----

----

|   |   |                                                                                                    |
|--------|--------|---------------------------------------------------------------------------------------------------------|
| þ |   | QUARTERLY      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF      1934  |

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

|      Delaware           |   |  83-0221517                           |
|--------------------------------------------------|--------|--------------------------------------------|
|  (State or      other jurisdiction of  |   |  (I.R.S. Employer      I.D. No.) |
|  incorporation      or organization)        |   |                                       |

|                                |   |                                              |   |                              |   |                                       |
|-------------------------------------|--------|---------------------------------------------------|--------|-----------------------------------|--------|--------------------------------------------|
| Large      accelerated filer o |   | Accelerated      filer o                     |   | Non-accelerated      filer o |   | Smaller      reporting company þ |
|                                |   | (Do      not check if a smaller reportingcompany) |

----

| PART      I - FINANCIAL INFORMATION |          |
|-------------------------------------|---------------|
|                                |          |   |        Page No. |
|                                | Item      1.  | Financial      Statements: |   |
|                                |          |   |   |
|                                |          | Condensed      Consolidated Balance Sheets at June 30, 2010 |   |
|                                |          | (unaudited)      and December 31, 2009 | 13 |
|                                |          |   |   |
|                                |          | Condensed      Consolidated Statements of Operations (unaudited) for the |   |
|                                |          | three      and six months ended June 30, 2010 and June 30, 2009 | 14 |
|                                |          |   |   |
|                                |          | Condensed      Consolidated Statement of Stockholders’ Deficit(unaudited) |   |
|                                |          | for      the three and six months ended June 30, 2010 | 15 |
|                                |          |   |   |
|                                |          | Condensed      Consolidated Statements of Cash Flows (unaudited) for  the |
|                                |          | six      months ended June 30, 2010 and June 30, 2009 | 16 |
|                                |          |   |   |
|                                |          | Notes      to Unaudited Condensed Consolidated Financial Statements | 17 |
|                                |          |   |   |
|                                | Item      2.  | Management's      Discussion and Analysis of Financial Condition and |
|                                |          | Results      of Operations | 2 |
|                                |          |   |   |
|                                | Item      3.  | Quantitative      and Qualitative Disclosures About Market Risk | 9 |
|                                |          |   |   |
|                                | Item      4T. | Controls      and Procedures | 9 |
|                                |          |   |   |
|                                |          |   |   |
|                                |          |   |   |
| PART      II - OTHER INFORMATION    |          |
|                                |          |   |   |
|                                | Item      1.  | Legal      Proceedings | 10 |
|                                |          |   |   |
|                                | Item      2.  | Unregistered      Sales of Equity Securities and Use of Proceeds | 10 |
|                                |          |   |   |
|                                | Item      3.  | Defaults      Under Senior Securities | 10 |
|                                |          |   |   |
|                                | Item      4.  | Removed      and Reserved | 11 |
|                                |          |   |   |
|                                | Item      5.  | Other      Information | 11 |
|                                |          |   |   |
|                                | Item      6.  | Exhibits | 11 |
|                                |          |   |   |
| SIGNATURES                          |          | 12 |
|                                |          |   |   |
| CERTIFICATIONS                      |          |   |

----

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

----

| ·   | MuGard™      is our approved product for the management of oral mucositis, a frequent      side-effect of cancer therapy for which there is no established treatment.      The market for mucositis treatment is estimated to be in excess of $1      billion world-wide. MuGard, a proprietary nanopolymer formulation, has      received marketing allowance in the U.S. from the Food & Drug      Administration (FDA). MuGard has been launched in Germany, Italy, UK,      Greece and the Nordic countries by our European commercial partner,      SpePharm. Our manufacturing of MuGard is underway as we expect to launch      MuGard in the United States during the third quarter of 2010. We are also      working with our partners in Korea and China for  marketing. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Our      lead development candidate for the treatment of cancer is ProLindac™, a      nanopolymer DACH-platinum prodrug. We recently completed a Phase 2      clinical trial on ProLindac in the European Union (EU), in patients with      recurrent ovarian cancer. The clinical study had positive safety and      efficacy results. On January 7, 2010, we announced that we are initiating      a study of ProLindac combined with Paclitaxel in second line treatment of      platinum pretreated advanced ovarian cancer patients. This multi-center      study of up to 25 evaluable patients will be conducted in Europe. We are      also currently planning a number of combination trials, looking at      combining ProLindac with other cancer agents in solid tumor indications      including colorectal and ovarian cancer. The DACH-platinum incorporated in      ProLindac is the same active moiety as that in oxaliplatin (Eloxatin;      Sanofi-Aventis), which has sales in excess of $2.0  billion. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Thiarabine,      or 4-thio Ara-C, is a next generation nucleoside analog licensed from      Southern Research Institute. Previously named SR9025 and OSI-7836, the      compound has been in two Phase 1/2 solid tumor human clinical trials and      was shown to have anti-tumor activity. We are working with leukemia and      lymphoma specialists at MD Anderson Cancer Center in Houston and intend to      initiate additional Phase 2 clinical trials in adult AML, ALL and other      indications. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Cobalamin™      is our proprietary preclinical nanopolymer oral drug delivery technology      based on the natural vitamin B12 oral uptake mechanism. We are currently      developing a product for the oral delivery of insulin, and have conducted      sponsored development of a product for oral delivery of human growth      hormone. We are in discussion with several companies regarding the      sponsored development of Cobalamin oral drug delivery formulations of      proprietary and non-proprietaryactives. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Cobalamin-mediated      cancer targeted delivery is a preclinical technology which makes use of      the fact that cell surface receptors for vitamins such as B12 are often      overexpressed by cancer cells. This technology uses nanopolymer constructs      to deliver more anti-cancer drug to tumors while protecting normal      tissues. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Compound                                                                                |   | Originator                            |   |  Technology   |   | Indication |   | ClinicalStage (1)                              |
|-----------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------|--------|------------|--------|------------------------------------------------|
|                                                                                    |   |                                  |   |               |   |       |   |                                           |
| MuGard™                                                                           |   | Access                                |   | Mucoadhesiveliquid |   | Mucositis  |   | (510k)      Marketing clearance received  |
| ProLindacTM      (Polymer   Platinate,      AP5346)  (2)  |   | Access      /Univ      ofLondon  |   | Syntheticpolymer   |   | Cancer     |   | Phase      2                                   |
| Thiarabine      (4-thio Ara-C) (3)                                                      |   | SouthernResearchInstitute        |   | Smallmolecule      |   | Cancer     |   | Phase      1/2                                 |
| Oral      Insulin                                                                  |   | Access                                |   | Cobalamin          |   | Diabetes   |   | Pre-clinical                                   |
| Oral      Delivery System                                                          |   | Access                                |   | Cobalamin          |   | Various    |   | Pre-clinical                                   |
| Cobalamin™-Targeted      Therapeutics                                             |   | Access                                |   | Cobalamin          |   | Anti-tumor |   | Pre-clinical                                   |

----

| (1)   | For      more information, see “Government Regulation” in our Annual Report on Form      10-K for description of clinicalstages. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | Licensed      from the School of Pharmacy, The University of  London. |
|-----------------|-----------------------------------------------------------------------|

| (3)   | Licensed      from Southern Research Institute of Birmingham,  Alabama. |
|-----------------|-------------------------------------------------------------------------|

----

----

| ·   | increased      stock compensation expense due to the calculated expense of options grants      ($193,000); |
|--------------------|------------------------------------------------------------------------------------------------------------|

| ·   | increased      salary and related costs due to employees at full salary in the second      quarter of 2010 while employees were paid at a reduced salary in June 2009      ($31,000); |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | other      net increases in research spending($50,000); |
|--------------------|---------------------------------------------------------|

| ·   | offset      by lower costs for product manufacturing for ProLindac which were higher      in 2009 ($51,000); |
|--------------------|--------------------------------------------------------------------------------------------------------------|

| ·   | offset      also by lower costs for clinical development ($36,000);  and |
|--------------------|--------------------------------------------------------------------------|

| ·   | offset      by lower scientific consulting expenses  ($36,000). |
|--------------------|-----------------------------------------------------------------|

| ·   | lower      general business consulting expenses due to reduction in use of outside      consultants ($295,000); |
|--------------------|-----------------------------------------------------------------------------------------------------------------|

| ·   | lower      license fees due to the termination of a license that was previously      accrued ($200,000); |
|--------------------|----------------------------------------------------------------------------------------------------------|

| ·   | lower      potential liquidated damages under an investor rights agreement with      certain investors ($159,000); |
|--------------------|--------------------------------------------------------------------------------------------------------------------|

| ·   | lower      general and administrative expenses incurred by MacroChem in      2010  ($57,000); |
|--------------------|---------------------------------------------------------------------------------------------------------|

| ·   | other      net decreases in other general and administrative expenses      ($51,000); |
|--------------------|---------------------------------------------------------------------------------------|

| ·   | offset      by higher investor relations expenses ($374,000);  and |
|--------------------|--------------------------------------------------------------------|

| ·   | offset      by higher salary and related costs due to the addition of two new      employees and due to existing employees at full salary in the second      quarter of 2010 while employees were paid at a reduced salary in June 2009      ($134,000). |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | increased      stock compensation expense due to the calculated expense of options grants      ($230,000); |
|--------------------|------------------------------------------------------------------------------------------------------------|

| ·   | increased      salary and related costs ($65,000); |
|--------------------|----------------------------------------------------|

| ·   | increased      costs for our internal lab costs for various projects      ($54,000); |
|--------------------|--------------------------------------------------------------------------------------|

| ·   | increased      costs for our external lab costs for various projects      ($41,000); |
|--------------------|--------------------------------------------------------------------------------------|

----

| ·   | increased      costs for clinical development as we prepared to start our new ProLindac      combination therapy clinical  trial  ($44,000); |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | other      net increases in research spending($32,000); |
|--------------------|---------------------------------------------------------|

| ·   | offset      by lower costs for product manufacturing for ProLindac which were higher      in 2009 ($116,000); and |
|--------------------|-------------------------------------------------------------------------------------------------------------------|

| ·   | offset      by lower scientific consulting expenses  ($100,000). |
|--------------------|------------------------------------------------------------------|

| ·   | lower      general business consulting expenses due to reduction in use of outside      consultants ($405,000); |
|--------------------|-----------------------------------------------------------------------------------------------------------------|

| ·   | lower      potential liquidated damages under an investor rights agreement with      certain investors ($317,000); |
|--------------------|--------------------------------------------------------------------------------------------------------------------|

| ·   | lower      license fees due to the termination of a license that was previously      accrued ($200,000); |
|--------------------|----------------------------------------------------------------------------------------------------------|

| ·   | lower      general and administrative expenses incurred by MacroChem in      2010  ($196,000); |
|--------------------|----------------------------------------------------------------------------------------------------------|

| ·   | net      decreases in other general and administrative expenses      ($26,000); |
|--------------------|---------------------------------------------------------------------------------|

| ·   | offset      by higher investor relations expenses ($395,000);  and |
|--------------------|--------------------------------------------------------------------|

| ·   | offset      by higher salary and related costs due to the addition of two new      employees ($146,000). |
|--------------------|----------------------------------------------------------------------------------------------------------|

----

| ITEM      3. | QUANTITATIVE      AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK |
|--------------|----------------------------------------------------------------|

----

| ITEM      2. | UNREGISTERED      SALES OF EQUITY SECURITIES AND USE OFPROCEEDS |
|--------------|-----------------------------------------------------------------|

----

| 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 |
|-------|-----------------------------------------------------------------------------------------------------------------------|

----

| Date:  | August 16, 2010 |                                             | By: | /s/ Jeffrey B. Davis       |   |
|--------|-----------------|--------------------------------------------------|-----|----------------------------|--------|
|   |            | Jeffrey      B. Davis                            |
|   |            | Chief      Executive Officer                     |
|   |            | (Principal      Executive Officer)               |
|   |            |                                             |
| Date:  | August 16, 2009 |                                             | By: | /s/ Stephen B.    Thompson |   |
|   |            | Stephen      B. Thompson                         |
|   |            | Vice      President and Chief Financial Officer  |
|   |            | (Principal      Financial and Accounting Officer |
|   |            |                                             |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | June 30, 2010                                                                                              |   |  December 31, 2009                                                                                                                                                                       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                   ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | (unaudited)                                                                                                |   |                                                                                                                                                                                               |
| Current      assetsCash and cash      equivalents   ReceivablesPrepaid expenses and other      current assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  $          2,758,00038,00052,000                   |   |  $             607,00036,000               42,000 |
|                       Total current assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  2,848,000                                                                                            |   |  685,000                                                                                                                                                                                      |
| Property      and equipment, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 44,000                                                                                                     |   | 50,000                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                       |   |                                                                                                                                                                                               |
| Patents,      net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 681,000                                                                                                    |   | 787,000                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                       |   |                                                                                                                                                                                               |
| Other      assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 52,000                                                                                                     |   | 61,000                                                                                                                                                                                             |
|             Total      assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  $          3,625,000                               |   | $          1,583,000                                                                                                                             |
|         LIABILITIES      AND STOCKHOLDERS' DEFICIT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                       |   |                                                                                                                                                                                               |
| Current      liabilities  Accounts      payable  Accrued      expenses  Dividends      payable  Accrued      interest payable  Current      portion of deferred revenue                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  $          2,988,000857,0003,548,000338,000347,000 |   |  $          4,094,000857,0002,773,000563,000347,000                                                                                         |
|                 Total      current liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 8,078,000                                                                                                  |   | 8,634,000                                                                                                                                                                                          |
| Derivative      liabilityLong-term      deferred revenueLong-term      debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 3,470,0004,556,0005,500,000                                                                                |   | 9,708,0004,730,0005,500,000                                                                                                                                                                        |
|  Total      liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 21,604,000                                                                                                 |   | 28,572,000                                                                                                                                                                                         |
| Commitments      and contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                       |   |                                                                                                                                                                                               |
| Stockholders'      deficit  Convertible      Series A preferred stock - $.01 par value; authorized      2,000,000      shares; 2,985.3617 shares issued at June 30, 2010      and      2,992.3617 shares issued at December 31, 2009  Common      stock - $.01 par value; authorized 100,000,000 shares;     issued,      15,672,284 at June 30, 2010 and 13,171,545 at     December      31, 2009  Additional      paid-in capital  Notes      receivable from stockholders  Treasury      stock, at cost – 163 shares  Accumulated      deficit |    -  157,000222,729,000(1,045,000)(4,000)(239,816,000)                           |   |    -  132,000215,735,000(1,045,000)(4,000)(241,807,000)                                                                                                                   |
|                      Total stockholders' deficit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | (17,979,000)                                                                                               |   | (26,989,000)                                                                                                                                                                                       |
|                      Total liabilities and      stockholders' deficit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  $          3,625,000                               |   |  $          1,583,000                                                                                                                       |

----

|                                                                  |   | Three      months endedJune 30, |       |   | Six      months endedJune 30, |   |
|-----------------------------------------------------------------------|--------|---------------------------------|------------|--------|-------------------------------|--------|
|                                                                  |   | 2010                            |       |   | 2009                          |   |   | 2010 |   |   | 2009 |   |
| Revenues                                                              |   |                            |       |   |                          |   |   |   |   |   |   |   |
| Licenserevenues                                                       |   | $                               | 87,000     |   |                          | $      | 63,000 |   |   | $ | 174,000 |   |   | $ | 104,000 |   |
| Royalties                                                             |   |                            | 18,000     |   |                          |   | - |   |   |   | 33,000 |   |   |   | - |   |
| Total revenues                                                        |   |                            | 105,000    |   |                          |   | 63,000 |   |   |   | 207,000 |   |   |   | 104,000 |   |
|                                                                  |   |                            |       |   |                          |   |   |   |   |   |   |   |   |   |   |   |
| Expenses                                                              |   |                            |       |   |                          |   |   |   |   |   |   |   |   |   |   |   |
| Research and      development                                         |   |                            | 733,000    |   |                          |   | 582,000 |   |   |   | 1,519,000 |   |   |   | 1,269,000 |   |
| General and      administrative                                       |   |                            | 1,253,000  |   |                          |   | 1,507,000 |   |   |   | 2,151,000 |   |   |   | 2,754,000 |   |
| Depreciation and      amortization                                    |   |                            | 59,000     |   |                          |   | 66,000 |   |   |   | 120,000 |   |   |   | 132,000 |   |
| Total expenses                                                        |   |                            | 2,045,000  |   |                          |   | 2,155,000 |   |   |   | 3,790,000 |   |   |   | 4,155,000 |   |
|                                                                  |   |                            |       |   |                          |   |   |   |   |   |   |   |   |   |   |   |
| Loss      from operations                                             |   |                            | (1,940,000 | )      |                          |   | (2,092,000 | ) |   |   | (3,583,000 | ) |   |   | (4,051,000 | ) |
|                                                                  |   |                            |       |   |                          |   |   |   |   |   |   |   |   |   |   |   |
| Interest      and miscellaneous income                                |   |                            | 512,000    |   |                          |   | 2,000 |   |   |   | 516,000 |   |   |   | 16,000 |   |
| Interest      and other expense                                       |   |                            | (143,000   | )      |                          |   | (118,000 | ) |   |   | (292,000 | ) |   |   | (262,000 | ) |
| Gain      on change in fair value of derivative                       |   |                            | 3,361,000  |   |                          |   | - |   |   |   | 6,238,000 |   |   |   | - |   |
|                                                                  |   |                            | 3,730,000  |   |                          |   | (116,000 | ) |   |   | 6,462,000 |   |   |   | (246,000 | ) |
| Net      income (loss)                                                |   |                            | 1,790,000  |   |                          |   | (2,208,000 | ) |   |   | 2,879,000 |   |   |   | (4,297,000 | ) |
|                                                                  |   |                            |       |   |                          |   |   |   |   |   |   |   |   |   |   |   |
| Less      preferred stock dividends                                   |   |                            | 446,000    |   |                          |   | 483,000 |   |   |   | 888,000 |   |   |   | 963,000 |   |
| Net      income (loss) allocable tocommon    stockholders             |   | $                               | 1,344,000  |   |                          | $      | (2,691,000 | ) |   | $ | 1,991,000 |   |   | $ | (5,260,000 | ) |
|                                                                  |   |                            |       |   |                          |   |   |   |   |   |   |   |   |   |   |   |
| Net      income (loss) per share                                      |   |                            |       |   |                          |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                 |   | $                               | 0.09       |   |                          | $      | (0.24 | ) |   | $ | 0.13 |   |   | $ | (0.48 | ) |
| Diluted                                                               |   | $                               | 0.07       |   |                          | $      | (0.24 | ) |   | $ | 0.11 |   |   | $ | (0.48 | ) |
|                                                                  |   |                            |       |   |                          |   |   |   |   |   |   |   |   |   |   |   |
| Weighted      average basic and dilutedcommon shares      outstanding |   |                            |       |   |                          |   |   |   |   |   |   |   |   |   |   |   |
|         Basic                                               |   |                            | 15,460,072 |   |                          |   | 11,406,700 |   |   |   | 15,115,424 |   |   |   | 10,954,472 |   |
|    Diluted                                             |   |                            | 27,937,880 |   |                          |   | 11,406,700 |   |   |   | 27,824,943 |   |   |   | 10,954,472 |   |
|                                                                  |   |                            |       |   |                          |   |   |   |   |   |   |   |   |   |   |   |
|                                                                  |   |                            |       |   |                          |   |   |   |   |   |   |   |   |   |   |   |

----

|                                                                              |   | Common Stock |           |   | Preferred Stock |   |         |   |   |   |       |   |   |                     |     |   |                                    |   |
|-----------------------------------------------------------------------------------|--------|--------------|----------------|--------|-----------------|--------|--------------|--------|--------|--------|------------|--------|--------|--------------------------|----------|--------|-----------------------------------------|--------|
|                                                                              |   | Shares       |           |   | Amount          |   |         | Shares |   |   | Amount     |   |   | Additionalpaid-incapital |     |   | Notes      receivable from stockholders |   |   |  Treasury      stock |   |   |  Accumulated      deficit |   |
| Balance        December 31, 2009                                        |   |         | 13,172,000     |   |            | $      | 132,000      |   |   |   | 2,992.3617 |   |   | $                        | -        |   |                                    | $      | 215,735,000 |   |   | $ | (1,045,000 | ) |   | $ | (4,000 | ) |   | $ | (241,807,000 | ) |
| Restricted      commonstock      issued for services                              |   |         | 73,000         |   |            |   | 1,000        |   |   |   | -          |   |   |                     | -        |   |                                    |   | 17,000 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Warrants      issued for  services                                      |   |         | -              |   |            |   | -            |   |   |   | -          |   |   |                     | -        |   |                                    |   | 19,000 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Preferred      stock converted      into common stock                             |   |         |   23,000  |   |            |   |   -     |   |   |   | (7.0000    | )      |   |                     |   - |   |                                    |   |   - |   |   |   |   - |   |   |   |   - |   |   |   |   - |   |
| Stock      option  compensation      expense                            |   |         | -              |   |            |   | -            |   |   |   | -          |   |   |                     | -        |   |                                    |   | 114,000 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Common      stock issued  for      cash exercise of  options  |   |         |   10,000  |   |            |   |   -     |   |   |   |   -   |   |   |                     |   - |   |                                    |   |   14,000 |   |   |   |   - |   |   |   |   - |   |   |   |   - |   |
| Common      stock issued  for      cashless warrant  exercise |   |         |   20,000  |   |            |   |   -     |   |   |   |   -   |   |   |                     |   - |   |                                    |   |   - |   |   |   |   - |   |   |   |   - |   |   |   |   - |   |
| Common      stock issued $3.00      share, net of costs                      |   |         | 2,083,000      |   |            |   | 21,000       |   |   |   | -          |   |   |                     | -        |   |                                    |   | 5,827,000 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Preferred      dividends                                                          |   |         | -              |   |            |   | -            |   |   |   | -          |   |   |                     | -        |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | (442,000 | ) |
| Net      income                                                                   |   |         | -              |   |            |   | -            |   |   |   | -          |   |   |                     | -        |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,089,000 |   |
| Balance      at March 31,   2010                                   |   |         | 15,381,000     |   |            |   | 154,000      |   |   |   | 2,985.3617 |   |   |                     | -        |   |                                    |   |  221,726,000 |   |   |   | (1,045,000 | ) |   |   | (4,000 | ) |   |   | (241,160,000 | ) |
|                                                                              |   |         |           |   |            |   |         |   |   |   |       |   |   |                     |     |   |                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Restricted      commonstock      issued for services                              |   |         | 106,000        |   |            |   | 1,000        |   |   |   | -          |   |   |                     | -        |   |                                    |   | 248,000 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Stock      option  compensation      expense                            |   |         | -              |   |            |   | -            |   |   |   | -          |   |   |                     | -        |   |                                    |   | 440,000 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Common      stock issued  for      cash exercise of  options  |   |         |   105,000 |   |            |   |   1,000 |   |   |   |   -   |   |   |                     |   - |   |                                    |   |   125,000 |   |   |   |   - |   |   |   |   - |   |   |   |   - |   |
| Common      stock issued  for      preferred dividends                  |   |         | 80,000         |   |            |   | 1,000        |   |   |   | -          |   |   |                     | -        |   |                                    |   | 190,000 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Preferred      dividends                                                          |   |         | -              |   |            |   | -            |   |   |   | -          |   |   |                     | -        |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | (446,000 | ) |
| Net      income                                                                   |   |         | -              |   |            |   | -            |   |   |   | -          |   |   |                     | -        |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,790,000 |   |
| Balance      at June 30,   2010                                    |   |         | 15,672,000     |   |            | $      | 157,000      |   |   |   | 2,985.3617 |   |   | $                        | -        |   |                                    | $      | 222,729,000 |   |   | $ | (1,045,000 | ) |   | $ | (4,000 | ) |   | $ | (239,816,000 | ) |
|                                                                              |   |         |           |   |            |   |         |   |   |   |       |   |   |                     |     |   |                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

|                                                                                                                                                                                      |   | Six Months ended June      30, |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                                                                                                                                      |   | 2010                           |       |   | 2009 |   |
| Cash      flows from operating activities:                                                                                                                                                |   |                           |       |   |   |   |
|      Net      income (loss)                                                                                                                                      |   | $                              | 2,879,000  |   |   | $ | (4,297,000 | ) |
|   Adjustments to      reconcile net income (loss) to cash used              in      operating activities: |   |                           |       |   |   |   |   |   |
| Gain on change in fair value of      derivative                                                                                                                                           |   |                           | (6,238,000 | ) |   |   | - |   |
|      Gain on negotiated accounts      payable                                                                                                                    |   |                           | (509,000   | )  |   |   | - |   |
| Depreciation and      amortization                                                                                                                                                        |   |                           | 120,000    |   |   |   | 132,000 |   |
| Stock option compensation      expense                                                                                                                                                    |   |                           | 554,000    |   |   |   | 308,000 |   |
| Stock and warrants issued for      services                                                                                                                                               |   |                           | 286,000    |   |   |   | 564,000 |   |
| Change in operating assets and      liabilities:                                                                                                                                          |   |                           |       |   |   |   |   |   |
|     Receivables                                                                                                                                                       |   |                           | (2,000     | ) |   |   | 132,000 |   |
|            Prepaid expenses and other current assets                                                                                                             |   |                           | (10,000    | ) |   |   | 117,000 |   |
| Other assets                                                                                                                                                                              |   |                           | 9,000      |   |   |   | 53,000 |   |
|     Accounts payable and accrued      expenses                                                                                                                        |   |                           | (597,000   | ) |   |   | 60,000 |   |
| Dividends    payable                                                                                                                                                                      |   |                           | 78,000     |   |   |   | (137,000 | ) |
| Accrued interest      payable                                                                                                                                                             |   |                           | (225,000   | ) |   |   | 229,000 |   |
| Deferredrevenue                                                                                                                                                                           |   |                           | (174,000   | ) |   |   | 1,380,000 |   |
| Net cash used in operating      activities                                                                                                                                                |   |                           | (3,829,000 | ) |   |   | (1,459,000 | ) |
|                                                                                                                                                                                      |   |                           |       |   |   |   |   |   |
| Cash      flows from investing activities:                                                                                                                                                |   |                           |       |   |   |   |   |   |
|     Capital      expenditures                                                                                                                                         |   |                           | (8,000     | ) |   |   | (2,000 | ) |
|  Proceeds from sale of      asset                                                                                                                                                    |   |                           | -          |   |   |   | 1,000 |   |
| Net cash used in investing      activities                                                                                                                                                |   |                           | (8,000     | ) |   |   | (1,000 | ) |
|                                                                                                                                                                                      |   |                           |       |   |   |   |   |   |
| Cash      flows from financing activities:                                                                                                                                                |   |                           |       |   |   |   |   |   |
|  Proceeds from exercise of      stock options                                                                                                                                        |   |                           | 140,000    |   |   |   | 14,000 |   |
|     Proceeds      from common stock issuances, net of costs                                                                                                           |   |                           | 5,848,000  |   |   |   | - |   |
| Net cash provided by financing      activities                                                                                                                                            |   |                           | 5,988,000  |   |   |   | 14,000 |   |
|                                                                                                                                                                                      |   |                           |       |   |   |   |   |   |
| Net      decrease in cash and cash equivalents                                                                                                                                            |   |                           | (2,151,000 | ) |   |   | (1,446,000 | ) |
| Cash      and cash equivalents at beginning of period                                                                                                                                     |   |                           | 607,000    |   |   |   | 2,677,000 |   |
| Cash      and cash equivalents at end of period                                                                                                                                           |   | $                              | 2,758,000  |   |   | $ | 1,231,000 |   |
|                                                                                                                                                                                      |   |                           |       |   |   |   |   |   |
| Supplemental      cash flow information:                                                                                                                                                  |   |                           |       |   |   |   |   |   |
|    Cash      paid for interest                                                                                                                                             |   | $                              | 440,000    |   |   | $ | - |   |
|                                                                                                                                                                                      |   |                           |       |   |   |   |   |   |
| Supplemental      disclosure of noncash transactions:                                                                                                                                     |   |                           |       |   |   |   |   |   |
| Shares issued for payables,      notes payable and accrued interest                                                                                                                       |   |                           | -          |   |   |   | 859,000 |   |
| Shares issued for dividends on      preferred stock                                                                                                                                       |   |                           | 191,000    |   |   |   | 856,000 |   |
|   Preferred      stock dividends in dividends payable                                                                                                                           |   |                           | 888,000    |   |   |   | 963,000 |   |
|                                                                                                                                                                                      |   |                           |       |   |   |   |   |   |

----

----

|                                            |   | June      30, 2010 |        |   | December      31, 2009  |   |
|-------------------------------------------------|--------|--------------------|-------------|--------|-------------------------|--------|
|                                            |   | Grosscarryingvalue |        |   | Accumulatedamortization |   |   | Grosscarryingvalue |   |   | AccumulatedAmortization |   |
| Amortizable      intangible assets Patents |   | $                  |  2,624 |   |                    | $      |  1,943 |   |   | $ |  2,624 |   |   | $ |  1,837 |   |
|                                            |   |               |        |   |                    |   |   |   |   |   |   |   |   |   |   |   |

----

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

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

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

| (in      thousands)                               |   | June      30, 2010 |   |   | December      31, 2009 |   |
|---------------------------------------------------|--------|--------------------|--------|--------|------------------------|--------|
|                                              |   | Level      1       |   |   | Level      2           |   |   | Total |   |   | Level      1 |   |   | Level      2 |   |   | Total |   |
| Assets:                                           |   |               |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  Cash                                        |   | $                  | 2,758  |   |                   | $      | - |   |   | $ | 2,758 |   |   | $ | 607 |   |   | $ | - |   |   | $ | 607 |   |
|                                              |   |               |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                                      |   |               |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  Derivative    liability |   | $                  | -      |   |                   | $      | 3,470 |   |   | $ | 3,470 |   |   | $ | - |   |   | $ | 9,708 |   |   | $ | 9,708 |   |

----

|                                                                                      |   | Three      months endedJune 30, |    |   | Six months endedJune 30, |   |
|-------------------------------------------------------------------------------------------|--------|---------------------------------|---------|--------|--------------------------|--------|
|                                                                                      |   | 2010                            |    |   | 2009                     |   |   | 2010 |   |   | 2009 |   |
|                                                                                      |   |                            |    |   |                     |   |   |   |   |   |   |   |
| Research      and development                                                             |   | $                               | 291,000 |   |                     | $      | 99,000 |   |   | $ | 365,000 |   |   | $ | 135,000 |   |
| General      and administrative                                                           |   |                            | 149,000 |   |                     |   | 153,000 |   |   |   | 189,000 |   |   |   | 173,000 |   |
| Stock-based      compensation expense   included      in operating expense |   | $                               | 440,000 |   |                     | $      | 252,000 |   |   | $ | 554,000 |   |   | $ | 308,000 |   |

|                         |                      |    |                     |   |
|------------------------------|---------------------------|---------|--------------------------|--------|
|                         | 6/30/10                   |    | 6/30/09                  |   |
| Expected      life (b)       |         5.7 yrs |    |   5.5      yrs |   |
| Risk      free interest rate |   2.4           | %       |   2.4          | %      |
| Expected      volatility(a)  |   123           | %  |   114          | %      |
| Expected      dividend yield |   0.0           | %       |   0.0          | %      |
|                         |                      |    |                     |   |

----

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

----

| (in      thousands, except per share amounts)                                |   | Three      months ended June 30, |   |   | Six      months ended June 30, |   |
|------------------------------------------------------------------------------|--------|----------------------------------|--------|--------|--------------------------------|--------|
|                                                                         |   | 2010                             |   |   | 2009                           |   |   | 2010 |   |   | 2009 |   |
|                                                                         |   |                             |   |   |                           |   |   |   |   |   |   |   |
| Basic      net income (loss) allocable to common shareholders                |   | $                                | 1,344  |   |                           | $      | (2,691 | ) |   | $ | 1,991 |   |   | $ | (5,260 | ) |
| Weighted      average shares outstanding                                     |   |                             | 15,460 |   |                           |   | 11,407 |   |   |   | 15,115 |   |   |   | 10,954 |   |
| Basic      net income (loss) per common share                                |   | $                                | 0.09   |   |                           | $      | (0.24 | ) |   | $ | 0.13 |   |   | $ | (0.48 | ) |
|                                                                         |   |                             |   |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Basic      net income (loss) allocable to common shareholders                |   | $                                | 1,344  |   |                           | $      | (2,691 | ) |   | $ | 1,991 |   |   | $ | (5,260 | ) |
|        Effect of      dilutive securities |   |                             |   |   |                           |   |   |   |   |   |   |   |   |   |   |   |
|        Preferred stock dividends          |   |                             | 446    |   |                           |   | - |   |   |   | 888 |   |   |   |  - |   |
|        Interest      related to dividends |   |                             | 37     |   |                           |   |  - |   |   |   |  77 |   |   |   |  - |   |
|             Diluted net income                 |   | $                                | 1,827  |   |                           | $      |  (2,691 | )  |   | $  |  2,956 |   |   | $  | (5,260 | )  |
| Weighted      average shares outstanding                                     |   |                             | 15,460 |   |                           |   | 11,407 |   |   |   | 15,115 |   |   |   | 10,954 |   |
| Effect      of dilutive options, warrants and preferred stock           |   |                             | 12,478 |   |                           |   | - |   |   |   | 12,710 |   |   |   | - |   |
| Weighted      average shares outstanding assuming dilution                   |   |                             | 27,938 |   |                           |   | 11,407 |   |   |   | 27,825 |   |   |   | 10,954 |   |
| Diluted      net income (loss) per common share                              |   | $                                | 0.07   |   |                           | $      | (0.24 | ) |   | $ | 0.11 |   |   | $ | (0.48 | ) |
|                                                                         |   |                             |   |   |                           |   |   |   |   |   |   |   |   |   |   |   |

| (in      thousands, except per share amounts) |   | Three      months ended June 30, |   |   | Six      months ended June 30, |   |
|-----------------------------------------------|--------|----------------------------------|--------|--------|--------------------------------|--------|
|                                          |   | 2010                             |   |   | 2009                           |   |   | 2010 |   |   | 2009 |   |
|                                          |   |                             |   |   |                           |   |   |   |   |   |   |   |
| Warrants                                      |   |                             | 6,175  |   |                           |   | 9,564 |   |   |   | 6,150 |   |   |   | 9,564 |   |
| Stock      options                            |   |                             | 1,168  |   |                           |   | 1,805 |   |   |   | 1,027 |   |   |   | 1,805 |   |
| Convertible      note                         |   |                             | 200    |   |                           |   | 200 |   |   |   | 200 |   |   |   | 200 |   |
| Preferred      stock                          |   |                             | -      |   |                           |   | 10,693 |   |   |   | - |   |   |   | 10,693 |   |
| Total                                         |   |                             | 7,543  |   |                           |   | 22,262 |   |   |   | 7,377 |   |   |   | 22,262 |   |
|                                          |   |                             |   |   |                           |   |   |   |   |   |   |   |   |   |   |   |

----