----

----

|   |   |                                                                                                    |
|--------|--------|---------------------------------------------------------------------------------------------------------|
| 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) |

----

|  ACCESS      PHARMACEUTICALS, INC. |
|-----------------------------------------|
|                                    |   |
| INDEX                                   |
|                                    |   |   |   |   |   |   |   |   |   |   |   |
|                                    |   |   |   |   |   |   |   |   |   |   | Page No. |
|                                    | PART      I - FINANCIAL INFORMATION |   |   |   |   |   |   |
|                                    |   |   |   |   |   |   |   |   |   |   |   |
|                                    |   | Item      1. |   | Financial      Statements: |   |   |   |   |   |
|                                    |   |   |   |   |   |   |   |   |   |   |   |
|                                    |   |   |   | Condensed      Consolidated Balance Sheets at September 30, 2010 |   |
|                                    |   |   |   | (unaudited)      and December 31, 2009 |   |   |   | 15 |
|                                    |   |   |   |   |   |   |   |   |   |   |   |
|                                    |   |   |   | Condensed      Consolidated Statements of Operations (unaudited) for the |   |   |
|                                    |   |   |   | three      and nine months ended September 30, 2010 and September 30,      2009 | 16 |
|                                    |   |   |   |   |   |   |   |   |   |   |   |
|                                    |   |   |   | Condensed      Consolidated Statement of Stockholders’ Deficit(unaudited) |   |
|                                    |   |   |   | for      the three and nine months ended September 30, 2010 |   | 17 |
|                                    |   |   |   |   |   |   |   |   |   |   |   |
|                                    |   |   |   | Condensed      Consolidated Statements of Cash Flows (unaudited) for the |   |
|                                    |   |   |   | nine      months ended September 30, 2010 and September 30, 2009 | 18 |
|                                    |   |   |   |   |   |   |   |   |   |   |   |
|                                    |   |   |   | Notes      to Unaudited Condensed Consolidated Financial Statements | 19 |
|                                    |   |   |   |   |   |   |   |   |   |   |   |
|                                    |   | Item      2. |   | Management's      Discussion and Analysis of Financial Condition and |   |
|                                    |   |   |   | Results      of Operations |   |   |   |   | 2 |
|                                    |   |   |   |   |   |   |   |   |   |   |   |
|                                    |   | Item      3. |   | Quantitative      and Qualitative Disclosures About Market Risk |   | 10 |
|                                    |   |   |   |   |   |   |   |   |   |   |   |
|                                    |   | Item      4. |   | Controls      and Procedures |   |   |   |   | 10 |
|                                    |   |   |   |   |   |   |   |   |   |   |   |
|                                    |   |   |   |   |   |   |   |   |   |   |   |
|                                    | PART      II - OTHER INFORMATION |   |   |   |   |   |   |
|                                    |   |   |   |   |   |   |   |   |   |   |   |
|                                    |   | Item      1. |   | Legal      Proceedings |   |   |   |   |   | 11 |
|                                    |   |   |   |   |   |   |   |   |   |   |   |
|                                    |   | Item      2. |   | Unregistered      Sales of Equity Securities and Use of Proceeds |   |   | 11 |
|                                    |   |   |   |   |   |   |   |   |   |   |   |
|                                    |   | Item      3. |   | Defaults      Under Senior Securities |   |   |   | 12 |
|                                    |   |   |   |   |   |   |   |   |   |   |   |
|                                    |   | Item      4. |   | Removed      and Reserved |   |   |   |   | 12 |
|                                    |   |   |   |   |   |   |   |   |   |   |   |
|                                    |   | Item      5. |   | Other      Information |   |   |   |   |   | 12 |
|                                    |   |   |   |   |   |   |   |   |   |   |   |
|                                    |   | Item      6. |   | Exhibits |   |   |   |   |   |   | 12 |
|                                    |   |   |   |   |   |   |   |   |   |   |   |
|                                    | SIGNATURES |   |   |   |   |   |   |   |   | 14 |
|                                    |   |   |   |   |   |   |   |   |   |   |   |
|                                    | 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. We launched MuGard in the United States during the third quarter      of 2010. We are working with our partners in Korea and China for      registration and 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 EU in patients with recurrent ovarian      cancer. The clinical study had positive safety and efficacy results. We      expect to initiate a study of ProLindac combined with Paclitaxel in second      line treatment of platinum pretreated advanced ovarian cancer patients in      the fourth quarter of 2010. 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 have      initiated additional Phase 2 clinical trials in adult AML, ALL and other      indications. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | CobOral™      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 have signed or are in discussion with several companies      regarding the sponsored development of CobOral™ oral drug delivery      formulations of proprietary and non-proprietary  actives. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | CobaCyte-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                                   |
| CobOral™      Delivery System                                                |   | Access                                |   | Cobalamin          |   | Various    |   | Pre-clinical                                   |
| CobaCyte™-Targeted      Therapeutics                                              |   | Access                                |   | Cobalamin          |   | Anti-tumor |   | Pre-clinical                                   |

----

| (1)   | For      more information, see “Government Regulation” for description of clinical      stages. |
|-----------------|-------------------------------------------------------------------------------------------------------------|

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

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

----

----

----

| ·   | increased      salary and related costs due to existing employees paid at full salary in      the third quarter of 2010 while employees were paid at a reduced salary in      the third quarter of 2009 plus an additional new employee      ($220,000); |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | increased      development costs ($118,000); |
|--------------------|----------------------------------------------|

| ·   | increase      lab costs due to lab activity for CobaCyte, CobOral and MuGard      ($112,000); |
|--------------------|-----------------------------------------------------------------------------------------------|

| ·   | increased      stock compensation expense due to additional option grants for research      and development employees($80,000); |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------|

| ·   | increased      clinical development with the planned starts in trials for MuGard,      ProLindac and Thiarabine ($71,000);and |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------|

| ·   | other      net increases in research spending($37,000). |
|--------------------|---------------------------------------------------------|

| ·   | lower      general business consulting expenses due to reduction in use of outside      consultants ($2,037,000); |
|--------------------|-------------------------------------------------------------------------------------------------------------------|

| ·   | lower      potential liquidated damages under an investor rights agreement with      certain investors ($161,000); |
|--------------------|--------------------------------------------------------------------------------------------------------------------|

| ·   | lower      stock compensation expense due to fewer option grants for general and      administrative employees ($81,000); |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------|

| ·   | lower      patent and license fees ($73,000);and |
|--------------------|--------------------------------------------------|

| ·   | offset      by other net increases in other general and administrative expenses      ($59,000). |
|--------------------|-------------------------------------------------------------------------------------------------|

----

----

| ·   | increased      stock compensation expense due to additional option grants for research      and development employees($325,000); |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------|

| ·   | increased      salary and related costs due to existing employees paid at full salary in      2010 while employees were paid at a reduced salary during a portion of      2009 plus an additional new employee($286,000); |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | increased      lab costs due to lab activity for CobaCyte, CobOral and MuGard      ($207,000); |
|--------------------|------------------------------------------------------------------------------------------------|

| ·   | increased      clinical development with the planned starts in trials for MuGard,      ProLindac and Thiarabine($115,000); |
|--------------------|----------------------------------------------------------------------------------------------------------------------------|

| ·   | other      net increases in research spending ($43,000);  and |
|--------------------|---------------------------------------------------------------|

| ·   | offset      by lower scientific consulting expenses  ($88,000). |
|--------------------|-----------------------------------------------------------------|

| ·   | lower      general business consulting expenses due to reduction in use of outside      consultants ($2,047,000); |
|--------------------|-------------------------------------------------------------------------------------------------------------------|

| ·   | lower      accrual of potential liquidated damages under an investor rights agreement      with certain investors ($478,000); |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------|

| ·   | lower      patent and license fees ($283,000); |
|--------------------|------------------------------------------------|

| ·   | lower      stock compensation expense due to fewer option grants for general and      administrative employees ($80,000); |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------|

| ·   | other      net decreases in general and administrative expenses ($193,000);      and |
|--------------------|--------------------------------------------------------------------------------------|

| ·   | offset      by increased salary and related costs due to existing employees paid at      full salary in 2010 while employees were paid at a reduced salary during a      portion of 2009 plus an additional new employee  ($185,000). |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

----

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

----

| ITEM      6. | 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 |
|-------|-----------------------------------------------------------------------------------------------------------------------|

----

| Date:  | November 10, 2010 | By:                                              | /s/ Jeffrey B. Davis    |
|--------|-------------------|--------------------------------------------------|-------------------------|
|   |              | Jeffrey      B. Davis                            |
|   |              | Chief      Executive Officer                     |
|   |              | (Principal      Executive Officer)               |
|   |              |                                             |
| Date:  | November 10, 2009 | By:                                              | /s/ Stephen B. Thompson |
|   |              | Stephen      B. Thompson                         |
|   |              | Vice      President and Chief Financial Officer  |
|   |              | (Principal      Financial and Accounting Officer |
|   |              |                                             |

----

|                            ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  September 30,      2010 (unaudited)                                                                      |   |  December 31,      2009                                                                                                                                                             |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Current assets   Cash and cash      equivalents   Receivables   Prepaid      expenses and other current assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  $          1,496,00040,00029,000                            |   |  $             607,00036,000               42,000 |
|                         Total current assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 1,565,000                                                                                                           |   | 685,000                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                |   |                                                                                                                                                                                               |
| Property      and equipment, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 38,000                                                                                                              |   | 50,000                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                |   |                                                                                                                                                                                               |
| Patents,      net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 627,000                                                                                                             |   | 787,000                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                |   |                                                                                                                                                                                               |
| Other      assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 49,000                                                                                                              |   | 61,000                                                                                                                                                                                             |
|             Total      assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  $          2,279,000                                        |   |  $          1,583,000                                                                                                                       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                |   |                                                                                                                                                                                               |
|         LIABILITIES      AND STOCKHOLDERS' DEFICIT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                |   |                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                |   |                                                                                                                                                                                               |
| Current      liabilities  Accounts      payable  Accrued      expenses  Dividends      payable  Accrued      interest payable  Short-term debt  Current      portion of deferred revenue                                                                                                                                                                                                                                                                                                                                                                                                                                             |  $          3,383,000857,0003,950,000446,0005,500,000347,000 |   |  $          4,094,000857,0002,773,000563,000-347,000                                                                                        |
|                           Total current liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 14,483,000                                                                                                          |   | 8,634,000                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                |   |                                                                                                                                                                                               |
| Derivative      liability warrantsDerivative      liability preferred stockLong-term      deferred revenueLong-term      debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 3,324,00010,455,0004,470,000-                                                                                       |   | 9,708,000-4,730,0005,500,000                                                                                                                                                                       |
|  Total      liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 32,732,000                                                                                                          |   | 28,572,000                                                                                                                                                                                         |
| Commitments      and contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                |   |                                                                                                                                                                                               |
| Stockholders'      deficit  Convertible      Series A preferred stock - $.01 par value; authorized      2,000,000      shares; 2,985.3617 shares issued at September 30,2010 and 2,992.3617 shares      issued at December 31, 2009  Common      stock - $.01 par value; authorized 100,000,000 shares;     issued,      15,899,227 at September 30, 2010 and 13,171,545 at     December      31, 2009  Additional      paid-in capital  Notes      receivable from stockholders  Treasury      stock, at cost – 163 sharesAccumulated      deficit |    -  159,000223,424,000(1,045,000)(4,000)(252,987,000)                                    |   |    -  132,000215,735,000(1,045,000)(4,000)(241,807,000)                                                                                                                   |
|                      Total stockholders' deficit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | (30,453,000)                                                                                                        |   | (26,989,000)                                                                                                                                                                                       |
|             Total      liabilities and stockholders' deficit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | $          2,279,000                                              |   | $          1,583,000                                                                                                                             |

----

|   |  Three      months endedSeptember      30,  |   |  Nine      months endedSeptember      30, |
|--------|-------------------------------------------------------|--------|------------------------------------------------|

|                                                                                                                                   |   | 2010   |        |   | 2009   |   |       | 2010   |   |   | 2009        |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-------------|--------|--------|--------|------------|--------|--------|--------|-------------|--------|
|                                                                                                                                   |   |   |        |   |   |   |       |   |   |   |        |   |
|          Revenues                                                                                                       |   |   |        |   |   |   |       |   |   |   |        |   |
|                  License revenues                                               |   | $      | 107,000     |   |   | $      | 124,000    |   |   | $      | 281,000     |   |   | $ | 228,000 |   |
|                  Royalties                                                      |   |   | 20,000      |   |   |   | 20,000     |   |   |   | 53,000      |   |   |   | 20,000 |   |
|                          Total revenues |   |   | 127,000     |   |   |   | 144,000    |   |   |   | 334,000     |   |   |   | 248,000 |   |
|                                                                                                                                   |   |   |        |   |   |   |       |   |   |   |        |   |   |   |   |   |
|     Expenses                                                                                                       |   |   |        |   |   |   |       |   |   |   |        |   |   |   |   |   |
| Research      and development                                                                                                          |   |   | 1,199,000   |   |   |   | 561,000    |   |   |   | 2,718,000   |   |   |   | 1,830,000 |   |
| General      and administrative                                                                                                        |   |   | 1,165,000   |   |   |   | 3,458,000  |   |   |   | 3,316,000   |   |   |   | 6,212,000 |   |
| Depreciation      and amortization                                                                                                     |   |   | 59,000      |   |   |   | 65,000     |   |   |   | 179,000     |   |   |   | 197,000 |   |
|          Total expenses                                                                                                 |   |   | 2,423,000   |   |   |   | 4,084,000  |   |   |   | 6,213,000   |   |   |   | 8,239,000 |   |
|                                                                                                                                   |   |   |        |   |   |   |       |   |   |   |        |   |   |   |   |   |
| Loss      from operations                                                                                                              |   |   | (2,296,000  | )      |   |   | (3,940,000 | )      |   |   | (5,879,000  | )      |   |   | (7,991,000 | ) |
|                                                                                                                                   |   |   |        |   |   |   |       |   |   |   |        |   |   |   |   |   |
|          Interest and miscellaneous income                                                                              |   |   | 38,000      |   |   |   | 2,000      |   |   |   | 554,000     |   |   |   | 18,000 |   |
|          Interest and other expense                                                                                     |   |   | (152,000    | )      |   |   | (133,000   | )      |   |   | (444,000    | )      |   |   | (395,000 | ) |
|          Gain on change in fair value of           derivative warrants                         |   |   | 146,000     |   |   |   | -          |   |   |   | 6,384,000   |   |   |   | - |   |
|     Loss on change in fair value of                           derivative preferred stock       |   |   | (10,455,000 | )      |   |   | -          |   |   |   | (10,455,000 | )      |   |   | - |   |
|                                                                                                                                   |   |   | (10,423,000 | )      |   |   | (131,000   | )      |   |   | (3,961,000  | )      |   |   | (377,000 | ) |
|  Net      loss                                                                                                                    |   |   | (12,719,000 | )      |   |   | (4,071,000 | )      |   |   | (9,840,000  | )      |   |   | (8,368,000 | ) |
|                                                                                                                                   |   |   |        |   |   |   |       |   |   |   |        |   |   |   |   |   |
| Less      preferred stock dividends                                                                                                    |   |   | 452,000     |   |   |   | 471,000    |   |   |   | 1,340,000   |   |   |   | 1,434,000 |   |
| Net      loss allocable to common stockholders                                                                                         |   | $      | (13,171,000 | )      |   | $      | (4,542,000 | )      |   | $      | (11,180,000 | )      |   | $ | (9,802,000 | ) |
|                                                                                                                                   |   |   |        |   |   |   |       |   |   |   |        |   |   |   |   |   |
| Basic/diluted      net loss per common share                                                                                           |   |   |        |   |   |   |       |   |   |   |        |   |   |   |   |   |
|   Net      loss allocable to common stockholders                                                                             |   | $      | (0.83       | )      |   | $      | (0.37      | )      |   | $      | (0.73       | )      |   | $ | (0.86 | ) |
|                                                                                                                                   |   |   |        |   |   |   |       |   |   |   |        |   |   |   |   |   |
| Weighted      average basic and diluted                                                                                                |   |   | 15,774,273  |   |   |   | 12,204,696 |   |   |   | 15,337,453  |   |   |   | 11,375,793 |   |
|                  common shares outstanding                                      |   |   |        |   |   |   |       |   |   |   |        |   |   |   |   |   |
|                                                                                                                                   |   |   |        |   |   |   |       |   |   |   |        |   |   |   |   |   |

----

|   | Common Stock | Preferred Stock |  Additionalpaid-incapital | Notes      receivable from stockholders |   Treasury      stock |   Accumulated      deficit |
|--------|--------------|-----------------|--------------------------------|-----------------------------------------|---------------------------------|--------------------------------------|
|   |  Shares |  Amount    |  Shares                   |  Amount                            |

| Balance   December      31, 2009                                   |   |   | 13,172,000     |   |   | $      | 132,000      |   |   |   | 2,992.3617 |   |   | $      | -        |   |   | $      | 215,735,000       |   |   | $      | (1,045,000 | )      |   | $      | (4,000   | )      |   | $      | (241,807,000 | )      |
|-----------------------------------------------------------------------------------|--------|--------|----------------|--------|--------|--------|--------------|--------|--------|--------|------------|--------|--------|--------|----------|--------|--------|--------|-------------------|--------|--------|--------|------------|--------|--------|--------|----------|--------|--------|--------|--------------|--------|
| Restricted      common        stock issued for services                      |   |   | 73,000         |   |   |   | 1,000        |   |   |   | -          |   |   |   | -        |   |   |   | 17,000            |   |   |   | -          |   |   |   | -        |   |   |   | -            |   |
| Warrants      issued for  services                                      |   |   | -              |   |   |   | -            |   |   |   | -          |   |   |   | -        |   |   |   | 19,000            |   |   |   | -          |   |   |   | -        |   |   |   | -            |   |
| Preferred      stock converted into common stock                                  |   |   |   23,000  |   |   |   |   -     |   |   |   | (7.0000    | )      |   |   |   - |   |   |   |   -          |   |   |   |   -   |   |   |   |   - |   |   |   |   -     |   |
| Stock      option  compensation      expense                            |   |   | -              |   |   |   | -            |   |   |   | -          |   |   |   | -        |   |   |   | 114,000           |   |   |   | -          |   |   |   | -        |   |   |   | -            |   |
| Common      stock issued  for      cash exercise of  options  |   |   |   10,000  |   |   |   |   -     |   |   |   |   -   |   |   |   |   - |   |   |   |   14,000     |   |   |   |   -   |   |   |   |   - |   |   |   |   -     |   |
| Common      stock issued  for      cashless warrant  exercise |   |   |   20,000  |   |   |   |   -     |   |   |   |   -   |   |   |   |   - |   |   |   |   -          |   |   |   |   -   |   |   |   |   - |   |   |   |   -     |   |
| Common      stock issued $3.00      share, net of costs                      |   |   | 2,083,000      |   |   |   | 21,000       |   |   |   | -          |   |   |   | -        |   |   |   | 5,827,000         |   |   |   | -          |   |   |   | -        |   |   |   | -            |   |
| Preferred      dividends                                                          |   |   | -              |   |   |   | -            |   |   |   | -          |   |   |   | -        |   |   |   | -                 |   |   |   | -          |   |   |   | -        |   |   |   | (442,000     | )      |
| Net      income                                                                   |   |   | -              |   |   |   | -            |   |   |   | -          |   |   |   | -        |   |   |   | -                 |   |   |   | -          |   |   |   | -        |   |   |   | 1,089,000    |   |
| Balance      at        March 31, 2010                                   |   |   | 15,381,000     |   |   |   | 154,000      |   |   |   | 2,985.3617 |   |   |   | -        |   |   |   |  221,726,000 |   |   |   | (1,045,000 | )      |   |   | (4,000   | )      |   |   | (241,160,000 | )      |
|                                                                              |   |   |           |   |   |   |         |   |   |   |       |   |   |   |     |   |   |   |              |   |   |   |       |   |   |   |     |   |   |   |         |   |
| Restricted      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 | )      |
|                                                                              |   |   |           |   |   |   |         |   |   |   |       |   |   |   |     |   |   |   |              |   |   |   |       |   |   |   |     |   |   |   |         |   |
| Restricted      commonstock      issued for services                              |   |   | 133,000        |   |   |   | 1,000        |   |   |   | -          |   |   |   | -        |   |   |   | 269,000           |   |   |   | -          |   |   |   | -        |   |   |   | -            |   |
| Stock      option  compensation      expense                            |   |   | -              |   |   |   | -            |   |   |   | -          |   |   |   | -        |   |   |   | 284,000           |   |   |   | -          |   |   |   | -        |   |   |   | -            |   |
| Common      stock issued  for      cash exercise of  options  |   |   |   38,000  |   |   |   |   -     |   |   |   |   -   |   |   |   |   - |   |   |   |   52,000     |   |   |   |   -   |   |   |   |   - |   |   |   |   -     |   |
| Common      stock issued  for      preferred dividends                  |   |   | 56,000         |   |   |   | 1,000        |   |   |   |       |   |   |   |     |   |   |   | 90,000            |   |   |   | -          |   |   |   | -        |   |   |   | -            |   |
| Preferred      dividends                                                          |   |   | -              |   |   |   | -            |   |   |   | -          |   |   |   | -        |   |   |   | -                 |   |   |   | -          |   |   |   | -        |   |   |   | (452,000     | )      |
| Net      loss                                                                     |   |   | -              |   |   |   | -            |   |   |   | -          |   |   |   | -        |   |   |   | -                 |   |   |   | -          |   |   |   | -        |   |   |   | (12,719,000  | )      |
| Balance      at        September 30, 2010                               |   |   | 15,899,000     |   |   | $      | 159,000      |   |   |   | 2985.3617  |   |   | $      | -        |   |   | $      | 223,424,000       |   |   | $      | (1,045,000 | )      |   | $      | (4,000   | )      |   | $      | (252,987,000 | )      |

----

|                                                                                                                                                                                  |   | Nine      Months ended September 30, |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                                                                                                                                  |   | 2010                                 |       |   | 2009 |   |
| Cash      flows from operating activities:                                                                                                                                            |   |                                 |       |   |   |   |
|      Net      loss                                                                                                                                           |   | $                                    | (9,840,000 | ) |   | $ | (8,368,000 | ) |
|   Adjustments to      reconcile net loss to cash used              in      operating activities: |   |                                 |       |   |   |   |   |   |
| Gain on change in fair value of      derivative warrants                                                                                                                              |   |                                 | (6,384,000 | ) |   |   | - |   |
| Loss on change in fair value of      derivative preferred stock                                                                                                                       |   |                                 | 10,455,000 |   |   |   | - |   |
| Gain on negotiated accounts      payable                                                                                                                                              |   |                                 | (509,000   | ) |   |   | - |   |
| Depreciation and      amortization                                                                                                                                                    |   |                                 | 179,000    |   |   |   | 197,000 |   |
| Stock option compensation      expense                                                                                                                                                |   |                                 | 838,000    |   |   |   | 593,000 |   |
| Stock and warrants issued for      services                                                                                                                                           |   |                                 | 556,000    |   |   |   | 2,852,000 |   |
| Change in operating assets and      liabilities:                                                                                                                                      |   |                                 |       |   |   |   |   |   |
|     Receivables                                                                                                                                                   |   |                                 | (4,000     | ) |   |   | 124,000 |   |
| Prepaid      expenses and other current assets                                                                                                                                        |   |                                 | 13,000     |   |   |   | 130,000 |   |
| Other assets                                                                                                                                                                          |   |                                 | 12,000     |   |   |   | 12,000 |   |
|     Accounts payable and accrued      expenses                                                                                                                    |   |                                 | (202,000   | ) |   |   | 318,000 |   |
| Dividends    payable                                                                                                                                                                  |   |                                 | 119,000    |   |   |   | (109,000 | ) |
| Accrued interest      payable                                                                                                                                                         |   |                                 | (117,000   | ) |   |   | 334,000 |   |
| Deferredrevenue                                                                                                                                                                       |   |                                 | (260,000   | ) |   |   | 2,755,000 |   |
| Net cash used in operating      activities                                                                                                                                            |   |                                 | (5,144,000 | ) |   |   | (1,162,000 | ) |
|                                                                                                                                                                                  |   |                                 |       |   |   |   |   |   |
| Cash      flows from investing activities:                                                                                                                                            |   |                                 |       |   |   |   |   |   |
|     Capital      expenditures                                                                                                                                     |   |                                 | (7,000     | ) |   |   | (2,000 | ) |
|  Proceeds from sale of      asset                                                                                                                                                |   |                                 | -          |   |   |   | 1,000 |   |
| Net cash used in investing      activities                                                                                                                                            |   |                                 | (7,000     | ) |   |   | (1,000 | ) |
|                                                                                                                                                                                  |   |                                 |       |   |   |   |   |   |
| Cash      flows from financing activities:                                                                                                                                            |   |                                 |       |   |   |   |   |   |
|  Proceeds from exercise of      stock options                                                                                                                                    |   |                                 | 192,000    |   |   |   | 158,000 |   |
|     Proceeds      from common stock issuances, net of costs                                                                                                       |   |                                 | 5,848,000  |   |   |   | - |   |
| Net cash provided by financing      activities                                                                                                                                        |   |                                 | 6,040,000  |   |   |   | 158,000 |   |
|                                                                                                                                                                                  |   |                                 |       |   |   |   |   |   |
| Net      increase (decrease) in cash and cash equivalents                                                                                                                             |   |                                 | 889,000    |   |   |   | (1,005,000 | ) |
| Cash      and cash equivalents at beginning of period                                                                                                                                 |   |                                 | 607,000    |   |   |   | 2,677,000 |   |
| Cash      and cash equivalents at end of period                                                                                                                                       |   | $                                    | 1,496,000  |   |   | $ | 1,672,000 |   |
|                                                                                                                                                                                  |   |                                 |       |   |   |   |   |   |
| Supplemental      cash flow information:                                                                                                                                              |   |                                 |       |   |   |   |   |   |
|    Cash      paid for interest                                                                                                                                         |   | $                                    | 440,000    |   |   | $ | - |   |
|                                                                                                                                                                                  |   |                                 |       |   |   |   |   |   |
| Supplemental      disclosure of noncash transactions:                                                                                                                                 |   |                                 |       |   |   |   |   |   |
| Shares issued for payables,      notes payable and accrued interest                                                                                                                   |   |                                 | -          |   |   |   | 859,000 |   |
| Shares issued for dividends on      preferred stock                                                                                                                                   |   |                                 | 282,000    |   |   |   | 927,000 |   |
|   Preferred      stock dividends in dividends payable                                                                                                                       |   |                                 | 1,340,000  |   |   |   | 1,434,000 |   |

----

| (1)  | Interim      Financial Statements |
|-----------|-----------------------------------|

----

| (2) | Intangible      Assets |
|-----|------------------------|

|                                            | September      30, 2010                                                        | December      31, 2009                                             |
|-------------------------------------------------|--------------------------------------------------------------------------------|--------------------------------------------------------------------|
|                                            | Grosscarryingvalue                                                             |  Accumulatedamortization                                      | Grosscarryingvalue |  AccumulatedAmortization |
| Amortizable      intangible assets Patents |   $          2,624 |   $        1,997 |   $      2,624 |   $      1,837 |
|                                            |                                                                           |                                                               |   |   |

|  2010                          |   |  $              53 |
|-------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|  2011                          |   |  212                                                                                     |
|  2012                          |   |  82                                                                                      |
|  2013                          |   |  44                                                                                      |
|  2014                          |   |  44                                                                                      |
|  over 5      years             |   | 192                                                                                           |
|  Total     |   |  $                 627            |

----

| · | 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) | September      30, 2010 | December      31, 2009 |
|---------------------|-------------------------|------------------------|
|                | Level      1            | Level      2           | Total | Level      1 | Level      2 | Total |

| Assets:                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|-----------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|  Cash                                                |   | $      | 1,496  |   |   | $      | -      |   |   | $      | 1,496  |   |   | $      | 607    |   |   | $      | - |   |   | $ | 607 |   |
|                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Derivative      liability  warrants             |   | $      | -      |   |   | $      | 3,324  |   |   | $      | 3,324  |   |   | $      | -      |   |   | $      | 9,708 |   |   | $ | 9,708 |   |
| Derivative      liability  preferred      stock |   | $      | -      |   |   | $      | 10,455 |   |   | $      | 10,455 |   |   | $      | -      |   |   | $      | - |   |   | $ | - |   |

----

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

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

----

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

----

----

----