UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION
                          Washington, D.C. 20549

                               FORM 10-Q

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

               FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006

                      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 Frwy, Suite 176, Dallas, TX 75207
               -----------------------------------------------
                  (Address of principal executive offices)

Telephone Number  (214) 905-5100

Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing
requirement for the past 90 days.

Yes  X   No
   -----   -----

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See Definition of "accelerated filer and large accelerated
filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer_____  Accelerated filer_____
Non-accelerated filer  X
                     -----

Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).

Yes      No   X
   -----   -----

The number of shares outstanding of the issuer's common stock,
as of August 21, 2006, was 3,532,308 shares, $0.01 par value
per share.

                         Ttal No. of Pages   32
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                     ACCESS PHARMACEUTICALS, INC.

                                 INDEX
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                                                                   Page No.
                                                                   --------
PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements:

Condensed Consolidated Balance Sheets at June 30, 2006
(unaudited) and December 31, 2005 (audited)                           22

Condensed Consolidated Statements of Operations (unaudited) for
the three and six months ended June 30, 2006 and June 30, 2005        23

Condensed Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 2006 and June 30, 2005              24

Notes to Unaudited Condensed Consolidated Financial Statements        25

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations                                    2

Item 3. Quantitative and Qualitative Disclosures About Market Risk     8

Item 4. Controls and Procedures                                        8

PART II - OTHER INFORMATION

Item 1 Legal Proceedings                                               9
Item 1A Risk Factors                                                   9

Item 2 Sales of Unregistered Equity Securities and Use of Proceeds    19

Item 3 Defaults Upon Senior Securities                                19

Item 4 Submission of Matters to a Vote of Security Holders            19

Item 5 Other Information                                              20

Item 6. Exhibits and Reports on Form 8-K                              20

SIGNATURES                                                            21

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                    PART I -- FINANCIAL INFORMATION

This Quarterly Report (including the information incorporated
by reference) contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of
1934, as amended, that involve risks and uncertainties. These
statements include, without limitation, statements relating to
uncertainties associated with research and development
activities, clinical trials, our ability to raise capital, the
timing of and our ability to achieve regulatory approvals,
dependence on others to market our licensed  products,
collaborations, future cash flow, the timing and receipt of
licensing and milestone revenues, the future success of our
marketed products and products in development, our sales
projections, and the sales projections of our licensing
partners, our ability to achieve licensing milestones, our
ability to continue as a going concern, anticipated payments
to be received  from Uluru, Inc., anticipated product
approvals and timing thereof, product opportunities, clinical
trials and U.S. Food and Drug Administration ("FDA")
applications, as well as our drug development strategy, our
clinical development organization expectations regarding our
rate of technological developments and competition, our plan
not to establish an internal marketing organization, our
expectations regarding minimizing development risk and
developing and introducing technology, the terms of future
licensing arrangements, our ability to secure additional
financing for our operations and our expected cash burn rate.
These statements relate to future events or our future
financial performance. In some cases, you can identify
forward-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 "Risk Factors," that may cause our
or our industry's actual results, levels of activity,
performance or achievements to be materially different from
any future results, levels or activity, performance or
achievements expressed or implied by such forward-looking statements.

Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or
achievements. We are under no duty to update any of the
forward-looking statements after the date of filing this Form
10-Q to conform such statements to actual results.

ITEM 1 FINANCIAL STATEMENTS

The response to this Item is submitted as a separate section
of this report.

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

OVERVIEW

Access Pharmaceuticals, Inc. ("Access" or the "Company") is an
emerging pharmaceutical company focused on developing novel
product candidates based upon our technologies in oncology and
vitamin targeted drug delivery.

All shares and per share information reflect a one for five
reserve stock split effected June 5, 2006.

Together with our subsidiaries, we have proprietary patents or
rights to four drug delivery technology platforms:

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<PAGE>
* synthetic polymer targeted delivery,
* vitamin mediated targeted delivery,
* vitamin mediated oral delivery, and
* mucoadhesive liquid technology.

Since our inception, we have devoted our resources primarily
to fund our research and development programs. We have been
unprofitable since inception and to date have received limited
revenues from the sale of products. We cannot assure you that
we will be able to generate sufficient product revenues to
attain profitability on a sustained basis or at all. We expect
to incur losses for the next several years as we continue to
invest in product research and development, preclinical
studies, clinical trials and regulatory compliance. As of June
30, 2006, our accumulated deficit was $74,352,000.

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

On October 12, 2005, we sold our oral care and dermatology
business unit to Uluru, Inc., a private Delaware corporation,
for up to $20.6 million to allow us to focus on our
technologies in oncology and vitamin targeted drug delivery.
The products and technologies sold to Uluru include amlexanox
5% paste (marketed under the trade names Aphthasol(R) and
Aptheal(R)), OraDisc(TM), Zindaclin(R) and Residerm(R) and all
of our assets related to these products. In addition, we have
licensed to Uluru our nanoparticle hydrogel aggregate
technology which could be used for applications such as local
drug delivery and tissue filler in dental and soft tissue
applications. 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 a nationally recognized
investment banking firm (see further discussion under
"Liquidity and Capital Resources").

In March 2005 we finalized an agreement with Cornell Capital
Partners and Highgate House Funds providing funding in the
form of a Secured Convertible Debenture for net proceeds of
approximately $2,360,000 (which was repaid in October 2005),
and a Standby Equity Distribution Agreement ("SEDA") under
which Access could draw, under certain circumstances, up to
$15,000,000 in working capital over a 2-year period (see
further discussion under "Liquidity and Capital Resources").

LIQUIDITY AND CAPITAL RESOURCES

We have funded our operations primarily through private sales
of common stock and convertible notes and our principal source
of liquidity is cash and cash equivalents. Contract research
payments, licensing fees and milestone payments from corporate
alliances and mergers have also provided funding for
operations. As of June 30, 2006 our cash and cash equivalents
and short-term investments were $1,617,000 and our working
capital was ($8,672,000). Our working capital at June 30, 2006
represented a decrease of $10,017,000 as compared to our
working capital as of December 31, 2005 of $1,345,000. Our
working capital is negative reflecting $9.0 million of debt
that becomes due prior to June 30, 2007 and $1.2 million of
interest payments due at June 30, 2006.

SCO Capital Partners LLC - Notes and Warrants
---------------------------------------------
On February 16, 2006, we entered into a note and warrant
purchase agreement pursuant to which we sold and issued an
aggregate of $5,000,000 of 7.5% convertible notes due March
31, 2007 and warrants to purchase an aggregate of 3,863,634
shares of common stock of Access. Net proceeds to Access were
$4.5 million after offering costs of approximately $500,000.
The notes and warrants were sold in a

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private placement to a group of accredited investors led by SCO
and its affiliates.

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

Each noteholder received a warrant to purchase a number of
shares of common stock of Access equal to 75% of the total
number shares of Access common stock into which such holder's
note is convertible. Each warrant has an exercise price of
$1.32 per share and is exercisable at any time prior to
February 16, 2012. In the event SCO and its affiliates were to
convert all of their notes and exercise all of their warrants,
it would own approximately 70.4% of the voting securities of
Access.

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

Uluru, Inc. - Sale of Oral/Topical Care Assets
----------------------------------------------
On October 12, 2005, we sold our oral care and dermatology
business unit to Uluru, Inc., a private Delaware corporation,
for up to $20.6 million to focus on our technologies in
oncology and vitamin targeted drug delivery. The products and
technologies sold to Uluru include amlexanox 5% paste
(marketed under the trade names Aphthasol(R) and Aptheal(R)),
OraDisc(TM), Zindaclin(R) and Residerm(R) and all of our
assets related to these products. In addition, we have
licensed to Uluru our nanoparticle hydrogel aggregate
technology which could be used for applications such as local
drug delivery and tissue filler in dental and soft tissue
applications. 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 a nationally recognized
investment banking firm.

Uluru assumed eight employees from the Company, and five
employees remained with Access after the sale transaction.
Throughout the transition period agreed to by the parties,
Uluru leased space from the Company at its Dallas, TX
headquarters. Uluru relocated in April 2006.

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

The upfront payment of this transaction allowed Access to
immediately retire our $2.6 million of Secured Convertible
Notes held by Cornell Capital Partners and its affiliate and
the various agreements relating to these notes. Such notes
were secured by all of our assets. In addition, the
elimination of the manufacturing and regulatory costs
associated with the oral care business, as well as required
employees for these marketed products and product candidates
are expected to reduce our burn rate substantially.

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

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<PAGE>
One holder of $4 million worth of convertible notes (Oracle
Partners LP and related funds) agreed to amend their notes to
a new maturity date, April  28, 2007, with the conversion
price being reduced from $27.50 per share to $5.00 per share.
In addition, the Company may cause a mandatory conversion of
the notes into common stock if the common stock trades at a
price of at least 1.5 times the conversion price for a minimum
number of trading days. There is also a provision to allow for
a minimum price for conversion  in the event of a change of
control of the Company. This modification resulted in us
recording additional debt discount of $2.1 million, which will
be accreted to interest expense to the revised maturity date.

Access was unable to reach a conversion agreement with the
second holder of $4 million worth of notes (Philip D.
Kaltenbacher), so we settled his claim by paying him this amount
plus expenses and interest as outlined in the terms of the
note.

The third noteholder, holding $5.5 million worth of
convertible notes agreed to amend its notes to a new 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 earn interest at a rate of 7.7%.

We do not have sufficient funds to repay our convertible notes
at their maturity. We may not be able to restructure the
convertible notes or obtain additional financing to repay them
on terms acceptable to us, if at all. If we raise additional
funds by selling equity securities, the relative equity
ownership of our existing investors would be diluted and the
new investors could obtain terms more favorable than previous
investors. A failure to restructure our convertible notes or
obtain additional funding to repay the convertible notes and
support our working capital and operating requirements, could
cause us to be in default of our convertible notes and prevent
us from making expenditures that are needed to allow us to
maintain our operations. A failure to restructure our existing
convertible notes or obtain necessary additional capital in
the future could jeopardize our operations.

Cornell Capital Partners Standby Equity Distribution Agreement
and Securities Purchase Agreement
---------------------------------
On March 30, 2005 the Company executed a Standby Equity
Distribution Agreement (SEDA) with Cornell Capital Patners.
Under the SEDA, under certain conditions, the Company may
issue and sell to Cornell Capital Partners common stock for a
total purchase price of up to $15,000,000. The purchase price
for the shares is equal to their market price, which is
defined in the SEDA as 98% of the lowest volume weighted
average price of the common stock during a specified period of
trading days following the date notice is given by the Company
that it desires to access the SEDA. Further, we agreed to pay
Cornell Capital Partners 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. The terms of the
SEDA do not allow us to make draw downs should they cause
Cornell Capital to own in excess of 9.9% of our outstanding
shares of common stock. Upon closing of the transaction,
Cornell Capital Partners received a one-time commitment fee of
29,300 shares of our common stock. On the same date, the
Company entered into a Placement Agency Agreement with
Newbridge Securities Corporation, a registered broker-dealer.
Pursuant to the Placement Agent Agreement, upon closing of the
transaction the Company paid a one-time placement agent fee of
700 shares of common stock. The shares issued were valued at
$500,000 and recorded as issuance costs and such costs are
amortized as the SEDA is accessed. As of June 30, 2006 we have
accessed $600,000 of the SEDA and $20,000 of the issuance
costs have been charged to additional paid-in capital and
$192,000 of issuance costs have been charged to interest
expense. The Company currently cannot access the SEDA until a
post-effective amendment to our registration statement is
filed with, and declared effective by, the SEC. The SEDA can
be accessed through March 30, 2007.

In addition, on March 30, 2005, the Company executed a
Securities Purchase Agreement with Cornell Capital Partners
and Highgate House Funds. Under the Securities Purchase
Agreement, Cornell Capital Partners and Highgate House Funds
purchased an aggregate of $2,633,000 principal amount of Secured

                                  5
<PAGE>
Convertible Debentures from the Company (net proceeds
to the Company of $2,360,000). The Secured Convertible
Debentures accrued interest at a rate of 7% per year and were
to mature 12 months from the issuance date with scheduled
monthly repayment commencing on November 1, 2005 to the extent
that the Secured Convertible Debenture had not been converted
to common stock. The Secured Convertible Debenture was
convertible into the Company's common stock at the holder's
option any time up to maturity at a conversion price equal to
$20.00. The Secured Convertible Debentures were secured by all
of the assets of the Company. The Company had the right to
redeem the Secured Convertible Debentures upon 3 business days
notice for 110% of the amount redeemed. Pursuant to the
Securities Purchase Agreement, the Company issued to the
holders an aggregate of 10,000 shares of common stock of the
Company.  The Secured Convertible Notes were paid in full on
October 12, 2005 in conjunction with the sale of our oral care
assets.

We have generally incurred negative cash flows from operations
since inception, and have expended, and expect to continue to
expend in the future, substantial funds to complete our
planned product development efforts. Since inception, our
expenses have significantly exceeded revenues, resulting in an
accumulated deficit as of June 30, 2006 of $74,352,000. We
expect that (including the full amount of the receivables due
from Uluru, Inc.) we will have funds adequate to fund our
current level of operations for nine months excluding any
obligation to repay the convertible notes and the debt service
on the convertible notes. We cannot assure you that we will
ever be able to generate significant product revenue or
achieve or sustain profitability. We currently do not have the
cash resources to repay the debt service due in September 2006
or our Convertible Notes due in March and April 2007. Our
financing plan including the sales of equity or use of the SEDA
are expected to provide the resources to repay such notes. At
this time the Company will not be able to access the SEDA
until a post-effective amendment to our registration statement
is filed with, and declared effective by, the SEC.

SECOND QUARTER 2006 COMPARED TO SECOND QUARTER 2005

Total research spending for the second quarter of 2006 was
$634,000, as compared to $653,000 for the same period in 2005,
a decrease of $19,000. The decrease in expenses was primarily
the result of lower clinical costs for ProLindac(TM) for the
second quarter of 2006 as the clinical trial was just getting
started in June 2006. The spending in the second quarter 2005
was for manufacturing product for the clinical trial.

Total general and administrative expenses were $663,000 for
the second quarter of 2006, a decrease of $1,153,000 as
compared to the same period in 2005. The decrease in spending
was due primarily to the following:

* lower expenses in 2006 due to the 2005 separation agreement
  expenses with our former CEO ($839,000);
* lower professional fees ($265,000);
* lower royalty license expenses ($150,000); and
* lower patent expenses ($69,000).

The decrease in expenses was partially offset by:

* higher salary and related expenses due to the hiring of a business
  development officer and a full quarter of our new CEO ($94,000);
* additional shareholder expenses ($53,000);
* expensing options ($15,000); and
* other increases ($8,000).

Depreciation and amortization was $77,000 for the second
quarter of 2006 as compared to $84,000 for the same period in
2005 reflecting a decrease of $7,000. The decrease in
depreciation and amortization was due to lower depreciation
resulting from some fully depreciated capital assets.

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<PAGE>
Interest and miscellaneous income was $100,000 for the second
quarter of 2006 as compared to $12,000 for the same period in
2005, an increase of $88,000. The increase in interest income
was due to higher cash balances in 2006 as compared with 2005.

Interest expense and other expense was $1,969,000 for the
second quarter of 2006 as compared to $447,000 for the same
period in 2005, an increase of $1,522,000. The increase in
expense is due to the addition of the Secured Convertible
Notes.

The Secured Convertible Notes include warrants and a conversion
feature. Due to the liquidated damages provisions associated
with the registration rights agreement, the warrants and
conversion feature are classified as liabilities and recorded
at fair value. From the date of issuance to June 30, 2006,
the fair value of these instruments has increased resulting
in an unrealized loss of $2.3 million of which $88,000 is
attributable to increases for the second quarter ended June
30, 2006. Unrealized net loss on fair value of warrants was
$88,000 for the second quarter of 2006 as compared to no gain
or loss for the same period in 2005, an increased loss of $88,000.

Discontinued operations in 2005 is the result of the sale of
our oral/topical business to Uluru, Inc. and the closure of
our Australian laboratory. The loss from our discontinued
operations was $806,000 or $0.26 per common share for the
second quarter of 2005.

Net loss in the second quarter of 2006 was $3,331,000, or a
$0.94 basic and diluted loss per common share, compared with
a loss of $3,794,000, or a $1.21 basic and diluted loss per
common share for the same period in 2005, a decreased loss of
$463,000 in 2006

SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED
JUNE 30, 2005

Total research spending for the first six months of 2006, was
$1,390,000, as compared to $1,194,000 for the same period in
2005, an increase of $196,000. The increase in expenses was
the result of initial clinical costs including manufacturing
the final product used in clinical studies in 2006 for
ProLindac(TM) versus costs in 2005 for ProLindac(TM) which were
primarily manufacturing of the initial product.

Total general and administrative expenses were $1,329,000 for
the first six months of 2006, a decrease of $1,176,000 as
compared to the same period in 2005. The decrease in general
and administrative expenses was due primarily to the
following:

* expenses due to the separation agreement with our former CEO ($839,000);
* lower professional fees ($302,000);
* lower royalty license expenses ($150,000);
* lower patent expenses ($27,000);
* lower fees resulting from not being listed on the American
  Stock Exchange ($65,000); and
* other net decreases ($40,000).

The decrease in general and administrative expenses is
partially offset by

* higher salary costs due to the hiring of a business
  development officer ($94,000);
* higher costs due to expensing options ($88,000); and
* higher shareholder costs ($65,000).

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Depreciation and amortization was $154,000 for the first six
months of 2006 as compared to $167,000 for the same period in
2005 reflecting a decrease of $13,000. The decrease in
depreciation and amortization was due to increased
depreciation resulting from the acquisition of additional
capital assets.

Interest and miscellaneous income was $192,000 for the first
six months of 2006 as compared to $22,000 for the same period
in 2005, an increase of $170,000. The increase in interest
income was due to higher cash balances in 2006 as compared
with 2005.

Interest and other expense was $3,268,000 for the first six
months of 2006 as compared to $760,000 for the same period in
2005, an increase of $2,508,000. The increase in expense is
due to the addition of the Secured Convertible Notes.

The Secured Convertible Notes include warrants and a conversion
feature. Due to the liquidated damages provisions associated
with the registration rights agreement, the warrants and
conversion feature are classified as liabilities and recorded
at fair value. From the date of issuance to June 30, 2006,
the fair value of these instruments has increased resulting
in an unrealized loss of $2.3 million of which $88,000 is
attributable to increases for the second quarter ended June
30, 2006. Unrealized loss on fair value of warrants was
$2,238,000 for the first six months of 2006 as compared to
no loss for the same period in 2005.

Discontinued operations in 2005 is the result of the sale of
our oral/topical business to Uluru, Inc. and the closure of
our Australian laboratory. The loss from our discontinued
operations was $1,620,000 or $0.52 per common share for the
second quarter of 2005.

Net loss in the first six months of 2006 was $8,187,000, or a
$2.32 basic and diluted loss per common share, compared with
a loss of $6,224,000, or a $1.99 basic and diluted loss per
common share for the same period in 2005, an increase of
$1,963,000.

ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
        MARKET RISK

We invest our excess cash and short-term investments in
certificates of deposit, corporate securities with high
quality ratings, and U.S. government securities. These
investments are not held for trading or other speculative
purposes. These financial investment securities all mature in
2006 and their estimated fair value approximates cost. Changes
in interest rates affect the investment income we earn on our
investments and, therefore, impact our cash flows and results
of operations. A hypothetical 50 basis point decrease in
interest rates would result in a decrease in annual interest
income and a corresponding increase in net loss of
approximately $5,000. This estimated effect assumes no changes
in our short-term investments at June 30, 2006. We do not
believe that we are exposed to any other market risks, as
defined under applicable SEC regulations. We are not exposed
to risks for changes in commodity prices, or any other market risks.

ITEM 4     CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Our
chief executive officer and our chief financial officer, after
evaluating the effectiveness of our "disclosure controls and
procedures" (as defined in Rules 13a-15(e) and 15d-(e) of the
Securities and Exchange Act of 1934, as amended (the "Exchange
Act") as of the end of the period covered by this quarterly
report, concluded that the Company's disclosure controls and
procedures were (1) designed to ensure

                                  8
<PAGE>
that material information relating to the Company, including its
consolidated subsidiaries, is made known to the Company's
chief executive officer and chief financial officer by others
within those entities, particularly during the period in which
this report was being prepared, and (2) were not effective for
the reasons discussed below, in Item 4(c), to ensure that
information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms.

(b) Changes in internal controls. Except as set forth below,
there were no changes in our internal controls over financial
reporting during the quarter ended June 30, 2006 that have
materially affected, or are reasonably likely to material
affect, our internal controls over financial reporting.

(c) As previously reported in our Annual Report on Form 10-K
for the fiscal year  ended December 31, 2005 (the "Form 10-K"),
two material weaknesses were reported, a material weakness
with respect to the inadequacy of staffing and a material
weakness relating to the lack of segregation of duties.

(d) Management is taking the necessary steps to correct the
two material weaknesses discussed above. Management is hiring
a staff accountant to assist in the preparation of financial
statements and provide sufficient personnel to accomplish
segregation of duties. We believe that these actions will
make our disclosure controls and procedures effective.

                      PART II - OTHER INFORMATION

ITEM 1     LEGAL PROCEEDINGS

None

ITEM 1-A    RISK FACTORS

The risk factors set forth below were previously discussed in
our Form 10-K for the fiscal year ended December 31, 2005.
There have not been any material changes from the risk factors
previously disclosed in our Form 10-K. These risk factors are
not the only ones facing the Company. Additional risks and
uncertainties not currently deemed to be material may also
materially or adversely affect our financial condition and/or
operating results.

Without obtaining adequate capital funding, we may not be able
to continue as a going concern.
--------------------------------------------------------------
The report of our independent registered public accounting
firm for the fiscal year ended December 31, 2005 contained a
fourth explanatory paragraph to reflect its significant doubt
about our ability to continue as a going concern as a result
of our history of losses and our liquidity position, as
discussed herein and in our Form 10-K. If we are unable to
obtain adequate capital funding in the future, we may not be
able to continue as a going concern, which would have an
adverse effect on our business and operations, and the value of
the investors' investment in us may decline.

We have experienced a history of losses, we expect to incur
future losses and we may be unable to obtain necessary
additional capital to fund operations in the future.
------------------------------------------------------------
We have recorded minimal revenue to date and we have incurred
a cumulative operating loss of approximately $74.3 million
through June 30, 2006. 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 principally from

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<PAGE>
costs incurred in research and development activities related to our
efforts to develop clinical drug candidates and from the
associated administrative costs. We expect to incur additional
operating losses over the next several years. We also expect
cumulative losses to increase if we expand research and
development efforts and preclinical and clinical trials. Our
net cash burn rate for the twelve months prior to June 30,
2006 was approximately $700,000 per month. We project our net
cash burn rate for the next nine months (July 1, 2006 to March
31, 2007) to be approximately $625,000 per month. Capital
expenditures are forecasted to be minor for the next nine months.

We require substantial capital for our development programs
and operating expenses, to pursue regulatory clearances and to
prosecute and defend our intellectual property rights. We
believe that our existing capital resources, interest income,
and revenue from possible licensing agreements and
collaborative agreements and amounts expected from Uluru, Inc.
will be sufficient to fund our currently expected operating
expenses for nine months (other than debt and interest
obligations including the approximately $5.0 million of Senior
Convertible notes due March 31, 2007, and approximately $4.0 million
of convertible notes which are required to be repaid in April 2007 and
interest of $1,189,000 due September 2006). We will need to raise
substantial additional capital to support our ongoing operations and debt
obligations.

If we do raise additional funds by issuing equity securities, further dilution
to existing stockholders would result and future investors may be granted
rights superior to those of existing stockholders. If adequate funds are not
available to us through additional equity offerings, we may be required to
delay, reduce the scope of or eliminate one or more of our research and
development programs or to obtain funds by entering into arrangements
with collaborative partners or others that require us to issue additional
equity securities or to relinquish rights to certain technologies or drug
candidates that we would not otherwise issue or relinquish in order to
continue independent operations. As a result of our history of losses and
our liquidity position, our auditors have issued an audit report expressing
significant doubt about our ability to remain a going concern.

We do not have operating revenue and we may never attain profitability.
-----------------------------------------------------------------------
To date, we have funded our operations primarily through private sales of
common stock and convertible notes. Contract research payments and
licensing fees from corporate alliances and mergers have also provided
funding for our operations. Our ability to achieve significant revenue or
profitability depends upon our ability to successfully complete the
development of drug candidates, to develop and obtain patent protection
and regulatory approvals for our drug candidates and to manufacture and
commercialize the resulting drugs. We sold our only revenue producing
assets to Uluru, Inc. in October 2005. We are not expecting any revenues
in the short-term from our remaining assets. Furthermore, we may not be
able to ever successfully identify, develop, patent, manufacture,
commercialize, obtain required regulatory approvals and market any
additional products. Moreover, even if we do identify, develop, patent,
manufacture, commercialize, and obtain required regulatory approvals to
market additional products, we may not generate revenues or royalties
from commercial sales of these products for a significant number of years,
if at all. Therefore, our proposed operations are subject to all the risks
inherent in the establishment of a new business enterprise.  In the next
few years, our revenues may be limited to minimal product sales and
royalties, any amounts that we receive under strategic partnerships and
research or drug development collaborations that we may establish and,
as a result, we may be unable to achieve or maintain profitability in the
future or to achieve significant revenues in order to fund our operations.

                                  10
<PAGE>
Our Standby Equity Distribution Agreement may have a dilutive impact
on our stockholders.
--------------------------------------------------------------------
We are dependent on external financing to fund our operations. Our
financial needs may be partially provided from the SEDA. The issuance
of shares of our common stock under the SEDA would have a dilutive
impact on our other stockholders and the issuance, or even potential
issuance of such shares could have a negative effect on the market price
of our common stock. In addition, if we access the SEDA, we will issue
shares of our common stock to Cornell Capital Partners at a discount to
the lowest daily volume weighted average of our common stock during a
specified period of trading days after we access the SEDA. Issuing shares
at a discount will further dilute the interests of other stockholders and may
negatively affect the market price of our Common Stock.

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

At this time we are not be able to draw funds from the SEDA until an
amendment to our registration statement relating to the SEDA is filed and
declared effective by the SEC.

We may not be able to pay our debt and other obligations and our assets
may be seized as a result.
-----------------------------------------------------------------------
We may not generate the cash flow required to pay our liabilities as they
become due. Our outstanding debt includes approximately $5.0 million of
Senior Convertible notes due March 31, 2007, and approximately $9.5
million of our Convertible Subordinated Notes of which $4.0 million is
due in April 2007 and $5.5 million is due in September 2010.

If our cash flow is inadequate to meet these obligations, we will default
on the notes. Any default on the notes could allow our note holders to
foreclose upon our assets, force us into bankruptcy. We may be unable to
repay, repurchase or restructure the convertible subordinated notes due
in April 2007 and September 2010 and be forced into bankruptcy. In the
event of a default, the holders of our secured convertible notes have the
right to foreclose on all of our assets, which could force us to curtail or
cease our business operations.

The holders of our Convertible Notes may require us to repurchase or
prepay all of the outstanding Convertible Notes under certain
circumstances. We may not have sufficient cash reserves to repurchase the
Convertible Notes at such time, which would cause an event of default
under the Convertible Notes and may force us to declare bankruptcy.

We may not successfully commercialize our drug candidates.
------------------------------------------------------------
Our drug candidates are subject to the risks of failure inherent in the
development of pharmaceutical products based on new technologies and
our failure to develop safe, commercially viable drugs would severely
limit our ability to become profitable or to achieve significant revenues.
We may be unable to successfully commercialize our drug candidates
because:

* some or all of our drug candidates may be found to be unsafe or
  ineffective or otherwise fail to meet applicable regulatory standards or
  receive necessary regulatory clearances;

* our drug candidates, if safe and effective, may be too difficult to
  develop into commercially viable drugs;

* it may be difficult to manufacture or market our drug candidates on a
  large scale;

                                  11
<PAGE>
* proprietary rights of third parties may preclude us from marketing our
drug candidates; and

* third parties may market superior or equivalent drugs.

The success of our research and development activities, upon which we
primarily focus, is uncertain.
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Our primary focus is on our research and development activities and the
commercialization of compounds covered by proprietary biopharmaceutical
patents and patent applications. Research and development activities, by
their nature, preclude definitive statements as to the time required and
costs involved in reaching certain objectives. Actual research and
development costs, therefore, could exceed budgeted amounts and
estimated time frames may require extension. Cost overruns, unanticipated
regulatory delays or demands, unexpected adverse side effects or
insufficient therapeutic efficacy will prevent or substantially slow our
research and development effort and our business could ultimately suffer.
We anticipate that we will remain principally engaged in research and
development activities for an indeterminate, but substantial, period of
time.

We may be unable to successfully develop, market, or commercialize our
products or our product candidates without establishing new relationships
and maintaining current relationships.
-------------------------------------------------------------------------
Our strategy for the research, development and commercialization of our
potential pharmaceutical products may require us to enter into various
arrangements with corporate and academic collaborators, licensors,
licensees and others, in addition to our existing relationships with other
parties. Specifically, we may seek to joint venture, sublicense or enter
other marketing arrangements with parties that have an established
marketing capability or we may choose to pursue the commercialization
of such products on our own. We may, however, be unable to establish
such additional collaborative arrangements, license agreements, or
marketing agreements as we may deem necessary to develop,
commercialize and market 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 parties of their responsibilities under
those arrangements and relationships.

Our ability to successfully commercialize, and market our product
candidates could be limited if any of these existing relationships were
terminated.

Furthermore, we may enter into a strategic licensing agreement with a
pharmaceutical company for our polymer platinate program where the
costs of developing a product would be shared. Although we have had
discussions with potential licensing partners with respect to our polymer
platinate program, to date we have not entered into any licensing
arrangement. We may be unable to execute our licensing strategy for
polymer platinate.

We may be unable to successfully manufacture our products and our
product candidates in clinical quantities or for commercial purposes
without the assistance of  contract manufacturers, which may be difficult
for us to obtain and maintain.
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We have limited experience in the manufacture of pharmaceutical products
in clinical quantities or for commercial purposes and we may not be able
to manufacture any new pharmaceutical products that we may develop. As
a result, we have established, and in the future intend to establish
arrangements with contract manufacturers to supply sufficient quantities
of products to conduct clinical trials and for the manufacture, packaging,
labeling and distribution of finished pharmaceutical products if any of our
potential products are approved for commercialization. If we are unable
to contract for a sufficient supply of our potential pharmaceutical products
on acceptable terms, our preclinical and human clinical testing schedule
may be delayed, resulting in the delay of our clinical programs and
submission of

                                  12
<PAGE>
product candidates for regulatory approval, which could
cause our business to suffer. Our business could suffer if there are delays
or difficulties in establishing relationships with manufacturers to produce,
package, label and distribute our finished pharmaceutical or other medical
products, if any, market introduction and subsequent sales of such
products. Moreover, contract manufacturers that we may use must adhere
to current Good Manufacturing Practices, as required by the FDA. In this
regard, the FDA will not issue a pre-market approval or product and
establishment licenses, where applicable, to a manufacturing facility for
the products until the manufacturing facility passes a pre-approval plant
inspection. If we are unable to obtain or retain third party manufacturing
on commercially acceptable terms, we may not be able to commercialize
our products as planned. Our potential dependence upon third parties for
the manufacture of our products may adversely affect our ability to
generate profits or acceptable profit margins and our ability to develop
and deliver such products on a timely and competitive basis.

ProLindac(TM) is manufactured by third parties for our Phase I/II clinical
trials. Manufacturing is ongoing for the current clinical trials. Certain
manufacturing steps are conducted by the Company to enable significant
cost savings to be realized.

We are subject to extensive governmental regulation which increases our
cost of doing business and may affect our ability to commercialize any
new products that we may develop.
----------------------------------------------------------------------
The FDA and comparable agencies in foreign countries impose substantial
requirements upon the introduction of pharmaceutical products through
lengthy and detailed laboratory, preclinical and clinical testing procedures
and other costly and time-consuming procedures to establish their safety
and efficacy. All of our drugs and drug candidates require receipt and
maintenance of governmental approvals for commercialization. Preclinical
and clinical trials and manufacturing of our drug candidates will be subject
to the rigorous testing and approval processes of the FDA and
corresponding foreign regulatory authorities. Satisfaction of these
requirements typically takes a significant number of years and can vary
substantially based upon the type, complexity and novelty of the product.
The status of our principal products is as follows:

* ProLindac(TM) is currently commencing a Phase II trial in Europe and
  has commenced a Phase II trial in the US.

* ProLindac(TM) has been approved for an additional Phase I trial in the
  US by the FDA.

* A mucoadhesive liquid technology product, MuGard(TM), will be the
  subject of a 510(k) device approval application in 2006.

* Vitamin mediated delivery technology is currently in the pre-clinical
  phase.

* We also have other products in the preclinical phase.

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

Government regulation also affects the manufacturing and marketing of
pharmaceutical products. Government regulations may delay marketing of
our potential drugs for a considerable or indefinite period of time, impose
costly procedural requirements upon our activities and furnish a
competitive advantage to larger companies or companies more experienced
in regulatory affairs. Delays in obtaining governmental regulatory
approval could adversely affect our marketing as well as our ability to
generate significant revenues from commercial sales. Our drug candidates
may not receive FDA or other regulatory approvals on a timely basis or
at all. Moreover, if regulatory approval of a drug candidate is granted,
such approval may impose limitations on the indicated use for which such
drug may be marketed. Even if we obtain initial regulatory approvals for
our drug candidates, Access, our drugs and

                                 15
<PAGE>
our manufacturing facilities would be subject to continual review and
periodic inspection, and later discovery of previously unknown problems
with a drug, manufacturer or facility may result in restrictions on the
marketing or manufacture of such drug, including withdrawal of the drug
from the market. The FDA and other regulatory authorities stringently apply
regulatory standards and failure to comply with regulatory standards can,
among other things, result in fines, denial or withdrawal of regulatory
approvals, product recalls or seizures, operating restrictions and
criminal prosecution.

The uncertainty associated with preclinical and clinical testing may affect
our ability to successfully commercialize new products.
---------------------------------------------------------------------------
Before we can obtain regulatory approvals for the commercial sale of any
of our potential drugs, the drug candidates will be subject to extensive
preclinical and clinical trials to demonstrate their safety and efficacy in
humans.  Preclinical or clinical trials of any of our future drug candidates
may not demonstrate the safety and efficacy of such drug candidates at all
or to the extent necessary to obtain regulatory approvals. In this regard,
for example, adverse side effects can occur during the clinical testing of
a new drug on humans which may delay ultimate FDA approval or even
lead us to terminate our efforts to develop the drug for commercial use.
Companies in the biotechnology industry have suffered significant setbacks
in advanced clinical trials, even after demonstrating promising results in
earlier trials. In particular, polymer platinate has taken longer to progress
through clinical trials than originally planned. This extra time has not been
related to concerns of the formulations but rather due to the lengthy
regulatory process. The failure to adequately demonstrate the safety and
efficacy of a drug candidate under development could delay or prevent
regulatory approval of the drug candidate. A delay or failure to receive
regulatory approval for any of our drug candidates could prevent us from
successfully commercializing such candidates and we could incur
substantial additional expenses in our attempts to further develop such
candidates and obtain future regulatory approval.

We may incur substantial product liability expenses due to the use or
misuse of our products for which we may be unable to obtain insurance
coverage.
---------------------------------------------------------------------
Our business exposes us to potential liability risks that are inherent in the
testing, manufacturing and marketing of pharmaceutical products. These
risks will expand with respect to our drug candidates, if any, that receive
regulatory approval for commercial sale and we may face substantial
liability for damages in the event of adverse side effects or product defects
identified with any of our products that are used in clinical tests or
marketed to the public. We generally procure product liability insurance
for drug candidates that are undergoing human clinical trials. Product
liability insurance for the biotechnology industry is generally expensive,
if available at all, and as a result, we may be unable to obtain insurance
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 held
liable as a result of the use or misuse of products which we have
developed, manufactured or sold and any such product liability claim
could adversely affect our business, operating results or financial
condition.

We may incur significant liabilities if we fail to comply with stringent
environmental regulations or if we did not comply with these regulations
in the past.
------------------------------------------------------------------------
Our research and development processes involve the controlled use of
hazardous materials. We are subject to a variety of federal, state and local
governmental laws and regulations related to the use, manufacture,
storage, handling and disposal of such material and certain waste products.
Although we believe that our activities and our safety procedures for
storing, using, handling and disposing of such materials comply with the
standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely
eliminated. In the event of such accident, we could be held liable for any
damages that result and any such liability could exceed our

                                  14
<PAGE>
resources.

Intense competition may limit our ability to successfully develop and
market commercial products.
---------------------------------------------------------------------
The biotechnology and pharmaceutical industries are intensely competitive
and subject to rapid and significant technological change. Our competitors
in the United States and elsewhere are numerous and include, among
others, major multinational pharmaceutical and chemical companies,
specialized biotechnology firms and universities and other research
institutions.

The following products may compete with polymer platinate:

* Cisplatin, marketed by Bristol-Myers-Squibb, the originator of the drug,
  and several generic manufacturers;

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

* Oxaliplatin, marketed exclusively by Sanofi-Synthelabo.

The following companies are working on therapies and formulations that
may be competitive with our polymer platinate:

* Antigenics and Regulon are developing liposomal formulations; and
  American Pharmaceutical Partners, Cell Therapeutics, Daiichi, Enzon and

* Debio are developing alternate drugs in combination with polymers and
  other drug delivery systems.

Companies working on therapies and formulations that may be competitive
with our vitamin mediated drug delivery system are Bristol-Myers-Squibb,
Centocor (acquired by Johnson & Johnson), GlaxoSmithKline, Imclone
and Xoma which are developing targeted monoclonal antibody therapy.

Amgen commercializes Palifermin(TM). CuraGen, McNeil, MGI Pharma and
OSI Pharmaceuticals are developing products to treat mucositis that may
compete with our mucoadhesive liquid technology.

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

Many of these competitors have and employ greater financial and other
resources, including larger research and development, marketing and
manufacturing organizations. As a result, our competitors may
successfully develop  technologies and drugs that are more effective or
less costly than any that we are developing or which would render our
technology and future products obsolete and noncompetitive.

In addition, some of our competitors have greater experience than we do
in conducting preclinical and clinical trials and obtaining FDA and other
regulatory approvals. Accordingly, our competitors may succeed in
obtaining FDA or other regulatory approvals for drug candidates more
rapidly than we do. Companies that complete clinical trials, obtain
required regulatory agency approvals and commence commercial sale of
their drugs before their competitors may achieve a significant competitive
advantage. Drugs resulting from our research and development efforts or
from our joint efforts with collaborative partners therefore may not be
commercially competitive with our competitors' existing products or
products under development.

                                  15
<PAGE>
Our ability to successfully develop and commercialize our drug candidates
will substantially depend upon the availability of reimbursement funds for
the costs of the resulting drugs and related treatments.
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The successful commercialization of, and the interest of potential
collaborative partners to invest in the development of our drug candidates,
may depend substantially upon reimbursement of the costs of the resulting
drugs and related treatments at acceptable levels from government
authorities, private health insurers and other organizations, including
health maintenance organizations, or HMOs. Limited reimbursement for
the cost of any drugs that we develop may reduce the demand for, or
price of such drugs, which would hamper our ability to obtain
collaborative partners to commercialize our drugs, or to obtain a sufficient
financial return on our own manufacture and commercialization of any
future drugs.

The market may not accept any pharmaceutical products that we successfully
develop.
---------------------------------------------------------------------------
The drugs that we are attempting to develop may compete with a number
of well-established drugs manufactured and marketed by major
pharmaceutical companies. The degree of market acceptance of any drugs
developed by us will depend on a number of factors, including the
establishment and demonstration of the clinical efficacy and safety of our
drug candidates, the potential advantage of our drug candidates over
existing therapies and the reimbursement policies of government and third-
party payers. Physicians, patients or the medical community in general
may not accept or use any drugs that we may develop independently or
with our collaborative partners and if they do not, our business could
suffer.

Trends toward managed health care and downward price pressures on
medical products and services may limit our ability to profitably sell any
drugs that we may develop.
--------------------------------------------------------------------------
Lower prices for pharmaceutical products may result from:
* third-party payers' increasing challenges to the prices charged for
  medical products and services;

* the trend toward managed health care in the United States and the
  concurrent growth of HMOs and similar organizations that can control or
  significantly influence the purchase of healthcare services and products;
  and

* legislative proposals to reform healthcare or reduce government
  insurance programs.

The cost containment measures that healthcare providers are instituting,
including practice protocols and guidelines and clinical pathways, and the
effect of any healthcare reform, could limit our ability to profitably sell
any drugs that we may successfully develop. Moreover, any future
legislation or regulation, if any, relating to the healthcare industry or
third-party coverage and reimbursement, may cause our business to suffer.

We may not be successful in protecting our intellectual property and
proprietary rights.
---------------------------------------------------------------------
Our success depends, in part, on our ability to obtain U.S. and foreign
patent protection for our drug candidates and processes, preserve our trade
secrets and operate our business without infringing the proprietary rights
of third parties. Legal standards relating to the validity of patents covering
pharmaceutical and biotechnological inventions and the scope of claims
made under such patents are still developing and there is no consistent
policy regarding the breadth of claims allowed in biotechnology patents.
The patent position of a biotechnology firm is highly uncertain and
involves complex legal and factual questions. We cannot assure you that
any existing or future patents issued to,

                                 16
<PAGE>
or licensed by, us will not subsequently be challenged, infringed upon,
invalidated or circumvented by others. As a result, although we, together
with our subsidiaries, are either the owner or licensee to 11 U.S. patents
and to 11 U.S. patent applications now pending, and 4 European patents and
12 European patent applications, we cannot assure you that any additional
patents will issue from any of the patent applications owned by, or licensed
to, us. Furthermore, any rights that we may have under issued patents may
not provide us with significant protection against competitive products or
otherwise be commercially viable.

Our patents for the following technologies expire in the years and during
the date ranges indicated below:

* ProLindac(TM) in 2021

* Mucoadhesive technology, patents are pending

* Vitamin mediated technology between 2006 and 2019

In addition, patents may have been granted to third parties or may be
granted covering products or processes that are necessary or useful to the
development of our drug candidates. If our drug candidates or processes
are found to infringe upon the patents or otherwise impermissibly utilize
the intellectual property of others, our development, manufacture and sale
of such drug candidates could be severely restricted or prohibited. In such
event, we may be required to obtain licenses from third parties to utilize
the patents or proprietary rights of others. We cannot assure you that we
will be able to obtain such licenses on acceptable terms, if at all. If we
become involved in litigation regarding our intellectual property rights or
the intellectual property rights of others, the potential cost of such
litigation, regardless of the strength of our legal position, and the potential
damages that we could be required to pay could be substantial.

Our business could suffer if we lose the services of, or fail to attract,
key personnel.
-------------------------------------------------------------------------
We are dependent upon the efforts of our senior management and
scientific team. The loss of the services of one or more of these
individuals could delay or prevent the achievement of our research,
development, marketing, or product commercialization objectives. While
we have employment agreements with David Nowotnik, PhD our Senior
Vice President Research and Development, and Stephen Thompson, our
Vice President and Chief Financial Officer, their employment may be
terminated by them or us at any time. Mr. Thompson's and Dr.
Nowotnik's agreements expire within one year and are extendable each
year on the anniversary date. Dr. Mazanet, our acting CEO is currently
an employee at will. We do not have employment contracts with our other
key personnel. We do not maintain any "key-man" insurance policies on
any of our key employees and we do not intend to obtain such insurance.
In addition, due to the specialized scientific nature of our business, we are
highly dependent upon our ability to attract and retain qualified scientific
and technical personnel. In view of the stage of our development and our
research and development programs, we have restricted our hiring to
research scientists and a small administrative staff and we have made only
limited investments in manufacturing, production, sales or regulatory
compliance resources. There is intense competition among major
pharmaceutical and chemical companies, specialized biotechnology firms
and universities and other research institutions for qualified personnel in
the areas of our activities, however, and we may be unsuccessful in
attracting and retaining these personnel.

An investment in our common stock may be less attractive because it is
not traded on a recognized public market.
----------------------------------------------------------------------
In February, 2006, our common stock was de-listed from trading on
American Stock Exchange, and traded on the "Pink Sheets" until May 18,
2006. Our common stock is currently traded on the OTC

                                 17
<PAGE>
Bulletin Board. This is viewed by most investors as a less desirable, and
less liquid, marketplace.  As a result, an investor may find it more
difficult to purchase, dispose of or obtain accurate quotations as to the
value of our common stock.

Our common stock is subject to Rules 15g-1 through 15g-9 under the
Exchange Act, which imposes certain sales practice requirements on
broker-dealers who sell our common stock to persons other than
established customers and "accredited investors" (as defined in Rule
501(c) of the Securities Act).  For transactions covered by this rule, a
broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the
transaction prior to the sale.  This rule adversely affects the ability of
broker-dealers to sell our common stock and purchasers of our common
stock to sell their shares of our common stock.

Additionally, our common stock is subject to SEC regulations applicable
to "penny stock." Penny stock includes 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/sell
transaction in a penny stock, a disclosure schedule proscribed by the SEC
relating to the penny stock market must be delivered by a broker-dealer
to the purchaser of such penny stock.  This disclosure must include the
amount of commissions payable to both the broker-dealer and the
registered representative and current price quotations for our common
stock.  The regulations also require that monthly statements be sent to
holders of penny stock that disclose recent price information for the penny
stock and information of the limited market for penny stocks.  These
requirements adversely affect the market liquidity of our common stock.

Ownership of our shares is concentrated, to some extent, in the hands of
a few investors which could limit the ability of our other stockholders to
influence the direction of the company.
---------------------------------------------------------------------------
SCO Capital Partners LLC and its affiliates, Larry N. Feinberg (Oracle
Partners LP, Oracle Institutional Partners LP and Oracle Investment
Management Inc.), Kerry P. Gray and Heartland Advisors, Inc. each
beneficially owned, as determined under the SEC's beneficial ownership
rules,  approximately 70.4%, 26.4%, 9.2% and 9.0%, respectively, of
our common stock as of August 21, 2006. Accordingly, they collectively
may have the ability to significantly influence or determine the election of
all of our directors or the outcome of most corporate actions requiring
stockholder approval. They may exercise this ability in a manner that
advances their best interests and not necessarily those of our other
stockholders.

Provisions of our charter documents could discourage an acquisition of
our company that would benefit our stockholders and may have the effect
of entrenching, and making it difficult to remove, management.
-----------------------------------------------------------------------
Provisions of our Certificate of Incorporation, By-laws and Stockholders
Rights Plan may make it more difficult for a third party to acquire control
of the Company, even if a change in control would benefit our
stockholders. In particular, shares of our preferred stock may be issued
in the future without further stockholder approval and upon such terms
and conditions, and having such rights, privileges and preferences, as our
Board of Directors may determine, including, for example, rights to
convert into our common stock. The rights of the holders of our common
stock will be subject to, and may be adversely affected by, the rights of
the holders of any of our preferred stock that may be issued in the future.
The issuance of our preferred stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes,
could have the effect of making it more difficult for a third party to
acquire control of us. This could limit the price that certain investors
might be willing to pay in the future for shares of our common stock and
discourage these investors from acquiring a majority of our common
stock. Further, the existence of these corporate governance provisions
could have the effect of entrenching management and making it more
difficult to change our management.

                                  18
<PAGE>
Substantial sales of our common stock could lower our stock price.
------------------------------------------------------------------
The market price for our common stock could drop as a result of sales of
a large number of our presently outstanding shares or shares that we may
issue or be obligated to issue in the future. All of the 3,532,308 shares of
our common stock that are outstanding as of August 21, 2006, are
unrestricted and freely tradable or tradable pursuant to a resale registration
statement or under Rule 144 of the Securities Act or are covered by a
registration rights agreement.

Failure to achieve and maintain effective internal controls could have a
material adverse effect on our business.
-------------------------------------------------------------------------
Effective internal controls are necessary for us to provide reliable financial
reports. If we cannot provide reliable financial reports, our operating
results could be harmed. All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
While we continue to evaluate and improve our internal controls, we
cannot be certain that these measures will ensure that we implement and
maintain adequate controls over our financial processes and reporting in
the future. Any failure to implement required new or improved controls,
or difficulties encountered in their implementation, could harm our
operating results or cause us to fail to meet our reporting obligations.

Failure to achieve and maintain an effective internal control environment
could cause investors to lose confidence in our reported financial
information, which could have a material adverse effect on our stock
price.

ITEM 2 SALES OF UNREGISTERED EQUITY SECURITIES AND USE OF PROCEEDS

In connection with the Separation Agreement with Kerry P. Gray, former
President, CEO and Director of the Company, Mr. Gray is entitled to
receive 700 shares of Access common stock per month for a total of 12,
600 shares from May 30, 2005 until October 30, 2006.

ITEM 3   DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The annual meeting of stockholders was held on May 19, 2006 in New
York, N.Y. At that meeting the following matters were submitted to a
vote of the stockholders of record. The proposals were approved by the
stockholders, as follows:

* Two directors were re-elected for three years terms with the following
votes:

    Stuart M Duty; 2,499,365- For; and 319,233-Withheld Authority
    Stephen B. Howell; 2,679,721- For; and 138,878- Withheld Authority

* The terms of office as a director of Access of each of Jeffrey B. Davis,
Mark V. Alvino, J. Michael Flinn, Max Link, Herbert H. McDade, Jr.
and John J. Meakem, Jr. continued after the meeting.

                                  19
<PAGE>
* A proposal to amend our Certificate of Incorporation to effect a one-for-
five reverse stock split was approved with 2,754,807- For; 61,911-
Against; and 1,880- Abstain.

* A proposal to amend our Certificate of Incorporation to increase the
number of shares of Common Stock authorized for issuance was approved
with 2,389,049- For; 427,647- Against; and 1,903- Abstain.

* A proposal to amend our 2005 Equity Incentive Plan, to increase the
number of shares authorized for issuance was approved with 796,886-
For; 342,370- Against; 6,194- Abstain; and 1,673,148- Broker Non-votes.

* A proposal to ratify the appointment of Grant Thornton LLP as
independent certified public accounts for the Company for the fiscal year
ending December 31, 2006 was approved with 2,752,123- For; 63,472-
Against; and 3,003- Abstain.

* A Stockholder Proposal to set the age of 70 years as the mandatory age
of retirement for members of the Board of Directors of the Company
failed with 445,523- For; 669,784- Against; 30,144- Abstain; and
1,673,148- Broker Non-votes.

ITEM 5   OTHER INFORMATION

None

ITEM 6   EXHIBITS

Exhibits:

31.1 Certification of Chief Executive Officer of Access Pharmaceuticals,
Inc. pursuant to Rule 13a-14(a)/15d-14(a)

31.2 Certification of Chief Financial Officer of Access Pharmaceuticals,
Inc. pursuant to Rule 13a-14(a)/15d-14(a)

32.1* Certification of Chief Executive Officer of Access Pharmaceuticals,
Inc. pursuant to 18 U.S.C. Section 1350

32.2* Certification of Chief Financial Officer of Access Pharmaceuticals,
Inc. pursuant to 18 U.S.C. Section 1350

______________

* This exhibit shall not be deemed "filed" for purposes of Section 18 of
the Securities Exchange Act of 1934 or otherwise subject to the liabilities
of that Section, nor shall it be deemed incorporated by reference in any
filings under the Securities Act of 1933 or the Securities and Exchange
Act of 1934, whether made before or after the date hereof and irrespective
of any general incorporation language in any filings.



                                  20
<PAGE>
                              SIGNATURES
                              ----------

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

                              ACCESS PHARMACEUTICALS, INC.

Date:  August 21, 2006        By: /s/Rosemary Mazanet
     -----------------           ---------------------
                              Rosemary Mazanet
                              Acting Chief Executive Officer
                              (Principal Executive Officer)

Date:  August 21, 2006        By: /s/ Stephen B. Thompson
     -----------------           ------------------------
                              Stephen B. Thompson
                              Vice President and Chief Financial Officer
                              (Principal Financial and Accounting Officer)


                                  21
<PAGE>
                    Access Pharmaceuticals, Inc. and Subsidiaries
                         Condensed Consolidated Balance Sheets


                                          June 30, 2006  December 31, 2005
                                          -------------   -------------
                                           (unaudited)
     ASSETS
Current assets
Cash and cash equivalents                 $  1,429,000    $    349,000
Short term investments, at cost                188,000         125,000
Receivables                                  4,641,000       4,488,000
Prepaid expenses and other current assets       81,000         197,000
                                          -------------   -------------
Total current assets                         6,339,000       5,159,000
                                          -------------   -------------

Property and equipment, net                    258,000         300,000
Debt issuance costs, net                       298,000               -
Patents, net                                   962,000       1,046,000
Licenses, net                                   50,000          75,000
Restricted cash and other assets               349,000         633,000
                                          -------------   -------------
Total assets                              $  8,256,000    $  7,213,000
                                          =============   =============

  LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued expenses     $  1,875,000    $  2,883,000
Accrued interest payable                     1,172,000         652,000
Deferred revenues                              173,000         173,000
Current portion of long-term debt           11,791,000         106.000
                                          -------------   -------------
Total current liabilities                   15,011,000       3,814,000

Long-term debt                               5,500,000       7,636,000
                                          -------------   -------------
Total liabilities                           20,511,000      11,450,000
                                          -------------   -------------

Commitments and contingencies

Stockholders' deficit
Preferred stock - $.01 par value;
 authorized 2,000,000 shares;
 none issued or outstanding                          -               -
Common stock - $.01 par value;
 authorized 100,000,000 shares;
 issued, 3,532,308 at June 30, 2006
 and 3,528,108 at December 31, 2005             35,000          35,000
Additional paid-in capital                  63,111,000      62,942,000
Notes receivable from stockholders          (1,045,000)     (1,045,000)
Treasury stock, at cost - 163 shares            (4,000)         (4,000)
Accumulated deficit                        (74,352,000)    (66,165,000)
                                          -------------   -------------
Total stockholders' deficit                (12,255,000)     (4,237,000)
                                          -------------   -------------
Total liabilities and
  stockholders' deficit                   $  8,256,000    $  7,213,000
                                          =============   =============

      The accompanying notes are an integral part of these statements.

                                  22
<PAGE>
             Access Pharmaceuticals, Inc. and Subsidiaries
            Condensed Consolidated Statements of Operations
                              (unaudited)
<TABLE>
<CAPTION>
                                 Three months ended        Six months ended
                                      June 30,                  June 30,
                             ------------------------- -------------------------
                                 2006         2005         2006         2005
                             ------------ ------------ ------------ ------------
<S>                          <C>          <C>          <C>          <C>
Expenses
Research and development     $   634,000  $   653,000  $ 1,390,000  $ 1,194,000
General and administrative       663,000    1,816,000    1,329,000    2,505,000
Depreciation and amortization     77,000       84,000      154,000      167,000
                             ------------ ------------ ------------ ------------
Total expenses                 1,374,000    2,553,000    2,873,000    3,866,000
                             ------------ ------------ ------------ ------------

Loss from operations          (1,374,000)  (2,553,000)  (2,873,000)  (3,866,000)

Interest and miscellaneous
  income                         100,000       12,000      192,000       22,000
Interest and other expense    (1,969,000)    (447,000)  (3,268,000)    (760,000)
Unrealized loss on fair
  value of warrants and
  conversion feature             (88,000)           -   (2,238,000)           -
                             ------------ ------------ ------------ ------------
                              (1,957,000)    (435,000)  (5,314,000)    (738,000)
                             ------------ ------------ ------------ ------------
Loss before discontinued
  operations                  (3,331,000)  (2,988,000)  (8,187,000)  (4,604,000)
Discontinued operations                -     (806,000)           -   (1,620,000)
                             ------------ ------------ ------------ ------------
Net loss                     $(3,331,000) $(3,794,000) $(8,187,000) $(6,224,000)
                             ============ ============ ============ ============

Basic and diluted loss per common share
 Loss from continuing operations
 Allocable to common shareholders $(0.94)      $(0.95)      $(2.32)      $(1.47)
 Discontinued operations               -        (0.26)           -        (0.52)
                             ------------ ------------ ------------ ------------
Net loss allocable to
  common shareholders             $(0.94)      $(1.21)      $(2.32)      $(1.99)
                             ============ ============ ============ ============

Weighted average basic and diluted
common shares outstanding      3,530,931    3,144,942    3,529,887     3,125,275
                             ============ ============ ============ ============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                  23
<PAGE>
              Access Pharmaceuticals, Inc. and Subsidiaries
            Condensed Consolidated Statements of Cash Flows
                              (unaudited)

                                            Six months ended June 30,
                                          ----------------------------
                                              2006           2005
                                          -------------  -------------
Cash flows from operating activities:
Net loss                                  $ (8,187,000)  $ (6,224,000)
Adjustments to reconcile net loss to
  cash used in operating activities:
Amortization of restricted stock grants              -        100,000
Depreciation and amortization                  154,000        330,000
Stock option expense                           123,000              -
Stock expense                                   46,000              -
Amortization of debt costs and discounts     2,588,000        175,000
Unrealized loss on fair value of warrants
  and conversion feature                     2,238,000              -
Change in operating assets and liabilities:
 Receivables                                         -        (19,000)
 Inventory                                           -         64,000
 Prepaid expenses and other current assets     116,000        266,000
 Restricted cash and other assets               92,000        581,000
 Accounts payable and accrued expenses      (1,008,000)       124,000
 Accrued interest payable                      520,000        567,000
 Deferred revenues                                   -        705,000
                                          -------------  -------------
Net cash used in operating activities       (3,318,000)    (3,331,000)
                                          -------------  -------------

Cash flows from investing activities:
Capital expenditures                            (3,000)       (26,000)
Purchases of short term
  investments and certificates of deposit      (63,000)             -
                                          -------------  -------------
Net cash used in investing activities          (66,000)       (26,000)
                                          -------------  -------------

Cash flows from financing activities:
Payments on notes payable                      (68,000)      (267,000)
Proceeds from secured convertible
  notes payable                              4,532,000      2,633,000
                                          -------------  -------------
Net cash provided by financing activities    4,464,000      2,366,000
                                          -------------  -------------

Net increase (decrease) in cash
  and cash equivalents                       1,080,000       (991,000)
Cash and cash equivalents at
  beginning of period                          349,000      1,775,000
                                          -------------  -------------
Cash and cash equivalents at
  end of period                           $  1,429,000   $    784,000
                                          =============  =============

Cash paid for interest                          $4,000        $10,000

Supplemental disclosure of non-cash transactions
 40,000 shares of common stock issued
   pursuant to the SEDA and Secured
   Convertible Notes                                $-       $500,000

   The accompanying notes are an integral part of these statements

                                  24
<PAGE>
           Access Pharmaceuticals, Inc. and Subsidiaries
       Notes to Condensed Consolidated Financial Statements
             Six Months Ended June 30, 2006 and 2005
                              (unaudited)

(1) Interim Financial Statements

The consolidated balance sheet as of June 30, 2006 and the consolidated
statements of operations and cash flows for the three months ended June
30, 2006 and 2005 were prepared by management without audit. In the
opinion of management, all adjustments, consisting only of normal
recurring adjustments, except as otherwise disclosed, necessary for the fair
presentation of the financial position, results of operations, and changes
in financial position for such periods, have been made.

All share and per share information reflect a one for five reverse stock
split effected on June 5, 2006.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted.
It is suggested that these interim financial statements be read in
conjunction with the financial statements and notes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 2005. The
results of operations for the period ended June 30, 2006 are not
necessarily indicative of the operating results which may be expected for
a full year. The consolidated balance sheet as of December 31, 2005
contains financial information taken from the audited financial statements
as of that date.

(2) Intangible Assets

Intangible assets consist of the following (in thousands):

                                   June 30, 2006             December 31, 2005
                             ------------------------- -------------------------
                                  Gross                     Gross
                                carrying  Accumulated     carrying  Accumulated
                                 value    amortization     value    amortization
                             ------------ ------------ ------------ ------------
Amortizable intangible assets
 Patents                         $1,680       $  718       $1,680       $  634
 Licenses                           500          450          500          425
                             ------------ ------------ ------------ ------------
Total                            $2,180       $1,168       $2,180       $1,059
                             ============ ============ ============ ============

Amortization expense related to intangible assets totaled $54,000 and
$96,000 for each of the three months ended June 30, 2006 and 2005,
respectively and totaled $109,000 and $194,000 for each of the six months
ended June 30, 2006 and 2005. The aggregate estimated amortization
expense for intangible assets remaining as of June 31 is as follows (in
thousands):

2006         $  109
2007            193
2008            168
2009            168
2010            168
Thereafter      206
            --------
Total        $1,012
            ========

                                  25
<PAGE>
(3) Liquidity

The Company incurred significant losses from continuing operations of
$8.2 million for the six months ended June 30, 2006, $7.6 million for the
year ended December 31, 2005 and $7.2 million for the year ended
December 31, 2004. Additionally, at June 30, 2006, we have working
capital of ($8,672,000). As of June 30, 2006, we did not have sufficient
funds to service our convertible notes, to repay our convertible notes at
their maturity and support our working capital and operating requirements.
As described below the funds raised from SCO and affiliates together with
amounts due to us in October from the sale of our oral/topical care
business to Uluru, Inc. are expected to allow us to support our working
capital and operating requirements for nine months. We do not have funds
to pay the obligations which are due in March and April 2007 and will
have to raise more funds or attempt to restructure the convertible notes.

SCO Capital Partners LLC Note and Warrant Purchase Agreement
------------------------------------------------------------
On February 16, 2006, we entered into a note and warrant purchase
agreement pursuant to which we sold and issued an aggregate of $5.0
million of 7.5% convertible notes due March 31, 2007 and warrants to
purchase an aggregate of 3,863,634 shares of common stock of Access.
Net proceeds to Access were $4.5 million. The notes and warrants were
sold in a private placement to a group of accredited investors led by SCO
Capital Partners LLC ("SCO").

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

Each noteholder received a warrant to purchase a number of shares of
common stock of Access equal to 75% of the total number shares of
Access common stock into which such holder's note is convertible.  Each
warrant has an exercise price of $1.32 per share and is exercisable at any
time prior to February 16, 2012.  In the event SCO and its affiliates were
to convert all of their notes and exercise all of their warrants, they would
own approximately 70% of the voting securities of Access.

The Company considers the warrant agreement and the conversion feature
of the notes to be derivatives and has classified the warrants and the
conversion feature as liabilities at fair value in the balance sheet.
Information regarding the valuation of the warrants and the conversion
feature is as follows:

                                                      2006
                                          ----------------------------
                                           February 16,     June 30,
                                          -------------  -------------
Weighted-average fair value of warrants         $0.93          $1.15

Black-Scholes Assumptions:
Dividend rate                                       -              -
Average risk-free interest rate                  5.08%          5.10%
Average volatility                                113%           145%
Contractual life in years                         6.0            5.6

Weighted-average fair value of
  conversion feature                            $0.50          $0.65

Black-Scholes Assumptions:
Dividend rate                                       -              -
Average risk-free interest rate                  3.50%          5.21%
Average volatility                                113%           145%
Contractual life in years                         1.1            .75

                                 26
<PAGE>
The change in fair value of the warrant between February 16, 2006 and
June 30, 2006, has been reflected as an unrealized loss on fair value in the
accompanying statement of operations.

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

Standby Equity Distribution Agreement (SEDA) with Cornell Capital Partners
--------------------------------------------------------------------------
On March 30, 2005, the Company executed a Standby Equity Distribution
Agreement (SEDA) with Cornell Capital Partners. Under the SEDA, the
Company may issue and sell to Cornell Capital Partners common stock for
a total purchase price of up to $15,000,000. The purchase price for the
shares is equal to their market price, which is defined in the SEDA as
98% of the lowest volume weighted average price of the common stock
during a specified period of trading days following the date notice is given
by the Company that it desires to access the SEDA. Further, we have
agreed to pay Cornell Capital Partners, 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. The terms of the SEDA
do not allow us to make draw downs should they cause Cornell Capital to
own in excess of 9.9% of our outstanding shares of common stock. Upon
closing of the transaction, Cornell Capital Partners received a one-time
commitment fee of 29,300 shares of the Company's common stock. On
the same date, the Company entered into a Placement Agent Agreement
with Newbridge Securities Corporation, a registered broker-dealer.
Pursuant to the Placement Agent Agreement, upon closing of the
transaction the Company paid a one-time placement agent fee of 700
shares of common stock. The shares issued were valued at $500,000 and
recorded as issuance costs and such costs are amortized as the SEDA is
accessed. As of June 30, 2006 we have accessed $600,000 of the SEDA
and $20,000 of the issuance costs have been charged to additional paid-in
capital and $192,000 of issuance costs have been charged to
interest expense. At this time the Company will not be able to
access the SEDA until a post-effective amendment to our registration
statement is filed with, and declared effective by, the SEC. The SEDA
can be accessed through March 30, 2007.


                                  27
<PAGE>
(4)  Debt

The Company's debt is summarized as follows:

                                   June 30, 2006  December 31, 2005
                                   -------------    -------------
Convertible note                    $ 4,015,000      $ 4,015,000
Convertible note                      5,500,000        5,500,000
                                    ------------     ------------
                                      9,515,000        9,515,000
Discount                             (1,167,000)      (1,879,000)
                                    ------------     ------------
                                      8,348,000        7,636,000

SCO and affiliates                    5,000,000                -
Fair value - warrants                 4,389,000                -
Fair value - convertible feature      2,850,000                -
                                    ------------     ------------
                                     12,239,000                -
Discount                             (3,331,000)               -
                                    ------------     ------------
                                      8,908,000                -

Bank note                                35,000          106,000
                                    ------------     ------------
Total                               $17,291,000      $ 7,742,000
                                    ============     ============

Short term                          $11,791,000      $   106,000
Long term                             5,500,000        7,636,000
                                    ------------     ------------
Total                               $17,291,000      $ 7,742,000
                                    ============     ============
(5) Discontinued Operations

In October 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. In addition, at the one year anniversary of the agreement, we
expect to receive up to $3.7 million and we will receive an additional $1
million within 24 months after closing or earlier upon the achievement of
a milestone. Any contingent liabilities that arise in the future relating to
our former business could reduce the $3.7 million receipt. Additional
payments of up to $7.2 million may be made upon the achievement of
certain additional milestones.

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

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

                              June 30, 2006  June 30, 2005
                              -------------  -------------
Revenues                                -      $404,000
Operating expenses                      -     2,024,000
                               -----------   -----------
Loss from discontinued operations       -   $(1,620,000)
                               ===========   ===========

                                  28
<PAGE>
We previously had licenses for the oral/topical assets. These licenses were
sold to Uluru, Inc. in October 2005. In the Asset Sale Agreement between
us and Uluru certain refunds and receipts were incurred before the date
of sale and were assigned to either us or to Uluru. We have $173,000
recorded as a deferred gain on the sale until such time as marketing
approvals are received.

(6) Stock Based Compensation

The Company has various stock-based employee compensation plans,
which are described more fully in Note 10 of the Notes to Consolidated
Financial Statements in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2005.

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

The Company adopted SFAS 123(R) using the modified prospective
transition method, which requires the application of the accounting
standard as of January 1, 2006, the first day of the Company's 2006 fiscal
year. The Company's consolidated financial statements for the six
months ended June 30, 2006, reflect the impact of SFAS 123(R). In
accordance with the modified prospective transition method, the
Company's consolidated financial statements for prior periods have not
been restated to include the impact of SFAS 123(R). Stock-based
compensation expense recognized under SFAS 123(R) for the three
months and six months ended June 30, 2006 was approximately $28,000
and $123,000, respectively. Stock-based compensation expense which
would have been recognized under the fair value based method would
have been approximately $490,000 and $645,000 during the three months
and six months ended June 30, 2005, respectively.

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

Stock-based compensation expense recognized in the Company's Statement
of Operations for the first six months ended June 30, 2006 includes
compensation expense for share-based payment awards granted prior to,
but not yet vested as of December 31, 2005, based on the grant date fair
value estimated in accordance with the pro forma provisions of SFAS 123
and compensation expense for the share-based payment awards granted
subsequent to December 31, 2005, based on the grant date fair value
estimated in accordance with the provisions of SFAS 123(R). Stock-based
compensation expense recognized in the Company's Statement of
Operations for the first six months ended June 30, 2006 is based on awards
ultimately expected to vest and has been reduced for estimated forfeitures,
which currently

                                  29

<PAGE>
is nil. SFAS 123(R) requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. In the Company's pro forma
information required under SFAS 123 for periods prior to fiscal year
2006, forfeitures have been accounted for as they occurred.

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

No stock options were granted in the second quarter of 2006 or 2005.

The expected volatility assumption was based upon a combination of
historical stock price volatility measured on a twice a month basis and is
a reasonable indicator of expected volatility. The risk-free interest rate
assumption is based upon U.S. Treasury bond interest rates appropriate
for the term of the Company's employee stock options. The dividend yield
assumption is based on the Company's history and expectation of dividend
payments. The estimated expected term is based on employee exercise
behavior.

At June 30, 2006, the balance of unearned stock-based compensation to
be expensed in future periods related to unvested share-based awards, as
adjusted for expected forfeitures, is approximately $235,000. The period
over which the unearned stock-based compensation is expected to be
recognized is approximately three and 1/2 years. The Company anticipates
that it will grant additional share-based awards to employees in the future,
which will increase the Company's stock-based compensation expense by
the additional unearned compensation resulting from these grants. The fair
value of these grants is not included in the amount above, because the
impact of these grants cannot be predicted at this time due to the
dependence on the number of share-based payments granted. In addition,
if factors change and different assumptions are used in the application of
SFAS 123(R) in future periods, stock-based compensation expense
recorded under SFAS 123(R) may differ significantly from what has been
recorded in the current period.

The Company's Employee Stock Purchase Plan has been deemed
compensatory in accordance with SFAS 123(R). Stock-based compensation
relating to this plan was computed using the Black-Scholes model option-
pricing formula with interest rates, volatility and dividend assumptions as
of the respective grant dates of the purchase rights provided to employees
under the plan. The weighted-average fair value of options existing under
this plan during the first six months of 2006 was $0.09.

The following table summarizes stock-based compensation in accordance
with SFAS 123(R) for the six months ended June 30, 2006, which was
allocated as follows (in thousands):

                                  30
<PAGE>
                                          Six months ended
                                           June 30, 2006
                                          ----------------
Research and development                      $       35
General and administrative                            88
                                             ------------
Stock-based compensation expense
  included in operating expenses                     123
                                             ------------
Total stock-based compensation expense               123
Tax benefit                                            -
                                             ------------
Stock-based compensation expense, net of tax  $      123
                                             ============

As a result of the adoption of Statement 123R, our financial results were
lower than under our previous accounting method for share-based
compensation by the following amounts:

					Three months ended	Six Months Ended
					  June 30, 2006		  June 30, 2006
					------------------      ----------------
Loss from continuing operations     $28,000			$123,000

Net loss					 28,000			 123,000

Basic and diluted net loss
   per common share			$0.01				$0.03


The following table reflects net income and diluted earnings per share for
the six months ended June 30, 2006, compared with proforma information
for the six months ended June 30, 2005, had compensation cost been
determined in accordance with the fair value-based method prescribed by
SFAS 123(R).

                                          Six Months Ended June 30,
                                         ----------------------------
                                         2006 Actuals   2005 Proforma
                                         -------------  -------------
                                     (In thousands, except per share data)

Net loss, as reported under APB 25
  for the prior period (1)                $       N/A    $    (6,224)

Add back stock based employee
  compensation expense in reported net
  loss, net of related tax effects                  -              -

Subtract total stock-based compensation
  expense determined under fair
  value-based method for all awards,
  net of related tax effects (2)                 (123)          (645)
                                         -------------   ------------
Net loss including the effect of stock-
  based compensation expense (3)          $    (7,252)    $   (6,869)
                                         =============   ============

Loss per share:
Basic and diluted, as reported for
the prior period (1)                      $     (2.05)    $    (1.99)
                                         =============   ============
Basic and diluted, including the
effect of stock-based compensation
expense (3)                               $     (2.05)    $    (2.20)
                                         =============   ============

------------------

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

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

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

Summary of Plans
----------------
During May 2005, the Company adopted a stock awards plan, as
amended, (the "2005 Equity Incentive Plan") which covers 1,000,000
shares of common stock. Under its terms, employees, officers and

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<PAGE>
directors of the Company and its subsidiaries are currently eligible to
receive non-qualified stock options, restricted stock awards and incentive
stock options within the meaning of Section 422 of the Internal Revenue
Code of 1986 (the "Code"). In addition, advisors and consultants who
perform services for the Company or its subsidiaries are eligible to receive
non-qualified stock options under the Stock Incentive Plan. The Stock
Incentive Plan is administered by the Board of Directors or a committee
designated by the Board of Directors. 36,873 options were granted in the
first quarter of 2006 at a weighted average exercise price of $3.10 per
share and with 118 months remaining on its contractual life. No options
were granted in the second quarter of 2006.

Under the 1995 Stock Awards Plan, as amended, 500,000 shares of our
authorized but unissued common stock were reserved for issuance to
optionees including officers, employees, and other individuals performing
services for us. At December 31, 2005, there were no additional shares
available for grant under the 1995 Stock Awards Plan. A total of 474,044
options were issued under this plan.

All stock options granted under the 2005 Equity Incentive Plan and 1995
Stock Awards Plan are exercisable for a period of up to ten years from the
date of grant. The Company may not grant incentive stock options
pursuant to either plan at exercise prices which are less than the fair
market value of the common stock on the date of grant.

In addition to the stock options covered by the above plans, the Company
has outstanding options to purchase 100,000 shares of common stock
under the 2000 Special Stock Option Plan. All options under this plan are
vested and there were no additional shares available for grant under the
Plan. All of the options in the 2000 Special Stock Option Plan were
exercisable at December 31, 2005. All of the options expire on March 1,
2010 and have an exercise price of $12.50 per share.

Summarized information for our option plans are as follows:



                                                         Weighted-
                                                          average
                                                         exercise
1995 Stock Awards Plan                     Shares         price
-----------------------                  ------------  ------------
Outstanding options at December 31, 2005    430,264        18.20
Options granted, forfeited or exercised
  in 2006                                         -            -
                                         ------------
Outstanding options at June 30, 2006        430,264        18.20
                                         ============

Exercisable at June 30, 2006			  414,574	     18.30

2000 Special Stock Option Plan
------------------------------
Outstanding options at December 31, 2005     50,000        12.50
Options granted, forfeited or exercised
  in 2006                                         -            -
                                         ------------
Outstanding options at June 30, 2006         50,000        12.50
                                         ============

Exercisable at June 30, 2006			   50,000	     12.50

2005 Equity Incentive Plan
---------------------------
Outstanding options at December 31, 2005     50,000         5.45
Options granted in 2006				   36,872         3.15
Options forfeited or exercised
  in 2006                                         -            -
                                         ------------
Outstanding options at June 30, 2006         86,872         4.47
                                         ============

Exercisable at June 30, 2006			   53,672	      4.18

The effect of our outstanding options, warrants and convertible
notes are anti-dilutive when we have a net loss. The fully
diluted shares are:


                   Three months            Six Months
                  ended June 30,          ended June 30,
               --------------------- ---------------------
                  2006        2005       2006      2005
               ---------- ---------- ---------- ----------
Fully diluted
  shares       13,697,432  4,943,741 13,696,388  4,924,075



                                  32