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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   Basis of Presentation   Transdel Pharmaceuticals, Inc. (Transdel or the Company) has prepared the accompanying condensed unaudited consolidated financial statements in accordance with generally accepted accounting principles in the United Stated States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011.  For further information, refer to the Companys audited consolidated financial statements and footnotes thereto included in the Companys annual report on Form 10-K for the year ended December 31, 2010.     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 under Financial Accounting Standards Board (FASB) guidance. 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 September 30, 2011, the Company has received initial non-refundable royalty advances of $100,000, these revenues have been deferred until certain royalty considerations are met.   As of September 30, 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.   Income Taxes   Income tax expense is provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes.  Deferred taxes are recognized for differences between the basis of assets and liabilities for financial statement and income tax purposes.  The differences relate primarily to the effects of net operating loss carry forwards and differing basis, depreciation methods, and lives of depreciable assets. The deferred tax assets represent the future tax return consequences of those differences, which will be deductible when the assets are recovered.   No income tax benefit (expense) was recognized for the nine months ended September 30, 2011 as a result of tax losses in this period and because deferred tax benefits, derived from the Companys prior net operating losses, were previously fully reserved, the Company had federal and California net operating loss carryforwards of approximately $ 12.1 million and $11.9 million, respectively.   The Company is subject to taxation in the United States and California. 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   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 September 30, 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 three and nine months ended September 30, 2011 and 2010, the Company recorded $0 and $338, $264 and $792, 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; text-autospace: none; font-family: Symbol">·</td> <td style="text-autospace: none; font-family: Times New Roman, Times, Serif">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="text-autospace: none; font-family: Symbol">·</td> <td style="text-autospace: none; font-family: Times New Roman, Times, Serif">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="text-autospace: none; font-family: Symbol">·</td> <td style="text-autospace: none; font-family: Times New Roman, Times, Serif">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, 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 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 recorded the fair value of nonforfeitable equity instruments issued for future consulting services as prepaid consulting fees in its consolidated balance sheets.   Basic and Diluted Loss per Common Share   Basic net loss per common share is computed by dividing net loss 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 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, stock options and warrants were 3,166,771 and 3,753,980 at September 30, 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.   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 GAAP and International Financial Reporting Standards (IFRS). 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 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 condensed consolidated financial statements.

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 approximately $18.2 million at September 30, 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 condensed 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. BANKRUPTCY PETETION 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. As described in Note 11, the Chapter 11 Case has subsequently been dismissed.

NOTE 4. NOTES PAYABLE   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 $111,574 at September 30, 2011 and interest expense for the three and nine months ended September 30, 2011 was $18,904 and $56,095, respectively and $18,904 and $36,575 for the three and nine months ended September 30. 2010, respectively. Following the Companys bankruptcy petition filed June 26, 2011, and subsequent to the period ended September 30, 2011, the change in ownership control following the issuance of preferred stock (see Note 11), the entire unpaid principal sum of this Note, together with its accrued and unpaid interest became immediately due and payable. Subsequent to the period ended September 30, 2011, the Company, the noteholder and its assignee entered into a waiver and settlement agreement described in Note 11.

NOTE 5. CASH ADVANCES FROM RELATED PARTIES   During the nine months ended September 30, 2011, the Company received cash advances from its Board members, Mr. Thornley and Dr. Abrams, in the amount of $27,537 to extend insurance policies of the Company. During the nine months ended September 30, 2011 no amount had been paid back to Mr. Thornley and Dr. Abrams.  This liability is recorded as due to related parties on the Companys condensed consolidated balance sheet.

NOTE 6. STOCKHOLDERS EQUITY   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 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. The restricted stock was valued at $0.80 per share, the reported closing price of the Companys common stock on October 20, 2010. 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 nine months ended September 30, 2011, the Company recorded a stock-based compensation expense related to the issuance and partial vesting of the restricted stock award of $3,332.   For the three and nine months ended September 30, 2011, 2010 and for the period from Inception through September 30, 2011, the Company recorded stock-based compensation expense for employees, directors and consultants of $36,798, $149,162, $125,676, $471,864 and $2,085,825, respectively, for options and restricted stock granted and vested which is included in selling, general and administrative expenses and research and development expenses for the three and nine months ended September 30, 2011, 2010 and for the period from Inception through September 30, 2011 in the amount of $36,798 and $0, $111,408 and $37,754, $107,310 and $18,366, $389,627 and $82,237 and $1,471,154, and $614,671, respectively. For the three and nine months ended September 30, 2011, 2010 and for the period from Inception through September 30, 2011, the Company amortized $0 and $0, $163,334 and $217,200 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 nine months ended September 30, 2011 is as follows:   <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="padding-bottom: 1pt"> </td> <td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">Number of shares</td><td style="padding-bottom: 1pt"> </td> <td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">Weighted Avg. Exercise Price</td><td style="padding-bottom: 1pt"> </td> <td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">Weighted Avg. Remaining Contractual Life</td><td style="padding-bottom: 1pt"> </td> <td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">Aggregate Intrinsic Value</td></tr> <tr style="vertical-align: bottom"> <td style="width: 40%; padding-left: 5.4pt">Outstanding - January 1, 2011</td><td style="width: 3%"> </td> <td style="width: 1%; text-align: left"> </td><td style="width: 10%; text-align: right">2,506,217</td><td style="width: 1%; text-align: left"> </td><td style="width: 3%"> </td> <td style="width: 1%; text-align: left">$</td><td style="width: 10%; text-align: right">1.37</td><td style="width: 1%; text-align: left"> </td><td style="width: 3%"> </td> <td style="width: 1%; text-align: left"> </td><td style="width: 10%; text-align: right"> </td><td style="width: 1%; text-align: left"> </td><td style="width: 3%"> </td> <td style="width: 1%; text-align: left"> </td><td style="width: 10%; text-align: right"> </td><td style="width: 1%; text-align: left"> </td></tr> <tr style="vertical-align: bottom"> <td style="padding-left: 5.4pt">Granted</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><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="padding-left: 5.4pt">Exercised</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><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="padding-bottom: 1pt; padding-left: 5.4pt">Cancelled/Forfeited</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">(1,215,000</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">1.37</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><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><td style="padding-bottom: 1pt; text-align: left"> </td></tr> <tr style="vertical-align: bottom"> <td style="padding-bottom: 2.5pt; padding-left: 5.4pt">Outstanding - September 30, 2011</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">1,291,217</td><td style="padding-bottom: 2.5pt; 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">1.37</td><td style="padding-bottom: 2.5pt; 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">5.03</td><td style="padding-bottom: 2.5pt; text-align: left"> </td><td style="padding-bottom: 2.5pt"> </td> <td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">  </td><td style="padding-bottom: 2.5pt; text-align: left"> </td></tr> <tr style="vertical-align: bottom"> <td style="padding-bottom: 2.5pt; padding-left: 5.4pt">Exercisable - September 30, 2011</td><td style="padding-bottom: 2.5pt"> </td> <td style="border-bottom: Black 2.5pt double; text-align: left"> </td><td style="border-bottom: Black 2.5pt double; text-align: right">1,183,217</td><td style="padding-bottom: 2.5pt; text-align: left"> </td><td style="padding-bottom: 2.5pt"> </td> <td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">1.44</td><td style="padding-bottom: 2.5pt; 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">4.84</td><td style="padding-bottom: 2.5pt; text-align: left"> </td><td style="padding-bottom: 2.5pt"> </td> <td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">  </td><td style="padding-bottom: 2.5pt; text-align: left"> </td></tr> <tr style="vertical-align: bottom"> <td style="padding-bottom: 2.5pt; padding-left: 5.4pt">Vested and expected to vest - September 30, 2011</td><td style="padding-bottom: 2.5pt"> </td> <td style="border-bottom: Black 2.5pt double; text-align: left"> </td><td style="border-bottom: Black 2.5pt double; text-align: right">1,280,417</td><td style="padding-bottom: 2.5pt; text-align: left"> </td><td style="padding-bottom: 2.5pt"> </td> <td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">1.38</td><td style="padding-bottom: 2.5pt; 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">5.01</td><td style="padding-bottom: 2.5pt; 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 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 September 30, 2011, based on the closing price of the Companys common stock of $0.08 on that date.   The options were granted to the employees, directors and consultants at exercise prices that ranged from $0.70 to $2.62, the estimated fair market value of the common stock on the dates of issuance. All options granted to date 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 Company did not issue any options during the nine months ended September 30, 2011 and the Company cancelled 1,215,000 stock options during the nine months ended September 30, 2011. These options were cancelled due to the resignation of the optionees during the nine months ended September 30, 2011. The Company recorded stock-based compensation related to stock options for employees and directors of $145,830, which is included in selling, general and administrative expenses and research and development expenses in the amount of $108,036 and $37,794, respectively.   As of September 30, 2011, there was approximately $107,162 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 1.42 years.

NOTE 8. WARRANTS   The Company issued warrants to purchase shares of its common stock in conjunction with private placement offerings in 2007 and 2008 and a consulting agreement in 2008. The expiration of the outstanding warrants occurs through May 2013 at various periods.   A summary of the status of the warrants for the nine months ended September 30, 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 - September 30, 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 - September 30, 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">1.16</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="text-align: left"> </td><td style="text-align: right"> </td><td style="padding-bottom: 2.5pt; text-align: left"> </td></tr> </table>

NOTE 9. 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 senior convertible promissory note (the Note) in April 2010 (see Note 5). When the Note was issued, the final installment payment of $13,149 was paid and the $26,299 was recognized as a gain by the Company.

NOTE 10. COMMITMENTS AND CONTINGENCIES   Commitments   The Company leased its office facilities under a noncancelable operating lease, which expired in December 31, 2010. The Company renewed the lease from January 1, 2011 to June 30, 2011, with a monthly amount due of $3,835. For the remaining fiscal year 2011, the Companys lease commitment is approximately $0. Rent expense for the three and nine months ended September 30, 2011 was $0 and $24,384. The Company entered into a new lease agreement for office facilities effective 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. 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.   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. The June 2011 agreement automatically terminated on August 12, 2011, no revenues or amounts were or are expected to be paid to or on behalf of the Company.   Cosmetic 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 September 30, 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 or are expected to be 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 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 September 30, 2011, no amounts were due under the separation agreement.   Suspension of Payroll March 1, 2011   Effective March 1, 2011, the Board of Directors of the Company suspended all payroll. Any time incurred and billed for projects or follow-up performed by the employees will be accrued based on their current hourly amount.

NOTE 11. 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. Changes in Management and Board   Effective December 16, 2011, upon the unanimous consent of the Board, Mark L. Baum and Dr. Robert J. Kammer joined the Board of Directors, each to serve until his resignation or removal or until his successor is duly elected and qualified. Mr. Baum and Dr. Kammer are the Managing Members of DermaStar and both Dr. Kammer and Mr. Baum hold ownership interests in DermaStar. There are no arrangements or understandings between either Mr. Baum or Dr. Kammer and any other persons pursuant to which either Mr. Baum or Dr. Kammer was elected as a director.   Effective December 16, 2011, Anthony S. Thornley resigned as a director from the Companys Board of Directors.   Effective December 16, 2011, Terry Nida resigned as Principal Executive Officer and Principal Financial Officer of the Company.   Effective January 1, 2012, the Board appointed Balbir Brar, D.V.M., Ph.D. as President of the Company.     Effective February 1, 2012, the Board appointed Andrew R. Boll as Vice-President of Accounting and Public Reporting and Principal Accounting and Financial Officer of the Company.     Effective February 15, 2012, the Board appointed Joachim Schupp, M.D. as Chief Medical Officer of the Company, Paul Finnegan, M.D. as a director of the Company and Balbir Brar as a director of the Company.     Bankruptcy Petition and Dismissal   As described in Note 3, 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 tour 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).   Change in Control - Preferred Stock In partial consideration for and in connection with the Line of Credit Agreement, 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 Convertible Preferred Stock (the Series A Preferred Stock) to DermaStar for an aggregate purchase price of $100,000.   The Purchase Agreement 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.  The shares of Series A Preferred Stock issued to DermaStar in the offering are convertible into 59,988,002 shares of the Companys Common Stock, however, following shareholder action and approval to increase the number of authorized shares of Common Stock through an amendment to the Companys Amended and Restated Certificate of Incorporation, DermaStar has the ability to convert five of its ten shares of Series A Preferred Stock into 29,994,001 shares of Common Stock, representing approximately 65% of the capital stock of the Company on an as-converted basis.  Upon issuance of the Series A Preferred Stock, Dermastar, and its members individually, became control persons of the Company, and as such, this and any further transactions between the Company and Dermastar, and/or its members individually, will be disclosed as related party transactions.   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 .   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.   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 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 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 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 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 14, 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.   Amendment to Certificate of Incorporation   On January 25, 2012, the Board approved an amendment to our Amended and Restated Certificate of Incorporation (the Certificate Amendment and submitted the Certificate Amendment to our stockholders for approval. The Certificate Amendment: (i) increases the number of authorized shares of our 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) changes our name from Transdel Pharmaceuticals, Inc. to Imprimis Pharmaceuticals, Inc. Our stockholders approved the Certificate Amendment in an action by written consent on January 25, 2012. We expect the Certificate Amendment to become effective on February 28, 2012, following our compliance with certain information requirements of the SEC.   In addition, also on January 25, 2012, the Board approved and submitted to our 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. The Reverse Stock Split would preserve the existing aggregate par value of our common stock. In the event we effect the Reverse Stock Split, no stockholder holding greater than 100 common shares prior to the Reverse Stock Split will hold, after such Reverse Stock Split, less than 100 common shares. Our stockholders approved an Amendment to our Amended and Restated Certificate of Incorporation to effect the Reverse Stock Split (the Reverse Split 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.

1055479

1647760

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