----

----

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

|   |  2600 Stemmons Frwy, Suite 176, Dallas, TX 75207 |   |
|--------|-------------------------------------------------------|--------|
|   |  (Address of principal executive offices)        |   |

|                                                                                            |  (214) 905-5100                                       |   |
|-------------------------------------------------------------------------------------------------|------------------------------------------------------------|--------|
|                                                                                            | (Registrant’s telephone number, including area code) |   |
|                                                                                            |                                                       |   |
|                                                                                            | N/A                                                        |   |
|    (Former name, former address and former fiscal year, if changed since last report) |

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

----

INDEX

| PART I - FINANCIAL INFORMATION |  Page No. |                                                                                                                          |
|--------------------------------|----------------|-------------------------------------------------------------------------------------------------------------------------------|
|                           |           |                                                                                                                          |   |   |
|                           |  Item 1.  | Financial Statements:                                                                                                         |   |   |
|                           |           |                                                                                                                          |   |   |
|                           |           | Condensed Consolidated Balance Sheets at March 31, 2011(unaudited) and December 31, 2010                                      | 11 |   |
|                           |           |                                                                                                                          |   |   |
|                           |           | Condensed Consolidated Statements of Operations (unaudited) for thethree months ended March 31, 2011 and March 31, 2010  | 12 |   |
|                           |           |                                                                                                                          |   |   |
|                           |           | Condensed Consolidated Statement of Stockholders’ Deficit (unaudited) for the three months ended March 31, 2011         | 13 |   |
|                           |           |                                                                                                                          |   |   |
|                           |           | Condensed Consolidated Statements of Cash Flows (unaudited) for thethree months ended March 31, 2011 and March 31, 2010       | 14 |   |
|                           |           |                                                                                                                          |   |   |
|                           |           | Notes to Unaudited Condensed Consolidated Financial Statements                                                                | 15 |   |
|                           |           |                                                                                                                          |   |   |
|                           |  Item 2.  | Management's Discussion and Analysis of Financial Condition andResults of Operations                                | 2 |   |
|                           |           |                                                                                                                          |   |   |
|                           |  Item 3.  | Quantitative and Qualitative Disclosures About Market Risk                                                                    | 7 |   |
|                           |           |                                                                                                                          |   |   |
|                           |  Item 4.  | Controls  and Procedures                                                                                                 | 7 |   |
|                           |           |                                                                                                                          |   |   |
|                           |           |                                                                                                                          |   |   |
| PART II - OTHER INFORMATION    |           |                                                                                                                          |
|                           |           |                                                                                                                          |   |   |
|                           |  Item 1.  | Legal Proceedings                                                                                                        | 8 |   |
|                           |           |                                                                                                                          |   |   |
|                           |  Item 2.  | Unregistered Sales of Equity Securities and Use of Proceeds                                                              | 8 |   |
|                           |           |                                                                                                                          |   |   |
|                           |  Item 3.  | Defaults Under Senior Securities                                                                                         | 8 |   |
|                           |           |                                                                                                                          |   |   |
|                           |  Item 4.  | Removed and Reserved                                                                                                     | 9 |   |
|                           |           |                                                                                                                          |   |   |
|                           |  Item 5.  | Other Information                                                                                                             | 9 |   |
|                           |           |                                                                                                                          |   |   |
|                           |  Item 6.  | Exhibits                                                                                                                 | 9 |   |
|                           |           |                                                                                                                          |   |   |
|  SIGNATURES               |           | 10                                                                                                                            |   |
|                           |           |                                                                                                                          |   |
|  CERTIFICATIONS           |           |                                                                                                                          |   |

----

Table of Contents 

PART I –FINANCIAL INFORMATION

|  ITEM 1.  | FINANCIAL STATEMENTS |
|---------------------|----------------------|

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

----

Table of Contents 

| ·   | 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 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 in the fourth 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 initiated 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 is being conducted in France. 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 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. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Table of Contents 

| Compound                                                                      |   | Originator                      |   |  Technology   |   | Indication |   | ClinicalStage (1)         |
|-------------------------------------------------------------------------------|--------|---------------------------------|--------|--------------------|--------|------------|--------|---------------------------|
|                                                                          |   |                            |   |               |   |       |   |                      |
| MuGard™                                                                 |   | Access                          |   | Mucoadhesiveliquid |   | Mucositis  |   | LaunchedU.S. and EU  |
| 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              |

----

----

Table of Contents 

| ·   | increased clinical development with trials for ProLindac, MuGard and Thiarabine ($229,000); |
|--------------------|---------------------------------------------------------------------------------------------|

| ·   | increased scientific consulting expense ($80,000) to help with clinical trials; |
|--------------------|---------------------------------------------------------------------------------|

| ·   | increased salary and related costs due to a new employee ($51,000); |
|--------------------|---------------------------------------------------------------------|

| ·   | increased stock compensation expense due to additional option grants for research and development employees ($30,000); and |
|--------------------|----------------------------------------------------------------------------------------------------------------------------|

| ·   | other net decreases in research spending ($56,000). |
|--------------------|-----------------------------------------------------|

----

Table of Contents 

| ·   | increased general business consulting expenses due to the use of outside consultants ($97,000); |
|--------------------|-------------------------------------------------------------------------------------------------|

| ·   | increased salary and related costs due to new employees ($45,000); |
|--------------------|--------------------------------------------------------------------|

| ·   | increased stock compensation expense due to option grants for general and administrative employees ($38,000); and |
|--------------------|-------------------------------------------------------------------------------------------------------------------|

| ·   | lower patent and license fees ($52,000). |
|--------------------|------------------------------------------|

----

Table of Contents 

|  ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
|---------------|------------------------------------------------------------|

|  ITEM 4. | CONTROLS AND PROCEDURES |
|---------------|-------------------------|

----

Table of Contents 

PART II -- OTHER INFORMATION

|  ITEM 1.   |  LEGAL PROCEEDINGS |
|---------------------------|-------------------------|

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

|  ITEM 3.    | DEFAULTS UPON SENIOR SECURITIES |
|---------------------------------|---------------------------------|

----

Table of Contents 

|  ITEM 4.    | REMOVED AND RESERVED |
|---------------------------------|----------------------|

|  ITEM 5.  | OTHER INFORMATION |
|---------------------|-------------------|

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

----

----

Table of Contents 

SIGNATURES

| Date:  | May 16, 2011 |                                        | By: | /s/ Jeffrey B. Davis    |   |
|--------|--------------|---------------------------------------------|-----|-------------------------|--------|
|   |         | Jeffrey B. Davis                            |
|   |         | Chief Executive Officer                     |
|   |         | (Principal Executive Officer)               |
|   |         |                                        |
| Date:  | May 16, 2011 |                                        | By: | /s/ Stephen B. Thompson |   |
|   |         | Stephen B. Thompson                         |
|   |         | Vice President and Chief Financial Officer  |
|   |         | (Principal Financial and Accounting Officer |
|   |         |                                        |

----

Table of Contents 

Condensed Consolidated Balance Sheets

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  March 31,2011                                                                                                 |   |  December 31, 2010                                                                                                                                                               |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                              ASSETS                                                                                                                                                                                                                                                                                                                                                                             |  (unaudited)                                                                                                   |   |                                                                                                                                                                                  |
| Current assetsCash and cash equivalents   ReceivablesPrepaid expenses and other current assets                                                                                                                                                                                                                                                                                                                                                                                                                                               |  $          6,174,00046,00049,000                            |   |  $          7,033,0001,018,000               70,000 |
| Total current assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 6,269,000                                                                                                           |   | 8,121,000                                                                                                                                                                             |
| Property and equipment, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 46,000                                                                                                              |   | 32,000                                                                                                                                                                                |
| Patents, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 521,000                                                                                                             |   | 574,000                                                                                                                                                                               |
| Other assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 40,000                                                                                                              |   | 44,000                                                                                                                                                                                |
|            Total assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  $          6,876,000                                        |   |  $          8,771,000                                                                                                          |
|         LIABILITIES AND STOCKHOLDERS' DEFICIT                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                |   |                                                                                                                                                                                  |
| Current liabilities  Accounts payable  Accrued expenses  Dividends payable  Accrued interest payable  Convertible debt, current portion  Current portion of deferred revenue                                                                                                                                                                                                                                                                                      |  $          2,892,000857,0004,941,000232,0005,500,000347,000 |   |  $          2,984,000857,0004,443,000126,0005,500,000347,000                                                                   |
|   Total current liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 14,769,000                                                                                                          |   | 14,257,000                                                                                                                                                                            |
| Derivative liability - warrantsDerivative liability - preferred stockLong-term deferred revenue                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 3,852,0006,663,0004,296,000                                                                                         |   | 5,087,0005,840,0004,382,000                                                                                                                                                           |
|  Total liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 29,580,000                                                                                                          |   | 29,566,000                                                                                                                                                                            |
| Commitments and contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                |   |                                                                                                                                                                                  |
| Stockholders' deficit  Convertible Series A preferred stock - $.01 par value; authorized      2,000,000 shares; 2,958.3617 shares issued at March 31,2011 and 2,978.3617 shares issued at December 31, 2010  Common stock - $.01 par value; authorized 100,000,000 shares;     issued, 19,299,798 at March 31, 2011 and 19,115,010 at     December 31, 2010  Additional paid-in capital  Treasury stock, at cost – 163 shares |    -  193,000230,579,000(4,000)                                                            |   |    -  191,000230,153,000(4,000)                                                                                                                              |
|       Accumulated deficit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | (253,472,000)                                                                                                       |   | (251,135,000)                                                                                                                                                                         |
|                 Total stockholders' deficit                                                                                                                                                                                                                                                                                                                                                                                                                                 | (22,704,000)                                                                                                        |   | (20,795,000)                                                                                                                                                                          |
|             Total liabilities and stockholders' deficit                                                                                                                                                                                                                                                                                                                                                                                                                                         |  $          6,876,000                                        |   |  $          8,771,000                                                                                                          |

----

Table of Contents 

Condensed Consolidated Statements of Operations

(unaudited)

|                                                                                   |   | Three Months ended March 31, |       |
|----------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                   |   | 2011                         |       |   | 2010 |   |
| Revenues                                                                               |   |                         |       |   |   |   |
| License revenues                                                                       |   | $                            | 87,000     |   |   | $ | 87,000 |   |
| Sponsored research and development                                                     |   |                         | 30,000     |   |   |   | - |   |
| Royalties                                                                              |   |                         | 20,000     |   |   |   | 15,000 |   |
| Product sales                                                                          |   |                         | 13,000     |   |   |   | - |   |
| Total revenues                                                                         |   |                         | 150,000    |   |   |   | 102,000 |   |
|                                                                                   |   |                         |       |   |   |   |   |   |
| Expenses                                                                               |   |                         |       |   |   |   |   |   |
| Research and development                                                               |   |                         | 1,120,000  |   |   |   | 786,000 |   |
| Product costs                                                                          |   |                         | 92,000     |   |   |   | - |   |
| General and administrative                                                             |   |                         | 1,026,000  |   |   |   | 898,000 |   |
| Depreciation and amortization                                                          |   |                         | 61,000     |   |   |   | 61,000 |   |
|             Total expenses |   |                         | 2,299,000  |   |   |   | 1,745,000 |   |
|                                                                                   |   |                         |       |   |   |   |   |   |
| Loss from operations                                                                   |   |                         | (2,149,000 | ) |   |   | (1,643,000 | ) |
|                                                                                   |   |                         |       |   |   |   |   |   |
| Interest and miscellaneous income                                                      |   |                         | 5,000      |   |   |   | 4,000 |   |
| Interest and other expense                                                             |   |                         | (167,000   | ) |   |   | (149,000 | ) |
| Gain on change in fair value of derivative – warrants                            |   |                         | 1,235,000  |   |   |   | 2,877,000 |   |
| Loss on change in fair value of derivative – preferred stock                     |   |                         | (823,000   | ) |   |   | - |   |
|                                                                                   |   |                         | 250,000    |   |   |   | 2,732,000 |   |
| Net income (loss)                                                                      |   |                         | (1,899,000 | ) |   |   | 1,089,000 |   |
|  Less preferred stock dividends                                                   |   |                         | 438,000    |   |   |   | 442,000 |   |
| Net income (loss) allocable to common stockholders                                     |   | $                            | (2,337,000 | ) |   | $ | 647,000 |   |
|                                                                                   |   |                         |       |   |   |   |   |   |
| Net income (loss) per share                                                            |   |                         |       |   |   |   |   |   |
| Basic                                                                                  |   | $                            | (0.12      | ) |   | $ | 0.04 |   |
| Diluted                                                                                |   | $                            | (0.12      | ) |   | $ | 0.04 |   |
|                                                                                   |   |                         |       |   |   |   |   |   |
| Weighted average number of common shares outstanding                                   |   |                         |       |   |   |   |   |   |
| Basic                                                                                  |   |                         | 19,241,570 |   |   |   | 14,766,947 |   |
| Diluted                                                                                |   |                         | 19,241,570 |   |   |   | 17,756,979 |   |

----

Table of Contents 

Condensed Consolidated Statements of Stockholders' Deficit

(unaudited)

|                                                           |   |   |  Common Stock |   |   |   | Preferred Stock |   |   |   |         |   |   |   |               |   |   |   |        |   |
|----------------------------------------------------------------|--------|--------|--------------------|--------|--------|--------|-----------------|--------|--------|--------|--------------|--------|--------|--------|--------------------|--------|--------|--------|-------------|--------|
|                                                           |   |   |               |   |   |   |            |   |   |   |         |   |   |   |               |   |   |   | Additional  |   |   |   |   |   |   |   |   |   |
|                                                           |   |   |               |   |   |   |            |   |   |   |         |   |   |   |               |   |   |   | paid-in     |   |   |   | Treasury   |   |   |   | Accumulated |   |
|                                                           |   |   | Shares             |   |   |   | Amount     |   |   |   | Shares  |   |   |   | Amount   |   |   |   | capital     |   |   |   | stock  |   |   |   | deficit |   |
| Balance December 31, 2010                                      |   |   | 19,115,000         |   |   | $      | 191,000         |   |   |   | 2,978.3617   |   |   | $      | -                  |   |   | $      | 230,153,000 |   |   | $ | (4,000 | ) |   | $ | (251,135,000 | ) |
| Restricted common  stock issued for services              |   |   | 21,000             |   |   |   | -               |   |   |   | -            |   |   |   | -                  |   |   |   | 50,000      |   |   |   | - |   |   |   | - |   |
| Common stock issued for  services                    |   |   | 85,000             |   |   |   | 1,000           |   |   |   | -            |   |   |   | -                  |   |   |   | 195,000     |   |   |   | - |   |   |   | - |   |
| Preferred stock converted     into common stock |   |   | 78,000             |   |   |   | 1,000           |   |   |   | (20.0000     | )      |   |   | -                  |   |   |   | -           |   |   |   | - |   |   |   | - |   |
| Common stock issued for   preferred dividends             |   |   | 1,000         |   |   |   | -          |   |   |   | -       |   |   |   | -             |   |   |   | -      |   |   |   | -  |   |   |   | -  |   |
| Stock option  compensation expense                   |   |   | -                  |   |   |   | -               |   |   |   | -            |   |   |   | -                  |   |   |   | 181,000     |   |   |   | - |   |   |   | - |   |
| Preferred dividends                                            |   |   | -                  |   |   |   | -               |   |   |   | -            |   |   |   | -                  |   |   |   | -           |   |   |   | - |   |   |   | (438,000 | ) |
| Net loss                                                       |   |   | -                  |   |   |   | -               |   |   |   | -            |   |   |   | -                  |   |   |   | -           |   |   |   | - |   |   |   | (1,899,000 | ) |
| Balance at  March 31, 2011                           |   |   | 19,300,000         |   |   | $      | 193,000         |   |   |   | 2,958.3617   |   |   | $      | -                  |   |   | $      | 230,579,000 |   |   | $ | (4,000 | ) |   | $ | (253,472,000 | ) |

----

Table of Contents 

Condensed Consolidated Statements of Cash Flows

(unaudited)

|                                                                                                                                 |   | Three Months ended March 31, |       |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                                                                 |   | 2011                         |       |   | 2010 |   |
| Cash flows from operating activities:                                                                                                |   |                         |       |   |   |   |
|      Net income (loss)                                                                                      |   | $                            | (1,899,000 | ) |   | $ | 1,089,000 |   |
|   Adjustments to reconcile net income (loss) to cash used                                                                  |   |                         |       |   |   |   |   |   |
|                   in operating activities: |   |                         |       |   |   |   |   |   |
| Gain on change in fair value of derivative - warrants                                                                                |   |                         | (1,235,000 | ) |   |   | (2,877,000 | ) |
| Loss on change in fair value of derivative - preferred stock                                                                         |   |                         | 823,000    |   |   |   | - |   |
| Depreciation and amortization                                                                                                        |   |                         | 61,000     |   |   |   | 61,000 |   |
| Stock option compensation expense                                                                                                    |   |                         | 181,000    |   |   |   | 114,000 |   |
| Stock and warrants issued for services                                                                                               |   |                         | 246,000    |   |   |   | 37,000 |   |
| Change in operating assets and liabilities:                                                                                          |   |                         |       |   |   |   |   |   |
|     Receivables                                                                                                  |   |                         | 972,000    |   |   |   | 1,000 |   |
| Prepaid expenses and other current assets                                                                                            |   |                         | 21,000     |   |   |   | (8,000 | ) |
| Other assets                                                                                                                         |   |                         | 4,000      |   |   |   | 5,000 |   |
|     Accounts payable and accrued expenses                                                                        |   |                         | (92,000    | ) |   |   | (235,000 | ) |
| Dividends payable                                                                                                                    |   |                         | 61,000     |   |   |   | 39,000 |   |
| Accrued interest payable                                                                                                             |   |                         | 106,000    |   |   |   | (331,000 | ) |
| Deferred revenue                                                                                                                     |   |                         | (86,000    | ) |   |   | (86,000 | ) |
| Net cash used in operating activities                                                                                                |   |                         | (837,000   | ) |   |   | (2,191,000 | ) |
|                                                                                                                                 |   |                         |       |   |   |   |   |   |
| Cash flows from investing activities:                                                                                                |   |                         |       |   |   |   |   |   |
|  Capital expenditures                                                                                                           |   |                         | (22,000    | )  |   |   | - |   |
| Net cash used in investing activities                                                                                                |   |                         | (22,000    | ) |   |   | - |   |
|                                                                                                                                 |   |                         |       |   |   |   |   |   |
| Cash flows from financing activities:                                                                                                |   |                         |       |   |   |   |   |   |
|  Proceeds from exercise of stock options                                                                                        |   |                         | -          |   |   |   | 14,000 |   |
|     Proceeds from common stock issuances, net of costs                                                           |   |                         | -          |   |   |   | 5,848,000 |   |
| Net cash provided by financing activities                                                                                            |   |                         | -          |   |   |   | 5,862,000 |   |
|                                                                                                                                 |   |                         |       |   |   |   |   |   |
| Net increase (decrease) in cash and cash equivalents                                                                                 |   |                         | (859,000   | ) |   |   | 3,671,000 |   |
| Cash and cash equivalents at beginning of period                                                                                     |   |                         | 7,033,000  |   |   |   | 607,000 |   |
| Cash and cash equivalents at end of period                                                                                           |   | $                            | 6,174,000  |   |   | $ | 4,278,000 |   |
|                                                                                                                                 |   |                         |       |   |   |   |   |   |
| Supplemental cash flow information:                                                                                                  |   |                         |       |   |   |   |   |   |
|    Cash paid for interest                                                                                             |   | $                            | -          |   |   | $ | 440,000 |   |
|                                                                                                                                 |   |                         |       |   |   |   |   |   |
| Supplemental disclosure of noncash transactions:                                                                                     |   |                         |       |   |   |   |   |   |
| Shares issued for dividends on preferred stock                                                                                       |   |                         | 1,000      |   |   |   | - |   |
|   Preferred stock dividends in dividends payable                                                                           |   |                         | 438,000    |   |   |   | 442,000 |   |

----

Table of Contents 

Notes to Condensed Consolidated Financial Statements

Three Months Ended March 31, 2011 and 2010

(unaudited)

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

----

Table of Contents 

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

|                                       | March 31, 2011                                                                 | December 31, 2010                                                  |
|--------------------------------------------|--------------------------------------------------------------------------------|--------------------------------------------------------------------|
|                                       | Grosscarryingvalue                                                             |  Accumulatedamortization                                      | Grosscarryingvalue |  AccumulatedAmortization |
| Amortizable intangible assets Patents |   $          2,624 |   $        2,103 |   $      2,624 |   $      2,050 |
|                                       |                                                                           |                                                               |   |   |

| 2011         |   | $      | 159    |   |
|--------------|--------|--------|--------|--------|
| 2012         |   |   | 82     |   |
| 2013         |   |   | 44     |   |
| 2014         |   |   | 44     |   |
| 2015         |   |   | 44     |   |
| over 5 years |   |   | 148    |   |
|         |   |   |   |   |
| Total        |   | $      | 521    |   |

| (3)  | Liquidity |
|-----------|-----------|

| (4)    | Fair Value of Financial Instruments |
|-----------------------|-------------------------------------|

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

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

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

| (in thousands)                                |   |                |   |   |    |   |   |    |   |   |    |   |   |                |   |
|-----------------------------------------------|--------|---------------------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|---------------------|--------|
|  Description                             |   | As ofMarch 31, 2011 |   |   | Level 1 |   |   | Level 2 |   |   | Level 3 |   |   | Total Gains(Losses) |   |
| Liabilities:  Derivative liability- |   |                |   |   |    |   |   |    |   |   |    |   |   |                |   |
|     warrants              |   | $                   | 3,852  |   |    | $      | -      |    |   | $      | 3,852   |   |   | $                   | -      |   |   | $ | 1,235 |   |
|     preferred stock       |   | $                   | 6,663  |   |    | $      | -      |    |   | $      | -       |   |   | $                   | 6,663  |   |   | $ | (823 | ) |

| (in thousands)                                |   |                   |   |   |          |   |   |          |   |   |          |   |   |                |   |
|-----------------------------------------------|--------|------------------------|--------|--------|---------------|--------|--------|---------------|--------|--------|---------------|--------|--------|---------------------|--------|
|   Description                       |   | As ofDecember 31, 2010 |   |   |  Level 1 |   |   |  Level 2 |   |   |  Level 3 |   |   | Total Gains(Losses) |   |
| Liabilities:  Derivative liability- |   |                   |   |   |          |   |   |          |   |   |          |   |   |                |   |
|     warrants              |   | $                      | 5,087  |   |          | $      | -      |          |   | $      | 5,087         |   |   | $                   | -      |   |   | $ | 4,621 |   |
|     preferred stock       |   | $                      | 5,840  |   |          | $      | -      |          |   | $      | -             |   |   | $                   | 5,840  |   |   | $ | (5,840 | ) |

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| (5)  | Stock Based Compensation |
|-----------|--------------------------|

|                                                                            |   | Three months endedMarch 31, |    |
|---------------------------------------------------------------------------------|--------|-----------------------------|---------|
|                                                                            |   | 2011                        |    |   | 2010 |   |
| Research and development                                                        |   | $                           | 103,000 |   |   | $ | 73,000 |   |
| General and administrative                                                      |   |                        | 78,000  |   |   |   | 41,000 |   |
| Stock-based compensation expense   included in operating expense |   | $                           | 181,000 |   |   | $ | 114,000 |   |

|                    |   | 3/31/11  |   |    | 3/31/10  |   |
|-------------------------|--------|----------|--------|---------|----------|--------|
| Expected life(b)        |   | 6.25 yrs |   |    | 5.97 yrs |   |
| Risk free interest rate |   |     | 1.1    | %       |     |   | 2.4 | % |
| Expected volatility(a)  |   |     | 112    | %  |     |   | 118 | % |
| Expected dividend yield |   |     | 0.0    | %       |     |   | 0.0 | % |

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

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|  (in thousands, except share and per share amounts) |   | Three months endedMarch 31, |       |
|----------------------------------------------------------|--------|-----------------------------|------------|
|                                                     |   | 2011                        |       |   | 2010 |   |
|                                                     |   |                        |       |   |   |   |
| Net income (loss)                                        |   | $                           | (2,337     | ) |   | $ | 647 |   |
| Weighted average shares outstanding                      |   |                        | 19,241,570 |   |   |   | 14,766,947 |   |
| Basic net income (loss) per common share                 |   | $                           | (0.12      | ) |   | $ | 0.04 |   |
|                                                     |   |                        |       |   |   |   |   |   |
| Net income (loss)                                        |   | $                           | (2,337     | ) |   | $ | 647 |   |
| Weighted average shares outstanding                      |   |                        | 19,241,570 |   |   |   | 14,766,947 |   |
| Effect of dilutive options and warrants                  |   |                        | -          |   |   |   | 2,990,032 |   |
| Weighted average shares outstanding assuming dilution    |   |                        | 19,241,570 |   |   |   | 17,756,979 |   |
| Diluted net income (loss) per common share               |   | $                           | (0.12      | ) |   | $ | 0.04 |   |
|                                                     |   |                        |       |   |   |   |   |   |

|             |   | Three months endedMarch 31, |       |
|------------------|--------|-----------------------------|------------|
|             |   | 2011                        |       |   | 2010 |   |
| Warrants         |   |                        | 12,060,907 |   |   |   | 6,124,749 |   |
| Stock options    |   |                        | 1,846,284  |   |   |   | 886,404 |   |
| Convertible note |   |                        | 200,000    |   |   |   | 200,000 |   |
| Preferred stock  |   |                        | 11,601,405 |   |   |   | 9,951,198 |   |
| Total            |   |                        | 25,708,596 |   |   |   | 17,162,351 |   |
|             |   |                        |       |   |   |   |   |   |

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