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NOTE 1. ORGANIZATION   Transdel Pharmaceuticals, Inc. (Transdel or Company) is a specialty pharmaceutical company developing non-invasive, topically delivered products. The Companys innovative patented Transdel cream formulation technology is designed to facilitate the effective penetration of a variety of products through the skin barrier. Ketotransdel®, the Companys lead pain product, utilizes the Transdel platform technology to deliver the active drug, ketoprofen, a non-steroidal anti-inflammatory drug (NSAID), through the skin directly into the underlying musculoskeletal and soft tissues where the drug exerts its well-known anti-inflammatory and analgesic effects. The Company intends to leverage its Transdel platform technology to expand and create a portfolio of topical products for a variety of indications.   As described in Note 4, the Company, on June 26, 2011, filed a voluntary petition for reorganization relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of California (the Bankruptcy Court), Case No. 11-10497-11 (the Chapter 11 Case). On November 21, 2011, in connection with the transactions described throughout these notes to the consolidated financial statements, the Company requested that the Bankruptcy Court dismiss the Chapter 11 Case, and on December 9, 2011, the Bankruptcy Court entered an order dismissing the Chapter 11 Case.

NOTE 2. GOING CONCERN   The accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred recurring operating losses, had negative operating cash flows and has not recognized any revenues since July 24, 1998 (Inception). In addition, the Company had a deficit accumulated during the development stage of $18.5 million at December 31, 2011. These factors raise substantial doubt about the Companys ability to continue as a going concern.   The Companys continuation as a going concern is dependent on its ability to obtain additional financing to fund operations, implement its business model, and ultimately, to attain profitable operations. In order to execute the second Phase 3 clinical trial and other supportive safety studies for Ketotransdel®, which are required by the U.S. Food and Drug Administration (FDA) to obtain final regulatory approval for Ketotransdel®, the Company will need to secure additional funds through various means, including equity and debt financing, funding from a corporate partnership or licensing arrangement or any similar financing. There can be no assurance that the Company will be able to obtain additional debt or equity financing, if and when needed, on terms acceptable to the Company. Any additional equity or debt financing may involve substantial dilution to the Companys stockholders, restrictive covenants or high interest costs. The failure to raise needed funds on sufficiently favorable terms could have a material adverse effect on the execution of the Companys business plan, operating results and financial condition. The Companys long term liquidity also depends upon its ability to generate revenues from the sale of its products and achieve profitability. The failure to achieve these goals could have a material adverse effect on the execution of the Companys business plan, operating results and financial condition. The Company intends to raise additional financing to fund its operations through various means, including equity or debt financing, funding from a corporate partnership or licensing arrangement or any similar financing. However, there is no assurance that sufficient financing will be available or, if available, on terms that would be acceptable to the Company.   The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   Basis of Presentation   The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), and with the rules and regulations of the Securities and Exchange Commission (SEC) related to an annual report on Form 10-K. The consolidated financial statements include the accounts of Transdel Pharmaceuticals Inc. and its wholly-owned subsidiary, Transdel Pharmaceuticals Holdings, Inc. (collectively, the Company). All significant intercompany balances and transactions have been eliminated in consolidation. The Company has evaluated subsequent events through the filing date of this Form 10-K, and determined that no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the notes thereto other than as disclosed in the accompanying notes.   Principles of Consolidation   On September 17, 2007, Transdel entered into an Agreement of Merger and Plan of Reorganization (the Merger Agreement) by and among Transdel, Transdel Pharmaceuticals Holdings, Inc., a privately held Nevada corporation (Transdel Holdings), and Trans-Pharma Acquisition Corp., a newly formed, wholly-owned Delaware subsidiary of Transdel (Acquisition Sub). Upon closing of the merger transaction contemplated under the Merger Agreement (the Merger), Acquisition Sub merged with and into Transdel Holdings, and Transdel Holdings, as the surviving corporation, became a wholly-owned subsidiary of Transdel.   In connection with the merger, 1,849,993 of Transdel common shares remain outstanding and all other outstanding shares of Transdel were cancelled. Also, at the closing of the Merger, each share of Transdel Holdings common stock issued and outstanding immediately prior to the closing of the Merger was exchanged for the right to receive 0.15625 of one share of Transdels common stock. An aggregate of 8,000,000 shares of Transdels common stock, which includes 195,313 shares of restricted stock which were subject to forfeiture, were issued to the holders of Transdel Holdings common stock. As a result of the transaction, the former owners of Transdel Holdings became the controlling stockholders of Transdel. Accordingly, the merger of Transdel Holdings and Transdel is a reverse merger that has been accounted for as a recapitalization of Transdel Holdings.   Effective on September 17, 2007, and for all reporting periods thereafter, Transdels operating activities, including any prior comparative period, include only those of Transdel Holdings. All references to share and per share amounts in the accompanying consolidated financial statements and footnotes have been restated to reflect the aforementioned share exchange. All significant intercompany accounts and transactions have been eliminated in consolidation.   On June 20, 2011, Transdel Holdings was merged with Transdel Pharmaceuticals, Inc., at which time Transdel Holdings ceased as a corporation, and Transdel Pharmaceuticals, Inc. remains as the sole surviving corporation.   Development Stage Enterprise   The Company is a development stage company as defined by the Financial Accounting Standards Board (the FASB). The Company is devoting substantially all of its present efforts to establish a new business, and its planned principal operations have not yet commenced. All losses accumulated since inception have been considered as part of the Companys development stage activities.   These consolidated financial statements contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is a development stage enterprise and has sustained significant losses since inception and expects to continue to incur losses through 2012.   Research and Development   The Company expenses all costs related to research and development as they are incurred.   Revenue Recognition and Deferred Revenue   The Company will recognize revenues in accordance with FASB guidance, which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) will be based on managements judgments regarding the fixed nature of the selling prices of the products delivered and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments will be provided for in the same period the related sales are recorded. The Company will defer any revenue for which the product has not been delivered or for which services have not been rendered or are subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or services have been rendered or no refund will be required.   As of December 31, 2011, the Company had not generated any revenues and the Company does not anticipate that it will generate any significant revenues until one or more of its drug candidates are approved by the FDA or until the Company is able to commercialize one or more of its cosmetic products. Also, effective sales and marketing support must be in place for either the drug candidates or the cosmetic products in order to generate any revenues. The FDA approval process is highly uncertain and the Company cannot estimate when it will generate revenues at this time from sales of its products.   Cash and Cash Equivalents   Cash equivalents include short-term, highly liquid investments with maturities of three months or less at the time of acquisition.   Concentrations of Credit Risk   A financial instrument which potentially subjects the Company to concentrations of credit risk is cash.  The Company places its cash with financial institutions deemed by management to be of high credit quality. The Federal Deposit Insurance Corporation (FDIC) provides basic deposit coverage with limits to $250,000 per owner. In addition to the basic insurance deposit coverage, the FDIC is providing temporary unlimited coverage for noninterest-bearing transaction accounts from December 31, 2010 to December 31, 2012. At December 31, 2011, there were no uninsured deposits.   Computer Equipment Computer equipment is stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful life of three years. During the years ended December 31, 2011 and 2010, the Company recorded $338 and $1,056, respectively, in depreciation expense. Fair Value Measurements   Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. US GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The established fair value hierarchy prioritizes the use of inputs used in valuation methodologies into the following three levels:   <table align="center" cellspacing="0" cellpadding="0" style="width: 100%; font-size: 10pt"> <tr style="vertical-align: top"> <td style="width: 24px; font-family: Symbol; text-align: left">·</td> <td style="font-family: Times New Roman, Times, Serif; text-align: left">Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and must be used to measure fair value whenever available.</td></tr> <tr style="vertical-align: top"> <td style="font-family: Symbol; text-align: left">·</td> <td style="font-family: Times New Roman, Times, Serif; text-align: left">Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.</td></tr> <tr style="vertical-align: top"> <td style="font-family: Symbol; text-align: left">·</td> <td style="font-family: Times New Roman, Times, Serif; text-align: left">Level 3: Significant unobservable inputs that reflect a reporting entitys own assumptions about the assumptions that market participants would use in pricing an asset or liability. For example, level 3 inputs would relate to forecasts of future earnings and cash flows used in a discounted future cash flows method.</td></tr> </table>   The fair values of the Companys cash and cash equivalents, accounts payable, accounts payable due to related parties, accrued expenses and notes payable approximate carrying values due to their short term maturities.   Stock-Based Compensation   All share-based payments to employees, including grants of stock options to employees, directors and consultants and restricted stock grants, are recognized in the consolidated financial statements based upon their fair values.   The Company's accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows FASB guidance. As such, the value of the applicable stock-based compensation is periodically remeasured and income or expense is recognized during their vesting terms. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor's performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is primarily recognized over the term of the consulting agreement. In accordance with FASB guidance, an asset acquired in exchange for the issuance of fully vested, nonforfeitable equity instruments should not be presented or classified as an offset to equity on the grantor's balance sheet once the equity instrument is granted for accounting purposes. Accordingly, the Company records the fair value of nonforfeitable equity instruments issued for future consulting services as prepaid consulting fees in its consolidated balance sheets.   Income Taxes   We account for income taxes under the provision of Accounting Standards Codification 740, Income Taxes, or ASC 740. As of December 31, 2011 and 2010, there were no unrecognized tax benefits included in the consolidated balance sheets that would, if recognized, affect the effective tax rate. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. We had no accrual for interest or penalties on our consolidated balance sheets at December 31, 2011 and 2010, respectively and have not recognized interest and/or penalties in the consolidated statement of operations for the years ended December 31, 2011 and 2010. We are subject to taxation in the United States and California.   Basic and Diluted Loss per Common Share   Basic net loss per common share is computed by dividing net loss attributable to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders for the period by the weighted average number of common and common equivalent shares, such as stock options and warrants outstanding during the period.   Basic and diluted net loss applicable to common stock per share is computed using the weighted average number of common shares outstanding during the period. Common stock equivalents (prior to application of the treasury stock, if converted method) from convertible notes, preferred stock, stock options and warrants were 33,089,677 and 4,330,676 for the years ended December 31, 2011 and 2010, respectively, are excluded from the calculation of diluted net loss per share for all periods presented because the effect is anti-dilutive.   <table cellspacing="0" cellpadding="0" style="width: 100%; margin-left: 4.65pt; border-collapse: collapse; font-size: 10pt"> <tr style="vertical-align: bottom"> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif; text-align: center">For the year ended</td> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif; text-align: center">For the year ended</td></tr> <tr style="vertical-align: top"> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif; text-align: center"> </td> <td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif; text-align: center">December 31, 2011</td> <td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif; text-align: center">December 31, 2010</td></tr> <tr style="vertical-align: top"> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr> <tr> <td nowrap="nowrap" style="vertical-align: bottom; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif">Net loss</td> <td style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif">$</td> <td style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif; text-align: center; text-indent: 10pt">(953,936)</td> <td style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif; text-align: center">$</td> <td style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif; text-align: center; text-indent: 10pt">(2,531,228)</td></tr> <tr> <td nowrap="nowrap" style="vertical-align: bottom; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif">Deemed dividend to preferred stockholders</td> <td style="vertical-align: top; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif; text-align: justify"> </td> <td style="vertical-align: top; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif; text-align: center; text-indent: 10pt">(100,000)</td> <td style="vertical-align: top; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="vertical-align: top; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif; text-align: center; text-indent: 10pt">-</td></tr> <tr> <td style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif">Numerator loss attributable to common stockholders</td> <td nowrap="nowrap" style="vertical-align: bottom; border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif"> </td> <td style="vertical-align: top; border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif; text-align: center">(1,053,936)</td> <td nowrap="nowrap" style="vertical-align: bottom; border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="vertical-align: top; border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif; text-align: center">(2,531,228)</td></tr> <tr style="vertical-align: top"> <td style="padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif">Denominator weighted average</td> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr> <tr style="vertical-align: top"> <td style="padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif">   number of shares outstanding, basic and diluted</td> <td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif; text-align: right; text-indent: 10pt"> </td> <td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif; text-align: center; text-indent: 10pt">15,912,112</td> <td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif; text-align: center; text-indent: 10pt">15,785,239</td></tr> <tr> <td style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif; font-weight: bold">Loss per share, basic and diluted</td> <td nowrap="nowrap" style="vertical-align: top; border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif; text-align: center"> $</td> <td style="vertical-align: top; border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif; text-align: center; text-indent: 10pt">(0.07)</td> <td nowrap="nowrap" style="vertical-align: bottom; border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif; text-align: center">$</td> <td style="vertical-align: top; border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-left: 5.4pt; font-family: Times New Roman, Times, Serif; text-align: center; text-indent: 10pt">(0.16)</td></tr> </table>   Use of Estimates   The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. Significant estimates made by management are, among others, the valuation of contributed services, stock options, deferred taxes and stock-based compensation issued to employees and non-employees. Actual results could differ from those estimates.   Recent Accounting Pronouncements   In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The update contains the results of the work of the FASB and the International Accounting Standards Board to develop common requirements for measuring fair value and for disclosing fair value measurements in accordance with U.S. GAAP and IFRSs. The amendments in this update are effective for periods beginning after December 15, 2011 and as a result are not yet applicable to the Company. The Company is evaluating the impact of the update on its consolidated financial statements.

NOTE 4. BANKRUPTCY PETITION AND ASSET PURCHASE AGREEMENT   On June 26, 2011 we filed a voluntary petition for reorganization relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of California (the Bankruptcy Court), Case No. 11-10497-11 (the Chapter 11 Case). In connection with the Chapter 11 Case, we, as seller, and Cardium Healthcare, Inc., a wholly-owned subsidiary of Cardium Therapeutics, Inc., as purchaser (the Cardium), entered into an Asset Purchase Agreement dated June 26, 2011 (the Asset Purchase Agreement) pursuant to which we agreed to sell substantially all of our assets pursuant to Sections 105, 363 and 365 of the Bankruptcy Code, subject to court approval and the satisfaction of certain conditions set forth in the Asset Purchase Agreement.   Consummation of the sale to Cardium was subject to a number of conditions, including, among others, the approval by the Bankruptcy Court of the transactions contemplated by the Asset Purchase Agreement and compliance with certain specified deadlines for actions in connection with the Bankruptcy Case. The Asset Purchase Agreement was terminable by the parties under a number of circumstances, including failure to obtain certain Bankruptcy Court orders by agreed dates.   On July 26, 2011, the Bankruptcy Court denied our motion to sell our assets pursuant to the Asset Purchase Agreement. On October 7, 2011, we terminated the Asset Purchase Agreement pursuant to its terms. On November 21, 2011, in connection with the transactions described below, we requested that the Bankruptcy Court dismiss the Chapter 11 Case and retain jurisdiction to decide matters related to claims brought in the Bankruptcy Case by the Purchaser. On December 9, 2011, the Bankruptcy Court entered an order dismissing the Chapter 11 Case.  In connection with the dismissal of the Chapter 11 Case, the Bankruptcy Court, among other things, declined to retain jurisdiction over claim objection proceedings and found moot our objection to certain claims to receive a break-up fee pursuant to the Asset Purchase Agreement of Cardium Therapeutics, Inc. and Cardium Healthcare, Inc., a wholly owned subsidiary of Cardium.  The dismissal of the Chapter 11 Case was based upon the provisions of both 11 U.S.C. Sections 305(a) and 1112(b).

NOTE 5. NOTES PAYABLE   Convertible Notes August 2005   In August 2005, the Company issued seven convertible promissory notes in the aggregate amount of $226,300 to various stockholders (collectively, the Stockholders Notes). The Stockholders Notes bore interest at 4% per annum and were to mature on August 25, 2010. In connection with the issuance of the Stockholders Notes, the Company granted warrants that were exercisable into an aggregate of 35,359 shares of the Companys common stock. The warrants were determined to have an insignificant fair value at the time of the grant.   In May 2007, the holders of the Stockholders Notes and related warrants forgave the amounts due and forfeited the related warrants. In connection with the forgiveness, the Company recorded additional paid-in capital of $241,701 equal to the value of the Stockholders Notes and related accrued interest. Interest expense on the Stockholders Notes was $15,401 for the period from Inception through December 31, 2007.   Convertible Notes May and June 2007   In May and June 2007, the Company issued convertible notes payable to various lenders for an aggregate amount of $1,500,000 (collectively, the 2007 Notes). Each of the 2007 Notes included interest at 7% per annum and were to mature on December 16, 2007 (Maturity Date). However, as a result of the Merger and Private Placement (see Note 6), the entire outstanding principal amount and accrued interest was converted into the Companys common stock at a conversion price equal to $1.00 per share, which resulted in the issuance of 1,530,177 shares. Also, the Company recorded a debt discount of $1,530,177, which was amortized immediately to interest expense upon the conversion of the 2007 Notes. Excluding the debt discount, interest expense on the 2007 Notes was $30,177 for the period from Inception through December 31, 2008.   Convertible Note April 2010   On April 5, 2010, the Company issued a Senior Convertible Promissory Note (the Note) to an existing investor through a private placement. The Note includes an annual interest rate of 7.5 percent and (unless converted or prepaid, as noted below) all principal and interest are due and payable on its maturity date April 5, 2012 (Maturity Date). At any time prior to the Maturity Date, the investor may convert all or a portion of the outstanding principal and accrued interest at a conversion ratio of one share of Transdels common stock for each $1 (the fair market value of the Companys common stock on April 5, 2010) owed. Also, at any time prior to the Maturity Date, the Company has the option to prepay the outstanding principal and accrued interest. The Company received gross proceeds from the issuance of the Note in the aggregate amount of $1,000,000. There were no discounts or commissions paid in connection with this private placement. Accrued interest on the Note was $130,479 and $55,479 at December 31, 2011 and 2010, respectively, and interest expense on the Note was $75,000 and $55,479 for the years ended December 31, 2011 and 2010, respectively. Following the Companys bankruptcy petition filed on June 26, 2011, and the change in ownership control following the issuance of preferred stock, the entire unpaid principal sum of this Note, together with its accrued and unpaid interest became immediately due and payable. Subsequent to the year ended December 31, 2011, the Company, the noteholder and its assignee entered into a waiver and settlement agreement described in Note 14.   Secured Line of Credit Related Party   On November 21, 2011, the Company entered into a Secured Line of Credit Letter Agreement (the Line of Credit Agreement) with DermaStar International, LLC (DermaStar).   The Line of Credit Agreement became effective on December 9, 2011, in connection with the dismissal of the Chapter 11 Case by the Bankruptcy Court.  On December 9, 2011, as required by the Line of Credit Agreement, the Company entered into a Security Agreement and an Intellectual Property Security Agreement with DermaStar, pursuant to which the Company granted to DermaStar a blanket security interest in all of its assets, including its intellectual property. The Line of Credit Agreement provides for advances to the Company of up to an aggregate of $750,000 (each an Advance and collectively the Loan), subject to the satisfaction by the Company of certain conditions in connection with the initial Advance and each subsequent Advance.  Each Advance will be made pursuant to a Promissory Note in favor of DermaStar.  The Company has received advances totaling $300,000 at December 31, 2011. The Promissory Notes accrue interest at 10% annually and mature one year after the effective dates of the respective advance.   DermaStar, and its members individually, are control persons of the Company, as they have the ability to direct or cause direction of management and policies of the Company through their ownership. Also Dr. Robert J. Kammer, a director of the Company, and Mark L. Baum, Esq., Executive Chairman of the Company, are managing members and partial owners of DermaStar.   Notes Payable consists of the following   <table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif"> <tr style="vertical-align: bottom"> <td style="text-align: center"> </td><td style="font-weight: bold"> </td> <td colspan="3" style="font-weight: bold; text-align: center">December 31,</td><td style="font-weight: bold"> </td> <td colspan="3" style="font-weight: bold; text-align: center">December 31,</td></tr> <tr style="vertical-align: bottom"> <td style="text-align: center"> </td><td style="font-weight: bold; padding-bottom: 1pt"> </td> <td colspan="3" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2011</td><td style="font-weight: bold; padding-bottom: 1pt"> </td> <td colspan="3" style="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2010</td></tr> <tr style="vertical-align: bottom"> <td style="width: 56%; padding-left: 5.4pt">10%  note payable due December 2012</td><td style="width: 8%"> </td> <td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">300,000</td><td style="width: 1%; text-align: left"> </td><td style="width: 8%"> </td> <td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">  </td><td style="width: 1%; text-align: left"> </td></tr> <tr style="vertical-align: bottom"> <td style="padding-bottom: 1pt; padding-left: 5.4pt">7.5% convertible note</td><td style="padding-bottom: 1pt"> </td> <td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">1,000,000</td><td style="padding-bottom: 1pt; text-align: left"> </td><td style="padding-bottom: 1pt"> </td> <td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">1,000,000</td><td style="padding-bottom: 1pt; text-align: left"> </td></tr> <tr style="vertical-align: bottom"> <td style="font-weight: bold; padding-left: 5.4pt">Total convertible notes payable</td><td style="font-weight: bold"> </td> <td style="font-weight: bold; text-align: left">$</td><td style="font-weight: bold; text-align: right">1,300,000</td><td style="font-weight: bold; text-align: left"> </td><td style="font-weight: bold"> </td> <td style="font-weight: bold; text-align: left">$</td><td style="font-weight: bold; text-align: right">1,000,000</td><td style="font-weight: bold; text-align: left"> </td></tr> <tr style="vertical-align: bottom"> <td style="padding-bottom: 1pt; padding-left: 5.4pt">Less: Current portion</td><td style="padding-bottom: 1pt"> </td> <td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">(1,300,000</td><td style="padding-bottom: 1pt; text-align: left">)</td><td style="padding-bottom: 1pt"> </td> <td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right"></td></tr> <tr style="vertical-align: bottom"> <td style="font-weight: bold; padding-bottom: 2.5pt; padding-left: 5.4pt">Long-term portion</td><td style="font-weight: bold; padding-bottom: 2.5pt"> </td> <td style="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">  </td><td style="padding-bottom: 2.5pt; font-weight: bold; text-align: left"> </td><td style="font-weight: bold; padding-bottom: 2.5pt"> </td> <td style="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">1,000,000  </td><td style="padding-bottom: 2.5pt; font-weight: bold; text-align: left"> </td></tr> </table>

NOTE 6. STOCKHOLDERS EQUITY   Preferred Stock   At December 31, 2011, the Company had 5,000,000 shares of preferred stock, $0.001 par value, authorized and 10 shares issued and outstanding.   On December 9, 2011, the Company filed a Certificate of Designation to its Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware (the Certificate of Designation), setting forth the rights and preferences of the Series A Preferred Stock.  Among other things, the Certificate of Designation (i) authorizes ten (10) shares of the Companys preferred stock to be designated as Series A Convertible Preferred Stock (Series A Preferred Stock); (ii) grants the holders of the Series A Preferred Stock the right to convert into the Companys Common Stock at a conversion price of $0.001667, as adjusted; (iii) grants a liquidation preference of $10,000 per share of Series A Preferred Stock; (iv) provides that the holders of Series A Preferred Stock shall vote with the holders of the Companys common stock on an as converted basis; and (v) provides that the affirmative vote of a majority of the outstanding shares of the Series A Preferred Stock is required to approve certain other corporate matters including, among other things, changes to the rights of the holders of the Series A Preferred Stock, amendments to the Companys Certificate of Incorporation or Bylaws, issuance of priority or parity securities, issuance of debt securities, entry into certain fundamental transactions and increase or decrease the size of the Board of Directors of the Company.   In partial consideration for and in connection with the Line of Credit Agreement described in Note 5, on November 21, 2011, the Company entered into a Securities Purchase Agreement (the Purchase Agreement) with DermaStar, pursuant to which the Company agreed to issue ten (10) shares of newly-designated Series A Preferred Stock to DermaStar for an aggregate purchase price of $100,000.   The Purchase Agreement, as amended, became effective on December 9, 2011, in connection with the dismissal of the Chapter 11 Case by the Bankruptcy Court.  On December 12, 2011, the Company and DermaStar consummated the transactions contemplated by the Purchase Agreement.  On December 31, 2011 and made effective November 21, 2011, the Company entered into a First Amendment to Securities Purchase Agreement (the Amendment). Pursuant to the terms of the Amendment, DermaStar agreed not to convert more than five (5) shares of Series A Preferred Stock into common stock until such time as the Company has a sufficient number of authorized shares of common stock to enable the conversion of all ten shares of Series A Preferred Stock held by DermaStar. The five shares of preferred stock can be converted into 29,994,001 shares of common stock, which represents approximately 65% of the capital stock of the Company on an as-converted basis.   The Company assigned a beneficial conversion feature of $100,000 to the preferred share purchase and recorded a preferred stock discount. As the preferred shares do not have a stated redemption date, the associated discount was amortized from the date of issuance to the earliest possible conversion date, which is the date of issuance and recognized as a deemed dividend to the preferred stockholders using the effective yield method. Accordingly, the Company recorded non-cash accretion of preferred stock deemed dividend totaling $100,000 in 2011, which represents an increase to reported net loss in arriving at net loss attributable to common stockholders and additional paid-in capital by a corresponding $100,000. The non-cash accretion of the preferred stock deemed dividend does have an effect on net loss or cash flows for the year ended December 31, 2011.   Upon issuance of the Series A Preferred Stock, DermaStar, and its members individually, became control persons of the Company. Also Dr. Robert J. Kammer, a director of the Company, and Mark L. Baum, Esq., Executive Chairman of the Company, are managing members and partial owners of DermaStar.   Common Stock   The following is a summary of common stock and capital contribution transactions from inception through December 31, 2011:   <table cellspacing="0" cellpadding="0" style="width: 100%; border-collapse: collapse; font-family: Times New Roman, Times, Serif"> <tr style="vertical-align: top"> <td style="width: 8%; padding-right: 0.8pt; padding-left: 0.5in; font-size: 12pt; text-align: left; text-indent: -0.25in">-           </td> <td style="width: 92%; padding-right: 0.8pt; font-size: 10pt; text-align: left">In fiscal year 1998, the Company recorded capital contributions of $100,000 (the estimated fair value of the services contributed) in connection with services contributed by stockholders, which is recorded respectively in selling, general and administrative and research and development expenses in the accompanying consolidated statements of operations.</td></tr> <tr style="vertical-align: top"> <td style="padding-right: 0.8pt; padding-left: 0.25in; font-size: 12pt; text-align: left"> </td> <td style="padding-right: 0.8pt; font-size: 12pt; text-align: left"> </td></tr> <tr style="vertical-align: top"> <td style="padding-right: 0.8pt; padding-left: 0.5in; font-size: 12pt; text-align: left; text-indent: -0.25in">-           </td> <td style="font-size: 10pt; text-align: left">In fiscal year 1999, the Company recorded capital contributions of $200,000 (the estimated fair value of the services contributed) in connection with services contributed by stockholders, which is recorded respectively in selling, general and administrative and research and development expenses in the accompanying consolidated statements of operations.</td></tr> <tr style="vertical-align: top"> <td style="padding-right: 0.8pt; padding-left: 0.5in; font-size: 10pt; text-align: left"> </td> <td style="padding-right: 62.95pt; padding-left: 0.25in; font-size: 10pt; text-align: left"> </td></tr> <tr style="vertical-align: top"> <td style="padding-right: 0.8pt; padding-left: 0.5in; font-size: 12pt; text-align: left; text-indent: -0.25in">-           </td> <td style="padding-right: 0.8pt; font-size: 10pt; text-align: left">In fiscal year 2000, the Company issued 937,500 shares of common stock at a price of $0.0064 per share for proceeds of $6,000. Also, recorded capital contributions of $200,000 (the estimated fair value of the services contributed) in connection with services contributed by stockholders, which is recorded respectively in selling, general and administrative and research and development expenses in the accompanying consolidated statements of operations.</td></tr> <tr style="vertical-align: top"> <td style="padding-right: 0.8pt; padding-left: 0.25in; font-size: 12pt; text-align: left"> </td> <td style="padding-right: 0.8pt; font-size: 12pt; text-align: left"> </td></tr> <tr style="vertical-align: top"> <td style="padding-right: 0.8pt; padding-left: 0.5in; font-size: 12pt; text-align: left; text-indent: -0.25in">-           </td> <td style="padding-right: 0.8pt; font-size: 10pt; text-align: left">In fiscal year 2001, the Company recorded capital contributions of $200,000 (the estimated fair value of the services contributed) in connection with services contributed by stockholders, which is recorded respectively in selling, general and administrative and research and development expenses in the accompanying consolidated statements of operations.</td></tr> <tr style="vertical-align: top"> <td style="padding-right: 0.8pt; padding-left: 0.25in; font-size: 12pt; text-align: left"> </td> <td style="padding-right: 0.8pt; padding-left: 0.25in; font-size: 12pt; text-align: left"> </td></tr> <tr style="vertical-align: top"> <td style="padding-right: 0.8pt; padding-left: 0.5in; font-size: 12pt; text-align: left; text-indent: -0.25in">-           </td> <td style="padding-right: 0.8pt; font-size: 10pt; text-align: left">In fiscal year 2002, the Company recorded capital contributions of $200,000 (the estimated fair value of the services contributed) in connection with services contributed by stockholders, which is recorded respectively in selling, general and administrative and research and development expenses in the accompanying consolidated statements of operations.</td></tr> <tr style="vertical-align: top"> <td style="padding-right: 0.8pt; padding-left: 0.25in; font-size: 12pt; text-align: left"> </td> <td style="padding-right: 0.8pt; font-size: 12pt; text-align: left"> </td></tr> <tr style="vertical-align: top"> <td style="padding-right: 0.8pt; padding-left: 0.5in; font-size: 12pt; text-align: left; text-indent: -0.25in">-           </td> <td style="text-align: left"> In fiscal year 2003, the Company recorded capital contributions of $200,000 (the estimated fair value of the services contributed) in connection with services contributed by stockholders, which is recorded respectively in selling, general and administrative and research and development expenses in the accompanying consolidated statements of operations.  </td></tr> <tr style="vertical-align: top"> <td style="padding-right: 0.8pt; padding-left: 0.5in; font-size: 12pt; text-align: left; text-indent: -0.25in">-           </td> <td style="text-align: left"> In fiscal year 2004, the Company recorded capital contributions of $400,000 (the estimated fair value of the services contributed) in connection with services contributed by stockholders, which is recorded respectively in selling, general and administrative and research and development expenses in the accompanying consolidated statements of operations.  </td></tr> <tr style="vertical-align: top"> <td style="padding-right: 0.8pt; padding-left: 0.5in; font-size: 12pt; text-align: left; text-indent: -0.25in">-           </td> <td style="text-align: left"> In fiscal year 2005, the Company issued 2,468,750 shares of common stock at a price of $0.0064 per share for gross proceeds of $15,800 for common stock purchases and stock option exercises. The Company received additional capital contributions in cash of $14,200 from the Companys stockholders and recorded capital contributions of $400,000 (the estimated fair value of the services contributed) in connection with services contributed by stockholders, which is recorded respectively in selling, general and administrative and research and development expenses in the accompanying consolidated statements of operations.  </td></tr> <tr style="vertical-align: top"> <td style="padding-right: 0.8pt; padding-left: 0.5in; font-size: 12pt; text-align: left; text-indent: -0.25in">-           </td> <td style="text-align: left"> In fiscal year 2006, the Company issued 375,000 shares of common stock at a price of $0.0064 per share for gross proceeds of $2,400. The Company received additional capital contributions in cash of $48,600 from the Companys stockholders and recorded capital contributions of $400,000 (the estimated fair value of the services contributed) in connection with services contributed by stockholders, which is recorded respectively in selling, general and administrative and research and development expenses in the accompanying consolidated statements of operations.  </td></tr> </table> -          Prior to the Merger during fiscal year 2007, the Company issued 4,023,437 shares of its common stock at a price of $0.0064 per share for proceeds of $25,750, which includes the issuance of 31,250 shares upon the exercise of a warrant and 7,813 shares upon exercise of stock options. Also, prior to the Merger, the Company received capital contributions of $105,907 from the Companys stockholders and recorded capital contributions of $175,000 (the estimated fair value of the services contributed) in connection with services contributed by stockholders, which is recorded respectively in selling, general and administrative and research and development expenses in the accompanying consolidated statements of operations.   -          Prior to the Merger during fiscal year 2007, the Company recorded additional paid-in capital of $241,701 related to the forgiveness of Stockholders Notes (see Note 5).   -          In August 2007, the Company issued a restricted stock grant to an executive of the Company for 195,313 shares of the Companys common stock.   -          In connection with the Merger in 2007, 1,849,993 of Transdel common shares remained outstanding (see Note 3).   -          Concurrent with the Merger in 2007, the Company sold 2,071,834 shares of common stock for net proceeds of $3,837,791 ($4,143,667 gross) through a private placement (the Private Placement). In addition, the investors received warrants to purchase 517,958 shares of common stock for a period of five years at a cash and cashless exercise price of $4.00 and $5.00 per share, respectively. In connection with the Private Placement, the Company incurred placement agent fees and other related expenses totaling $342,105 (of which $36,229 was paid in fiscal year 2008 and netted with the 2008 private placement discussed below) and issued warrants to purchase up to 33,750 shares of common stock for a period of three years at cash and cashless exercise price of $4.00 and $5.00 per share, respectively.   -          Concurrent with the Merger in 2007, the Company issued 1,530,177 shares of common stock related to the conversion of the 2007 Notes and accrued interest of $1,530,177 (see Note 5). Also, the Company recorded a debt discount of $1,530,177 related to the 2007 Notes (see Note 5).   -          In September 2007, the Company entered into three, one-year consulting agreements with three separate firms to provide services related to investor communications. In the aggregate, 275,000 shares of common stock were issued in accordance with the terms of the agreements along with a warrant to purchase 18,750 shares of common stock for a period of five years at a cash and cashless exercise price of $4.00 and $5.00, respectively. The fair value of the stock and warrants were valued at $550,000. The estimated costs of the consulting agreements, including the stock, warrants and non-refundable fee were amortized over the one-year terms.   -          On May 12, 2008, the Company sold 1,818,180 shares of common stock for net proceeds of $3,941,301 ($4,000,000 gross) through a follow-on private placement (the Follow-on Private Placement) to accredited investors. In addition, the investors received warrants to purchase 227,272 shares of common stock for a period of five years at a cash and cashless exercise price of $4.40 and $5.50 per share, respectively. In connection with the Follow-On Private Placement, the Company incurred expenses of $22,470, which was recorded as a reduction of additional paid-in capital, and the gross proceeds were also netted with $36,229 related to the 2007 private placement that was paid in 2008.   -          In 2008, in connection with the termination of certain consulting agreements entered into in 2007 and 2008, 82,568 shares of common stock were forfeited at a value that was reversed of $135,136. The Company also decreased additional paid-in capital and consulting expense by $70,000 because of the remeasurement of certain consulting agreements. Additionally, during 2008, the Company entered into an agreement with an investor relations firm (IR Firm). Pursuant to the agreement with the IR Firm, the Company issued 68,667 shares of common stock during 2008 at a value of $85,833. In a separate agreement, the Company entered into a consulting agreement in which the Company issued a three-year warrant to purchase 5,000 shares of the Companys common stock at a cash and cashless price of $2.00 per share. The fair value of the warrant, determined based on the Black-Scholes pricing model, was valued at $1,310. The net amount of shares forfeited during 2008 from consulting agreements and the IR Firm was (13,901) and the net expense reversed and charged to additional paid-in capital was ($117,993).   -          On November 21, 2008, the Company issued a restricted stock grant to a director of the Company for 25,000 shares of the Companys common stock. The restricted stock grant vested over a one-year period.   -          During 2009, in connection with the agreement with the IR Firm, the Company issued 45,778 shares of common stock valued at $50,356. In a separate agreement, the Company entered into a consulting agreement in which the Company issued a stock option to purchase 50,000 shares of the Companys common stock at an exercise price of $0.99 per share. The fair value of the option, determined based on the Black-Scholes pricing model, was recorded as $14,434. In another agreement, the Company entered into a consulting agreement in which the Company issued stock options to purchase 47,500 shares of the Companys common stock at an exercise price of $1.60 per share. The fair value of the options, determined based on the Black-Scholes pricing model, was recorded at $56,665. The total value of common stock, warrants and options recorded during 2009 was $121,455.   -          In August 2009, the Company issued 50,000 shares of common stock at a price of $0.99 per share for gross proceeds of $49,500 for stock option exercises.   -          In June 2010, the Company entered into two separate agreements with an investor relations firm and a financial advisory services firm (collectively the firms) in order to provide certain investor relations and advisory services to the Company for a period of one year. In exchange for such services, the Company issued 200,000 shares, in the aggregate, of its unregistered common stock, of which all shares were nonforfeitable (valued at $208,000 and recorded as prepaid consulting fees upon issuance) to the firms as a prepayment of services to be received over a three-month period. The Company agreed to suspend the services related to these agreements, therefore, at this time no additional shares of common stock will be issued to the firms. For the year ended December 31, 2010, the Company recorded stock-based compensation related to the stock of $208,000. On August 13, 2010, the Company entered into a consulting agreement in which the Company issued stock options to purchase 201,217 shares of the Companys common stock at an exercise price of $1.07 per share (see Note 7). The fair value of the options, determined based on the Black-Scholes pricing model, was recorded at $132,300. In September 2010, the Company entered an agreement with an investor relations firm in order to provide certain investor relations services to the Company for a period of six months. In exchange for such services, the Company issued 30,000 shares, in the aggregate, of its unregistered common stock, of which all shares were nonforfeitable (valued at $27,600 and recorded as prepaid consulting fees upon issuance) to the investor relations firm as a prepayment of services to be received for the initial three-month period of the agreement. The agreement was terminated by the Company during November 2010. For the year ended December 31, 2010, the Company recorded stock-based compensation related to the restricted stock of $27,600. The total number of shares issued to consultants during 2010 was 230,000 and the total value of common stock and options issued to consultants during 2010 was $367,900.   -          On October 20, 2010, the Company appointed John N. Bonfiglio, Ph.D. as Chief Executive Officer and President of the Company. Dr. Bonfiglio was also appointed as a director on the Companys Board. The Board granted Dr. Bonfiglio a stock option for 400,000 shares of common stock and issued 50,000 shares of restricted common stock in accordance with the Companys 2007 Incentive Stock and Awards Plan. The stock option and the restricted common stock vested as follows: 25% of the option shares and the restricted stock vested immediately upon grant, with the balance of the option shares and the restricted stock vesting in equal monthly installments over the next 36 months beginning 30 days after the grant date. The restricted stock was valued at $0.80 per share, the reported closing price of the Companys common stock on October 20, 2010. For the year ended December 31, 2010, the Company recorded stock-based compensation expense related to the issuance and partial vesting of the restricted stock award of $12,083.   -          On May 13, 2011, the Board accepted the resignation of Dr. Bonfiglio, Ph.D. as Chief Executive Officer and President of the Company and as a director on the Board. As a result of Dr. Bonfiglios resignation, of the 50,000 shares of restricted stock awarded to him, 18,750 shares had vested and 31,250 shares were returned to treasury and cancelled effective his date of resignation. For the year ended December 31, 2011, the Company recorded stock-based compensation expense related to the issuance and partial vesting of the restricted stock award of $3,332.   -          On October 5, 2011, the Company issued 300,000 stock options to former employees, valued at $11,400 (see Note 7).   For the year ended December 31, 2011, the Company recorded $177,421 of stock-based compensation expense for employee options, $11,400 of compensation expense to employees paid in stock options in lieu of cash and $3,332 of stock-based compensation expense related to the vesting of restricted stock (total expense of $192,153). For the year ended December 31, 2010, the Company recorded $535,812 of stock-based compensation expense for employee options, $12,083 of stock-based compensation expense related to the vesting of restricted stock, $132,300 of expense for stock options issued for consulting services (total expense of $680,195 related to stock options and restricted stock for employees and consultants) and $235,600 of expense for stock issued for consulting services. For the period from Inception through December 31, 2011, the Company recorded stock-based compensation expense for employees, directors and consultants of $2,128,816, respectively, for options and restricted stock granted and vested. The expense for options and restricted stock issued to employees and consultants included in selling, general and administrative expenses and research and development expenses for the years ended December 31, 2011 and 2010 and the period from inception through December 31, 2011 is $154,399 and $37,754, $579,592 and $100,603, and $1,514,145, and $614,671, respectively. For the years ended December 31, 2011 and 2010 and for the period from Inception through December 31, 2011, the Company amortized $0, $235,600 and $807,608, respectively, of prepaid consulting fees which is included as part of selling, general and administrative expenses.

NOTE 7. STOCK OPTION PLAN   On September 17, 2007, the Companys Board of Directors and stockholders adopted the 2007 Incentive Stock and Awards Plan (the Plan), which provides for the issuance of a maximum of an aggregate of 3,000,000 (as amended on November 5, 2008) shares of Common Stock. The purpose of the Plan is to provide an incentive to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons into the Companys development and financial success. Under the Plan, the Company is authorized to issue incentive stock options intended to qualify under Section 422 of the Code, non-qualified stock options and restricted stock. The Plan will be administered by the Companys Board of Directors until such time as such authority has been delegated to a committee of the board of directors.   A summary of the Plan for the year ended December 31, 2011 is as follows:   <table border="0" cellpadding="0" cellspacing="0" style="width: 100%; border-collapse: collapse; font: 10pt Times New Roman, Times, Serif"> <tr style="vertical-align: middle"> <td style="width: 20%"> </td> <td style="border-bottom: windowtext 1pt solid; text-align: center; width: 20%"> </td> <td style="border-bottom: windowtext 1pt solid; text-align: center; width: 20%">Weighted Avg. Exercise Price</td> <td style="border-bottom: windowtext 1pt solid; text-align: center; width: 20%">Weighted Avg. Remaining Contractual Life</td> <td style="border-bottom: windowtext 1pt solid; text-align: center; width: 20%">Aggregate Intrinsic Value</td></tr> <tr style="vertical-align: middle"> <td>Outstanding - January 1, 2011</td> <td style="text-align: center">2,506,217</td> <td style="text-align: right"> $        1.37</td> <td> </td> <td> </td></tr> <tr style="vertical-align: middle"> <td>Granted</td> <td style="text-align: center">300,000</td> <td style="text-align: right">0.1</td> <td> </td> <td> </td></tr> <tr style="vertical-align: middle"> <td>Exercised</td> <td style="text-align: center">-</td> <td style="text-align: right">-</td> <td> </td> <td> </td></tr> <tr style="vertical-align: middle"> <td>Cancelled/Forfeited</td> <td style="border-bottom: windowtext 1pt solid; text-align: center">-1,605,000</td> <td style="border-bottom: windowtext 1pt solid; text-align: right">1.26</td> <td style="border-bottom: windowtext 1pt solid"> </td> <td style="border-bottom: windowtext 1pt solid"> </td></tr> <tr style="vertical-align: middle"> <td>Outstanding - December 31, 2011</td> <td style="border-bottom: windowtext 2pt double; text-align: center">1,201,217</td> <td style="border-bottom: windowtext 2pt double; text-align: right"> $        1.21</td> <td style="border-bottom: windowtext 2pt double; text-align: center">3.28</td> <td style="border-bottom: windowtext 2pt double; text-align: center"> $      6,000</td></tr> <tr style="vertical-align: middle"> <td>Exercisable - December 31, 2011</td> <td style="border-bottom: windowtext 2pt double; text-align: center">1,169,217</td> <td style="border-bottom: windowtext 2pt double; text-align: right"> $        1.22</td> <td style="border-bottom: windowtext 2pt double; text-align: center">3.18</td> <td style="border-bottom: windowtext 2pt double; text-align: center"> $      6,000</td></tr> <tr style="vertical-align: middle"> <td>Vested and expected to vest - December 31, 2011</td> <td style="border-bottom: windowtext 2pt double; text-align: center">1,198,017</td> <td style="border-bottom: windowtext 2pt double; text-align: right"> $        1.21</td> <td style="border-bottom: windowtext 2pt double; text-align: center">3.27</td> <td style="border-bottom: windowtext 2pt double; text-align: center"> $      6,000</td></tr> </table>       The aggregate intrinsic value in the table above represents the total pre-tax amount of the proceeds, net of exercise price, which would have been received by option holders if all option holders had exercised and immediately sold all options with an exercise price lower than the market price on December 31, 2011, based on the closing price of the Companys common stock of $0.12 on that date.   The options were granted to the employees, directors and consultants at exercise prices that ranged from $0.10 to $2.62, the estimated fair market value of the common stock on the dates of issuance. All options granted prior to 2011 expire on the ten year anniversary of the issuance date and were vested immediately or on a quarterly basis up to five years. The Company uses the Black-Scholes option pricing model to estimate the grant-date fair value of share-based awards. The Black-Scholes model requires subjective assumptions regarding future stock price volatility and expected time to exercise, along with assumptions about the risk-free interest rate and expected dividends, which affect the estimated fair values of the Companys stock-based awards. The expected term of options granted was determined in accordance with the simplified approach as the Company has very limited historical data on employee exercises and post-vesting employment termination behavior. The expected volatility is based on the historical volatilities of the common stock of comparable publicly traded companies based on the Companys belief that it currently has limited historical data regarding the volatility of its stock price on which to base a meaningful estimate of expected volatility. The risk-free rate selected to value any particular grant is based on the U.S. Treasury rate that corresponds to the expected term of the grant effective as of the date of the grant. The Company used 0% as an expected dividend yield assumption. These factors could change in the future, affecting the determination of stock-based compensation expense in future periods. Utilizing these assumptions, the fair value is determined at the date of grant. The weighted fair value of the stock options granted during 2011 is $0.04. For the years ended December 31, 2011 and 2010 and for the period from inception through December 31, 2011, the Company recorded stock-based compensation related to stock options and restricted stock for employees and directors of $192,153, $547,895 and $1,461,165, respectively which is included in selling, general and administrative expenses and research and development expenses in the amount of $154,399 and $37,754, $447,292 and $100,603, and $1,024,102 and $437,063, respectively. The Company cancelled 1,605,000 stock options during the year ended December 31, 2011. These options were cancelled due to the resignation of the optionees during the fiscal year. As of December 31, 2011, there was approximately $14,094 of total unrecognized compensation expense related to unvested stock options under the Plan. That expense is expected to be recognized over the weighted-average period of 1.89 years.   Effective February 17, 2010, the Board of Directors of the Company accepted the resignation of Dr. Juliet Singh as Chief Executive Officer of the Company and as a director on the Board. In connection with Dr. Singhs resignation, the Company and Dr. Singh entered into a separation agreement that provided Dr. Singh with one year of continued salary in accordance with the terms of her existing employment agreement as well as the accelerated vesting of 300,000 stock options previously granted. In addition, the term in which Dr. Singh may exercise the vested options (which included 610,000 options in total, comprised of 310,000 stock options that were vested as of the separation date as well as the 300,000 stock options subject to the accelerated vesting) was modified and extended to three years from the date of her resignation. In accordance with accounting guidance, since these stock options were modified, the value of the modification for each stock option was determined. For the stock options vested as of the separation date, the modified value was equal to the number of options multiplied by the difference in value (per the Black-Scholes option pricing model) between the original and modified terms of the stock options utilizing current values for market stock price, interest rate and volatility. For the stock options in which the vesting was accelerated, the new value for these stock options was calculated as of the separation date using the Black-Scholes option pricing model. In total, the additional stock based compensation expense recognized for the modified stock options was approximately $174,000 and was recorded in stock-based compensation in additional paid-in capital and general and administrative expenses in the accompanying consolidated balance sheets and consolidated statement of operations as of and for the year ended December 31, 2010, respectively.   On February 26, 2010, the Companys Board of Directors granted 300,000 stock options to an executive officer of the Company under the Companys 2007 Incentive Stock and Awards Plan. All of the options were granted with an exercise price of $0.90 and have a ten year life. Also, the options vest one-twelfth per quarter commencing on the first full quarter after the initial grant date of February 26, 2010. On August 13, 2010, the Company entered into a consulting agreement (previously approved by the Board of Directors) with a retained search firm to provide the Company with executive recruitment services. In accordance with the agreement, the Company had the option to pay for such services in cash or by issuing stock options of an equivalent value. Per the agreement, 50% of the fee (deemed non-refundable) was due upon execution of the agreement and the remaining 50% was due if and when the retained search firm placed a candidate with the Company. The total fee ultimately owed to the retained search firm would not be finalized until an executive was hired as it will be based on the total compensation for the executive in the first year of employment. It was agreed between the retained search firm and the Company that the value of the stock option as of the execution of the agreement would be the basis for determining the number of stock options to be issued for the initial fee as well as in the total fee due to the retained search firm. The option value was determined to be $0.6575 based on the Black-Scholes pricing model using an exercise price of $1.07. Using an estimated first year salary (including bonus) of $350,000, the total fee was estimated to be $105,000. As noted above, the Company was obligated to pay 50% of the estimated total fee, or $52,500, upon execution of the agreement, which the Company opted to issue a non-qualified stock option in lieu of cash. Therefore, the Company issued a non-qualified stock option, under the Plan, to purchase up to 80,000 shares of common stock in payment of this initial fee. The stock option is non-refundable and therefore, fully vested upon issuance. As a result, the total value of the fee/option was recognized in August 2010. Effective October 20, 2010, the Board of Directors appointed a new president and chief executive officer that was a candidate referred to the Company from the retained search firm (see below). The total first year compensation for the executive was estimated to be $441,000, therefore, the final fee due to the retained search firm was $132,300. The Company opted to pay the remainder of the fee due with a non-qualified stock option. Considering the option issued in August 2010 for the purchase of up to 80,000 shares of common stock, the final stock option issued in October 2010 was to purchase an additional 121,217 shares of common stock. The value of this stock option representing the remainder of the fee, $79,800, was recognized in October 2010. For the years ended December 31, 2011 and 2010 and the period from Inception through December 31, 2011, the Company recorded stock-based compensation related to these stock options of $0, $132,300 and $132,300, respectively.   Effective October 20, 2010, the Company appointed John N. Bonfiglio, Ph.D. as Chief Executive Officer and President of the Company. Dr. Bonfiglio was also appointed as a director on the Companys Board. The Board granted Dr. Bonfiglio a stock option for 400,000 shares of common stock and issued 50,000 shares of restricted common stock in accordance with the Companys 2007 Incentive Stock and Awards Plan. The stock option and the restricted common stock will vest as follows: 25% of the option shares and the restricted stock shall vest immediately upon grant, with the balance of the option shares and the restricted stock vesting in equal monthly installments over the next 36 months beginning 30 days after the grant date; provided, however, Dr. Bonfiglio shall gain a vested interest in an additional 10% of the option shares and the restricted stock upon the closing of a Qualified Transaction. The exercise price of the stock option will be $0.80 per share, the reported closing price of the Companys common stock on October 20, 2010. The vesting of all options will fully accelerate upon an involuntary termination of Dr. Bonfiglios employment within twelve months following a change of control (as such terms are defined in the Employment Agreement). Effective May 13, 2011, this individual resigned and all options granted to the employee have been cancelled.   On October 5, 2011, priority claims of former employees in the amount of $119,667 originating as a result of the Companys Bankruptcy petition filed June 26, 2010 (the Priority Claimants), were settled and paid by the Company. These amounts consisted of accrued and owed payroll amounts, accrued vacation and any other claims held against the Company at October 5, 2011. The Priority Claimants were given cash in the amount $47,975 and 300,000 stock options valued at $11,400 and the difference of $60,292 was recognized as a gain on forgiveness of liabilities during the year ended December 31, 2011. These options have an exercise price of $0.10, vested immediately upon issuance, and have a three year life from the date of issuance.   The table below illustrates the fair value per share and Black-Scholes option pricing model with the following assumptions used for the grants issued to the employees and directors during the years ended December 31, 2011 and 2010   <table border="0" cellpadding="0" cellspacing="0" style="width: 100%; border-collapse: collapse; font: 10pt Times New Roman, Times, Serif"> <tr style="vertical-align: middle"> <td style="padding-bottom: 1pt; font-weight: bold; width: 34%"> </td> <td style="border-bottom: black 1pt solid; font-weight: bold; text-align: center; width: 33%">2011</td> <td style="border-bottom: black 1pt solid; font-weight: bold; text-align: center; width: 33%">2010</td></tr> <tr style="vertical-align: middle"> <td>Weighted-average fair value of options granted</td> <td style="text-align: right"> $        0.04</td> <td style="text-align: right"> $        0.56</td></tr> <tr style="vertical-align: middle"> <td>Expected terms (in years)</td> <td style="text-align: right">3</td> <td style="text-align: right">6</td></tr> <tr style="vertical-align: middle"> <td>Expected volatility</td> <td style="text-align: right">85%</td> <td style="text-align: right">75%</td></tr> <tr style="vertical-align: middle"> <td>Risk-free interest rate</td> <td style="text-align: right">0.46%</td> <td style="text-align: right">2.02%</td></tr> <tr style="vertical-align: middle"> <td>Dividend yield</td> <td style="text-align: right">  </td> <td style="text-align: right">  </td></tr> </table>     No options were issued to consultants during the year ended December 31, 2011.   The table below illustrates the fair value per share and Black-Scholes option pricing model with the following assumptions used for the grants issued to the consultants during the year ended December 31, 2010:   <table border="0" cellpadding="0" cellspacing="0" style="width: 100%; border-collapse: collapse; font: 10pt Times New Roman, Times, Serif"> <tr> <td style="font: 11pt Calibri, Halvetica, Sans-Serif; padding-bottom: 1pt; vertical-align: bottom; width: 50%"> </td> <td style="border-bottom: black 1pt solid; font-weight: bold; vertical-align: middle; text-align: center; width: 50%">2010</td></tr> <tr style="vertical-align: middle"> <td>Weighted-average fair value of options granted</td> <td style="text-align: right">0.66</td></tr> <tr style="vertical-align: middle"> <td>Expected terms (in years)</td> <td style="text-align: right">5</td></tr> <tr style="vertical-align: middle"> <td>Expected volatility</td> <td style="text-align: right">75%</td></tr> <tr style="vertical-align: middle"> <td>Risk-free interest rate</td> <td style="text-align: right">1.63%</td></tr> <tr style="vertical-align: middle"> <td>Dividend yield</td> <td style="text-align: right">  </td></tr> </table>

NOTE 8. WARRANTS   A summary of the status of the warrants for the year ended December 31, 2011 is as follows: <table cellpadding="0" cellspacing="0" style="width: 100%"> <tr style="vertical-align: bottom"> <td style="text-align: center"> </td><td style="font: 10pt Times New Roman, Times, Serif; padding-bottom: 1pt"> </td> <td colspan="3" style="font: 10pt Times New Roman, Times, Serif; text-align: center; border-bottom: Black 1pt solid">Number of Shares Subject to Warrants Outstanding</td><td style="font: 10pt Times New Roman, Times, Serif; padding-bottom: 1pt"> </td> <td colspan="3" style="font: 10pt Times New Roman, Times, Serif; text-align: center; border-bottom: Black 1pt solid">Weighted Avg. Exercise Price</td></tr> <tr style="vertical-align: bottom"> <td style="padding-left: 5.4pt"> </td><td> </td> <td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td><td> </td> <td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td></tr> <tr style="vertical-align: bottom"> <td style="width: 56%; font: 10pt Times New Roman, Times, Serif; padding-left: 5.4pt">Warrants outstanding - January 1, 2011</td><td style="width: 8%; font: 10pt Times New Roman, Times, Serif"> </td> <td style="width: 1%; font: 10pt Times New Roman, Times, Serif; text-align: left"> </td><td style="width: 12%; font: 10pt Times New Roman, Times, Serif; text-align: right">768,980</td><td style="width: 1%; font: 10pt Times New Roman, Times, Serif; text-align: left"> </td><td style="width: 8%; font: 10pt Times New Roman, Times, Serif"> </td> <td style="width: 1%; font: 10pt Times New Roman, Times, Serif; text-align: left">$</td><td style="width: 12%; font: 10pt Times New Roman, Times, Serif; text-align: right">4.10</td><td style="width: 1%; font: 10pt Times New Roman, Times, Serif; text-align: left"> </td></tr> <tr style="vertical-align: bottom"> <td style="font: 10pt Times New Roman, Times, Serif; padding-left: 5.4pt">Granted</td><td style="font: 10pt Times New Roman, Times, Serif"> </td> <td style="font: 10pt Times New Roman, Times, Serif; text-align: left"> </td><td style="font: 10pt Times New Roman, Times, Serif; text-align: right">  </td><td style="font: 10pt Times New Roman, Times, Serif; text-align: left"> </td><td> </td> <td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td></tr> <tr style="vertical-align: bottom"> <td style="font: 10pt Times New Roman, Times, Serif; padding-left: 5.4pt">Exercised</td><td style="font: 10pt Times New Roman, Times, Serif"> </td> <td style="font: 10pt Times New Roman, Times, Serif; text-align: left"> </td><td style="font: 10pt Times New Roman, Times, Serif; text-align: right">  </td><td style="font: 10pt Times New Roman, Times, Serif; text-align: left"> </td><td> </td> <td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td></tr> <tr style="vertical-align: bottom"> <td style="font: 10pt Times New Roman, Times, Serif; padding-bottom: 1pt; padding-left: 5.4pt">Expired</td><td style="font: 10pt Times New Roman, Times, Serif; padding-bottom: 1pt"> </td> <td style="border-bottom: Black 1pt solid; font: 10pt Times New Roman, Times, Serif; text-align: left"> </td><td style="border-bottom: Black 1pt solid; font: 10pt Times New Roman, Times, Serif; text-align: right">(5,000</td><td style="padding-bottom: 1pt; font: 10pt Times New Roman, Times, Serif; text-align: left">)</td><td style="font: 10pt Times New Roman, Times, Serif; padding-bottom: 1pt"> </td> <td style="border-bottom: Black 1pt solid; font: 10pt Times New Roman, Times, Serif; text-align: left"> </td><td style="border-bottom: Black 1pt solid; font: 10pt Times New Roman, Times, Serif; text-align: right">2.00</td><td style="padding-bottom: 1pt; font: 10pt Times New Roman, Times, Serif; text-align: left"> </td></tr> <tr style="vertical-align: bottom"> <td style="font: 10pt Times New Roman, Times, Serif; padding-bottom: 2.5pt; padding-left: 5.4pt">Warrants outstanding and exercisable - December 31, 2011</td><td style="font: 10pt Times New Roman, Times, Serif; padding-bottom: 2.5pt"> </td> <td style="border-bottom: Black 2.5pt double; font: 10pt Times New Roman, Times, Serif; text-align: left"> </td><td style="border-bottom: Black 2.5pt double; font: 10pt Times New Roman, Times, Serif; text-align: right">763,980</td><td style="padding-bottom: 2.5pt; font: 10pt Times New Roman, Times, Serif; text-align: left"> </td><td style="font: 10pt Times New Roman, Times, Serif; padding-bottom: 2.5pt"> </td> <td style="border-bottom: Black 2.5pt double; font: 10pt Times New Roman, Times, Serif; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; font: 10pt Times New Roman, Times, Serif; text-align: right">4.15</td><td style="padding-bottom: 2.5pt; font: 10pt Times New Roman, Times, Serif; text-align: left"> </td></tr> <tr style="vertical-align: bottom"> <td style="font: 10pt Times New Roman, Times, Serif; padding-bottom: 2.5pt; padding-left: 5.4pt">Weighted average remaining contractual life of the outstanding warrants in years - December 31, 2011</td><td style="font: 10pt Times New Roman, Times, Serif; padding-bottom: 2.5pt"> </td> <td style="border-bottom: Black 2.5pt double; font: 10pt Times New Roman, Times, Serif; text-align: left"> </td><td style="border-bottom: Black 2.5pt double; font: 10pt Times New Roman, Times, Serif; text-align: right">0.91</td><td style="padding-bottom: 2.5pt; font: 10pt Times New Roman, Times, Serif; text-align: left"> </td><td style="padding-bottom: 2.5pt"> </td> <td style="border-bottom: Black 2.5pt double; text-align: left"> </td><td style="border-bottom: Black 2.5pt double; text-align: right"> </td><td style="padding-bottom: 2.5pt; text-align: left"> </td></tr> </table>   The expiration of the outstanding warrants at December 31, 2011 occurs through May 2013 at various dates.   On April 24, 2008, the Company entered into a one-year consulting agreement with a firm to provide the Company with financial advisory services. As compensation for the services, the Company issued a three-year warrant to purchase 5,000 shares of the Companys common stock at a cash and cashless price of $2.00 per share. The fair value of the warrant, determined based on the Black-Scholes pricing model, this warrant expired during the year ended December 31, 2011.

NOTE 9. INCOME TAXES   The Company is subject to taxation in the United States and California. The Company does not have any income tax provision for the years ended December 31, 2011 and 2010 due to current and historical losses.   The provision for income taxes using the statutory federal income tax rate of 34% as compared to the companys effective tax rate is summarized as follows:  <table cellspacing="0" cellpadding="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif; margin-left: 5.4pt; border-collapse: collapse"> <tr style="vertical-align: bottom"> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">December  31,</td> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">December  31,</td></tr> <tr style="vertical-align: top"> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center"> </td> <td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">2011</td> <td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">2010</td></tr> <tr style="vertical-align: top"> <td style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: justify">Federal tax benefit at statutory rate</td> <td style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: justify">$</td> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">(319,489)</td> <td style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">$</td> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">(842,257)</td></tr> <tr style="vertical-align: top"> <td style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: justify">State tax benefit, net</td> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">(58,881)</td> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">(161,372)</td></tr> <tr> <td style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt; text-align: justify">Research and development credits</td> <td style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="vertical-align: bottom; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">(10,123)</td> <td nowrap="nowrap" style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="vertical-align: bottom; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">(39,517)</td></tr> <tr style="vertical-align: top"> <td style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: justify">Employee stock-based compensation</td> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">-</td> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">-</td></tr> <tr style="vertical-align: top"> <td style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: justify">Other differences</td> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">-</td> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">46</td></tr> <tr style="vertical-align: top"> <td style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: justify">Change in valuation allowance</td> <td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; text-align: justify"> </td> <td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">388,493</td> <td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">1,043,100</td></tr> <tr style="vertical-align: top"> <td style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: justify">Provision for income taxes</td> <td style="border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-left: 5.4pt; text-align: justify">$</td> <td nowrap="nowrap" style="border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">-</td> <td style="border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">$</td> <td nowrap="nowrap" style="border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">-</td></tr> </table>     At December 31, 2011 and 2010, the Company had deferred tax assets of $6,167,481 and $5,778,988, respectively. Due to uncertainties surrounding the Companys ability to generate future taxable income to realize these assets, a full valuation allowance has been established to offset the net deferred tax asset. Additionally, the future utilization of the Companys net operating loss to offset future taxable income may be subject to an annual limitation, pursuant to Internal Revenue Code Section 382, as a result of ownership changes that may have occurred previously or that could occur in the future.  The Company has not performed a Section 382 analysis to determine the limitation of the net operating loss and research and development credit carry forwards.   Significant components of the companys deferred tax assets are as follows:   <table cellspacing="0" cellpadding="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif; margin-left: 5.4pt; border-collapse: collapse"> <tr style="vertical-align: bottom"> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">December  31,</td> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">December  31,</td></tr> <tr style="vertical-align: top"> <td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center"> </td> <td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">2011</td> <td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">2010</td></tr> <tr> <td style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt; text-align: justify">Deferred tax assets</td> <td style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="vertical-align: bottom; padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="vertical-align: bottom; padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr> <tr> <td style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt; text-align: justify">  Federal and state net operating loss carryforwards</td> <td style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt; text-align: justify">$</td> <td style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">4,886,429</td> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">$</td> <td style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">4,565,466</td></tr> <tr> <td style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt; text-align: justify">  Stock-based compensation</td> <td style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="vertical-align: bottom; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">743,789</td> <td style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="vertical-align: bottom; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">671,940</td></tr> <tr style="vertical-align: bottom"> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt">  Tax credits</td> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">532,278</td> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">522,155</td></tr> <tr style="vertical-align: bottom"> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt">  Other</td> <td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">4,985</td> <td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">19,427</td></tr> <tr style="vertical-align: bottom"> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt">Total deferred tax assets</td> <td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">6,167,481</td> <td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">5,778,988</td></tr> <tr style="vertical-align: bottom"> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt">Less: Valuation allowance</td> <td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">(6,167,481)</td> <td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt"> </td> <td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">(5,778,988)</td></tr> <tr style="vertical-align: bottom"> <td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt">Net deferred income tax asset</td> <td nowrap="nowrap" style="border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-left: 5.4pt">$</td> <td nowrap="nowrap" style="border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">-</td> <td nowrap="nowrap" style="border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">$</td> <td nowrap="nowrap" style="border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-left: 5.4pt; text-align: center">-</td></tr> </table>   Realization of the deferred tax assets is dependent upon the generation of future taxable income, the amount and timing of which are uncertain.  Accordingly, the net deferred tax assets have been fully offset by a valuation allowance.  The valuation allowance increased by approximately $388,000 and $1.0 million in 2011 and 2010, respectively.   As of December 31, 2011, the Company had federal and California net operating loss carryforwards of approximately $12.3 million and $12.2 million, respectively. The federal and California tax loss carry forwards will begin to expire in 2020 and 2015, respectively, unless previously utilized. The Company estimates its federal and California research and development tax credit carryforwards of approximately $315,000 and $330,000, respectively, which begin to expire in 2027 unless previously utilized.   A portion of the net operating loss carry forwards as of December 31, 2011 and 2010 include amounts related to stock option deductions. Excess tax benefits, if any, from share-based compensation are only realized when income taxes payable is reduced, with the corresponding credit posted to Additional Paid-in Capital.   The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has 50% or less likelihood of being sustained upon examination. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded.   The Companys practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties at December 31, 2011 and 2010, and has not recognized interest and/or penalties in the consolidated statements of operations for the years ended December 31, 2011 and 2010. The Companys tax years for 2000 and forward are subject to examination by the United States and state tax authorities due to the carry forward of unutilized net operating losses.

NOTE 10. COMMITMENTS AND CONTINGENCIES   Commitments   The Company leased its office facilities under a noncancelable operating lease, which expired December 31, 2010. The Company renewed the lease from January 1, 2011 to June 30, 2011, with a monthly amount due of $3,835. Rent expense for the years ended December 31, 2011, 2010 and the period from Inception through December 31, 2011 was $18,299, $54,821 and $243,955, respectively. The Company entered into a new lease agreement for office facilities from February 15, 2012 to February 28, 2014. Monthly rent begins on March 1, 2012 in the amount of $2,972 for the first 12 months, and $3,715 is due monthly for the next 12 months.   Indemnities and Guarantees   In addition to the indemnification provisions contained in the Companys charter documents, the Company will generally enter into separate indemnification agreements with the Companys directors and officers. These agreements require the Company, among other things, to indemnify the director or officer against specified expenses and liabilities, such as attorneys fees, judgments, fines and settlements, paid by the individual in connection with any action, suit or proceeding arising out of the individuals status or service as the Companys director or officer, other than liabilities arising from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest, and to advance expenses incurred by the individual in connection with any proceeding against the individual with respect to which the individual may be entitled to indemnification by the Company. The Company has also entered into an indemnification agreement with DermaStar as a secured lender. This agreement requires the Company, among other things, to indemnify DermaStar, and any of its directors or officers as individuals, against specified expenses and liabilities, such as attorneys fees in connection with the preparation, amendment, appraisal, audit, modification, waiver, of the Line of Credit Agreement and enforcement of any rights/interest under the Line of Credit Agreement. These guarantees and indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not been obligated nor incurred any payments for these obligations and, therefore, no liabilities have been recorded for these indemnities and guarantees in the accompanying consolidated balance sheets.   Cato Research Ltd. Agreement   In accordance with the Master Services Agreement, dated April 10, 2007, between the Company and Cato Research Ltd. (Cato), a contract research and development organization, the Company entered into a clinical trial services agreement (Agreement) with Cato on June 10, 2008. Under the Agreement, Cato served as the Companys strategic partner and contract research organization in conducting the Companys Phase 3 clinical trial for Ketotransdel®. As of December 31, 2009, the Company incurred approximately $3.2 million (original estimate of costs was $3.3 million) related to Catos fees as well as pass-through costs incurred by Cato or payable to the clinical sites for patients enrolled in the study. The Company does not anticipate incurring any additional costs related to this Agreement.   Cosmetic Products Consulting Agreement   On August 25, 2008, the Company entered into an agreement with RIL-NA, LLC (RIL-NA) in order to enter into business relationships with third parties for certain of the Companys cosmetic product formulations. RIL-NA was to be paid a commission equal to approximately twenty percent (20%) of the adjusted gross revenues realized from transactions related to this agreement. This agreement was terminable with 60 days written notice by either RIL-NA or the Company. On June 12, 2011, the Company entered into another agreement with RIL-NA whereby RIL-NA paid approximately $5,000 in related legal filing fees to acquire exclusive marketing rights for the Companys anti-cellulite product formulation from June 13, 2011 through August 11, 2011. This agreement automatically terminated on August 12, 2011, and no revenues or amounts were paid to or on behalf of the Company.   Cosmetic Product License Agreements   On May 20, 2009, the Company and JH Direct, LLC (JH Direct) entered into a licensing agreement providing JH Direct with the exclusive worldwide rights to the Companys anti-cellulite cosmetic product which utilizes the Companys patented transdermal delivery system technology, Transdel. Under the terms of the agreement, JH Direct will pay the Company initial royalty advances and a continuing licensing royalty on the worldwide sales of the anti-cellulite product. The Company retained the exclusive rights to seek pharmaceutical/dermatological partners for the anti-cellulite product for an initial period of one year following the launch of the product, thereafter JH Direct will be allowed to expand in this channel. The expiration date for this agreement is May 31, 2013. In accordance with the cosmetic products consulting agreement, the consulting firm will receive a percentage of the operating profits paid to the Company.   As of December 31, 2011, the Company had received non-refundable royalty advances totaling $100,000 from JH Direct, and has deferred all of these revenues. Management believes JH Direct has abandoned its efforts to commercialize the anti-cellulite cream and the Company has exercised its rights to terminate the agreement in 2012, at which time all revenues from this agreement will be recognized in full. Management believes no other monies will come from this contract.   In June 2010, the Company and Jan Marini Skin Research, Inc. (JMSR) entered into a licensing agreement providing JMSR with the exclusive U.S. rights to Transdels transdermal delivery technology for use in an anti-cellulite cosmetic product for the dermatological market. Under the terms of the agreement, JMSR will pay Transdel a licensing royalty on the U.S. and worldwide sales of an anti-cellulite product using Trandels delivery technology. JMSR obtained an exclusive right to promote and sell a product in the U.S. dermatological market for approximately one year after which time they have a non-exclusive right. Also, JMSR obtained a non-exclusive right to promote and sell the product in the ex-U.S. dermatological market. In accordance with the cosmetic products consulting agreement, the cosmetic consultants will receive a percentage of the royalties paid to the Company. Management believes JMSR has abandoned its efforts to commercialize the anti-cellulite cream and the Company will look to terminate this agreement in 2012. No revenues or amounts were paid to or on behalf of the Company related to this agreement.   Separation Agreement   Effective February 17, 2010, the Board of Directors of the Company accepted the resignation of Dr. Juliet Singh as Chief Executive Officer of the Company and as a director on the Board. In connection with Dr. Singhs resignation, the Company and Dr. Singh entered into a separation agreement that provides Dr. Singh with one year of continued salary in accordance with the terms of her existing employment agreement as well as the accelerated vesting of 300,000 stock options previously granted. The separation agreement also includes a mutual release of claims. In accordance with this agreement, the Company recorded a one-time accrual, in the year ended December 31, 2010, of $242,000 for the one year of continued salary (including the related employer payroll taxes) and medical benefits. Also, the Company recorded a total expense of approximately $174,000 for the value of the modifications to the stock options. As of December 31, 2011, no amounts are due under the separation agreement.

NOTE 11. OTHER RELATED PARTY TRANSACTIONS   During the year ended December 31, 2011, the Company received cash advances from its Board member Jeffery Abrams and former Board member Anthony Thornley in the amount of $27,537 to extend insurance policies of the Company. Following the dismissal of the Chapter 11 Case by the Bankruptcy Court on December 9, 2011, $27,537 was paid back by the Company in cash to Mr. Thornley and Mr. Abrams. There are currently no amounts due to Mr. Thornley and/or Dr. Abrams related to this or any other transaction.   During the year ended December 31, 2011, DermaStar purchased trade debt from third party vendors totaling $56,087. The amount owed to DermaStar related to this debt is included in the accounts payable related party line item on the consolidated balance sheet. No amounts were paid to DermaStar related to this debt. DermaStar also made cash payments on behalf of the Company during the year ended December 31, 2011 in the amount of $254,142. On December 31, 2011, the Company made a payment to DermaStar totaling $254,142, as reimbursement for DermaStars cash payments made on behalf of the Company. DermaStar, and its members individually, are control persons of the Company. Also Dr. Robert J. Kammer, a director of the Company, and Mark L. Baum, Esq., Executive Chairman of the Company, are managing members and partial owners of DermaStar.

NOTE 12. RESEARCH AND DEVELOPMENT CREDIT   In November 2010, the Company received a Federal grant amount of $244,479 under the Qualifying Therapeutic Discovery Project that is part of the Patient Protection and Affordable Care Act. The funds were awarded in support of Ketotransdel, the Companys late-stage topical NSAID product candidate for the treatment of acute soft tissue injuries. The proceeds from this grant were recorded as a reduction in research and development expenses in the accompanying consolidated statement of operations.

NOTE 13. GAIN ON FORGIVENESS OF LIABILITIES   On October 2, 2008, the Company entered into a payment agreement with a vendor, settling a balance of $52,598. It was agreed between the Company and the vendor that 50% of the amount owed, or $26,299, would be forgiven and the remainder would be paid in two installments, which were, 50%, or $13,150, upon execution of the payment agreement and $13,149 upon an infusion of capital into the Company. Since the inception of the payment agreement, the amount to be forgiven, $26,299, continued to be recorded as an accounts payable up until the infusion of $1 million from the issuance of the Note in April 2010. When the Note was issued, the final installment payment of $13,149 was paid and the $26,299 was recognized as a gain on forgiveness of liabilities by the Company during the year ended December 31, 2010.   On October 5, 2011, priority claims of former employees in the amount of $119,667 originating as a result of the Companys Bankruptcy petition filed June 26, 2010 (the Priority Claimants), were settled and paid by the Company. These amounts consisted of accrued and owed payroll amounts, accrued vacation and any other claims held against the Company at October 5, 2011. The Priority Claimants were given cash in the amount $47,975 and 300,000 stock options valued at $11,400 (using the Black-Scholes option pricing model to estimate the grant-date fair value) and the difference of $60,292 was recognized as a gain on forgiveness of liabilities during the year ended December 31, 2011.

NOTE 14. SUBSEQUENT EVENTS   The Company has performed an evaluation of events occurring subsequent to the period end through the issuance date of this report. Based on our evaluation, nothing other than the events described below need to be disclosed.   Settlement with the Holders of the Companys 7.5% Convertible Promissory Note   As of January 25, 2012, the Board of Directors of the Company approved, and the Company entered into, separate waiver and settlement agreements with the two counter parties holding a $1,000,000, 7.5% convertible promissory note (the Convertible Note) issued by the Company on April 5, 2010. DermaStar had previously acquired eighty percent (80%) of the Convertible Note in a private transaction with Alexej Ladonnikov, the original purchaser of the Convertible Note. Mr. Ladonnikov is now the holder of twenty percent (20%) of the Convertible Note.   In connection with each of the waiver and settlement agreements, the holders of the Convertible Note each agreed to forever waive their rights to (i) accelerate the entire unpaid principal sum of the Convertible Note and all accrued interest pursuant to Section 1 of the Convertible Note related to the Companys Bankruptcy petition filed June 26, 2011, (ii) Section 7 of the Senior Convertible Note Purchase Agreement dated April 5, 2010, regarding the designation and creation of the Series A Convertible Preferred Stock and (iii) certain conversion rights pursuant to Section 3 of the Convertible Note related to the change of control that resulted from the sale of the Series A Convertible Preferred Stock. In addition, pursuant to the terms of the waiver and settlement agreement by and between the Company and DermaStar (the DermaStar Waiver Agreement), DermaStar and the Company agreed to the mandatory conversion of the eighty percent (80%) of the principal and accrued and unpaid interest of the Convertible Note held by DermaStar, at such time as (and not until) the Company has a sufficient number of authorized common shares to effect such a conversion, into the common stock of the Company at a conversion price of $0.01667 (DermaStar Conversion Price). Additionally, DermaStar agreed to a mandatory conversion of an additional $56,087 in good and valid current accounts payable of the Company (AP Conversion) currently held by DermaStar, at such time as (and not until) the Company has a sufficient number of authorized common shares and is able to convert the Convertible Note. The AP Conversion will be made at the DermaStar Conversion Price. Directors Mr. Baum and Dr. Kammer are both affiliates of DermaStar. The DermaStar Waiver Agreement was negotiated and approved by a disinterested director unaffiliated with DermaStar. Directors Mr. Baum and Dr. Kammer abstained from voting on this matter.   Pursuant to the terms of the waiver and settlement agreement by and between the Company and Mr. Ladonnikov (the Ladonnikov Waiver Agreement), Mr. Ladonnikov and the Company agreed to the mandatory conversion of the twenty percent (20%) of the principal and accrued and unpaid interest of the Convertible Note held by Mr. Ladonnikov, at such time as (and not until) the Company has a sufficient number of authorized common shares to effect such a conversion, into the common stock of the Company at a conversion price of $0.015. Additionally, Mr. Ladonnikov agreed to make a one-time payment to the Company, at such time as the Convertible Note is converted into Company common stock, of $50,000.   At any time prior to the automatic conversions of the Convertible Note, the Company retains the right to pay the Convertible Note off in full. As of February 15, 2012, the balance of the Convertible Note, including principal and accrued and unpaid interest, equals approximately $1,139,932. At maturity, to the extent the number of authorized Company common shares was increased, the conversion of the Convertible Note and AP Conversion would result in the issuance of approximately 73,269,391 additional shares of the Companys common stock. A conversion of the Convertible Note would eliminate all amounts due to DermaStar and Alexej Ladonnikov in connection with the Convertible Note.   Amendments to Articles of Incorporation   On January 25, 2012, the Board approved and submitted to the Companys stockholders an amendment to the Companys Amended and Restated Certificate of Incorporation (the Certificate Amendment) to: (i) increases the number of authorized shares of capital stock to Four Hundred Million (400,000,000) and the number of authorized shares of Common Stock to Three Hundred Ninety-Five Million (395,000,000) (the Share Increase); and (ii) change the name of the Company from Transdel Pharmaceuticals, Inc. to Imprimis Pharmaceuticals, Inc. The Companys stockholders approved the Certificate Amendment in an action by written consent on January 25, 2012. The Certificate Amendment will become effective following the Companys compliance with certain information requirements of the SEC, which the Company expects to occur on or about February 28, 2012.   In addition, also on January 25, 2012, the Board approved and submitted to the Companys stockholders a proposal to effect a reverse stock split of all of the outstanding shares of Common Stock (the Reverse Stock Split) at an exchange ratio of either one-for-six, one-for-eight, one-for-ten or one-for-20, such exchange ratio to be determined by the Board of Directors in its sole discretion at any time following stockholder approval of the Reverse Stock Split through the date twelve months following the date of such stockholder approval, which Reverse Stock Split shall preserve the existing aggregate par value of the Companys Common Stock, such that par value shall remain $0.001 per share. In the event of a reverse stock split of any of the aforementioned ratios, no shareholder holding greater than 100 common shares prior to the reverse stock split, may hold, after such reverse stock split, less than 100 common shares. The Companys stockholders approved the Certificate Amendment in an action by written consent on January 25, 2012. The stockholder approval will become effective following the Companys compliance with certain information statement requirements of the SEC, which the Company expects to occur on or about February 28, 2012. At that time, the Board will effect a one-for-eight reverse stock split.   Amendments to 2007 Incentive Stock and Awards Plan   The 2007 Incentive Stock and Awards Plan (the Plan) was originally approved by the Board and the stockholders of the Company on September 17, 2007 and prior to the approval of the amendments to the Plan discussed below, provided for the granting of stock options and awards to purchase up to a maximum of 3,000,000 shares of common stock (subject to adjustment in the event of certain capital changes). On January 25, 2012, the Board unanimously approved the below amendments to the Plan (collectively, the Plan Amendments) and recommended their approval to the stockholders.  The Plan currently authorizes the grant of awards to Participants with respect to a maximum of 3,000,000 shares of Common Stock, which will increase to 30,000,000 as of the effective date of the Plan Amendment.

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1860962

1390514

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1706234

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