resources”).

 

In March 2005 wefinalized an agreement with Cornell Capital Partners and Highgate House Fundsproviding funding in the form of a Secured Convertible Debenture for netproceeds of approximately $2,360,000 (which was paid in October 2005), and anEquity Distribution Agreement under which the Company can draw up to$15,000,000 in working capital over a 2-year period (see further discussionunder “Liquidity and Capital Resources”).

 

On February 24,2004 we closed a private placement sale of our common stock pursuant to whichwe sold 1,789,371 shares of our common stock at a per share price of $5.40. Wereceived gross proceeds of $9,663,000 from this sale and had expenses of$615,000. The investors also received 5 year warrants at an exercise price of$7.10 per share to purchase 447,344 shares of our common stock and theplacement agents received warrants in the offering at an exercise price of$5.40 per share to purchase 156,481 shares of our common stock.

 

25

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**Results of Operations**

 

**Comparison of Years EndedDecember 31, 2005 and 2004**

 

Our total researchspending for continuing operations for the year ended December 31, 2005 was$2,783,000, as compared to $2,335,000 in 2004, an increase of $448,000. Theincrease in expenses was the result of Phase II start-up costs includingmanufacturing and clinical costs for AP5346 polymer platinate clinical trials($674,000) and other net costs ($20,000) offset by lower salary costs due tocutbacks in scientific staff ($246,000).

 

Our total general andadministrative expenses were $4,638,000 for 2005, an increase of $1,439,000over 2004 expenses of $3,199,000, due to:

 

•            Expensesdue to the separation agreement with our former CEO ($909,000);

 

•            Professionalfees for investment banking and financing decisions ($397,000);

 

•            Higherlegal fees due to changes in our convertible debt and legal fees associatedwith merger candidates ($161,000);  and

 

•            Royaltylicense fee ($150,000).

 

The increases in generaland administrative expenses is offset by:

 

•            Lowerinvestor relations costs ($90,000);

 

•            Lowerpatent expenses ($61,000); and

 

•            Lower netother increases ($27,000).

 

Depreciation andamortization was $333,000 in 2005 as compared to $469,000 in 2004, a decreaseof $136,000 due to the impairment of a license which is no longer effective($109,000) plus lower depreciation.

 

In addition wewrote off our goodwill in 2005 of $1,868,000 following an impairment analysis.

 

Our loss fromcontinuing operations in 2005 was $9,622,000 as compared to a loss of$6,003,000 in 2004.

 

Interest andmiscellaneous income was $100,000 for 2005 as compared to $226,000 for 2004, adecrease of $126,000, relating to interest income due to lower cash balances in2005 as compared with 2004.

 

Interest andmiscellaneous expense was $2,100,000 for 2005 as compared to $1,385,000 for thesame period in 2004, an increase of $715,000. The increase was due to repaymentof the secured convertible notes and contractually accelerated interest andpenalty and due to amortization of the discount on the extension of theconvertible note.

 

Net loss for 2005was $1,700,000, or a $0.10 basic and diluted loss per common share compared witha loss of $10,238,000, or a $0.68 basic and diluted loss per common share, for2004.

 

**DiscontinuedOperations**

 

In October 2005 wesold our oral/topical care business to Uluru, Inc. for a gain of $12,891,000 less$4,067,000 tax expense and we closed down our Australian operations. The loss fromdiscontinued operations of our oral/topical care business and our Australianoperation was $2,969,000.

 

Our focus will bedeveloping unique polymer linked cytotoxics for use in the treatment of cancerand other diseases states. Our lead product AP5346 is in Phase II clinicaltesting. The Company also has other advanced drug delivery technologiesincluding vitamin-mediated targeted delivery and oral care drug delivery. We donot have any agreements which provide for near term revenues. Our expenses forsalaries and rent are reduced from prior years. Our clinical developmentexpenses may be higher than previous years.

 

26

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**Comparison of Years EndedDecember 31, 2004 and 2003**

 

Our total researchspending for continuing operations for the year ended December 31, 2004 was$2,335,000, as compared to $2,549,000 in 2003, a decrease of $214,000. Thedecrease in expenses was the result of lower costs for the AP5280 and AP5346 polymerplatinate clinical trials ($374,000) of which the AP5280 trial was completed in2003 and other net increases ($160,000).

 

Our total generaland administrative expenses were $3,199,000 for 2004, an increase of $685,000over 2003 expenses of $2,514,000,  dueto:

 

•            higherprofessional fees and expenses ($339,000) principally due to increasedaccounting and legal fees associated with compliance with the Sarbanes-OxleyAct, new contracts and legal proceedings;

 

•            higherbusiness consulting expenses for new business development activities ($88,000);

 

•            higherfees for a healthcare consultant review ($133,000);

 

•            higherpatent and license expenses ($51,000);

 

•            highersalary and related expense ($63,000); and

 

•            other netincreases ($11,000).

 

Depreciation andamortization was $469,000 in 2004 as compared to $363,000 in 2003, an increaseof $106,000 due to the impairment of a license which is no longer effective($109,000) offset by lower depreciation ($3,000).

 

Our loss fromcontinuing operations in 2004 was $6,003,000 as compared to a loss of$5,426,000 in 2003.

 

Interest andmiscellaneous income was $226,000 for 2004 as compared to $279,000 for 2003, adecrease of $53,000. The decrease in interest income due to lower cash balancesand lower interest rates in 2004 as compared with 2003.

 

Interest andmiscellaneous expense was $1,385,000 for 2004 as compared to $1,281,000 for thesame period in 2003, an increase of $104,000. The expense to record animpairment in investment $112,000 and the change in interest expense was$8,000.

 

The loss of ourdiscontinued operations of our oral/topical care business and our Australianoperation was $3,076,000 in 2004 and a loss of $507,000 in 2003, an increasedloss of $2,569,000. The increased loss of $2,280,000, primarily miscellaneousincome, was due to a one time payment in 2003 associated with a settlementagreement with Block Drug Company. The remainder of the loss was due to higherproduction and testing costs for Aphthasol® and OraDiscTM and higher expenses inthe Australian operations.

 

Net loss for 2004was $10,238,000, or a $0.68 basic and diluted loss per common share comparedwith a loss of $6,935,000, or a $0.52 basic and diluted loss per common share,for 2003.

 

**Liquidityand Capital Resources**

 

We have funded ouroperations primarily through private sales of common stock and convertiblenotes and our principal source of liquidity is cash and cash equivalents.Contract research payments, licensing fees and milestone payments fromcorporate alliances and mergers have also provided funding for operations. Asof December 31, 2005 our cash and cash equivalents and short-term investmentswere $474,000 and our working capital was $1,345,000. Our working capital atDecember 31, 2005 represented an increase of $8,738,000 as compared to ourworking capital as of December 31, 2004 of $(7,393,000). The increase inworking capital was due mainly to the pay-off of $4,015,000 of convertiblenotes, the restructuring and change in the maturity date, to April 28, 2007, ofanother $4,015,000 convertible note and the receipt of $8.7 million dollars fromthe sale of the oral/topical care assets to Uluru.

 

As of December 31, 2005,the Company did not have enough capital to achieve its near, medium orlong-term goals. Subsequent to that date, the Company reached an agreementwhich management believes will provide sufficient capital to achieve itsshort-term goals, and depending upon results may provide sufficient capital tomeet its long-term goals. As of March 30, 2006 the Company had cash and cashequivalents of approximately $3.6 million.

 

27

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##### SCO CapitalPartners LLC - Notes and Warrants

 

On February 16, 2006, we entered into anote and warrant purchase agreement pursuant to which we sold and issued anaggregate of $5,000,000 of 7.5% convertible notes due March 31, 2007 andwarrants to purchase an aggregate of 19,318,184 shares of common stock ofAccess. Net proceeds to Access were $4.557 million. The notes and warrants weresold in a private placement to a group of accredited investors led by SCO andits affiliates.

 

The notes mature on March 31, 2007, areconvertible into Access common stock at a fixed conversion rate of $0.22 pershare, bear interest of 7.5% per annum and are secured by certain assets ofAccess. Each note may be converted at the option of the noteholder or Accessunder certain circumstances as set forth in the notes.

 

Each noteholder received a warrant topurchase a number of shares of common stock of Access equal to 75% of the totalnumber shares of Access common stock into which such holder’s note isconvertible.  Each warrant has anexercise price of $0.264 per share and is exercisable at any time prior toFebruary 16, 2012.  In the event SCO andits affiliates were to convert all of their notes and exercise all of theirwarrants, it would own approximately 72.7% of the voting securities of Access.

 

In connection with the sale and issuanceof notes and warrants, Access entered into an investors rights agreement wherebyit granted SCO the right to designate two individuals to serve on the Board ofDirectors of Access while the notes are outstanding, and also grantedregistration rights with respect to the shares of common stock of Accessunderlying the notes and warrants. SCO designated Jeffrey B. Davis and Mark J.Alvino to the Board of Directors, and on March 13, 2006 Messrs, Davis andAlvino were appointed to the Board of Directors.

 

Uluru, Inc. – Saleof Oral/Topical Care Assets

 

On October 12, 2005, wesold our oral care and dermatology business unit to Uluru, Inc, a privateDelaware corporation, for up to $20.6 million to focus on our technologies inoncology and oral drug delivery. The products and technologies sold to Uluruinclude amlexanox 5% paste (marketed under the trade names Aphthasol® andAptheal®), OraDiscTM, Zindaclin® and Residerm® and all of our assetsrelated to these products. In addition, we have licensed to Uluru ournanoparticle hydrogel aggregate technology which could be used for applicationssuch as local drug delivery and tissue filler in dental and soft tissueapplications. The CEO of Uluru is Kerry P. Gray, the former CEO of the Company.In conjunction with the sale transaction, we received a fairness opinion from anationally recognized investment banking firm.

 

Uluru assumed eightemployees of the Company, and five employees remained with Access after thesale transaction. Throughout a transition period agreed to by the parties,Uluru leased space from the Company at its Dallas, TX headquarters.

 

At the closing of thisagreement we received $8.7 million. In addition, at the one year anniversary ofthe agreement we will receive $3.7, and we will receive an additional $1 millionwithin 24 months after closing or earlier upon the achievement of a milestone. Anycontingent liabilities that arise in the future relating to our former businesscould reduce the $3.7 million receipt. Additional payments of up to $7.2million may be made upon the achievement of certain additional milestones.

 

The upfrontpayment of this transaction allowed Access to immediately retire our $2.6million of Secured Convertible Notes held by Cornell Capital Partners and itsaffiliate and the various agreements relating to these notes. Such notes weresecured by all of our assets. In addition, the elimination of the manufacturingand regulatory costs associated with the oral care business, as well asrequired employees for these marketed products and product candidates areexpected to reduce our burn rate substantially.

 

##### RestructuringConvertible Notes

 

On November 9,2005 we announced the restructuring and partial repayment of our 7.0%convertible promissory notes due September 13, 2005.

 

One holder of $4 million worth of convertible notes(Oracle Partners LP and related funds) agreed to amend their notes to a newmaturity date, April 28, 2007, with the conversion price being reduced from$5.50 per share to $1.00 per share. In addition, the Company may cause amandatory conversion of the notes into common stock if the common stock tradesat a price of at least 1.5 times the conversion price for a minimum number oftrading days.

 

28

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There is also a provisionto allow for a minimum price for conversion in the event of a change of controlof the Company. This modification resulted in us recording additional debtdiscount of $2.1 million, which will be acreted to interest expense to therevised maturity date.

 

The Company was unable to reach a conversion agreementwith the second holder of $4 million worth of notes (Philip D. Kaltenbacher),so settled his claim by paying him this amount plus expenses and interest asoutlined in the terms of the note.

 

The third noteholder, holding $5.5 million worth ofconvertible notes agreed to amend its notes to a new maturity date, September13, 2010 and elected to have the 2005 interest of $423,000 to be paid onSeptember 13, 2006. The delayed interest will earn interest at a rate of 7.7%.

 

We do not have sufficient funds to repay ourconvertible notes at their maturity. We may not be able to restructure theconvertible notes or obtain additional financing to repay them on termsacceptable to us, if at all. If we raise additional funds by selling equitysecurities, the relative equity ownership of our existing investors would bediluted and the new investors could obtain terms more favorable than previousinvestors. A failure to restructure our convertible notes or obtain additionalfunding to repay the convertible notes and support our working capital andoperating requirements, could cause us to be in default of our convertiblenotes and prevent us from making expenditures that are needed to allow us tomaintain our operations. A failure to restructure our existing convertiblenotes or obtain necessary additional capital in the future could jeopardize ouroperations.

 

Cornell Capital Partners Standby Equity DistributionAgreement and Securities Purchase Agreement

 

**On March 30, 2005 the Company executed a StandbyEquity Distribution Agreement (SEDA) with Cornell Capital Partners. Under theSEDA, the Company may issue and sell to Cornell Capital Partners common stockfor a total purchase price of up to $15,000,000. The purchase price for theshares is equal to their market price, which is defined in the SEDA as 98% ofthe lowest volume weighted average price of the common stock during a specifiedperiod of trading days following the date notice is given by the Company thatit desires to access the SEDA. Further, we agreed to pay Cornell CapitalPartners 3.5% of the proceeds that we receive under the Equity Line of Credit.The amount of each draw down is subject to a maximum amount of $1,000,000. Theterms of the SEDA do not allow us to make draw downs if the draw down wouldcause Cornell Capital to own in excess of 9.9% of our outstanding shares ofcommon stock. Upon closing of the transaction, Cornell Capital Partnersreceived a one-time commitment fee of 146,500 shares of the our common stock.On the same date, the Company entered into a Placement Agent Agreement withNewbridge Securities Corporation, a registered broker-dealer. Pursuant to thePlacement Agent Agreement, upon closing of the transaction the Company paid aone-time placement agent fee of 3,500 shares of common stock. The shares issuedwere valued at $500,000 and recorded as Debt issuance costs and such costs areamortized as the SEDA is accessed. As of December 31, 2005 we have accessed$600,000 of the SEDA and $20,000 of the Debt issuance costs were charged toadditional paid-in capital. The Company currently cannot access the SEDA untila post-effective amendment to our registration statement is filed with, anddeclared effective by, the SEC. The SEDA can be accessed through March 30,2007.**

** **

In addition, on March 30, 2005, the Company executed aSecurities Purchase Agreement with Cornell Capital Partners and Highgate HouseFunds. Under the Securities Purchase Agreement, Cornell Capital Partners andHighgate House Funds purchased an aggregate of $2,633,000 principal amount ofSecured Convertible Debentures from the Company (net proceeds to the Company of$2,360,000). The Secured Convertible Debentures accrue interest at a rate of 7%per year and were to mature 12 months from the issuance date with scheduledmonthly repayment commencing on November 1, 2005 to the extent that the SecuredConvertible Debenture had not been converted to common stock. The SecuredConvertible Debenture was convertible into the Company’s common stock at theholder’s option any time up to maturity at a conversion price equal to $4.00.The Secured Convertible Debentures were secured by all of the assets of theCompany. The Company had the right to redeem the Secured Convertible Debenturesupon 3 business days notice for 110% of the amount redeemed. Pursuant to theSecurities Purchase Agreement, the Company issued to the holders an aggregateof 50,000 shares of common stock of the Company. The Secured Convertible Noteswere paid in full on October 12, 2005 in conjunction with the sale of our oralcare assets.

 

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We have generally incurred negative cash flows fromoperations since inception, and have expended, and expect to continue to expendin the future, substantial funds to complete our planned product developmentefforts. Since inception, our expenses have significantly exceeded revenues,resulting in an accumulated deficit as of December 31, 2005 of $66,165,000. Weexpect that our capital resources as of March 31, 2006, together withreceivables due from Uluru, Inc. will be adequate to fund our current level ofoperations for twelve months excluding any obligation to repay the convertiblenotes and the debt service on the convertible notes***.*******Wecannot assure you****that we will ever be able togenerate significant product revenue or achieve or sustain profitability. Wecurrently do not have the cash resources to repay our Convertible Notes due inMarch and April 2007. Our financing plan through the sales of equity or use ofthe SEDA are expected to provide the resources to repay such notes. At thistime the Company will not be able to access the SEDA until a post-effectiveamendment to our registration statement is filed with, and declared effectiveby, the SEC.

 

We plan to expendsubstantial funds to conduct research and development programs, preclinicalstudies and clinical trials of potential products, including research anddevelopment with respect to our acquired and developed technology. Our futurecapital requirements and adequacy of available funds will depend on manyfactors, including:

 

•      thesuccessful commercialization of AP5346 and our other product candidates;

 

•      theability to convert, repay or restructure our outstanding convertible notes anddebentures;

 

•      theability to establish and maintain collaborative arrangements with corporatepartners for the research, development and commercialization of products;

 

•      continuedscientific progress in our research and development programs;

 

•      themagnitude, scope and results of preclinical testing and clinical trials;

 

•      thecosts involved in filing, prosecuting and enforcing patent claims;

 

•      thecosts involved in conducting clinical trials;

 

•      competingtechnological developments;

 

•      thecost of manufacturing and scale-up;

 

•      theability to establish and maintain effective commercialization arrangements andactivities; and

 

•      successfulregulatory filings.

 

We have devotedsubstantially all of our efforts and resources to research and developmentconducted on our own behalf. The following table summarizes research anddevelopment spending by project category (in thousands), which spendingincludes, but is not limited to, payroll and personnel expense, lab supplies,preclinical expense, development cost, clinical trial expense, outsidemanufacturing expense and consulting expense:

 

30

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| ** **                            | ** ** | **Twelve Months ended  December 31,** | ** ** | **Inception To** | ** ** |
|---------------------------------------|------------|------------------------------------------------------|------------|-----------------------|------------|
| **Project**                           | ** ** | **2005**                                             | ** ** | **2004**              | ** ** | **Date (1)** | ** ** |
| Polymer Platinate (AP5280 and AP5346) |       | $                                                    | 2,653      |                  | $          | 2,177 |   | $ | 17,611 |   |
| Mucoadhesive Liquid Technology (MLT)  |       | —                                               |       | 51                    |       | 1,480 |   |
| Others (2)                            |       | 130                                                  |       | 107                   |       | 5,044 |   |
| Total                                 |       | $                                                    | 2,783      |                  | $          | 2,335 |   | $ | 24,135 |   |

 

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(1)   Cumulativespending from inception of the Company or project through December 31, 2005.

(2)   Thefollowing projects are among the ones included in this line item:  Vitamin Mediated Targeted Delivery,carbohydrate targeting, amlexanox cream and gel and other related projects.

 

Due to uncertainties andcertain of the risk factors described above, including those relating to ourability to successfully commercialize our drug candidates, our ability toobtain necessary additional capital to fund operations in the future, ourability to successfully manufacture our products and our product candidates inclinical quantities or for commercial purposes, government regulation to whichwe are subject, the uncertainty associated with preclinical and clinicaltesting, intense competition that we face, market acceptance of our productsand protection of our intellectual property, it is not possible to reliablypredict future spending or time to completion by project or product category orthe period in which material net cash inflows from significant projects areexpected to commence. If we are unable to timely complete a particular project,our research and development efforts could be delayed or reduced, our businesscould suffer depending on the significance of the project and we might need toraise additional capital to fund operations, as discussed in the risk factorsabove, including without limitation those relating to the uncertainty of thesuccess of our research and development activities and our ability to obtainnecessary additional capital to fund operations in the future. As discussed insuch risk factors, delays in our research and development efforts and anyinability to raise additional funds could cause us to eliminate one or more ofour research and development programs.

 

We plan to continue ourpolicy of investing any available funds in certificates of deposit, moneymarket funds, government securities and investment-grade interest-bearingsecurities. We do not invest in derivative financial instruments.

 

### **Critical AccountingPolicies and Estimates**

### ** **

The preparation of ourfinancial statements in conformity with accounting principles generallyaccepted in the United State of America requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities,disclosure of contingent assets and liabilities at the date of the financialstatements and the reported amount of revenues and expenses during the reportedperiod. In applying our accounting principles, we must often make individualestimates and assumptions regarding expected outcomes or uncertainties. As youmight expect, the actual results or outcomes are often different than theestimated or assumed amounts. These differences are usually minor and areincluded in our consolidated financial statements as soon as they are known.Our estimates, judgments and assumptions are continually evaluated based onavailable information and experience. Because of the use of estimates inherentin the financial reporting process, actual results could differ from thoseestimates.

 

***Receivables***

 

Due to our sale of assets in October 2005 we have $4.7 million inreceivables due from Uluru, Inc. The receivables at December 31, 2005 are $4.3million reflecting their net present value. Management believes that thereceivables are collectible.

 

***Asset Impairment***

 

**On January 1, 2002, we adopted SFAS 142, *“Goodwill and Other Intangible Assets.”*Uponadoption, we performed a transitional impairment test on our recordedintangible assets that consisted primarily of acquisition related goodwill andlicense intangibles. We also performed an annual impairment test in the fourthquarter of 2005. The**

 

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**analysis compared the Company’s marketcapitalization with net asset value resulting in an impairment charge in 2005of $1,868,000.**

** **

**Our intangible assets at December 31, 2005consist primarily of patents acquired in acquisitions and licenses which wererecorded at fair value on the acquisition date. We perform an impairment testat least on an annual basis or when indications of impairment exist. AtDecember 31, 2005, management believes no impairment of our intangible assetsexists.**

** **

Based on an assessment ofour accounting policies and underlying judgments and uncertainties affectingthe application of those policies, we believe that our consolidated financialstatements provide a meaningful and fair perspective of us. We do not suggestthat other general factors, such as those discussed elsewhere in this report,could not adversely impact our consolidated financial position, results ofoperations or cash flows. The impairment tests involve judgment on the part ofmanagement as to the value of goodwill, licenses and intangibles.

 

*RecentAccounting Pronuncements*

 

In December 2004, the Financial Accounting Standards Board (FASB)issued Statement No. 123(R), *Share-Based Payment*(SFAS123(R)), which requires companies to measure and recognize compensation expensefor all stock-based payments at fair value. In April 2005, the SEC postponed the effective date of SFAS 123(R) untilthe fiscal year beginning after June 15, 2005. In March 2005, the SEC staff issued guidance on SFAS 123(R).  Staff Accounting Bulletin No. 107 (“SAB 107”)was issued to assist preparers by simplifying some of the implementationchallenges of SFAS 123(R) while enhancing the information that investorsreceive.  The Company will apply theprinciples of SAB 107 in conjunction with its adoption of SFAS 123(R).  The Company will adopt SFAS 123R in the firstquarter of 2006.  Management estimatesthat the Company’s net loss for 2006 will increase by approximately $153,000due to non-cash stock compensation in accordance with SFAS 123(R), whichexcludes any grants in 2006 which have not been approved.  However, management expects that actualresults may differ due to differences and changes in components of thecalculation during the 2006 fiscal year. See Note 1 for information related to the pro forma effects on theCompany’s reported net loss and net loss per common share of applying the fairvalue recognition provisions of the previous SFAS 123, *Accountingfor Stock-Based Compensation*, to stock-based employee compensation.

 

**Off-Balance SheetTransactions**

** **

**None**

** **

**Contractual Obligations**

** **

**The Company’s contractual obligations as of December31, 2005 are set forth below.**

** **
| ** **                 | ** ** | **Payment Due by Period** | ** ** |
|----------------------------|------------|---------------------------|------------|
| ** **                 | ** ** | **Total**                 | ** ** | **Less Than 1  Year** | ** ** | **1-3 Years** | ** ** |
|                       |       |                      |       |   |   |   |   |
| Long-Term Debt Obligations |       | $                         | 9,515,000  |   | $ | — |   | $ | 9,515,000 |   |
| Interest                   |       | 2,645,000                 |       | 1,189,000 |   | 1,456,000 |   |
| Lease Obligations          |       | 3,000                     |       | 3,000 |   | — |   |
|                       |       |                      |       |   |   |   |   |
| Total                      |       | $                         | 12,163,000 |   | $ | 1,192,000 |   | $ | 10,971,000 |   |

 

**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

We invest any excess cashin certificates of deposit, corporate securities with high quality ratings, andU.S. government securities. These investments are not held for trading or otherspeculative purposes. These financial investment securities all mature in 2006and their estimated fair value approximates cost. Changes in interest ratesaffect the investment income we earn on our investments and, therefore, impactour cash flows and results of operations. A hypothetical 50 basis pointdecrease in interest rates would result in a decrease in annual interest incomeand a corresponding increase in net loss of approximately $1,000. The estimatedeffect assumes no changes in our short-term investments from December 31, 2005.We do not believe that we are exposed to any market risks, as defined. We arenot exposed to risks for changes in commodity prices, or any other marketrisks.

 

**ITEM 8. FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

Financial statementsrequired by this Item are incorporated in this Form 10-K on pages F-1 throughF-20. Reference is made to Item 15 of this Form -10-K.

 

**ITEM 9. CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND**

**FINANCIALDISCLOSURE**

 

None.

 

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**ITEM 9A. CONTROLS AND PROCEDURES**

 

(a) Disclosure Controls and Procedures

 

Our disclosure controls and procedures are designed toensure that information required to be disclosed by us in the reports we fileor submit under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms. An evaluation was performedunder the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Financial Officer, of the effectivenessof the design and operation of our disclosure controls and procedures (asdefined in Rule 13a — 15(e) under the Securities Exchange Act of 1934) as ofthe end of the period covered by this annual report. Based on this evaluation,our management, including our Chief Executive Officer and our Chief FinancialOfficer, concluded that, as of December 31, 2005, our disclosure controls andprocedures were not effective for the reasons discussed below to ensure thatinformation required to be disclosed by us in the reports we file or submitunder the Securities Exchange Act of 1934, as amended, is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms.

 

Our independent registered public accounting firm hascommunicated to our audit committee two material weaknesses regarding ourinternal controls over financial reporting.

 

•      A material weakness with respect to theinadequacy of staffing in our financial reporting function that resulted in ourinability to record, process, summarize and report within the time periodsspecified in the Securities and Exchange Commission’s rules and forms. Thismaterial weakness resulted in adjustments to our financial statements for theyear ended December 31, 2005, relating to the accounting for debt modificationsand the accounting for and presentation of discontinued operations.

•      A material weakness relating to the lackof segregation of duties over the initiation, authorization, recording andreporting of transactions and the preparation and review of financial statements.This material weakness did not result in audit adjustments for the year endedDecember 31, 2005, but could result in audit adjustments in future periods.

 

(b) Management’s annualreport on internal control over financial reporting.

 

Not applicable.

 

(c) Attestation report of the Independent RegisteredPublic Accounting Firm.

 

Not applicable.

 

(d) Changes in Internal Control over FinancialReporting

 

For the quarter ended December 31, 2005, there havebeen no changes in our internal control over financial reporting (as defined inRule 13a-15(f) under the Securities Exchange Act of 1934) that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

(e) Management’s disclosure on remediation.

 

Management is taking the necessary steps to correctthe two material weaknesses discussed above. Management is hiring a staffaccountant to prepare financial statements and add a level to the segreation ofduties. We beleive that these actions will make our disclosure controls andprocedures effective.

 

**ITEM 9B. OTHER INFORMATION**

 

None.

 

**PART III**

 

**ITEM 10. DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

**Directorsand Reports of Beneficial Ownership**. The information requiredby this item with respect to directors (including with respect to the auditcommittee of our Board of Directors) and reports of beneficial ownership willbe contained in our definitive Proxy Statement (“Proxy Statement”) for our 2006Annual Meeting of Stockholders to be held on May 18, 2006 and is incorporatedherein by reference. We will file the Proxy Statement with the Securities andExchange Commission not later than May 1, 2006 (or will file an amendment tothis Form 10-K to include such information).

 

**Codeof Ethics**. We have adopted a Code of Business Conduct andEthics (the “Code”) that applies to all of our employees (including executiveofficers) and directors. The Code is available on our website atwww.accesspharma.com under the heading “Investor Information”. We intend tosatisfy the disclosure requirement regarding any waiver of a provision of theCode applicable to any executive officer or director, by posting suchinformation on such website. Access shall provide to any person without charge,upon request, a copy of the Code. Any such request must be made in writing toAccess, c/o Investor Relations, 2600 Stemmons Freeway, Suite 176, Dallas,TX  75207.

 

Our corporate governanceguidelines and the charters of the audit committee, compensation committee andnominating and corporate governance committee of the Board of Directors areavailable on our website at www.accesspharma.com under the heading “InvestorInformation”. Access shall provide to any person without charge, upon request,a copy of any of the foregoing materials. Any such request must be made inwriting to Access, c/o Investor Relations, 2600 Stemmons Freeway, Suite 176,Dallas, TX  75207.

 

**ITEM 11. EXECUTIVECOMPENSATION**

 

The information requiredby this item will be contained in the Proxy Statement and is incorporatedherein by reference.

 

**ITEM 12. SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

**AND RELATED STOCKHOLDER MATTERS**

 

The information requiredby this item will be contained in the Proxy Statement and is incorporatedherein by reference.

 

33

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**ITEM 13. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

The information requiredby this item will be contained in the Proxy Statement and is incorporatedherein by reference.

 

**ITEM 14. PRINCIPALACCOUNTANT FEES AND SERVICES**

 

Theinformation required by this item will be contained in the ProxyStatement and is incorporated herein by reference.

 

34

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**PART IV**

** **

**ITEM 15. EXHIBITSAND FINANCIAL STATEMENT SCHEDULES**

 
| a.     | Financial  Statements. The following financial statements are  submitted as part of this report: |   |   |
|--------|--------------------------------------------------------------------------------------------------|--------|--------|
|   |                                                                                             |   |   |
|   | Report of  Registered Independent Public Accounting Firm                                         |   |   |
|   | Consolidated  Balance Sheets at December 31, 2005 and 2004                                       |   |   |
|   | Consolidated  Statements of Operations and Comprehensive Loss for 2005, 2004 and 2003            |   |   |
|   | Consolidated  Statements of Stockholders’ Equity (Deficit) for 2005, 2004 and 2003          |   |   |
|   | Consolidated  Statements of Cash Flows for 2005, 2004 and 2003                                   |   |   |
|   | Notes to  Consolidated Financial Statements                                                      |   |   |

 

b.      FinancialStatement Schedules

 

Nofinancial statement schedules are included because they are not required or theinformation is included in the financial statements or notes thereto.

 

c.      Exhibits

 
| **Exhibit Number** | ** ** | ** ** |
|-------------------------|------------|------------|
| 2                       | .1         |       | Amended and Restated Agreement of Merger and Plan of  Reorganization between Access Pharmaceuticals, Inc. and Chemex  Pharmaceuticals, Inc., dated as of October 31, 1995 (Incorporated by  reference to Exhibit A of the our Registration Statement on Form S-4 dated  December 21, 1995, Commission File No. 33-64031) |
| 3                       | .0         |       | Articles of incorporation and bylaws: |
| 3                       | .1         |       | Certificate of Incorporation (Incorporated by  Reference to Exhibit 3(a) of our Form 8-B dated July 12, 1989, Commission  File Number 9-9134) |
| 3                       | .2         |       | Certificate of  Amendment of Certificate of Incorporation filed August 21, 1992 |
| 3                       | .3         |       | Certificate of  Merger filed January 25, 1996. (Incorporated by reference to Exhibit E of our  Registration Statement on Form S-4 dated December 21, 1995, Commission File  No. 33-64031) |
| 3                       | .4         |       | Certificate of  Amendment of Certificate of Incorporation filed January 25, 1996.  (Incorporated by reference to Exhibit E of our Registration Statement on Form  S-4 dated December 21, 1995, Commission File No. 33-64031) |
| 3                       | .5         |       | Amended and Restated  Bylaws (Incorporated by reference to Exhibit 3.1 of our Form 10-Q for the  quarter ended June 30, 1996) |
| 3                       | .6         |       | Certificate of  Amendment of Certificate of Incorporation filed July 18, 1996. (Incorporated  by reference to Exhibit 3.8 of our Form 10-K for the year ended December 31,  1996) |
| 3                       | .7         |       | Certificate of  Amendment of Certificate of Incorporation filed June 18, 1998. (Incorporated  by reference to Exhibit 3.8 of our Form 10-Q for the quarter ended June 30,  1998) |
| 3                       | .8         |       | Certificate of  Amendment of Certificate of Incorporation filed July 31, 2000. (Incorporated  by reference to Exhibit 3.8 of our Form 10-Q for the quarter ended March 31,  2001) |
| 3                       | .9         |       | Certificate of  Designations of Series A Junior Participating Preferred Stock filed November  7, 2001 (Incorporated by reference to Exhibit 4.1.h of our Registration  Statement on Form S-8, dated December 14, 2001, Commission File No.  333-75136) |
| 10                      | .0         |       | Material  contracts: |
| *10                     | .1         |       | 1995 Stock Option Plan  (Incorporated by reference to Exhibit F of our Registration Statement on Form  S-4 dated December 21, 1995, Commission File No. 33-64031) |
| 10                      | .2         |       | Lease Agreement between  Pollock Realty Corporation and us dated July 25, 1996 (Incorporated by  reference to Exhibit 10.19 of our Form 10-Q for the quarter ended September  30, 1996) |

 

35

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| **Exhibit Number** | ** ** | ** ** |
|-------------------------|------------|------------|
| 10                      | .3         |       | Platinate HPMA  Copolymer Royalty Agreement between The School of Pharmacy, University of  London and the Company dated November 19, 1996 (Incorporated by reference to  Exhibit 10.19 of our Form 10-Q for the quarter ended September 30, 1996) |
| *10                     | .4         |       | Employment Agreement of David P. Nowotnik, PhD  (Incorporated by reference to Exhibit 10.19 of our Form 10-K for the year  ended December 31, 1999) |
| *10                     | .5         |       | 401(k) Plan  (Incorporated by reference to Exhibit 10.20 of our Form 10K for the year  ended December 31, 1999) |
| *10                     | .6         |       | 2000 Special  Stock Option Plan and Agreement (Incorporated by reference to Exhibit 10.24  of our Form 10-Q for the quarter ended September 30, 2000) |
| 10                      | .7         |       | Form of  Convertible Note (Incorporated by reference to Exhibit 10.24 of our Form 10-Q  for the quarter ended September 30, 2000) |
| 10                      | .8         |       | Supplemental  Lease Agreement between Pollock Realty Corporation and us dated February 9,  2002. (Incorporated by reference to Exhibit 10.19 of our Form 10-Q for the  quarter ended June 30, 2002) |
| 10                      | .9         |       | Rights  Agreement, dated as of October 31, 2001 between the Registrant and American  Stock Transfer & Trust Company, as Rights Agent (incorporated by  reference to Exhibit 99.1 of our Current Report on Form 8-K dated October 19,  2001) |
| *10                     | .10        |       | 2001 Restricted  Stock Plan (incorporated by reference to Appendix A of our Proxy Statement  filed on April 16, 2001) |
| 10                      | .11        |       | Supplemental  Lease Agreement between Pollock Realty Corporation and us dated September 15,  2002. (Incorporated by reference to Exhibit 10.24 of our Form 10-K for the  year ended December 31, 2001) |
| 10                      | .12        |       | Amendment to  1995 Stock Option Plan (Incorporated by reference to Exhibit 10.25 of our  Form 10-K for the year ended December 31, 2001) |
| 10                      | .13        |       | 2005 Equity  Incentive Plan (incorporated by reference to Exhibit 1 of our Proxy Statement  filed on April 18, 2005 |
| 10                      | .14        |       | Standby Equity Distribution Agreement, dated as of March 30, 2005 by and between us and Cornell Capital Partners, LP (Incorporated by reference to Exhibit 10.27 of our Form 10-Q for the quarter ended March 31, 2005) |
| 10                      | .15        |       | Securities Purchase Agreement, dated a of March 30, 2005 by and between us and Buyers (Incorporated by reference to Exhibit 10.28 of our Form 10-Q for the quarter ended March 31, 2005) |
| 10                      | .16        |       | Secured Convertible Notes dated as of March 30, 2005 (Incorporated by reference to Exhibit 10.29 of our Form 10-Q for the quarter ended March 31, 2005) |
| 10                      | .17        |       | Investor Rights Agreement dated as of March 30, 2005 (Incorporated by reference to Exhibit 10.30 of our Form 10-Q for the quarter ended March 31, 2005) |
| 10                      | .18        |       | Security Agreement dated as of March 30, 2005 (Incorporated by reference to Exhibit 10.31 of our Form 10-Q for the quarter ended March 31, 2005) |
| 10                      | .19        |       | Pledge and Escrow Agreement dated as of March 30, 2005 (Incorporated by reference to Exhibit 10.32 of our Form 10-Q for the quarter ended March 31, 2005) |
| 10                      | .20        |       | Escrow Agreement dated as of March 30, 2005 (Incorporated by reference to Exhibit 10.33 of our Form 10-Q for the quarter ended March 31, 2005) |
| 10                      | .21        |       | Registration  Rights Agreement dated as of March 30, 2005 (Incorporated by reference to  Exhibit 10.33 of our Form 10-Q for the quarter ended March 31, 2005) |
| 10                      | .22        |       | Separation  Agreement, dated as of May 10, 2005 by and between us and Kerry P. Gray |
| *10                     | .23        |       | Letter  Agreement, dated as of May 11, 2005 by and between us and Dr. Rosemary  Mazanet |
| *10                     | .24        |       | Employment  Agreement, dated as of June 1, 2005 by and between us and Stephen B. Thompson |
| 10                      | .25        |       | Sale Agreement,  dated as of October 12, 2005, by and between us and Uluru, Inc. |
| 10                      | .26        |       | License  Agreement, dated as of October 12, 2005, by and between us and Uluru, Inc. |
| 10                      | .27        |       | Rights  Agreement, as amended, dated as of October 31, 2005 between the Registrant  and American Stock Transfer & Trust Company, as Rights Agent |
| 10                      | .28        |       | Amendment to 7%  (Subject to Adjustment) Convertible Promissory Notes Due September 13, 2005,  dated as of November 3, 2005, by and between us and Oracle Partners LP,  Oracle Institutional Holders LP, SAM Oracle Investments Inc. and Oracle  Offshore Ltd. |

 

36

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| 21 |   |   | Subsidiaries of  the registrant                                                                                                                                                         |
|----|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 23 |   |   | Consent of Grant  Thornton LLP                                                                                                                                                          |
| 31 | .1     |   | Chief Executive  Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                        |
| 31 | .2     |   | Chief Financial  Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                        |
| 32 |   |   | Chief Executive  Officer Certification Chief Financial Officer Certification Pursuant to 18  U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |

 

----

*              Managementcontract or compensatory plan required to be filed as an Exhibit to this Formpursuant to Item 15(c) of the report.

 

37

----

 

**SIGNATURES**

 

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

 
|   |           | ACCESS  PHARMACEUTICALS, INC.            |
|--------|----------------|------------------------------------------|
|   |           |
|   |           |
| Date   | April 25, 2006 |                                     | By: | /s/ Rosemary  Mazanet |   |
|   |           | Rosemary  Mazanet, M.D., Ph.D.           |
|   |           | acting Chief  Executive Officer          |
|   |           |                                     |
| Date   | April 25, 2006 |                                     | By: | /s/ Stephen B.  Thompson |   |
|   |           | Stephen B.  Thompson                     |
|   |           | Vice President,  Chief Financial Officer |
|   |           | and Treasurer                            |
|        |                |                                          |  |  |  |  |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Report has beensigned below by the following persons on behalf of the Company and in thecapacities and on the dates indicated.

 

 
| Date   | April 25, 2006 |   | By:    | /s/ Rosemary  Mazanet             |   |
|--------|----------------|--------|--------|-----------------------------------|--------|
|   |           |   |   | Rosemary  Mazanet, M.D., Ph.D.    |
|   |           |   |   | acting Chief  Executive Officer   |
|   |           |   |   |                              |
| Date   | April 25, 2006 |   | By:    | /s/ Mark J.  Alvino               |   |
|   |           |   |   | Mark J. Alvino,  Director         |
|   |           |   |   |                              |
| Date   | April 25, 2006 |   | By:    | /s/ Jeffrey B.  Davis             |   |
|   |           |   |   | Jeffrey B.  Davis, Director       |
|   |           |   |   |                              |
| Date   | April 25, 2006 |   | By:    | /s/ Stuart M.  Duty               |   |
|   |           |   |   | Stuart M. Duty,  Director         |
|   |           |   |   |                              |
| Date   | April 25, 2006 |   | By:    | /s/ J. Michael  Flinn             |   |
|   |           |   |   | J. Michael  Flinn, Director       |
|   |           |   |   |                              |
| Date   | April 25, 2006 |   | By:    | /s/ Stephen B.  Howell            |   |
|   |           |   |   | Stephen B.  Howell, Director      |
|   |           |   |   |                              |
| Date   | April 25, 2006 |   | By:    | /s/ Max Link                      |   |
|   |           |   |   | Max Link,  Director               |
|   |           |   |   |                              |
| Date   | April 25, 2006 |   | By:    | /s/ Herbert H.  McDade, Jr.       |   |
|   |           |   |   | Herbert H.  McDade, Jr., Director |
|   |           |   |   |                              |
| Date   | April 25, 2006 |   | By:    | /s/ John J.  Meakem               |   |
|   |           |   |   | John J. Meakem,  Jr., Director    |
|        |                |        |        |                                   |        |  |

 

38

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**Report of Independent RegisteredPublic Accounting Firm**

** **

Boardof Directors and

Shareholdersof Access Pharmaceuticals, Inc. and Subsidiaries

 

Wehave audited the accompanying consolidated balance sheets of AccessPharmaceuticals, Inc. (the “Company”), as of December 31, 2005 and 2004, andthe related consolidated statements of operations and comprehensive loss,stockholders’ equity (deficit), and cash flows for each of the three years inthe period ended December 31, 2005.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

 

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

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position of AccessPharmaceuticals, Inc., as of December 31, 2005 and 2004, and the results oftheir consolidated operations and their consolidated cash flows for each of thethree years in the period ended December 31, 2005, in conformity withaccounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been preparedassuming that the Company will continue as a going concern. As discussed inNote 2 to the consolidated financial statements the Company has incurredsignificant losses in each of the three years in the period ended December 31,2005 in the amounts of $1.7 million, $10.2 million, and $6.9 million,respectively; the Company’s total liabilities exceeded its total assets by $4.2million at December 31, 2005; and, its operating cash flows were negative $7.3million and negative $8.4 million for the years ended December 31, 2005 and2004, respectively. These matters, among others described in Note 2, raisesubstantial doubt about the Company’s ability to continue as a going concern.Management’s plans in regard to these matters are also described in Note 2. Theconsolidated financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

/s/ Grant Thornton LLP

Dallas,Texas

April 25, 2006

 

F-1

----

 

**Access Pharmaceuticals, Inc. and Subsidiaries**

 

CONSOLIDATED BALANCE SHEETS

 
|                                                                                                                                       | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ASSETS                                                                                                                                     |       |                  |       |                  |       |
|                                                                                                                                       |       |                  |       |                  |       |
| Current assets                                                                                                                             |       |                  |       |                  |       |
| Cash and cash  equivalents                                                                                                                 |       | $                     | 349,000    |                  | $          | 1,775,000 |   |
| Short term  investments, at cost                                                                                                           |       | 125,000               |       | 486,000               |       |
| Receivables                                                                                                                                |       | 4,488,000             |       | 77,000                |       |
| Inventory                                                                                                                                  |       | —                |       | —                |       |
| Prepaid expenses  and other current assets                                                                                                 |       | 197,000               |       | 822,000               |       |
| Total current  assets                                                                                                                      |       | 5,159,000             |       | 3,160,000             |       |
|                                                                                                                                       |       |                  |       |                  |       |
| Assets relating to discontinued operations                                                                                                 |       | —                |       | 2,974,000             |       |
|                                                                                                                                       |       |                  |       |                  |       |
| Property and equipment, net                                                                                                                |       | 300,000               |       | 464,000               |       |
|                                                                                                                                       |       |                  |       |                  |       |
| Debt issuance costs, net                                                                                                                   |       | —                |       | 130,000               |       |
|                                                                                                                                       |       |                  |       |                  |       |
| Patents, net                                                                                                                               |       | 1,046,000             |       | 1,214,000             |       |
|                                                                                                                                       |       |                  |       |                  |       |
| Licenses, net                                                                                                                              |       | 75,000                |       | 125,000               |       |
|                                                                                                                                       |       |                  |       |                  |       |
| Goodwill, net                                                                                                                              |       | —                |       | 1,868,000             |       |
|                                                                                                                                       |       |                  |       |                  |       |
| Restricted cash and other assets                                                                                                           |       | 633,000               |       | 1,155,000             |       |
|                                                                                                                                       |       |                  |       |                  |       |
| Total assets                                                                                                                               |       | $                     | 7,213,000  |                  | $          | 11,090,000 |   |
|                                                                                                                                       |       |                  |       |                  |       |
| LIABILITIES AND  STOCKHOLDERS’ DEFICIT                                                                                                |       |                  |       |                  |       |
|                                                                                                                                       |       |                  |       |                  |       |
| Current liabilities                                                                                                                        |       |                  |       |                  |       |
| Accounts payable  and accrued expenses                                                                                                     |       | $                     | 2,883,000  |                  | $          | 1,728,000 |   |
| Accrued interest  payable                                                                                                                  |       | 652,000               |       | 311,000               |       |
| Deferred  revenues                                                                                                                         |       | 173,000               |       | 173,000               |       |
| Current portion of  long term debt                                                                                                         |       | 106,000               |       | 8,341,000             |       |
| Total current  liabilities                                                                                                                 |       | 3,814,000             |       | 10,553,000            |       |
|                                                                                                                                       |       |                  |       |                  |       |
| Liabilities relating to discontinued operations                                                                                            |       | —                |       | 1,595,000             |       |
|                                                                                                                                       |       |                  |       |                  |       |
| Long-term debt, net of discount $1,879,000 in 2005                                                                                         |       | 7,636,000             |       | 5,603,000             |       |
|                                                                                                                                       |       |                  |       |                  |       |
| Total  liabilities                                                                                                                         |       | 11,450,000            |       | 17,751,000            |       |
|                                                                                                                                       |       |                  |       |                  |       |
| Commitments and contingencies                                                                                                              |       |                  |       |                  |       |
|                                                                                                                                       |       |                  |       |                  |       |
| Stockholders’ deficit                                                                                                                 |       |                  |       |                  |       |
| Preferred stock  - $.01 par value; authorized 2,000,000 shares; none issued or outstanding                                                 |       | —                |       | —                |       |
| Common stock -  $.01 par value; authorized 50,000,000 shares; issued, 17,640,540 at December  31, 2005 and 15,524,734 at December 31, 2004 |       | 176,000               |       | 155,000               |       |
| Additional  paid-in capital                                                                                                                |       | 62,801,000            |       | 59,010,000            |       |
| Notes receivable  from stockholders                                                                                                        |       | (1,045,000            | )          | (1,045,000            | )          |
| Unamortized  value of restricted stock grants                                                                                              |       | —                |       | (309,000              | )          |
| Treasury stock,  at cost – 819 shares                                                                                                 |       | (4,000                | )          | (4,000                | )          |
| Accumulated  other comprehensive loss                                                                                                      |       | —                |       | (3,000                | )          |
| Accumulated  deficit                                                                                                                       |       | (66,165,000           | )          | (64,465,000           | )          |
| Total  stockholders’ deficit                                                                                                          |       | (4,237,000            | )          | (6,661,000            | )          |
|                                                                                                                                       |       |                  |       |                  |       |
| Total  liabilities and stockholders’ deficit                                                                                          |       | $                     | 7,213,000  |                  | $          | 11,090,000 |   |

 

The accompanying notes are an integral part of these statements.

 

F-2

----

 

**AccessPharmaceuticals, Inc. and Subsidiaries**

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVELOSS

 
| ** **                                                        | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                        | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                              |       |                        |       |   |   |   |   |
| Expenses                                                          |       |                        |       |   |   |   |   |
| Research and  development                                         |       | $                           | 2,783,000  |   | $ | 2,335,000 |   | $ | 2,549,000 |   |
| General and  administrative                                       |       | 4,638,000                   |       | 3,199,000 |   | 2,514,000 |   |
| Depreciation and  amortization                                    |       | 333,000                     |       | 469,000 |   | 363,000 |   |
| Write off of  goodwill                                            |       | 1,868,000                   |       | — |   | — |   |
| Total expenses                                                    |       | 9,622,000                   |       | 6,003,000 |   | 5,426,000 |   |
|                                                              |       |                        |       |   |   |   |   |
| Loss from operations                                              |       | (9,622,000                  | )          | (6,003,000 | ) | (5,426,000 | ) |
|                                                              |       |                        |       |   |   |   |   |
| Interest and miscellaneous income                                 |       | 100,000                     |       | 226,000 |   | 279,000 |   |
| Interest and other expense                                        |       | (2,100,000                  | )          | (1,385,000 | ) | (1,281,000 | ) |
|                                                              |       | (2,000,000                  | )          | (1,159,000 | ) | (1,002,000 |   |
|                                                              |       |                        |       |   |   |   |   |
| Loss from operations before tax benefit                           |       | (11,622,000                 | )          | (7,162,000 | ) | (6,428,000 | ) |
| Income tax benefit                                                |       | 4,067,000                   |       | — |   | — |   |
| Loss from operations                                              |       | (7,555,000                  | )          | (7,162,000 | ) | (6,428,000 | ) |
|                                                              |       |                        |       |   |   |   |   |
| Discontinued  operations, net of taxes of $4,067,000 in 2005      |       | 5,855,000                   |       | (3,076,000 | ) | (507,000 | ) |
|                                                              |       |                        |       |   |   |   |   |
| Net loss                                                          |       | $                           | (1,700,000 | ) | $ | (10,238,000 | ) | $ | (6,935,000 | ) |
|                                                              |       |                        |       |   |   |   |   |
| Basic and diluted loss per common share                           |       |                        |       |   |   |   |   |
| Loss from  continuing operations allocable to common stockholders |       | $                           | (0.46      | ) | $ | (0.48 | ) | $ | (0.48 | ) |
| Discontinued  operations                                          |       | 0.36                        |       | (0.20 | ) | (0.04 | ) |
| Net income  allocable to common stockholders                      |       | $                           | (0.10      | ) | $ | (0.68 | ) | $ | (0.52 | ) |
|                                                              |       |                        |       |   |   |   |   |
| Weighted average  basic and diluted common shares outstanding     |       | 16,187,440                  |       | 15,162,256 |   | 13,266,733 |   |
|                                                              |       |                        |       |   |   |   |   |
| Net loss                                                          |       | $                           | (1,700,000 | ) | $ | (10,238,000 | ) | $ | (6,935,000 | ) |
| Other comprehensive loss                                          |       |                        |       | — |   | — |   |
| Foreign currency  translation adjustment                          |       | 3,000                       |       | (17,000 | ) | 28,000 |   |
| Comprehensive loss                                                |       | $                           | (1,697,000 | ) | $ | (10,255,000 | ) | $ | (6,907,000 | ) |

 

**Theaccompanying notes are an integral part of these statements.**

 

F-3

----

 

**Access Pharmaceuticals, Inc. and Subsidiaries**

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(DEFICIT)

 
| ** **                                                     | ** ** | **Common  Stock** | ** ** | **Additional  paid-in** | ** ** | **Notes  receivable  from** | ** ** | **Unamortized  value of  restricted** | ** ** | **Treasury**      | ** ** | **Accumulated  other  comprehensive  income** | ** ** | **Accumulated** | ** ** |
|----------------------------------------------------------------|------------|-------------------|------------|-------------------------|------------|-----------------------------|------------|---------------------------------------|------------|-------------------|------------|-----------------------------------------------|------------|-----------------|------------|
| ** **                                                     | ** ** | **Shares**        | ** ** | **Amount**              | ** ** | **capital**                 | ** ** | **stockholders**                      | ** ** | **stock  grants** | ** ** | **stock**                                     | ** ** | **(loss)**      | ** ** | **deficit** | ** ** |
| Balance, January  1, 2003                                      |       | 13,159,000        |       | $                       | 132,000    |                        | $          | 48,989,000                            |       | $                 | (1,045,000 | )                                             | $          | (277,000        | )          | $ | (4,000 | ) | $ | (14,000 | ) | $ | (47,292,000 | ) |
| Common stock  issued for cash exercise of warrants and options |       | 103,000           |       | 1,000                   |       | 266,000                     |       | —                                |       | —            |       | —                                        |       | —          |       | — |   |
| Common stock  issued for cashless exercise of warrants         |       | 80,000            |       | 1,000                   |       | (1,000                      | )          | —                                |       | —            |       | —                                        |       | —          |       | — |   |
| Warrants issued                                                |       | —            |       | —                  |       | 233,000                     |       | —                                |       | —            |       | —                                        |       | —          |       | — |   |
| Issuance of  restricted stock grants                           |       | 55,000            |       | —                  |       | 110,000                     |       | —                                |       | (111,000          | )          | —                                        |       | —          |       | — |   |
| Other  comprehensive income                                    |       | —            |       | —                  |       | —                      |       | —                                |       | —            |       | —                                        |       | 28,000          |       | — |   |
| Amortization of  restricted stock grants                       |       | —            |       | —                  |       | —                      |       | —                                |       | 94,000            |       | —                                        |       | —          |       | — |   |
| Net loss                                                       |       | —            |       | —                  |       | —                      |       | —                                |       | —            |       | —                                        |       | —          |       | (6,935,000 | ) |
| Balance, December  31, 2003                                    |       | 13,397,000        |       | 134,000                 |       | 49,597,000                  |       | (1,045,000                            | )          | (294,000          | )          | (4,000                                        | )          | 14,000          |       | (54,227,000 | ) |
|                                                           |       |              |       |                    |       |                        |       |                                  |       |              |       |                                          |       |            |       |   |   |
| Common stock  issued for cash, net of offering costs           |       | 1,789,000         |       | 18,000                  |       | 8,998,000                   |       | —                                |       | —            |       | —                                        |       | —          |       | — |   |
| Common stock  issued for cash exercise of warrants and options |       | 117,000           |       | 1,000                   |       | 282,000                     |       | —                                |       | —            |       | —                                        |       | —          |       | — |   |
| Common stock  issued for cashless exercise of warrants         |       | 210,000           |       | 2,000                   |       | (2,000                      | )          | —                                |       | —            |       | —                                        |       | —          |       | — |   |
| Issuance of  restricted stock grants                           |       | 12,000            |       | —                  |       | 135,000                     |       | —                                |       | (135,000          | )          | —                                        |       | —          |       | — |   |
| Other  comprehensive loss                                      |       | —            |       | —                  |       | —                      |       | —                                |       | —            |       | —                                        |       | (17,000         | )          | — |   |
| Amortization of  restricted stock grants                       |       | —            |       | —                  |       | —                      |       | —                                |       | 120,000           |       | —                                        |       | —          |       | — |   |
| Net loss                                                       |       | —            |       | —                  |       | —                      |       | —                                |       | —            |       | —                                        |       | —          |       | (10,238,000 | ) |
| Balance, December  31, 2004                                    |       | 15,525,000        |       | 155,000                 |       | 59,010 000                  |       | (1,045,000                            | )          | (309,000          | )          | (4,000                                        | )          | (3,000          | )          | (64,465,000 | ) |
|                                                           |       |              |       |                    |       |                        |       |                                  |       |              |       |                                          |       |            |       |   |   |
| Common stock  issued, net of offering costs                    |       | 1,184,000         |       | 12,000                  |       | 1,109,000                   |       | —                                |       | —            |       | —                                        |       | —          |       | — |   |
| Common stock  issued for payment of interest                   |       | 951,000           |       | 9,000                   |       | 609,000                     |       | —                                |       | —            |       | —                                        |       | —          |       | — |   |
| Other  comprehensive income                                    |       | —            |       | —                  |       | —                      |       | —                                |       | —            |       | —                                        |       | 3,000           |       | — |   |
| Discount on  convertible note extension                        |       | —            |       | —                  |       | 2,109,000                   |       | —                                |       | —            |       | —                                        |       | —          |       | — |   |
| Amortization and  forfeiture of restricted stock grants        |       | (19,000           | )          | —                  |       | (36,000                     | )          | —                                |       | 309,000           |       | —                                        |       | —          |       | — |   |
| Net loss                                                       |       | —            |       | —                  |       | —                      |       | —                                |       | —            |       | —                                        |       | —          |       | (1,700,000 | ) |
| Balance, December  31, 2005                                    |       | 17,641,000        |       | 176,000                 |       | 62,801,000                  |       | (1,045,000                            | )          | —            |       | (4,000                                        | )          | —          |       | (66,165,000 | ) |
|                                                                |            |                   |            |                         |            |                             |            |                                       |            |                   |            |                                               |            |                 |            |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these statements.

 

F-4

----

 

**Access Pharmaceuticals, Inc. andSubsidiaries**

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
| ** **                                                                   | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                   | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                        |       |                        |       |   |   |   |   |
| Net loss                                                                     |       | $                           | (1,700,000 | ) | $ | (10,238,000 | ) | $ | (6,935,000 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                        |       |   |   |   |   |
| Warrants issued  in payment of consulting expenses                           |       | —                      |       | — |   | 57,000 |   |
| Loss on sale  Australia assets                                               |       | 208,000                     |       | — |   | — |   |
| Impairment of  investment                                                    |       | —                      |       | 112,000 |   | — |   |
| Write off of goodwill                                                        |       | 1,868,000                   |       | — |   | — |   |
| Amortization of  restricted stock grants                                     |       | 309,000                     |       | 120,000 |   | 94,000 |   |
| Stock issued for  compensation                                               |       | 42,000                      |       | — |   | — |   |
| Stock issued for  interest                                                   |       | 618,000                     |       | — |   | — |   |
| Depreciation and  amortization                                               |       | 570,000                     |       | 773,000 |   | 621,000 |   |
| Amortization of  debt costs and discounts                                    |       | 695,000                     |       | 183,000 |   | 183,000 |   |
| Gain on sale of  assets                                                      |       | (12,891,000                 | )          | — |   | — |   |
| Change in  operating assets and liabilities:                                 |       |                        |       |   |   |   |   |
| Receivables                                                                  |       | 622,000                     |       | 358,000 |   | 47,000 |   |
| Inventory                                                                    |       | 104,000                     |       | 60,000 |   | 353,000 |   |
| Prepaid expenses  and other current assets                                   |       | 817,000                     |       | (195,000 | ) | 130,000 |   |
| Accounts payable  and accrued expenses                                       |       | 490,000                     |       | 401,000 |   | (689,000 | ) |
| Accrued interest  payable                                                    |       | 341,000                     |       | — |   | — |   |
| Deferred  revenues                                                           |       | 606,000                     |       | 15,000 |   | (15,000 | ) |
| Net cash used in operating activities                                        |       | (7,301,000                  | )          | (8,411,000 | ) | (6,154,000 | ) |
|                                                                         |       |                        |       |   |   |   |   |
| Cash flows from investing activities:                                        |       |                        |       |   |   |   |   |
| Capital  expenditures                                                        |       | (28,000                     | )          | (221,000 | ) | (336,000 | ) |
| Proceeds from sale  of equipment                                             |       | 335,000                     |       | — |   | — |   |
| Proceeds from sale  of patents                                               |       | 974,000                     |       | — |   | — |   |
| Proceeds from sale  of oral/topical care assets                              |       | 7,391,000                   |       | — |   | — |   |
| Restricted cash  and other assets                                            |       | 684,000                     |       | (666,000 | ) | (209,000 | ) |
| Redemptions of  short-term investments and certificates of deposit, net      |       | 361,000                     |       | 1,374,000 |   | 6,472,000 |   |
| Net cash provided by investing activities                                    |       | 9,717,000                   |       | 487,000 |   | 5,927,000 |   |
|                                                                         |       |                        |       |   |   |   |   |
| Cash flows from financing activities:                                        |       |                        |       |   |   |   |   |
| Payments of  notes payable                                                   |       | (407,000                    | )          | (310,000 | ) | (784,000 | ) |
| Payment of  secured notes payable and convertible notes                      |       | (6,648,000                  | )          | — |   | — |   |
| Proceeds from  secured notes payable                                         |       | 2,633,000                   |       | — |   | — |   |
| Proceeds from  stock issuances, net of costs                                 |       | 577,000                     |       | 9,299,000 |   | 266,000 |   |
| Net cash provided by (used in) financing activities                          |       | (3,845,000                  | )          | 8,989,000 |   | (518,000 | ) |
|                                                                         |       |                        |       |   |   |   |   |
| Net increase (decrease) in cash and cash equivalents                         |       | (1,429,000                  | )          | 1,065,000 |   | (745,000 | ) |
| Effect of exchange rate changes on cash and cash  equivalents                |       | 3,000                       |       | (17,000 | ) | 28,000 |   |
| Cash and cash equivalents at beginning of year                               |       | 1,775,000                   |       | 727,000 |   | 1,444,000 |   |
| Cash and cash equivalents at end of year                                     |       | $                           | 349,000    |   | $ | 1,775,000 |   | $ | 727,000 |   |
|                                                                         |       |                        |       |   |   |   |   |
| *Cash paid for interest*                                                     | * *   | *$*                         | *445,000*  | * * | *$* | *1,073,000* | * * | *$* | *1,281,000* |   |
| * *                                                                     | * *   | * *                    | * *   | * * | * * | * * |   |
| *Supplemental disclosure of noncash transactions*                            |       |                        |       |   |   |   |   |
| *Value  of restricted stock grants*                                          | * *   | *—*                    | * *   | *135,000* | * * | *111,000* |   |
| *Assets  acquired under capital leases*                                      | * *   | *—*                    | * *   | *59,000* | * * | *126,000* |   |
| *Common  stock issued for SEDA and Secured Convertible Notes*                | * *   | *502,000*                   | * *   | *—* | * * | *—* |   |
| *Discount  on convertible note extension*                                    | * *   | *2,109,000*                 | * *   | *—* | * * | *—* |   |

 

The accompanying notes are an integral part of these statements.

 

F-5

----

 

**Access Pharmaceuticals, Inc. and Subsidiaries**

** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Three years ended December 31, 2005

 

**NOTE1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

** **

**Nature of Operations**

** **

**Access Pharmaceuticals, Inc. is anemerging pharmaceutical company engaged in the development of noveltherapeutics based primarily on the adaptation of existing therapeutic agentsusing its proprietary drug delivery platforms. Our efforts have beenprincipally devoted to research and development, resulting in significantlosses since inception on February 24, 1988.**

** **

**A summary of the significantaccounting policies applied in the preparation of the accompanying consolidatedfinancial statements follows.**

** **

**Principles of Consolidation**

** **

**The consolidated financialstatements include the financial statements of Access Pharmaceuticals, Inc. andour wholly-owned subsidiaries. All intercompany balances and transactions havebeen eliminated in consolidation.**

** **

**Cash and Cash Equivalents**

** **

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

** **

**Short-term Investments**

** **

**Short-term investments consist ofcertificates of deposit. All short term investments are classified as held tomaturity. The cost of debt securities is adjusted for amortization of premiumsand accretion of discounts to maturity. Such amortization is included ininterest income. The cost of securities sold is based on the specific identificationmethod.**

** **

**Property and Equipment**

** **

**Property and equipment are recordedat cost. Depreciation is provided using the straight-line method over estimateduseful lives ranging from three to seven years.**

 

F-6

----

 

**Research and Development Expenses**

** **

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

** **

**Income Taxes**

** **

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

 

**Loss Per Share**

 

**We have presented basic loss pershare, computed on the basis of the weighted average number of common sharesoutstanding during the year, and diluted loss per share, computed on the basisof the weighted average number of common shares and all dilutive potentialcommon shares outstanding during the year. Potential common shares result fromstock options, vesting of restricted stock grants, convertible notes andwarrants. However, for all years presented, all outstanding stock options,restricted stock grants, convertible notes and warrants are anti-dilutive dueto the losses for the periods. If not for the losses, 6,754,325, 5,405,045 and5,570,611 shares would have been included in the diluted per share computationin 2005, 2004 and 2003, respectively.**

 

F-7

----

 

**Exchange Rate Translation**

** **

**For international operations, local currencies havebeen determined to be the functional currencies. We translate assets andliabilities to their U.S. dollar equivalents at rates in effect at the balancesheet date and record translation adjustments in*Shareholders’ equity*. We translate statement of incomeaccounts at average rates for the period. Transaction adjustments are recordedin*Other (income)/expense*.**

 

Because we closed ourAustralian operations in 2005, $44,000 of foreign currency translationadjustment was included as a component of discontinued operations in 2005.

 

**Restricted Cash**

** **

**Restricted cash is cash that is ormay be committed for a particular purpose. We have restricted cash in 2005 ascollateral for a note payable of $103,000; in 2004 we had restricted cash of$839,000 for a deferred license agreement, $233,000 as collateral for a notepayable and $213,000 for rent guarantees for a manufacturing agreement andlaboratory rent.**

 

F-8

----

 

**Intangible Assets**

** **

**We expense internal patent andapplication costs as incurred because, even though we believe the patents andunderlying processes have continuing value, the amount of future benefits to bederived therefrom are uncertain. Purchased patents are capitalized andamortized over the life of the patent. We recognize the purchase cost oflicenses and amortize them over their estimated useful lives.**

** **

**The Company operates in a single segment. In 2005,the Company wrote off its goodwill as determined by comparing the Company’s marketcapitalization with its net asset value resulting in an impairment charge of$1,868,000. In 2005, the Company sold one of its patents for $974,000 and theCompany believes the fair value of the remaining patent based on discountedcash flow analysis exceeds the carry values. In 2004, the Company determinedthat one of its licenses was no longer useful for its current business focusand expensed $109,000 for the license net of amortization and royalty payable.**

** **

Intangibleassets consist of the following (in thousands):

 
| ** **                                              | ** ** | **December 31, 2005**      | ** ** | **December 31, 2004**         | ** ** | **December 31, 2003**      | ** ** |
|---------------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|----------------------------|------------|
| ** **                                              | ** ** | **Gross  carrying  value** | ** ** | **Accumulated  amortization** | ** ** | **Gross  carrying  value** | ** ** | **Accumulated  amortization** | ** ** | **Gross  carrying  value** | ** ** | **Accumulated****amortization** | ** ** |
| Amortizable intangible assets                           |       |                       |       |                          |       |                       |       |   |   |   |   |   |   |
| Patents                                                 |       | $                          | 1,680      |                          | $          | 634                        |       | $ | 3,179 |   | $ | 864 |   | $ | 3,179 |   | $ | 527 |   |
| Licenses                                                |       | 500                        |       | 425                           |       | 500                        |       | 375 |   | 830 |   | 463 |   |
| Total                                                   |       | $                          | 2,180      |                          | $          | 1,059                      |       | $ | 3,679 |   | $ | 1,239 |   | $ | 4,009 |   | $ | 990 |   |
| Intangible  assets not subject to amortization Goodwill |       | $                          | —     |                          | $          | —                     |       | $ | 2,464 |   | $ | 596 |   | $ | 2,464 |   | $ | 596 |   |

 

Amortization expense related to intangible assets totaled $345,000, $420,000and $421,000 for the years ended December 31, 2005, 2004 and 2003,respectively. The aggregate estimated amortization expense for intangibleassets remaining as of December 31, 2005 is as follows (in thousands):

 
| 2006       |   | $      | 218    |   |
|------------|--------|--------|--------|--------|
| 2007       |   | 193    |   |
| 2008       |   | 168    |   |
| 2009       |   | 168    |   |
| 2010       |   | 168    |   |
| Thereafter |   | 206    |   |
|       |   |   |   |
| Total      |   | $      | 1,121  |   |

 

F-9

----

 

**Stock-Based Compensation**

** **

**We account for our stock optionplan in accordance with the provisions of Accounting Principles Board (“APB”)Opinion No. 25, “Accounting for Stock Issued to Employees”, and relatedinterpretations. Compensation expense is recorded only if the current marketprice of the underlying stock exceeds the exercise price on the date of grant.We have adopted the disclosure provisions of Statement of Financial AccountingStandards (SFAS) No. 123, “Accounting for Stock-Based Compensation”, whichrecognizes the fair value of all stock-based awards on the date of grant.**

** **

**At December 31, 2005 we had two stock-basedemployee compensation plans, which are described more fully in Note 10. Nostock-based employee compensation cost is reflected in net loss, as all optionsgranted under those plans had an exercise price equal to the market value ofthe underlying common stock on the date of grant. The following tableillustrates the effect on net loss and net loss per share if we had applied thefair value recognition provisions of SFAS 123, *Accounting for Stock-Based Compensation*, to stock-basedemployee compensation.**

** **
| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|------------------|------------|
| ** **                       | ** ** | **2005**         | ** ** | **2004** | ** ** | **2003** | ** ** |
|                             |       |             |       |   |   |   |   |
| Net loss                         |       |             |       |   |   |   |   |
| As reported                      |       | $                | (1,700,000 | ) | $ | (10,238,000 | ) | $ | (6,935,000 | ) |
| Pro forma stock  option expense  |       | (750,000         | )          | (738,000 | ) | (1,232,000 | ) |
| Pro forma                        |       | (2,450,000       | )          | (10,976,000 | ) | (8,167,000 | ) |
| Basic and diluted loss per share |       |             |       |   |   |   |   |
| As reported                      |       | $                | (0.10      | ) | $ | (.68 | ) | $ | (.52 | ) |
| Pro forma stock  option expense  |       | (0.06            | )          | (.05 | ) | (.09 | ) |
| Pro forma                        |       | $                | (0.16      | ) | $ | (.73 | ) | $ | (.61 | ) |

 

**The effect of our outstandingoptions and warrants are anti-dilutive when we have a net loss. The fullydiluted shares are:**

** **
| ** **           | ** ** | **December 31,** | ** ** |
|----------------------|------------|------------------|------------|
| ** **           | ** ** | **2005**         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Fully diluted shares |       | 22,941,765       |       | 20,567,301 |   | 18,837,344 |   |

** **

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

** **

**Recent Accounting Pronouncement**

** **

**On December 16, 2004, the FASB issuedFAS 123R, *“Share-Based Payment —An Amendment of FASB Statements No. 123 and 95”*, (FAS 123R)which is effective for public companies at the beginning of their first fiscal yearthat begins after June 15, 2005. We will be required to implement theproposed standard on January 1, 2006. We intend to apply the modifiedprospective basis to adopt this standard. FAS 123R addresses theaccounting for transactions in which an enterprise receives employee servicesin exchange for (a) equity instruments of the enterprise or(b) liabilities that are based on the fair value of the enterprise’sequity instruments or that may be settled by the issuance of such equityinstruments. FAS 123R would eliminate the ability to account forshare-based compensation transactions using APB 25, and generally wouldrequire instead that such transactions be accounted for using a fair-valuebased method. Companies will be required to recognize an expense forcompensation cost related to share-based payment arrangements including stockoptions and employee stock purchase plans. We expect to recognize $153,000 instock based compensation in 2006 resulting from the adoption of FAS 123R.**

 

F-10

----

** **

**Use of Estimates**

** **

**In preparing consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America, management is required to make estimates andassumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.**

** **

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

** **

**Fair Value of Financial Instruments**

** **

**The carrying value of cash, cashequivalents, short-term investments and accounts payable approximates fairvalue due to the short maturity of these items. It is not practical to estimatethe fair value of the Company’s note receivable from Uluru, Inc. and long-termdebt because quoted market prices do not exist and there were no availablesecurities with similar terms to use as a basis to value these instruments.**

** **

**NOTE 2 – LIQUIDITY**

** **

The Companyincurred significant losses from continuing operations of $7.6 million for theyear ended December 31, 2005 and $7.2 million for the year ended December 31,2004. Additionally, at December 31, 2005, we have working capital of $1.3million. As of December 31, 2005, we did not have sufficientfunds to repay our convertible notes at their maturity and support our workingcapital and operating requirements. As described below, in February 2006, weentered into financing arrangements and together with amounts due to us inOctober from the sale of our oral/topical care business to Uluru, Inc. webelieve that these funds will allow us to support our working capital andoperating requirements for twelve months. We do not have funds to pay theobligations which are due in March and April 2007 and will have to raise morefunds or attempt to restructure the convertible notes.

 

SCO Capital Partners LLCNote and Warrant Purchase Agreement

 

OnFebruary 16,2006, we entered into a note and warrant purchase agreement pursuant to whichwe sold and issued an aggregate of $5.0 million of 7.5% convertible notes dueMarch 31, 2007 and warrants to purchase an aggregate of 19,318,184 shares ofcommon stock of Access. Net proceeds to Access were $4.557 million. The notesand warrants were sold in a private placement to a group of accreditedinvestors led by SCO Capital Partners LLC (“SCO”).

 

The notes mature on March 31, 2007, areconvertible into Access common stock at a fixed conversion rate of $0.22 pershare, bear interest of 7.5% per annum and are secured by certain assets ofAccess. Each note may be converted at the option of the noteholder or Accessunder certain circumstances as set forth in the notes.

 

Each noteholder received a warrant topurchase a number of shares of common stock of Access equal to 75% of the totalnumber shares of Access common stock into which such holder’s note isconvertible. Each warrant has an exercise price of $0.264 per share and isexercisable at any time prior to February 16, 2012. In the event SCO and itsaffiliates were to convert all of their notes and exercise all of theirwarrants, they would own approximately 73% of the voting securities of Access.

 

In connection with its sale and issuanceof notes and warrants, Access entered into an investors rights agreementwhereby it granted SCO the right to designate two individuals to serve on theBoard of Directors of Access while the notes are outstanding, and also grantedregistration rights with respect to the shares of common stock of Accessunderlying the notes and warrants.

 

F-11

----

 

Standby Equity Distribution Agreement (SEDA) with Cornell CapitalPartners

 

**On March 30, 2005 the Company executed a StandbyEquity Distribution Agreement (SEDA) with Cornell Capital Partners. Under theSEDA, the Company may issue and sell to Cornell Capital Partners common stockfor a total purchase price of up to $15,000,000. The purchase price for theshares is equal to their market price, which is defined in the SEDA as 98% ofthe lowest volume weighted average price of the common stock during a specifiedperiod of trading days following the date notice is given by the Company thatit desires to access the SEDA. Further, we have agreed to pay Cornell CapitalPartners, L.P. 3.5% of the proceeds that we receive under the Equity Line of Credit.The amount of each draw down is subject to a maximum amount of $1,000,000. Theterms of the SEDA do not allow us to make draw downs if the draw down wouldcause Cornell Capital to own in excess of 9.9% of our outstanding shares ofcommon stock. Upon closing of the transaction, Cornell Capital Partnersreceived a one-time commitment fee of 146,500 shares of the Company’s commonstock. On the same date, the Company entered into a Placement Agent Agreementwith Newbridge Securities Corporation, a registered broker-dealer. Pursuant tothe Placement Agent Agreement, upon closing of the transaction the Company paida one-time placement agent fee of 3,500 shares of common stock. The sharesissued were valued at $500,000 and recorded as debt issuance costs and suchcosts are amortized as the SEDA is accessed. As of December 31, 2005 we haveaccessed $600,000 of the SEDA and $20,000 of the Debt issuance costs werecharged to additional paid-in capital. At this time the Company will not beable to access the SEDA until a post-effective amendment to our registrationstatement is filed with, and declared effective by, the SEC. The SEDA can beaccessed through March 30, 2007.**

** **

**The Company believes that based on the fundsavailable from the agreements referred to above the Company will have theability to pay obligations as they come due in 2006.**

** **

**NOTE 3 - RELATED PARTYTRANSACTIONS**

** **

**Stephen B. Howell, M.D., aDirector, receives payments for consulting services and reimbursement of directexpenses and has also received warrants for his consulting services. Dr. Howell’spayments for consulting services, expense reimbursements and warrants are asfollows:**

** **
| ** ** | ** ** | **Consulting** | ** ** | **Expense**       | ** ** | ** **   | ** ** | **Exercise** | ** ** | **Fair**  | ** ** |
|------------|------------|----------------|------------|-------------------|------------|--------------|------------|--------------|------------|-----------|------------|
| **Year**   | ** ** | **Fees**       | ** ** | **Reimbursement** | ** ** | **Warrants** | ** ** | **Price**    | ** ** | **Value** | ** ** |
|       |       |           |       |              |       |         |       |         |       |      |       |
| 2005       |       | $              | 79,000     |              | $          | 5,000        |       | —       |       | $         | —     |   | $ | — |   |
| 2004       |       | 58,000         |       | 9,000             |       | —       |       | —       |       | —    | ** ** |
| 2003       |       | 60,000         |       | 6,000             |       | 30,000       |       | 3.00         |       | 30,000    | ** ** |
|            |            |                |            |                   |            |              |            |              |            |           |            |  |  |  |  |

 

**See Note 9 for a discussion of our Restricted StockPurchase Program.**

 

**NOTE 4 - PROPERTY ANDEQUIPMENT**

 

**Property and equipment consists ofthe following:**

 
| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|------------------|------------|
| ** **                                     | ** ** | **2005**         | ** ** | **2004** | ** ** |
|                                           |       |             |       |   |   |
| Laboratory equipment                           |       | $                | 1,090,000  |   | $ | 2,208,000 |   |
| Laboratory and building improvements           |       | 167,000          |       | 167,000 |   |
| Furniture and equipment                        |       | 138,000          |       | 204,000 |   |
|                                           |       | 1,395,000        |       | 2,579,000 |   |
| Less accumulated depreciation and amortization |       | 1,095,000        |       | 1,539,000 |   |
|                                           |       |             |       |   |   |
| Net property and equipment                     |       | $                | 300,000    |   | $ | 1,040,000 |   |

 

**Depreciation and amortization on property and equipment was$225,000, $244,000, and $200,000 for the years ended December 31, 2005, 2004and 2003, respectively.**

** **

**F-12**

----

** **

**NOTE 5 – 401(k) PLAN**

** **

**We have a tax-qualified employee savings andretirement plan (the “401(k) Plan”) covering all our employees. Pursuant to the401(k) Plan, employees may elect to reduce their current compensation by up tothe statutorily prescribed annual limit ($14,000 in 2005; $13,000 in 2004; and$12,000 in 2003) and to have the amount of such reduction contributed to the401(k) Plan. We have a 401(k) matching program whereby we contribute for eachdollar a participant contributes a like amount, with a maximum contribution of2% of a participant’s earnings. The 401(k) Plan is intended to qualify underSection 401 of the Internal Revenue Code so that contributions by employees orby us to the 401(k) Plan, and income earned on 401(k) Plan contributions, arenot taxable to employees until withdrawn from the 401(k) Plan, and so thatcontributions by us, if any, will be deductible by us when made. At thedirection of each participant, we invest the assets of the 401(k) Plan in anyof 23 investment options. Company contributions under the 401(k) Plan wereapproximately $31,000 in 2005; $46,000 in 2004; and $45,000 in 2003.**

 

**NOTE 6 – DISCONTINUED OPERATIONS**

 

InOctober 2005 we sold our oral/topical care business to Uluru, Inc. for up to$20.6 million. At the closing of this agreement we received $8.7 million. Inaddition, at the one year anniversary of the agreement we will receive $3.7million and we will receive an additional $1 million within 24 months afterclosing or earlier upon the achievement of a milestone. Any contingentliabilities that arise in the future relating to our former business couldreduce the $3.7 million receipt. Additional payments of up to $7.2 million maybe made upon the achievement of certain additional milestones.

 

InSeptember 2006 we closed our Australian laboratory and office, keeping thevitamin B12 technology.

 

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

 
| ** **                        | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Revenues                          |       | $          | 781,000    |       | $          | 549,000    |       | $ | 1,295,000 |   |
|                              |       |       |       |       |       |       |       |
| Expenses                          |       |       |       |       |       |       |       |
| Cost of product  sales            |       | (1,012,000 | )          | (239,000   | )          | (277,000   | )          |
| Research and  development         |       | (2,501,000 | )          | (3,082,000 | )          | (3,547,000 | )          |
| Depreciation and  amortization    |       | (237,000   | )          | (304,000   | )          | (258,000   | )          |
| Total expenses                    |       | (3,750,000 | )          | (3,625,000 | )          | (4,082,000 | )          |
|                              |       |       |       |       |       |       |       |
| Interest and miscellaneous income |       | —     |       | —     |       | 2,280,000  |       |
|                              |       |       |       |       |       |       |       |
| Loss for discontinued operations  |       | (2,969,000 | )          | (3,076,000 | )          | (507,000   | )          |
|                              |       |       |       |       |       |       |       |
| Gain on sale of  assets           |       | 12,891,000 |       | —     |       | —     |       |
| Tax expense                       |       | (4,067,000 | )          | —     |       | —     |       |
|                              |       |       |       |       |       |       |       |
| Discontinued operations           |       | $          | 5,855,000  |       | $          | (3,076,000 | )          | $ | (507,000 | ) |

 

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

 

Assetsrelating to discontinued operations as of December 31, 2004 are as follows:

 
| Accounts  receivable        |   | $         | 714,000   |   |
|-----------------------------|--------|-----------|-----------|--------|
| Inventory                   |   | 125,000   |      |
| Prepaid expenses            |   | 271,000   |      |
| Property and equipment, net |   | 576,000   |      |
| Patents, net                |   | 1,101,000 |      |
| Restricted cash             |   | 187,000   |      |
| Total                       |   | $         | 2,974,000 |   |

 

Liabilities relating todiscontinued operations as of December 31, 2004 are as follows:

 
| Accounts payable                  |   | $         | 403,000   |   |
|-----------------------------------|--------|-----------|-----------|--------|
| Deferred revenues                 |   | 1,026,000 |      |
| Current portion of long-term debt |   | 76,000    |      |
| Long term debt                    |   | 90,000    |      |
|                              |   |      |      |
| Total                             |   | $         | 1,595,000 |   |

 

**NOTE 7 – DEBT**

** **

**On September 20, 2001, we completed a $600,000installment loan with a bank. The balance at December 31, 2005 is $103,000. Theloan was used to purchase capital equipment and for leasehold improvements toexpand our laboratory and office space. The loan is due in 60 equalinstallments, including interest at 6.5%. The loan is secured by a $103,000certificate of deposit classified as an other asset at December 31, 2005.**

** **

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

** **

**$4,015,000 due on April 28, 2007.** This investor’s noteshave a fixed conversion price of $1.00 per share of common stock and may beconverted by the note holder or us under certain circumstances as defined inthe note. Upon a change of control, this investor is not required toautomatically convert the note unless the amount payable to the investor uponchange of control, issuable upon conversion of the note equals or exceeds$1.50. If the notes are not converted we will have to repay the notes on thedue dates. The investor’s notes were amended November 3, 2005 extending theterm and adjusting the conversion price from $5.50 to $1.00 per common share.The amendment and modification resulted in us recording additional debtdiscount of $2.1 million, which will be acreted to interest expense to therevised maturity date. The interest due at December 31, 2005 was $92,000.

** **

**$5,500,000 due on September 13,2010**. This investor delayed his interest payment which was duein 2005 until September 13, 2006. The interest due plus interest on interestwas $560,000 at December 31, 2005. This note has a fixed conversion price of$5.50 per share of common stock and may be converted by the note holder or usunder certain circumstances as defined in the note. If the notes are notconverted we will have to repay the notes on the due dates.

 

Futurematurities of debt, note payable and other obligations are as follows:

 
| ** **     | ** ** | **Notes payable** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------|------------|-------------------|------------|-------------|------------|------------|------------|------------|------------|
| **Future**     | ** ** | **and other**     | ** ** | **Capital** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Maturities** | ** ** | **obligations**   | ** ** | **leases**  | ** ** | **Debt**   | ** ** | **Total**  | ** ** |
|           |       |              |       |        |       |       |       |       |       |
| 2006           |       | $                 | 103,000    |        | $          | 3,000      |       | $          | —     |   | $ |  106,000 |   |
| 2007           |       |              | —     |        |       | —     |       | 4,015,000  |       | 4,015,000 |   |
| 2010           |       |              | —     |        |       | —     |       | 5,500,000  |       | 5,500,000 |   |
|                |            |                   |            |             |            |            |            |            |            |  |  |  |  |

 

The debt of $4,015,000 isdiscounted and at December 31, 2005 is on the balance sheet as $2,136,000.

 

**NOTE 8 - COMMITMENTS ANDCONTINGENCIES**

** **

**Operating Leases**

** **

**At December 31, 2005, we havecommitments under noncancelable operating leases for office and research anddevelopment facilities until December 31, 2006 totaling $35,000. Rent expensefor the years ended December 31, 2005, 2004 and 2003 was $168,000, $166,000 and$165,000, respectively**

 

Legal

 

TheCompany is not currently subject to any material pending legal proceedings.

 

F-13

----

 

**NOTE 9 - STOCKHOLDERS’EQUITY**

** **

**Restricted Stock Purchase Program**

** **

**On October 12, 2000, the Board of Directorsauthorized a Restricted Stock Purchase Program. Under the Program, the Company’sexecutive officers and corporate secretary were given the opportunity topurchase shares of common stock in an individually designated amount perparticipant determined by the Compensation Committee of the Board of Directors.A total of 190,000 shares were purchased under the Program by**foureligible participants at $5.50 per share, the fair market value of the commonstock on October 12, 2000, for an aggregate consideration of $1,045,000. Thepurchase price was paid through the participants’ delivery of a 50%-recoursepromissory note payable to the Company for three executive officer participantsand 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 maximumterm of ten years. The notes are secured by a pledge of the purchased shares tothe Company. The Company recorded the notes receivable from participants inthis Program of $1,045,000 as a reduction of equity in the Consolidated BalanceSheet. Interest on the notes is neither being collected nor accrued.

** **

**The stock granted under the Program other than toone participant vested ratably over a four year period and is fully vested atDecember 31, 2005.**

** **

**Warrants**

 

**There were warrants to purchase a totalof 730,825 shares of common stock outstanding at December 31, 2005. Allwarrants were vested and exercisable at December 31, 2005. The warrants hadvarious prices and terms as follows:**

** **
| ** **                     | ** ** | **Warrants**    | ** ** | **Exercise** | ** ** | **Expiration** | ** ** |
|--------------------------------|------------|-----------------|------------|--------------|------------|----------------|------------|
| **Summary of Warrants**        | ** ** | **Outstanding** | ** ** | **Price**    | ** ** | **Date**       | ** ** |
| 2004 offering (a)              |       | 447,344         |       | $            | 7.10       |           | 2/24/09    |   |
| 2004 offering (a)              |       | 156,481         |       | 5.40         |       | 2/24/09        |       |
| 2003 financial advisor (b)     |       | 72,000          |       | 3.90         |       | 10/30/08       |       |
| 2003 scientific consultant (c) |       | 30,000          |       | 3.00         |       | 1/1/06         |       |
| 2002 scientific consultant (d) |       | 10,000          |       | 4.96         |       | 2/01/09        |       |
| 2001 scientific consultant (e) |       | 15,000          |       | 3.00         |       | 1/1/08         |       |
| Total                          |       | 730,825         |       |         |       |           |       |
|                                |            |                 |            |              |            |                |            |  |

 

----

**(a)**   In connection withoffering of common stock in 2004, warrants to purchase a total of 603,825shares of common stock were issued. All of the warrants are exercisableimmediately and expire five years from date of issuance.

** **

**(b)**   During 2003, financialadvisors received warrants to purchase 72,000 shares of common stock at anytime from October 30, 2003 until October 30, 2008, for financial consultingservices rendered in 2003 and 2004. All the warrants are exercisable. The fairvalue of the warrants was $2.82 per share on the date of the grant using theBlack-Scholes pricing model with the following assumptions: expected dividendyield 0.0%, risk-free interest rate 2.9%, expected volatility 92% and a term of5 years.

 

F-14

----

 

**(c)**   During 2003, adirector who is also a scientific advisor received warrants to purchase 30,000shares of common stock at an exercise price of $3.00 per share at any time fromJanuary 1, 2003 until January 1, 2006, for scientific consulting servicesrendered in 2003. The fair value of the warrants was $.99 per share on the dateof the grant using the Black-Scholes pricing model with the followingassumptions: expected dividend yield 0.0%, risk-free interest rate 3.26%,expected volatility 98% and a term of 3 years. The warrants expired on January1, 2006 without being exercised.

** **

**(d)**   During 2002, adirector who is also a scientific advisor received warrants to purchase 10,000shares of common stock at an exercise price of $4.91 per share at any time fromFebruary 1, 2002 until February 1, 2009, for scientific consulting servicesrendered in 2002. The fair value of the warrants was $3.70 per share on thedate of the grant using the Black-Scholes pricing model with the followingassumptions: expected dividend yield 0.0%, risk-free interest rate 3.90%,expected volatility 81% and a term of 7 years.

** **

**(e)**   During 2001, adirector who is also a scientific advisor received warrants to purchase 15,000shares of common stock at an exercise price of $3.00 per share at any time fromJanuary 1, 2001 until January 1, 2008, for scientific consulting servicesrendered in 2001. The fair value of the warrants was $2.74 per share on thedate of the grant using the Black-Scholes pricing model with the followingassumptions: expected dividend yield 0.0%, risk-free interest rate 5.03%,expected volatility 118% and a term of 7 years.

** **

2001 Restricted Stock Plan

** **

**We have a restricted stock plan, the 2001 RestrictedStock Plan, as amended, under which 400,000 shares of our authorized butunissued common stock were reserved for issuance to certain employees,directors, consultants and advisors. The restricted stock granted under theplan generally vests 25% two years after the grant date with additional 25%vesting every anniversary date. All stock is vested after five years. AtDecember 31, 2005 there were 135,913 shares issued and 264,087 shares availablefor grant under the 2001 Restricted Stock Plan.**

 

F-15

----

 

**NOTE 10 - STOCK OPTIONPLANS**

 

**We have a stock awards plan, (the “2005Equity Incentive Plan”), under which 700,000 shares of our authorized butunissued common stock were reserved for issuance to employees of or consultantsto one or more of the Company and its affiliates or to non-employee members ofthe Board or of any board of directors (or similar governing authority) of anyaffiliate of the Company. The 2005 Equity Incentive Plan replaced thepreviously 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 theBlack-Scholes option pricing model with the following weighted averageassumptions used for grants in fiscal 2005: dividend yield of 0%; volatility of113%; risk-free interest rate of 4.71% expected lives of four years. Theweighted average fair value of options granted was $1.70 per share during 2005.**

 

**Under the 2005 Equity IncentivePlan, 250,000 options were issued in 2005 and were outstanding at December 31,2005. 70,000 options in the 2005 Equity Incentive Plan were exercisable atDecember 31, 2005. All of the options expire on November 2, 2015 and have anexercise price of $1.09 per share.**

 

**On February 11, 2000 we adopted the2000 Special Stock Option Plan and Agreement (the “Plan”). The Plan providesfor the award of options to purchase 500,000 shares of the authorized butunissued shares of common stock of the Company. At December 31, 2005, therewere no additional shares available for grant under the Plan.**

** **

**Under the 2000 Special Stock Option Plan, 500,000options were issued in 2000 and are outstanding at December 31, 2005. All of** the options in the2000 Special Stock Option Plan were exercisable at December 31, 2005 and 2004,and 468,749 of the options were exercisable at December 31, 2003. All of theoptions expire on March 1, 2010 and have an exercise price of $2.50 per share.

** **

**Under the 1995 Stock Awards Plan,as amended, 2,500,000 shares of our authorized but unissued common stock werereserved for issuance to optionees including officers, employees, and otherindividuals performing services for us. At December 31, 2005, there were noadditional shares available for grant under the 1995 Stock Awards Plan. A totalof 2,370,220 options were issued under this plan.**

** **

**Under the 1995 Stock Awards Plan,the fair value of options was estimated at the date of grant using theBlack-Scholes option pricing model with the following weighted averageassumptions used for grants in fiscal 2005, 2004 and 2003, respectively:dividend yield of 0% for all periods; volatility of 104%, 41% and 117%;risk-free interest rates of 4.15%, 3.61% and 2.26%, respectively, and expectedlives of four years for all periods. The weighted average fair values ofoptions granted were $1.29, $2.18 and $1.56 per share during 2005, 2004 and2003, respectively.**

** **

**Options granted under all the plansgenerally vest ratably over a four to five year period and are generallyexercisable over a ten-year period from the date of grant. Stock options aregenerally granted with an exercise price equal to the market value at the dateof grant.**

 

F-16

----

 

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

** **
| ** **                               | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
|------------------------------------------|------------|------------|------------|---------------|------------|
| ** **                               | ** ** | ** ** | ** ** | **average**   | ** ** |
| ** **                               | ** ** | ** ** | ** ** | **exercise**  | ** ** |
| ** **                               | ** ** | **Shares** | ** ** | **price**     | ** ** |
|                                     |       |       |       |          |       |
| Outstanding options at January 1, 2003   |       | 1,711,156  |       | 3.59          |       |
| Granted, fair value of $1.56 per share   |       | 374,500    |       | 2.20          |       |
| Exercised                                |       | (28,000    | )          | 2.55          |       |
| Forfeited                                |       | (4,000     | )          | 2.70          |       |
| Outstanding options at December 31, 2003 |       | 2,053,656  |       | 3.45          |       |
|                                     |       |       |       |          |       |
| Granted, fair value of $2.18 per share   |       | 314,200    |       | 5.75          |       |
| Exercised                                |       | (109,695   | )          | 2.38          |       |
| Forfeited                                |       | (75,980    | )          | 4.21          |       |
| Outstanding options at December 31, 2004 |       | 2,182,181  |       | 3.76          |       |
|                                     |       |       |       |          |       |
| Granted, fair value of $1.29 per share   |       | 248,500    |       | 2.41          |       |
| Forfeited                                |       | (279,297   | )          | 3.46          |       |
| Outstanding options at December 31, 2005 |       | 2,151,384  |       | 3.64          |       |
|                                     |       |       |       |          |       |
| Exercisable at December 31, 2003         |       | 1,389,185  |       | 3.49          |       |
| Exercisable at December 31, 2004         |       | 1,671,160  |       | 3.64          |       |
| Exercisable at December 31, 2005         |       | 2,033,800  |       | 3.68          |       |

 

**Further information regardingoptions outstanding under the 1995 Stock Awards Plan at December 31, 2005 issummarized below:**

** **
| ** **                   | ** ** | **Number of**   | ** ** | **Weighted average** | ** ** | **Number of** | ** ** | **Weighted-average** | ** ** |
|------------------------------|------------|-----------------|------------|----------------------|------------|---------------|------------|----------------------|------------|
| ** **                   | ** ** | **shares**      | ** ** | **Remaining**        | ** ** | **Exercise**  | ** ** | **shares**           | ** ** | **exercise** | ** ** |
| **Range of exercise prices** | ** ** | **outstanding** | ** ** | **life in years**    | ** ** | **price**     | ** ** | **exercisable**      | ** ** | **price** | ** ** |
|                         |       |            |       |                 |       |          |       |                 |       |   |   |
| $ 2.00-2.18             |       | 362,980         |       | 4.2                  |       | $             | 2.01       |                 | 346,459    |   | $ | 2.01 |   |
| $ 2.30-2.81             |       | 525,100         |       | 7.6                  |       | 2.43          |       | 453,100              |       | 2.45 |   |
| $ 2.94-3.99             |       | 625,919         |       | 4.4                  |       | 3.39          |       | 620,606              |       | 3.39 |   |
| $ 4.05-7.8125           |       | 637,385         |       | 5.7                  |       | 5.81          |       | 613,635              |       | 5.81 |   |
| ** **                   | ** ** | ** **      | ** ** | ** **           | ** ** | ** **    | ** ** | ** **           | ** ** | ** ** | ** ** |
|                         |       | 2,151,384       |       |                 |       |          |       | 2,033,800            |       |   |   |
|                              |            |                 |            |                      |            |               |            |                      |            |  |  |  |  |

 

**All issued options under the 1987Stock Awards Plan expired in 2004. No further grants can be made. Summarizedinformation for the 1987 Stock Awards Plan is as follows:**

 
| ** **                              | ** ** | ** **  | ** ** | **Weighted-** | ** ** |
|-----------------------------------------|------------|-------------|------------|---------------|------------|
| ** **                              | ** ** | ** **  | ** ** | **average**   | ** ** |
| ** **                              | ** ** | **Stock**   | ** ** | **exercise**  | ** ** |
| ** **                              | ** ** | **options** | ** ** | **price**     | ** ** |
| Outstanding awards at January 1, 2003   |       | 17,178      |       | 23.31         |       |
| Forfeited                               |       | (5,750      | )          | 35.00         |       |
| Outstanding awards at December 31, 2003 |       | 11,428      |       | 17.42         |       |
|                                    |       |        |       |          |       |
| Forfeited                               |       | (11,428     | )          | 17.42         |       |
| Outstanding awards at December 31, 2004 |       | —      |       |          |       |

 

F-17

----

 

**NOTE 11 - INCOME TAXES**

** **

**Income tax expense differs from thestatutory amounts as follows:**

** **
| ** **                                                                                     | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                                                           |       |       |       |       |       |       |       |
| Income taxes at U.S. statutory rate                                                            |       | $          | (438,000   | )          | $          | (3,442,000 | )          | $ | (2,358,000 | ) |
| Change in valuation allowance                                                                  |       | (2,051,000 | )          | 895,000    |       | 304,000    |       |
| Change in miscellaneous items                                                                  |       | 397,000    |       | 598,000    |       | (415,000   | )          |
| Benefit of foreign losses not recognized                                                       |       | 304,000    |       | —     |       | —     | ** ** |
| Expenses not deductible                                                                        |       | 738,000    |       | 7,000      |       | 40,000     | ** ** |
| Expiration of  net operating loss and general business credit carryforwards, net of  revisions |       | 1,050,000  |       | 1,942,000  |       | 2,429,000  |       |
| ** **                                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total tax  expense                                                                             |       | $          | —     |       | $          | —     |       | $ | — | ** ** |

 

**Deferred taxes are provided for thetemporary differences between the financial reporting bases and the tax basesof our assets and liabilities. The temporary differences that give rise todeferred tax assets were as follows:**

** **
| ** **                                         | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                               |       |                  |       |   |   |   |   |
| Deferred tax assets (liabilities)                  | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net operating  loss carryforwards                  |       | $                     | 20,261,000 |   | $ | 20,808,000 |   | $ | 20,193,000 | ** ** |
| General business  credit carryforwards             |       | 2,261,000             |       | 2,094,000 |   | 1,960,000 | ** ** |
| Deferred gain on  sale of oral/topical care assets |       | (1,490,000            | )          | — |   | — | ** ** |
| Property,  equipment and goodwill                  |       | 78,000                |       | 259,000 |   | 113,000 |   |
| ** **                                         | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross deferred tax assets                          |       | 21,110,000            |       | 23,161,000 |   | 22,266,000 |   |
| Valuation allowance                                |       | (21,110,000           | )          | (23,161,000 | ) | (22,266,000 | ) |
| Net deferred  taxes                                |       | $                     | —     |   | $ | — |   | $ | — |   |

 

**At December 31, 2005, we hadapproximately $50,864,000 of net operating loss carryforwards and approximately$2,234,000 of general business credit carryforwards. These carryforwards expireas follows:**

** **
| ** ** | ** ** | **Net operating**      | ** ** | **General business**     | ** ** |
|------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** ** | ** ** | **loss carryforwards** | ** ** | **credit carryforwards** | ** ** |
| 2006       |       | $                           | 587,000    |                          | $          | 38,000 |   |
| 2007       |       | 994,000                     |       | 26,000                        |       |
| 2008       |       | 4,004,000                   |       | 138,000                       |       |
| 2009       |       | 1,661,000                   |       | 185,000                       |       |
| 2010       |       | 2,171,000                   |       | 140,000                       |       |
| Thereafter |       | 41,447,000                  |       | 1,707,000                     |       |
|       |       | $                           | 50,864,000 |                          | $          | 2,234,000 | ** ** |

 

**As a result of a merger on January25, 1996, a change in control occurred for federal income tax purposes whichlimits the utilization of pre-merger net operating loss carryforwards ofapproximately $3,100,000 to approximately $530,000 per year.**

 

F-18

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**NOTE 12 – QUARTERLY FINANCIAL DATA(UNAUDITED)**

 

**Our results of operations by quarter for the years endedDecember 31, 2005 and 2004 were as follows (in thousands, except per shareamounts):**

** **
| ** **                                     | ** ** | **2005 Quarter Ended** | ** ** |
|------------------------------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **March 31**           | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| Loss from continuing operations                |       | $                      | (1,616     | ) | $ | (2,988 | ) | $ | (1,612 | ) | $ | (1,339 | ) |
| Income (loss) from discontinued operations     |       | (806                   | )          | (798 | ) | (451 | ) | 7,910 |   |
| Net income (loss)                              |       | $                      | (2,422     | ) | $ | (3,786 | ) | $ | (2,063 | ) |   | 6,571 |   |
| Basic and diluted income/loss per common share |       | $                      | (0.16      | ) | $ | (0.24 | ) | $ | (0.13 | ) | $ | 0.43 |   |

 
| ** **                              | ** ** | **2004 Quarter Ended** | ** ** |
|-----------------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **March 31**           | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| Loss from operations                    |       | $                      | (1,577     | ) | $ | (1,773 | ) | $ | (1,673 | ) | $ | (2,139 | ) |
| Discontinued operations                 |       | (774                   | )          | (780 | ) | (755 | ) | (767 | ) |
| Net loss                                |       | $                      | (2,351     | ) | $ | (2,553 | ) | $ | (2,428 | ) | $ | (2,906 | ) |
| Basic and diluted loss per common share |       | $                      | (0.17      | ) | $ | (0.17 | ) | $ | (0.16 | ) | $ | (0.18 | ) |

 

F-19

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