UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, ~~2009~~2010

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-32741

Vyteris, Inc.

(Exact Name of Registrant as Specified in Charter)

NEVADA		84-1394211
(State or Other Jurisdiction		(I.R.S. Employer
Of Incorporation or Organization)		Identification No.)

13-01 Pollitt Drive
Fair Lawn, New Jersey		07410
(Address of Principal Executive Office)		(Zip Code)

(201) 703-2299

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

None

Securities registered pursuant to Section 12(g) of the Exchange Act:

Common stock, par value $0.015 per share

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Check whether the issuer (1) filed all reports to be filed by Section 13 or 15(d) of the Exchange Act during the past twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller Reporting Company x

Indicate by check mark whether the registrant is a shel1 company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

State issuer’s revenues for its most recent fiscal year. $4117,~~560,709~~792

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.) The aggregate market value of voting and non-voting common equity held by non-affiliates as of June 30, 2010, based upon the price at which such common equity was sold, was approximately $5,666,889. The number of shares outstanding of the registrant’s Common Stock, as of March 31, 2011, was 69,175,223 shares.

The aggregate market value of voting common equity held by non-affiliates as of March 3, 2010 was approximately $6,499,904. The number of shares outstanding of the registrant’s Common Stock, as of March 3, 2010, was 62,398,817 shares.

Documents Incorporated by Reference

Portions of the Definitive Proxy Statement for the ~~2010~~2011 Annual Meeting of Stockholders are incorporated by reference in Part III hereof.

VYTERIS , INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, ~~2009~~2010

TABLE OF CONTENTS

Form 10-K Item Number:		Page No.
	PART I
	Cautionary Statement Regarding Forward-Looking Statements	3
Item 1.	Business	4
Item 1A.	Risk Factors	1615
Item 1B.	Unresolved Staff Comments
Item 2.	Properties	2527
Item 3.	Legal Proceedings	2527
Item 4.	Submission of Matters to a Vote of Security Holders	2527
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2628
Item 6.	Selected Financial Data	27
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 8.	Financial Statements and Supplementary Data	4441
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	73
Item 9A.	Controls and Procedures	73
Item 9B.	Other Information	74
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	74
Item 11.	Executive Compensation	74
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	74
Item 13.	Certain Relationships and Related Transactions, and Director Independence	75
Item 14.	Principal Accounting Fees and Services	75
	PART IV
Item 15.	Exhibits	75
	Signatures	79

Vyteris® and LidoSite® are our trademarks. All other trademarks or servicemarks referred to in this Annual Report on Form 10-K are the property of their respective owners.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain information included in or incorporated by reference in this report, in press releases, written statements or other documents filed with or furnished to the Securities and Exchange Commission, or in our communications and discussions through webcasts, phone calls, conference calls and other presentations and meetings, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “future” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions.

Reference is made to forward-looking statements, including, but not limited to, those regarding:

the anticipated amount, mix and timing of future product sales, revenues from services provided for our Contract Research Organization (“CRO”), business, royalty revenues or obligations, milestone payments, expenses, liabilities, charges, contractual obligations, cash expenditures, share-based compensation, currency hedges, ax benefits and effective tax rate, and amortization of intangible assets;

our ability to integrate our CRO business with our drug delivery business in a cost and operationally efficient manner;

growth trends for our CRO business and any products developed with our drug delivery technology;

the incidence, timing, outcome and impact of litigation, proceedings related to patents and other intellectual property rights, tax audits and assessments and other legal proceedings;

the timing and impact of accounting standards;

the design, costs, development and timing of, and therapeutic area and indications targeted by, programs in our technology pipeline;

the timing and outcome of regulatory filings and communications with regulatory authorities;

the impact of the global macroeconomic environment and the deterioration of the credit and economic conditions internationally;

our ability to finance our operations and business initiatives and obtain funding for such activities;

our reliance on third-parties for certain aspects of our business;

the structure, strategy, financial and operational impact, and timing of our framework for growth; and

the drivers for growing our business, including our plans to pursue external business development and research opportunities, and the impact of competition.

Any such forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ materially from those envisaged by such forward-looking statements. These forward-looking statements speak only as of the date of the report, press release, statement, document, webcast, or oral discussion in which they were made. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” (refer to Part I, Item 1A).

PART I

ITEM 1.

BUSINESS

Introduction

~~Business Overview~~Vyteris, Inc. (the terms “Vyteris”, “we”, “our”, “us” and the “Company” refer to each of Vyteris, Inc. incorporated in the State of Nevada, its subsidiary, Vyteris, Inc. (incorporated in the State of Delaware), its subsidiary, MediSync BioServices, Inc. (“MediSync”) (incorporated in the State of Delaware) and the consolidated company) has developed and produced the first FDA-approved, electronically controlled transdermal drug delivery system that transports drugs through the skin comfortably, without needles. We believe that this platform technology can be used to administer a wide variety of therapeutics either directly into the skin or into the bloodstream.

~~Vyteris, Inc.~~On ~~(formerly~~April ~~Vyteris Holdings (Nevada)~~6, ~~Inc.) (the terms “Vyteris”~~2011, “we~~”, “our”,~~ ~~“us”~~completed ~~and~~a merger (the “~~Company~~Merger”) ~~refer~~pursuant to ~~each~~which ofMediSync ~~Vyteris~~BioServices, Inc. ~~incorporated~~became inour ~~the State~~wholly ofowned ~~Nevada,~~subsidiary. ~~its~~On ~~subsidiary~~April 1, ~~Vyteris~~2011, ~~Inc.~~the ~~(incorporated~~Company inexecuted the ~~State~~Agreement ~~of Delaware)~~ and ~~the~~Plan ~~consolidated~~of ~~company)~~Merger ~~has~~with ~~developed~~MediSync BioServices, Inc. and ~~produced~~on April 6, 2011, the ~~first FDA-approved~~Company, ~~electronically~~ ~~controlled~~and ~~transdermal~~MediSync ~~drug~~consummated ~~delivery~~the ~~system~~Merger ~~that~~by ~~transports~~filing ~~drugs through~~a Certificate of merger with the ~~skin~~Secretary ~~comfortably,~~of ~~without~~State ~~needles~~of the State of Delaware. WeMediSync’s ~~believe~~business ~~that~~plan ~~this platform~~contemplates ~~technology~~the ~~can~~acquisition beand ~~used~~operation toof ~~administer~~contract aresearch ~~wide~~organizations ~~variety~~(“CROs”) ofand ~~therapeutics either~~related ~~directly~~businesses. ~~into~~MediSync ~~the~~acquired ~~skin~~one orCRO ~~into~~in ~~the~~2009, ~~bloodstream.~~and Weis ~~hold~~currently ~~approximately~~negotiating ~~50 U.S.~~with ~~and~~several 70other ~~foreign~~acquisition ~~patents~~targets. ~~relating~~As toa result of the ~~delivery~~Merger, ofwe ~~drugs~~will ~~across~~operate ~~the~~in ~~skin using~~two anbusiness ~~electronically~~segments: ~~controlled~~a ~~“smart~~CRO ~~patch”~~business ~~device~~and a drug delivery technology business.

MediSync was formed in 2006 for the purpose of acquiring and consolidating CROs and related businesses, including but not limited to (i) SMOs, which sub-contract clinical trial-related responsibilities from CROs and pharmaceutical/biotechnology companies, (ii) post marketing surveillance companies, which monitor pharmaceutical drugs or devices after release into the market and (iii) clinical, regulatory and litigation consulting companies. We believe that MediSync’s current and future operations serve a growing demand for outsourced clinical research and related services in the pharmaceutical and biomedical industries. We further believe that each CRO and related business that MediSync acquires (each, an “Acquired Business”) may benefit from (a) potential cost savings and efficiencies proposed by the consolidation model, (b) the sharing of, and collaboration on, clinical research studies among the Acquired Businesses, (c) new services offered by other Acquired Businesses, and (d) synergistic efficiencies caused by MediSync’s consolidation with the existing Vyteris infrastructure.

The CRO Industry

CROs provide a wide range of pharmaceutical research and device-development services to the pharmaceutical, biotechnology, and medical device industries, including, but not limited to, product development and formulation, clinical trial management, and data management services to conform to Food and Drug Administration (FDA) regulations. The CRO industry revenue was predicted to approach $20 billion in 2010, or approximately one-third of research and development spending for the pharmaceutical and biotechnology sectors.1 Several analyst reports and studies have demonstrated a growing trend in pharmaceutical and biotechnology companies’ reliance on the outsourcing of clinical research and related services to CROs and similar organizations. For example, in mid-2009, it was estimated that approximately 25% of all biopharmaceutical drug development was being outsourced, representing a CRO market greater than $22 billion.2 Some industry analysts anticipate that the rate of outsourcing to CROs will accelerate, approaching 40% over the next several years.3

In addition, approximately $125 billion of revenue from patent-protected drugs may no longer be available in the next few years, due to recent and upcoming patent expirations.4 As a result, pressure on pharmaceutical companies to revive drug development pipelines has intensified.5 We believe that this pressure will lead to new drug development opportunities for CROs and related businesses.

1 CRO Market, www.acrohealth.org/cro-market1.html, as of March 6, 2011.

2 J.P. Morgan, CRO Report, July 16, 2009.

3 Goldman Sachs, Americas: Healthcare Services: Pharmaceutical Services, October 20, 2009.

4 Washington Drug Letter, FDA News, Vol. 42 No. 42, October 25, 2010.

5 J.P. Morgan, CRO Report, July 16, 2009.

Acquisition Strategy

We anticipate that MediSync’s Acquired Businesses will consist of companies that play an integral role in assisting pharmaceutical and biotechnology companies with the development of, and strategies relating to, drugs, biologics and medical devices. With respect to MediSync’s acquisition targets, we intend to focus on privately owned and operated companies that are profitable (after making certain pro-forma acquisition adjustments), have at least five years of operating history, and have built a good reputation through working with numerous well-known pharmaceutical and/or biotechnology customers. We plan to build value (i) through programs designed to drive incremental new revenues, (ii) by benefiting from economies of scale, proactive business development and marketing initiatives, centralized management and information systems, and “brand name” identification, and (iii) by broadening the scope of services offered by each of the Acquired Businesses.

With respect to the Acquired Businesses, we plan to strategically:

contribute expansion capital as appropriate and available;

increase operational efficiencies;

leverage the unique specialties and areas of expertise of each Acquired Business;

create new revenue streams through new service offerings;

leverage cost savings through economies of scale;

operate throughout the U.S. and subsequently embark upon a global expansion; and

carefully monitor the synergies among the Acquired Businesses to effectively nurture organic growth of their businesses.

We intend to cause each Acquired Business to maintain its own identity and specialty skills while at the same time benefiting from operating efficiencies and lower overhead costs. Because we plan to target small- to mid-size companies, we believe that a consolidation of resources of such companies could significantly contribute to the expansion of operations, resulting in increased revenues. We believe that our acquisition of carefully selected companies with complementary attributes and expertise will contribute to an inherent synergy, thereby allowing the Acquired Businesses to source, and collaborate on, clinical research studies among one another. Through this cross pollenization, MediSync can expand its operations by offering a larger range of services provided by each of its unique Acquired Businesses to potential customers.

We anticipate MediSync’s organizational structure to be as follows:

MediSync is pursuing acquisition targets with respect to its pipeline, which we intend to pursue for closing by the end of the first quarter of 2012. These include the following:

Potential extension of agreement with scientific consulting firm across a variety of business applications to industry and counsel in (i) assisting clients with the navigation of clinical and regulatory requirements, and (ii) supporting clients in defending their products in a variety of legal actions. Transaction terms include a total purchase price up to $7.3 million consisting of (i) $4.3 million in cash; (ii) $1.0 million in purchase money promissory note; (iii) 3.75 million shares of Company common stock valued at $0.8 million; and (iv) earn outs of up to $1.2 million over three years.

Signed letter of intent with a service management organization specializing in trials requiring a controlled environment. Transaction terms include a total purchase price of $10.0 million consisting of (i) $8.0 million in cash; and (ii) $0.6 million in Vyteris common stock, along with a $1.2 million earn out. Due diligence, as well as an audit of the targets financial statements, is underway.

Negotiations underway with a CRO with a 50 bed research unit. Transaction terms anticipated to include a total purchase price of $12.5 million, with $10.0 million in cash and $1.0 million in equity, with a $1.5 million three-year earn out.

Negotiations underway with an international CRO. Transaction terms anticipated to include a total purchase price of $7.5 million, with $1.0 million in cash and $4.0 million in equity, with $2.5 million in a combination of purchase money notes and/or earn outs.

Negotiations underway with a research company which specializes in post-marketing surveillance. Transaction terms anticipated to include a total purchase price of $7.5 million, with $4.0 million in cash, $1.8 million in earn out and $0.9 million in each of a purchase money note and equity.

There can be no assurances whether any or all of the above described acquisitions will be consummated or if financing can be secured for any acquisition, and if so, on what terms.

Our Drug Delivery Business

Technology

Our drug delivery business is technology driven. Our active transdermal drug delivery technology is based upon a process known as electrotransport, or more specifically iontophoresis, which is the ability to transport drugs, including peptides, through the skin by applying a low-level electrical current. Our active patch patented technology works by applying a charge to the drug-holding reservoir of the patch. This process differs significantly from passive transdermal drug delivery which relies on the slow, steady diffusion of drugs through the skin. A significantly greater number of drugs can be delivered through active transdermal delivery than is possible with passive transdermal delivery. Our technology can also be used in conjunction with complementary technologies to further enhance the ability to deliver drugs transdermally.

Market Opportunity

We believe there are a significant number of pharmaceutical drugs with substantial annual sales for which the patent is due to expire by 2012. Based on our analysis, there are currently a significant number of these and other FDA-approved drugs that may be relatively easily formulated for transdermal delivery and thus made eligible for new patent protection. ~~We believe that the application of our novel drug delivery technologies to such existing therapeutics is an attractive means of prolonging the commercial viability of many currently marketed drugs.~~

Business Model

Business Strategy and Initiatives

Our ~~long term~~commercialization ~~viability~~strategy is ~~linked~~ to ~~our~~develop ~~ability~~near-term toand ~~successfully~~future ~~pursue~~market ~~new~~ opportunities ~~with~~ ~~products~~utilizing ~~that~~FDA-approved ~~can~~and bemarketed ~~delivered~~drugs by(primarily ~~means~~peptides ofand small molecule drugs) with our ~~smart~~proprietary ~~patch~~delivery technology,. By targeting compounds that may qualify for accelerated development and regulatory pathways such as those ~~facing~~implemented ~~patent~~under ~~expiration.~~Section In505(b)(2) ~~addition~~of tothe ~~extended~~Federal ~~patent~~Food, Drug and ~~clinical usage~~Cosmetic Act, ~~our~~we ~~platform~~strive ~~may~~to ~~also~~develop beand acommercialize ~~useful~~products ~~tool~~that ~~for~~can ~~pharmaceutical~~reach the market faster and ~~biotechnology~~ ~~companies~~at toa ~~reduce~~reduced ~~their~~cost ~~research~~as ~~and~~compared ~~development~~to ~~investment~~the traditional development and ~~protect~~ ~~their~~regulatory ~~brands~~approval ~~against~~processes ~~generics. Based~~for ~~upon~~new ~~these~~drugs. ~~tenets~~Additionally, ~~our business~~we ~~model~~are ~~for~~exploring ~~achieving~~various ~~corporate~~strategies ~~growth~~to ~~focuses~~derive onrevenue ~~three areas: commercialization~~from ~~and~~our ~~revenue-development~~FDA ~~strategies~~approved LidoSite product, ~~technology~~ ~~initiatives~~and our phase II infertility and ~~acquisition~~phase ~~opportunities~~I migraine projects. By ~~focusing~~These ~~on all~~strategies ~~three~~include ~~areas,~~sale weor ~~seek~~licensing of these products to ~~expand~~third ~~our~~parties ~~capabilities~~and topursuit ~~generate~~of ~~revenues~~partnership ~~over~~ opportunities with other companies in the ~~next~~pharmaceutical ~~several~~and ~~years~~biotechnology industries.

~~Our commercialization~~Technology ~~strategy~~initiatives isare toalso ~~develop~~under ~~near-term~~way ~~and~~to ~~future~~expand ~~market opportunities~~our ~~utilizing~~drug ~~FDA-approved~~delivery ~~and~~capabilities ~~marketed~~so ~~drugs~~that ~~(primarily~~we ~~peptides~~are ~~and small~~able ~~molecule~~to ~~drugs)~~utilize ~~with~~ our ~~proprietary delivery~~ technology. ~~By targeting compounds that may qualify~~ for ~~accelerated~~a ~~development~~wider ~~and~~variety ~~regulatory pathways such as those implemented under Section 505(b)(2)~~ of ~~the~~pharmaceutical ~~Federal~~applications. ~~Food,~~We ~~Drug~~are ~~and Cosmetic~~looking ~~Act, we strive~~ to ~~develop~~improve ~~and~~our ~~commercialize~~existing ~~products~~patch ~~that can reach the market faster~~ and atcontroller atechnology, ~~reduced~~as ~~cost~~well as ~~compared~~ to ~~the~~implement ~~traditional~~innovative ~~development and~~product ~~regulatory~~manufacturing ~~approval~~methods ~~processes~~to ~~for~~reduce ~~new~~materials ~~drugs~~costs. We ~~are~~have inbeen ~~the~~actively ~~process~~pursuing ~~of undertaking~~opportunities ~~two~~that ~~feasibility~~combine ~~studies,~~our technology with ~~the~~complementary ~~goal~~technologies ofsuch ~~converting~~as atultrasound, ~~least~~chemical ~~one~~enhancers, ~~of those~~in ~~studies~~order ~~into~~to afurther ~~full~~increase ~~development~~transdermal ~~program~~drug inpenetration ~~2010. Additionally, we~~that ~~are~~may ~~exploring~~lead ~~various~~to ~~strategies~~successful todelivery ~~derive~~of ~~revenue~~higher ~~from~~molecular ~~our~~weight ~~FDA~~drugs. ~~approved LidoSite~~We ~~product,~~are ~~and~~not ~~our~~currently ~~phase~~manufacturing IIany ~~infertility~~products and ~~phase~~if Iwe ~~migraine~~are ~~projects. These~~able ~~strategies~~to ~~include~~move ~~sale~~toward orcommercial ~~licensing~~viability of ~~these~~ products towe ~~third~~will ~~parties and~~look ~~pursuit~~for ofalternative ~~partnership~~production ~~opportunities~~strategies, ~~with~~which ~~other~~may ~~companies~~include ~~in the pharmaceutical and biotechnology industries~~outsourcing.

Technology initiatives are also under way to expand our drug delivery capabilities so that we are able to utilize our technology for a wider variety of pharmaceutical applications. We are looking to improve our existing patch and controller technology, as well as to implement innovative product manufacturing methods to reduce materials costs. We also seek to combine our technology with complementary technologies such as ultrasound, chemical enhancers, in order to further increase transdermal drug penetration that may lead to successful delivery of higher molecular weight drugs. As we move toward commercially viable products, we continue to develop a comprehensive strategy for efficient clinical and large scale manufacturing at lower cost of goods, which may include outsourcing, to be presented to prospective development partners.

We are also looking for growth opportunities through the acquisition of a late development-stage or revenue-generating complementary business. We believe that there may be small private drug development and delivery companies that would have an interest in the benefits of becoming part of a public company, including access to the capital markets as a public company and stockholder liquidity.

Given the December 2009 termination by Ferring of its joint collaborative infertility project with us, we are reevaluating our business strategy. We continue to look to streamline our operations and focus our resources on a narrow breadth of projects geared to determine viability and to potential sale and license of our current in-house projects. We will also evaluate a finite number of licensing and/or acquisition opportunities in an effort to acquire a technology or product which is closer to commercialization, possibly at a Phase III testing stage. Our business plan will continue to evolve over the next fiscal quarters as we evaluate in-house projects as well as review appropriate outside opportunities.

Market Opportunity

We have identified key areas of market opportunity in the areas of therapeutic peptides and small molecules which we intend to pursue:

Women’s health, such as infertility,

Migraine treatment,

Pain management, and

Metabolic diseases, such as diabetes and osteoporosis.

Our focus on these core market areas represents our belief in their relatively near-term commercialization and revenue-generating potential.

Female Infertility Treatment

One of our development opportunities is in the peptide delivery market. Pursuant to the termination provisions of our former Development Agreement with Ferring Pharmaceuticals, Inc. (“Ferring”), we believe we now own the rights for the development of an innovative product to treat female infertility using our smart patch technology. The product under development is designed to mimic the female body's natural rhythms of hormonal secretions, a characteristic important in the delivery of therapeutics for the treatment of infertility. To be effective, many patients currently need to undergo multiple injection-based protocols for ovulation inducement, sometimes as many as eight daily injections for up to three weeks. Our product would make it possible to administer the peptide without needles in a painless, convenient and cost-effective manner. ~~There are also other potential benefits, including possible reduction of the likelihood of multiple births.~~

Migraine Treatment

Another key area where we are seeking to apply our smart patch technology is the treatment of migraines. This may be a highly attractive market segment, estimated at over $3 billion per year (“Migraine Market: Trexima Approval Delays Benefits Generic Triptan”, RedOrbit NEWS, published March 29, 2007), where major market leaders face imminent patent expirations. ByThe ~~focusing on~~treatment ~~these~~of ~~patent-expiring~~migraine ~~drugs,~~requires werapid onset of medication. A class of compounds known as “triptans” is currently considered an effective treatment. We believe wea ~~can~~significant ~~offer~~market ~~potential~~opportunity ~~development partners~~exists ~~extended~~to ~~patent~~improve ~~protection~~the ~~through~~efficacy ~~use~~of triptan therapy for migraines by changing the method by which triptans are administered. Taken orally, triptans often fail to deliver sufficient quantities of ~~our~~medication ~~active~~in ~~transdermal~~the ~~patch delivery~~short ~~platform~~time frame required to optimally treat migraine onset. Further, ~~with~~they often fail to prevent the ~~additional~~second ~~benefit~~episode, ofknown ~~potentially~~as ~~providing~~recurrence, which many migraine patients suffer within 12 to 18 hours after a ~~more effective~~first ~~product~~attack.

The treatment of migraine requires rapid onset of medication. A class of compounds known as “triptans” is currently considered an effective treatment. We believe a significant market opportunity exists to improve the efficacy of triptan therapy for migraines by changing the method by which triptans are administered. Taken orally, triptans often fail to deliver sufficient quantities of medication in the short time frame required to optimally treat migraine onset. Further, they often fail to prevent the second episode, known as recurrence, which many migraine patients suffer within 12 to 18 hours after a first attack.

Our active patch technology can be pre-programmed for rapid delivery — as little as 15 minutes to achieve therapeutic levels — followed by a sustained maintenance dose that may prevent headache recurrence. If our smart patch is applied in this area, this customizable drug delivery could offer advantages in the treatment of migraine, and could improve patient satisfaction and patient compliance. We believe that this could be a unique and significantly improved therapy and that it could be a potentially effective way to significantly improve treating and preventing recurring migraine headaches.

We have demonstrated in a Phase I study that our proprietary active transdermal delivery technology can be used to provide controlled delivery of a leading migraine triptan medication in humans. Our objective is to find a development and marketing partner to complete the necessary trials and obtain FDA approval to launch this triptan loaded smart patch about the time the specific triptan we are targeting loses patent protection.

Pain Management

Another key area of potential partnership with pharmaceutical companies is in pain management, specifically, the non-steroidal anti-inflammatory drug (“NSAID”) sector, which falls in line with our strategy of pursuing high probability, low risk opportunities leading to better patient care. ~~The total annual NSAID market is potentially worth $6 billion (see “Celebrex sales plunge 40 percent”, CNN Money.com, June 29, 2005).~~ Some of the well-known NSAIDs that are or have been on the market are Vioxx, Celebrex, Naproxen and Daypro.

NSAIDs have made a dramatic contribution to pain management, but their extensive use has also documented a problematic safety profile, due to gastrointestinal (“GI”) side effects associated with extended use or over dosing of the drugs. In the United States alone, more than 107,000 hospitalizations are attributed to NSAID use, and more than 16,000 deaths a year are attributed to NSAID use (“Horizon Therapeutics Announces Two Pivotal HZT-501 Phase 3 Trials Meet Primary Endpoints,” Horizon Therapeutics, Inc., December 2, 2008).

Our active delivery system bypasses the gastrointestinal tract, minimizing the GI side effects associated with oral NSAIDs, and circumvents a major disadvantage of these commonly used medications. We believe that if our smart patch technology is applied to NSAIDs, the controlled drug delivery profile from our active patch could also curtail overdosing of the drugs. ~~This may represent a significant market opportunity if we are successful in entering into a strategic partnership to penetrate the NSAID market.~~

Metabolic Diseases

We are also exploring the possible opportunities to use our technology to combat certain metabolic diseases, such as diabetes and osteoporosis.

Diabetes

Diabetes mellitus is a common metabolic disease. It is characterized by a lack of insulin secretion and/or increased cellular resistance to insulin, resulting in hyperglycemia and other metabolic disturbances. People with diabetes suffer from increased morbidity and premature mortality related to cardiovascular, microvascular and neuropathic complications. The Diabetes Control and Complication Trial has convincingly demonstrated the relationship of hyperglycemia to the development and progression of complications and showed that improved glycemic control reduced these complications. The delivery of peptides (insulin or GLP-1) through the skin drugs may be accomplished by iontophoresis alone or by a combination of physical or chemical ~~enhanement~~ enhancement technologies with iontophoresis to result in delivery of these therapies.

Osteoporosis

Osteoporosis is a metabolic skeletal disorder wherein bone strength decreases and risk of bone fracture increases. Bone strength is maintained by a continual process of bone resorption and bone regeneration. Osteoporosis results when bone resorption occurs at a faster rate than bone regeneration. We believe iontophoresis can be used to transdermally deliver calcium-regulating hormones such as salmon calcitonin and parathyroid hormone (1-34). Such delivery could be useful for chronic treatment of post-menopausal osteoporosis and other clinical indications as a superior alternative to injection.

Topical Anesthesia

The first area targeted with our smart patch technology, and our “proof of concept” case, was primarily needle stick pain with a secondary focus on the areas of dermatology, rheumatology and oncology procedures. On May 6, 2004, we received approval from the FDA to commercially launch our first product, LidoSite. LidoSite is a topical delivery system indicated for use on normal intact skin to provide local anesthesia prior to needle stick procedures such as venipunctures (blood draws), injections and intravenous therapies for arthritis and oncology patients as well as superficial dermatological procedures. Our LidoSite product, discontinued in 2008, used our technology to achieve rapid, deep local anesthesia prior to these procedures. We are currently seeking a sale, licensing or strategic partnering opportunity for our LidoSite product line.

Technology

Overview of Electrotransport, or Active Transdermal Drug Delivery

Our active transdermal drug delivery technology (also referred to as our smart patch technology) is based on a process known as electrotransport, or more specifically, iontophoresis, a process that transports drugs through the skin by applying a low-level electrical current. Our patented technology works by applying a charge to the drug-holding reservoir of the patch. A positive charge is applied to a reservoir where a positively charged drug molecule is held. Because like-charges repel, the drug molecules are forced out of the reservoir and into the skin (the same process can occur when a negative charge is applied to a reservoir containing a negatively charged drug molecule).

This process differs significantly from passive transdermal drug delivery, which relies on the slow, steady diffusion of drugs through the skin. Passive drug delivery patches have a limited number of applications including: smoking cessation, birth control, hormone replacement therapy, angina and motion sickness.

By contrast, using iontophoresis, certain drugs can be delivered through the skin and deeper into the bloodstream faster and in larger quantities than by passive transdermal patches. Because of the application of an external form of energy (electrical energy in the form of a charge), this mode of delivery is also called “active transdermal delivery”. Initial research indicates that a significantly greater number of drugs can be delivered through active transdermal delivery than through passive transdermal delivery. Based on our analysis, we estimate that there are currently in excess of 180 FDA-approved drugs that can be delivered through our active transdermal delivery platform.

Furthermore, because the drug is only delivered when current is being administered, our delivery system is precise, controllable and electronically programmable, thereby enabling active transdermal delivery technology to duplicate the steady or periodic delivery patterns of intravenous infusion. By controlling the intensity and duration of the charge applied, the smart patch controls whether the drug delivery is topical, or whether the delivery is systemic, in which case the drug molecules are pushed deeper into the skin, where they enter the body’s circulatory system directly. The technology also aids speed of absorption.

Our Approach to Iontophoresis

Our proprietary active transdermal technology is the result of over 20 years of research and development while a part of Becton, Dickinson and Company and after spin-off from Becton Dickinson in November 2000. Our goal has been to fully realize the potential of this technology by creating irritation-free, easy to use, wearable, low-cost, and disposable systems that would be specifically designed to improve the administration of certain drugs to address high-value unmet medical needs.

We have developed a proprietary technology encompassing a series of significant improvements to drug formulation and commercial manufacturing. We used this technology with our first FDA-approved product, LidoSite, and are currently using this technology to deliver peptides and small molecules in a research and development setting. Many of our innovations center on the way we approach designing and formulating electronically controlled drug delivery patches. Our patches are pre-filled with the proper dosage of drug during the manufacturing process. They are designed to be disposable after a single application and are discreet in appearance. Further, we designed our patches so that they can be quickly and cost-effectively mass-produced using automated manufacturing processes.

To complement our patch design, we approached the design of electronic controllers with the goal of being small, wearable, easy to operate and programmable to handle simple, as well as complex, drug delivery profiles. The dose controller contains a miniature battery and circuitry, controlling delivery rate, and is capable of recording information on the amount and time of drug delivered. We believe the controllability and programmability offered by our technology are distinct competitive advantages that will enable our products to deliver more consistent and ~~predicable~~predictable results for a broad range of existing and new drugs.

Clinical Studies

Infertility/Peptide Application

We assisted Ferring in completing a ~~late~~ Phase I clinical trial demonstrating that our patented smart patch transdermal technology successfully delivered a peptide molecule in humans (multiple pulse) without the use of needles (noninvasively) in therapeutic levels aimed at the treatment of female infertility. The study results showed that therapeutic levels of the peptide in humans are achievable without the use of injections or infusion pumps. The clinical trial was conducted in the U.S. with 30 patients under an investigational new drug application. Specific technical data will undergo peer review for future disclosure.

In the Phase I clinical trial, a pulse profile controlled the transdermal delivery of the peptide from patches loaded with different concentrations of the peptide. The amounts of peptide delivered using the patch were comparable or higher than with subcutaneous (subQ) injection. The study used different formulations within our patch that were compared with subQ delivery of the peptide.

Ferring also conducted a Phase II clinical trial of the infertility product. The Phase II trial was a multi-center clinical trial conducted at approximately 35 centers throughout the U.S. and enrolled approximately 350 female patients between the ages of 18 and 38 years with anovulatory / oligoovulatory infertility. In this clinical trial, the safety, tolerability, and effectiveness of our transdermal delivery system was evaluated. We are currently reviewing the results of this trial to determine what degree of success was achieved based on the goals of the trial; whether an additional Phase II trial may be needed; and the feasibility of moving on to Phase III trials. We anticipate that any such additional trials would be conducted by a strategic partner pursuant to a development and marketing agreement.

LidoSite

We received FDA approval for the sale of our LidoSite product in the United States in 2004. ~~Prior~~ toOur ~~receiving FDA approval,~~ LidoSite ~~underwent extensive~~product ~~clinical~~is ~~and~~currently ~~laboratory testing~~dormant, ~~culminating~~and inthere ~~the~~are ~~completion~~no ~~of Phase~~plans ~~III~~to ~~clinical~~engage ~~studies~~ in ~~the~~further ~~fourth quarter of 2001. Those Phase III clinical studies involved 15 sites within the U.S. and over 1~~development,~~000~~ ~~human applications~~marketing ofor ~~our~~licensing ~~system, testing various aspects such as safety, wearability, pain sensation and reliability. Under the appropriate Investigative New Drug provision~~ of ~~the~~this ~~Food, Drug and Cosmetic Act, we conducted the following studies of our lidocaine system in humans~~product.

Phase I Clinical Studies.

Phase I clinical studies consisted of several series focused on:

· finalizing the design of the system;

· seeing how deep the numbness goes;

· looking at the amount of drug that gets into the blood stream;

· determining if it matters where you place the patch on the body;

· making sure the lidocaine that is administered does not contaminate the blood samples that are drawn from the site where the patch was on the skin; and

· comparing the performance of the patch to EMLA lidocaine cream.

Phase II Clinical Studies.

One study of 48 pediatric, i.e., patients 5-18 years old, was conducted in a major mid-west children's hospital to measure the pain sensation, or lack thereof, associated with actual clinical use of our lidocaine system. The participants were patients that needed to have a needle placed through their skin and into a vein because of the need to draw blood or the need to insert an intravenous catheter for infusion of IV medication. During these studies, which were randomized and placebo-controlled, clinical investigators noted pain scores during needle penetration. From these studies, we were able to conclude that the system could be used easily on these patients and a statistically significant pain reduction was noted over the placebo patches.

Phase III Clinical Studies.

We conducted four Phase III clinical studies to demonstrate the efficacy and safety of our lidocaine delivery system when used for local dermal anesthesia on intact skin. These large-scale studies consisted of two studies involving puncture of the skin by needles and two dermatological studies involving minor incisions of the skin or the use of lasers to treat skin conditions. In all, over 650 patients were evaluated in the four studies. The two large-scale studies consisted of a double-blind evaluation of our lidocaine delivery system in pediatric patients, ages 5 to 17, and a double-blind evaluation of the system in adult patients. In children aged 5 to 17 as well as adults, the study results demonstrated that those treated with our lidocaine delivery system reported significantly less pain than subjects treated with a placebo system.

Phase IV Clinical Studies.

During the fall of 2006, we conducted a Phase IV clinical study to assess the feasibility and acceptance of LidoSite Topical System for use as a topical anesthetic system by practicing rheumatologists, prior to injection procedures in their offices. The study, involved six study sites and 14 physicians, and followed 63 patients over the course of two routine injections of hyaluronic acid for the treatment of osteoarthritis. During the first treatment, patients either received no local anesthesia or an alternate local anesthesia prior to cannulation or needle puncture. During the second treatment, patients received the LidoSite system, comprised of the LidoSite patch and controller. In the study more than 73 percent of the subjects preferred LidoSite to the treatment used during their first visit. Unlike topical anesthetic creams typically used in today's healthcare settings to address needlestick pain, the LidoSite system delivers numbing medication to the procedure site quickly and effectively after a 10 minute application. Topical anesthetic creams usually take up to an hour for full anesthetic benefit.

Drug Approval Process and Regulatory Status of our LidoSite Product

A 505(b)(2) application is an abbreviated New Drug Approval (NDA) process applicable to a new drug that was developed by modifying an existing, approved drug. The development program is abbreviated because the safety and efficacy of the approved products are in public domain. Thus the 505(b)(2) usually involves neither pre-clinical studies, nor the normal massive clinical studies associated with an NDA, but instead usually relies on relatively short and inexpensive bridging studies (bio and/or clinical endpoint studies) to relate the safety and efficacy of the new 505(b)(2) product to the related NDA product to which it is connected through this bridging.

Our main strategy will be to implement a drug development program with a diminished cost and faster time to market. Our development and commercialization strategy, by us or strategic partners, will be to use the FDA's 505(b)(2) approval process to obtain more timely and efficient approval of new formulations of previously approved therapeutics. Because the 505(b)(2) approval process is designed to address new formulations of previously approved drugs, we believe it has the potential to be more efficient, less costly, and less time consuming than regular NDA FDA-approval methods.

Our LidoSite product is considered a “combination” product by the FDA, as it consists of a drug-filled patch and a device, our controller. For a combination product, approval by the FDA requires that an NDA and a 510(k) notification be submitted to the FDA. In addition, an acceptable Pre-approval Inspection, or PAI, of our facility, quality systems and data documentation by the FDA was required. In May 2004, we received approval from the FDA to commercially launch our LidoSite product in the United States.

Sales, Marketing and Distribution

While we were able to demonstrate some very limited success with commercialization of our LidoSite product, the results were not statistically significant, and we had no sales or marketing activities relating to that product in 2009. As we have products reach the commercial development stage in the future, we anticipate that sales, marketing and distribution will be handled by strategic partners. Accordingly, we do not have an active emphasis on sales, marketing and distribution.

Competition

Any existing or future products which we may develop will likely compete with both conventional drug delivery methods and advanced drug delivery methods.

Conventional Drug Delivery Methods

Traditionally, the pharmaceutical industry has relied on oral delivery and injection as the primary methods of administering drugs:

Conventional Oral Method. Conventional, oral drug dosage forms, such as pills and capsules, are the most common types of drug delivery. Oral drug delivery methods are easy to administer, but their efficacy can be limited because drugs must first pass through the digestive system and liver before being absorbed into the bloodstream. Therefore, orally delivered drug dosages must be large to overcome the degradation that occurs in the gastrointestinal tract and liver. As a result, conventional oral dosage forms often produce higher initial drug levels than are required to achieve the desired therapeutic effects, thereby increasing the risk of side effects, some of which can be serious. Also, it is difficult to maintain therapeutically optimal drug levels using oral drug delivery methods. Further, oral drug delivery methods can require patients to follow inconvenient dosing routines, which may diminish patient compliance with self-medication schedules.

Injection Methods. Injectable drug dosage forms generally provide rapid onset of therapeutic action and offer many of the same advantages as conventional oral drug dosage methods. Injectable drug delivery methods use needles, raising the possibility of needle-stick injuries, as well as the risk of infection to the caregiver and the patient. The use of needles also increases patient anxiety due to the pain of injection.

Advanced Drug Delivery Technologies

The limitations of conventional forms of drug delivery have driven demand for advanced drug delivery alternatives that are safer, more effective and more convenient. Advanced drug delivery technologies have improved oral and injection methods as well as offering new means of administering drugs, such as through the skin and the respiratory system. Advanced drug delivery technologies include sustained release pills and injectables, passive transdermal patches and infusion pumps, as well as pulmonary, nasal, intravaginal and opththalmic methods. In some cases, these technologies offer better control over the release of drugs into the bloodstream, thereby improving therapeutic efficacy and reducing side effects and risks. In other cases, advanced drug delivery technologies make therapies easier to administer and support more complex therapeutic regimens. Innovative drug delivery technologies can offer many advantages over traditional methods, including ease of use and administration, greater control of drug concentration in the blood, improved safety and efficacy, improved patient compliance, expanded indications for certain therapies, and totally new therapies using drugs that cannot be delivered otherwise.

The following is an overview of advanced drug delivery technologies and other alternative methods that could be direct or indirect competitors of our potential future products:

Sustained release oral dosage forms are designed to release the active ingredients of the drug into the body at either a predetermined point in time or at a predetermined rate over an extended period of time, generally do not work fast and may be partially destroyed by the liver and stomach before they get into the blood stream.

Passive transdermal patches allow absorption of drugs through the skin and generally provide a convenient method of administering drugs at a steady rate over an extended period of time, but onset of action may take hours after application, and absorption of the drug may continue for hours after the patch is removed, which can increase side effects. Additionally, because human skin is an effective barrier, most drug formulations will not passively permeate the skin in therapeutic quantities.

Sustained release injectable preparations allow conventional injectable drugs to be incorporated into a biodegradable material that is then injected and absorbed slowly into the surrounding tissue. These preparations reduce the frequency of injections by creating a small “depot” of the drug beneath the skin that is slowly absorbed by the body, thus increasing the interval between injections. They can turn a conventional once-a-day injection into a once weekly or even longer regimen.

Continuous infusion pumps are small implantable or externally-worn battery-powered pumps that introduce drugs directly into the body, using a needle or catheter inserted into tissue just below the skin or directly into the blood stream or spinal space. They use conventional drugs, and provide rapid onset of action as well as sustained or programmed delivery of medication. These are costly, complex electromechanical devices reserved mostly for treatment of chronic conditions such as the delivery of insulin for certain diabetes patients and for chronic intractable pain management for the treatment of certain forms of spasticity.

Pulmonary, nasal and transmucosal methods are designed to provide fast action or to deliver drugs that are destroyed by the gastro-intestinal tract. Variations in a user's respiratory tract, often brought on by everyday occurrences such as a cold, infection or even changes in climate, can markedly affect the amount of drug inhaled from each spray.

Jet injection drug delivery technology uses stored mechanical energy from either a spring or compressed gas cylinder to ballistically deliver a liquid or powder through the skin without a needle. Liquid jet injection has been used for many years with minimal success. A new technology allows the administration of small amounts of drugs in dry powder form through the skin using a specially engineered device, which propels the drug using a high-powered jet of helium gas. The gas accelerates the dry drug particles, enabling penetration of the skin.

Competition for our drug delivery products may come from any of the above technologies or new, yet-to-be-developed technologies.

Current and Potential Iontophoresis Competition

NuPathe Inc. is a privately-held specialty pharmaceutical company specializing in the development of therapeutic products based on iontophoresis for neurological and psychiatric diseases. NuPathe’s lead compound, Zelix™, combines sumatriptan with NuPathe’s proprietary Iontophoretic System. NuPathe completed its pivotal Phase III study and is believed to be planning an NDA filing in 2011.

Dharma Therapeutics, Inc. is a subsidiary of Transcu Group Limited. Dharma is an early stage drug delivery company based in Seattle, Washington which develops transdermal delivery systems with a focus on iontophoretic transdermal drug delivery technology. Dharma is currently developing products in the areas related to pain, inflammation, and nausea. Recently, Dharma completed Phase II clinical trials for its Lidocaine iontophoresis patch drug delivery system.

EyeGate Pharma is a specialty pharmaceutical company centered in ophthalmics and focused on developing and commercializing its EyeGate® II Delivery System and formulation technologies to deliver therapeutics to the eye. Eyegate uses iontophoresis technology to deliver drugs to both the anterior and posterior tissues of the eye. EyeGate Pharma’s initial focus is on treating inflammatory conditions like uveitis, which is responsible for an estimated 10 to 15 percent of all cases of blindness in the Unites States. The company recently completed a Phase II study of its lead product candidate, EGP-437, for the treatment of anterior uveitis, a proprietary formulation of a well-studied corticosteroid, for treating severe uveitis and dry eye.

Alza Corporation, formerly a Johnson & Johnson subsidiary, with its E-TRANS® system, is the only other company known to have developed pre-filled iontophoresis technology. Alza has chosen a very different application, delivery of an opiate-based product for systemic pain management, for its first product. Alza received approval of its IONSYSTM NDA in the summer of 2006 from the FDA. This approval further validates the potential value and utility of iontophoretic drug delivery, making this class of technology more attractive to the pharmaceutical and health-care industries. The Alza system was developed to treat pain associated with major surgery and cannot be used as a dermal anesthetic. We also believe that because Alza has incorporated the electronics into each patch, the added complexity of the product necessitates product development cycles for new applications that are significantly longer than those required by our system.

Travanti Pharma, Inc., formerly Birch Point Medical, Inc., a development stage company, developed a single use iontophoretic system called IontoPatch™, aimed at the physical therapy market. We believe that the IontoPatch product is not FDA-approved for any specific therapeutic indication and is not pre-filled with medication.

Becton Dickinson is engaged in developing alternative drug delivery technologies, and we may compete in the future with alternative technologies developed or acquired by Becton Dickinson. Becton Dickinson has developed drug delivery technology employing “micro-needles,” tiny needles that deliver compounds into the first few hundred microns of the skin. This technology, which has not yet been commercialized, may compete directly with our current technology.

Patents, Intellectual Property and Proprietary Technology

The intellectual property that we own is based in large part on significant improvements we have made to our drug delivery technology during more than 20 years of research and development, ten of which were as a division of Becton Dickinson. A significant portion of our intellectual property relates to the design and manufacture of our proprietary disposable, active transdermal patches and electronic dose controllers.

We protect our technological and marketing position in advanced transdermal drug delivery technology by filing U.S. patent applications and, where appropriate, corresponding foreign patent applications. Our success will depend in part upon our ability to protect our proprietary technology from infringement, misappropriation, duplication and discovery. Our policy is to apply for patent protection for inventions and improvements deemed important to the success of our business. We have a portfolio of approximately 50 U.S. patents and 70 foreign patents. We have approached the design and development of our active transdermal drug delivery systems with the objective of maximizing overall delivery system efficiency while addressing commercial requirements for reproducibility, formulation stability, safety, convenience and cost. To achieve this goal, our delivery systems integrate proprietary and patented technology with commercially available, off-the-shelf components.

Iontophoresis, as a way of delivering drugs, has been well known for many years. Our patent portfolio consists of innovations that advance basic iontophoresis technology through:

enabling more efficient electrode designs;

drug formulations that enhance iontophoresis;

specific transdermal patch features allowing convenient use and low manufacturing cost;

electronic circuitry and program algorithms improving the safety and control of medication delivery; and

ability to deliver specific classes of molecules not previously possible.

We believe these patented features provide for improved clinical performance and provide a competitive advantage in manufacturing cost and quality. Some areas in which we have a particular concentration of patents are components, designs and formulations resulting in little to no skin sensation during delivery, delivery of cell adhesion inhibitors via iontophoresis, creating safe, single-use patches that cannot be inadvertently reused, and patches that can be used with drugs having limited aqueous stability.12

The issuance of a patent is not conclusive as to its validity or as to the enforceable scope of the claims of the patent. The patent positions of pharmaceutical, biotechnology and drug delivery companies, including our company, are uncertain and involve complex legal and factual issues. Accordingly, we cannot assure investors that our patents will prevent other companies from developing similar products or products which produce benefits substantially the same as our products, or that other companies will not be issued patents that may prevent the sale of our products or require us to pay significant licensing fees in order to market our products. If our patent applications are not approved or, even if approved, if such patents are circumvented or not upheld in a court of law, our ability to competitively exploit our patented products and technologies may be significantly reduced. Additionally, the coverage claimed in a patent application can be significantly reduced before the patent is issued. As a consequence, we do not know whether any of our patent applications will be granted with broad coverage or whether the claims that eventually issue or that relate to our current patents will be circumvented. Since patent applications in the United States can be maintained in secrecy until patents issue, and since publication of discoveries in scientific or patent literature often lag behind actual discoveries, we cannot be certain that we were the first inventor of inventions covered by our issued patents or pending patent applications or that we were the first to file patent applications or such inventions. Moreover, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office to determine priority of invention, which could result in substantial cost to us, even if the eventual outcome is favorable. An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from or to third parties or require us to cease using the technology in dispute.

Also, patents may or may not provide competitive advantages for their respective products or they may be challenged or circumvented by competitors, in which case our ability to commercially exploit these products may be diminished.

From time to time, we may need to obtain licenses to patents and other proprietary rights held by third parties in order to develop, manufacture and market our products. If we are unable to timely obtain these licenses on commercially reasonable terms, our ability to commercially exploit such products may be inhibited or prevented. Additionally, we cannot be assured that any of our products or technology will be patentable or that any future patents we obtain will give us an exclusive position in the subject matter claimed by those patents. Furthermore, we cannot be assured that our pending patent applications will result in issued patents, that patent protection will be secured for any particular technology, or that our issued patents will be valid, enforceable and provide us with meaningful protection.

Although we have entered into invention assignment agreements with our employees and with certain advisors, if those employees or advisors develop inventions or processes independently which may relate to products or technology under development by us, disputes may arise about the ownership of those inventions or processes. Time-consuming and costly litigation could be necessary to enforce and determine the scope of our rights.

We also rely on trade secrets and proprietary know-how that we seek to protect, in part, through confidentiality agreements with our strategic partners, customers, suppliers, employees and consultants. It is possible that these agreements will be breached or will not be enforceable in every instance, and that we will not have adequate remedies for any such breach. It is also possible that our trade secrets will otherwise become known or independently developed by competitors.

Manufacturing

Patch Manufacturing

We have an automated manufacturing and assembly facility for pre-commercial and low-volume commercial production of LidoSite and other patches based upon our smart patch technology. With this competency in place, we have the capability of developing and manufacturing other transdermal products that we may develop. Our facility is periodically audited and reviewed by the FDA. The facility also practiced current Good Manufacturing Practices.

We conduct our manufacturing in a 14,000 square foot section of our 13-01 Pollitt Drive facility in Fair Lawn, New Jersey with a maximum production capacity of up to two million patches per year. In order to manufacture the patches cost-effectively (should demand rise to exceed current maximum production capacity), we would need to increase our manufacturing efficiency through the installation of a fully paid for second manufacturing line that we expect would operate at four to five times the capacity of our current equipment.

We design, develop and maintain our own manufacturing processes, but use third parties to build the automated assembly equipment and fabricate replacement parts when necessary. As we move to implement our revised business plan and when products become near commercialization, we will review the benefits of in-house manufacturing versus outsourcing to a “contract manufacturer.”

Electronic Dose Controller Development and Manufacturing

To date, we have gained significant expertise in the design and development of miniature, wearable electronic dose controllers using commercially available, off-the-shelf components assembled onto miniature circuit boards. The controller that was developed for LidoSite is a simple, single-pulse device initiated by the push of a button, which turns on the electric current for a ten-minute interval as it delivers the drug.

In addition, we have developed a more sophisticated prototype controller that was effectively used in the Phase I clinical trials related to infertility product and have made further improvements in conjunction with controllers that were utilized in the Phase II clinical trial.

Suppliers

~~Our principal~~Some ~~suppliers~~of ~~are~~our ~~AquaMed~~principal ~~Technologies,~~suppliers ~~Inc., M&C Specialities Co. and Altron Inc. Some~~ of ~~these~~ components, and other of our suppliers, are single-source. Although we have not experienced significant production delays attributable to supply changes, we believe that, for the electrode subcomponent and hydrogel in particular, alternative sources of supply would be difficult to develop over a short period of time. Because we do not have supply agreements and direct control over our third-party suppliers, interruptions or delays in the products and services provided by these third parties may be difficult to remedy in a timely fashion. In addition, if such suppliers are unable or unwilling to deliver the necessary parts or products or if we are unable to make full payments to these suppliers on a current basis, we may be unable to redesign or adapt our technology to work without such parts or find alternative suppliers or manufacturers. In such events, we could experience interruptions, delays, increased costs, or quality control problems.

Research and Development

We spent approximately 8,916 hours engaged in R&D in 2010. Most R&D was internally generated and not attributable to any customers.

Governmental Regulation

Under the United States Food, Drug and Cosmetic Act, "new drugs" must obtain clearance from the Food and Drug Administration, or FDA before they can be marketed lawfully in the United States. Applications for marketing clearance must be based on extensive clinical and other testing, the cost of which is very substantial. Approvals – sometimes including pricing approvals — are required from health regulatory authorities in foreign countries before marketing of pharmaceutical products may commence in those countries. Requirements for approval may differ from country to country, and can involve additional testing. There can be substantial delays in obtaining required clearances from both the FDA and foreign regulatory authorities after applications are filed. Even after clearances are obtained, further delays may be encountered before the products become commercially available in countries requiring pricing approvals.

Product development generally involves the following steps which are required by the regulatory process:

preclinical development, during which initial laboratory development and in vitro and in vivo testing takes place;

submission to the FDA of an investigational new drug application (IND) for the commencement of clinical studies;

adequate and well-controlled human clinical trials — Phase I, II and III studies —to establish the safety and efficacy of the product;

submission of an NDA to the FDA requesting clearance to market the product and comparable filings to regulatory agencies outside the United States if the product is to be marketed outside of the United States; and

clearance from the FDA — and foreign regulatory authorities, if applicable — must be obtained before the product can be marketed.

Medical devices are subject to comparable regulatory requirements.

Each of these steps can take several years and can cost tens of millions of dollars. Failure to obtain, or delays in obtaining, regulatory clearance to market new products, as well as other regulatory actions and recalls, could adversely affect our financial results.

The packaging, labeling and advertising of pharmaceutical products are also subject to government regulation. The FDA recommends preclearing advertising materials prior to the launch of a product, and the launch materials for products receiving an accelerated FDA clearance must be precleared by the FDA. With an accelerated FDA clearance, all labeling and advertising must be submitted to the FDA 30 days prior to use, unless the FDA determines otherwise. In addition, the FDA may require that additional clinical studies - Phase IV studies - be completed after it grants clearance to market a product.

Our research and development, manufacturing and distribution operations involve the use of hazardous substances and are regulated under international, federal, state and local laws governing health and safety and the environment. We believe that our operations comply in all material respects with applicable environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be eliminated and we cannot be assured that the application of environmental and health and safety laws to us will not require us to incur significant expenditures.

Employees

At December 31, ~~2009~~2010, weVyteris ~~have~~had a staff of 2215 employees, of which 72 are part-time employees and 1513 are full-time employees. Of those 2215 employees, 73 are in ~~manufacturing~~ ~~and~~ process development, 32 in regulatory, quality and analytical services, 43 in research and development and 87 in administration and management. We ~~also~~None ~~have two consultants currently providing services in the area~~ of ~~research and development and business development. None of~~ our employees isare represented by a labor union or covered by a collective bargaining agreement, nor have we experienced any work ~~stoppages~~stoppage.

Investor Information

Our Internet website address is www.vyteris.com. The information on our website is not a part of this annual report. We make available, free of charge on our website, by clicking on the “SEC filings” link on our home page, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the Securities and Exchange Commission (the “ SEC”).

ITEM 1A.

RISK FACTORS

You should carefully consider the risks described below together with all of the other information included in this report, as well as all other information included in all other filings, incorporated herein by reference, when evaluating us and our business. If any of the following risks actually occurs, our business, financial condition, and results of operations could suffer. In that case, the price of our common stock could decline and our stockholders may lose all or part of their investment. The risks set forth below are not the only ones facing our Company. Additional risks and uncertainties may exist that could also adversely affect our business, operations and prospects. If any of the following risks actually materialize, our business, financial condition, prospects and/or operations could suffer. No inference should be drawn as to the magnitude of any particular risk from its position in ~~the list of risk factors.~~

the list of risk factors.

RISKS RELATED TO OUR BUSINESS

~~We continue~~General toBusiness experience a severe, continuing cash shortage and without sufficient additional financing we may be required to cease operations, and this demonstrates uncertainty as to our ability to continue as a going concern.Risks

AsWe ~~of December~~continue ~~31, 2009, our cash and cash equivalents amounted~~ to ~~$2.2~~experience ~~million.~~a ~~Our revenue has been de minimis~~severe, ~~other~~continuing ~~than~~cash ~~product~~shortage ~~development expense reimbursement from Ferring (which was discontinued in December 2009),~~ and ~~we have~~without been dependent upon such reimbursement of development expenses to fund our operations. As of December 31, 2009, our current liabilities exceeded our current assets by approximately $6.0 million, and we have approximately $2.3 million in outstanding accounts payable which are over 60 days past due. If we do not continue to raise capital until we generate sufficient ~~cash~~additional ~~flow~~financing ~~from operations to cover this working capital deficit,~~ we may not be ~~required~~able to ~~discontinue~~execute ~~or further substantially modify~~ our MediSync business, instrategy ~~addition~~and tomay ~~the substantial cost cutting measures that have been implemented in the last two years. We cannot~~ be ~~certain that additional financing will be available to us on favorable terms when~~ required, ~~if at all. The failure~~ to ~~raise~~cease ~~needed funds could have a material adverse effect on our business~~operations, ~~financial condition, operating results~~ and ~~prospects. Additionally,~~this wedemonstrates ~~face~~uncertainty ~~mounting~~as ~~claims and litigation from our vendors and other parties~~ to ~~which we owe money, and we do not have sufficient funds to pay such payables and/or to defend litigation which may arise from nonpayment. These factors raise substantial doubt about~~ our ability to continue as a going concern. The report of the independent registered public accounting firm relating to the audit of our consolidated financial statements for the year ended December 31, 2009 contains an explanatory paragraph expressing uncertainty regarding our ability to continue as a going concern because of our operating losses and our need for additional capital. Such explanatory paragraph could make it more difficult for us to raise additional capital and may materially and adversely affect the terms of any future financing that we may obtain.

As of December 31, 2010, our cash and cash equivalents amounted to $0.4 million. Our revenue in 2010 was de minimis, and we have been dependent upon proceeds from various fundraising activities to fund our operations. As of December 31, 2010, our current liabilities exceeded our current assets by approximately $14.4 million, and we have approximately $1.9 million in outstanding accounts payable which are over 60 days past due. If we do not continue to raise capital until we generate sufficient cash flow from operations to cover this working capital deficit, we may be required to discontinue or further substantially modify our business, as well as not being able to finance the acquisitions that are the core of our MediSync business strategy. We cannot be certain that additional financing will be available to us on favorable terms when required, if at all. The failure to raise needed funds could have a material adverse effect on our business, financial condition, operating results and prospects. Additionally, we face claims and litigation from our vendors and other parties to which we owe money, and we do not have sufficient funds to pay such payables and/or to defend litigation which may arise from nonpayment. These factors raise substantial doubt about our ability to continue as a going concern. The report of the independent registered public accounting firm relating to the audit of our consolidated financial statements for the year ended December 31, 2010 contains an explanatory paragraph expressing uncertainty regarding our ability to continue as a going concern because of our operating losses and our need for additional capital. Such explanatory paragraph could make it more difficult for us to raise additional capital and may materially and adversely affect the terms of any future financing that we may obtain.

As of April 11, 2011, we have commitments from our Board of Directors and other insiders to fund at least $0.1 million no later than April 21, 2011 ("Initial Bridge Funding"). This Initial Bridge Funding is insufficient to fund our operations for more than three weeks, and during that time, we will not pay for any nonessential services, including salaries for our management team, and we will continue to incur payables, as well as be unable to pay other payables which are already in arrears.

We are currently in negotiations with an investment banking firm with respect its acting as a selling agent for a longer term bridge financing of up to $2.0 million, to be comprised of convertible notes and warrants. Our objective is to launch this bridge financing before April 30, 2011.

Additionally, the Company engaged two other investment bankers in the first quarter of 2011 to assist in raising equity capital needed to complete its business plan. While no specific dollar amounts or terms have been agreed to as yet, our discussions with these firms relate to their raising approximately $10.0 to $15.0 million, to fund CRO’s acquisitions, and for working capital and general corporate purposes.

Even if we are successful in raising the bridge capital set forth above, no inference can be made that this is an indication of potential success in raising equity capital needed to complete its business plan The bridge capital is intended as short term, interim finances, and without successful completion of the larger financing by our investment bankers, management will, more likely than not, be required to substantially curtail, if not cease, operations, which will result in a material adverse effect on the financial position and results of operations of the Company. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

We have never been profitable, we may never be profitable, and, if we become profitable, we may be unable to sustain profitability.

From November 2000 through December 31, ~~2009~~2010, we incurred net losses in excess of $~~214~~224.39 million, as we have been engaged primarily in clinical testing and development activities. In 2011, we will also be required to fund the activities of our MediSync business until or unless we acquire businesses with sufficient cash flow to fund those operations. We have never been profitable, we may never be profitable, and, if we become profitable, we may be unable to sustain profitability. We expect to continue to incur significant losses for the foreseeable future and will endeavor to finance our operations through sales of securities and incurrence of indebtedness, of which there can be no assurance.

~~Ferring’s recent termination of its License and Development Agreement with us could have a material adverse effect on us.~~15

Ferring’s recent termination of its License and Development Agreement with us presents several risks.

(i) Advances and fundings made to us by Ferring pursuant to various Ferring agreements were our principal source of revenues since 2006. Unless we are able to secure another source of revenues, we will be dependent upon proceeds from financings to fund our operations until alternative sources of revenue develop.

(ii) Unless we are able to secure an alternative development partner for our drug delivery product for female infertility or are otherwise able to continue development of this product on our own, we will in all likelihood have to abandon this product line, which would likely have a material adverse effect on us both with respect to our ability to derive a stream of revenues and our ability to bring a product to market within the time frames previously anticipated by us.

(iii) We are currently evaluating the License and Development Agreement and other agreements that we have with Ferring to determine amounts owed to Ferring, which we believe to be approximately $1.4 million. We intend to negotiate with Ferring to repay such amounts over a period of time so as to lessen the immediate burden on our cash flow, with a further goal of terminating the senior lien and security interest that Ferring maintains on our assets. In the event that we are unable to come to an amicable resolution of these obligations, Ferring could, among other remedies, foreclose on our assets which would have a material adverse effect on us. In addition, a failure to come to a satisfactory resolution with Ferring could result in litigation, which may be costly, regardless of the outcome, and which could result in a substantial diversion of our financial and management resources.

We may be unable to hire and retain the key management necessary to develop and grow our business.

We rely on the continued service of our senior management, our chief technical staff, and other key employees as well as the hiring of new qualified employees. Due to the Merger, we have recently embarked on a business plan which includes acquisition of various CRO businesses which rely heavily upon the continued services of their incumbent management. In the pharmaceutical ~~industry~~and biotechnology industries, there is substantial and continuous competition for highly skilled business, product development, technical and other personnel. Given the concern over our long-term financial strength and current general economic conditions, we may not be successful in recruiting new personnel and retaining and motivating existing personnel, which could lead to increased turnover and reduce our ability to meet the needs of our current and future customers. If we are unable to retain qualified personnel, we could face disruptions to operations, loss of key information, expertise or know-how, and unanticipated additional recruitment and training costs. If employee turnover increases, our ability to execute our strategy would be negatively affected.

As a small company with limited financial resources, we have not proven that we will be capable to meet the many challenges that we face, including successfully bringing product to market.

You should consider the risks and uncertainties that a company with limited financial resources, such as Vyteris, faces in the rapidly evolving ~~market~~markets for CROs and for drug delivery technologies, especially given the challenges of general economic conditions, which have materially limited the ability of small companies to raise capital and generate revenues. In particular, you should consider that we have not proven that we will be able to:

raise significant additional capital in the public or private markets;

be able to acquire CROs on favorable terms and pricing;

obtain the regulatory approvals necessary to commence selling drug delivery systems that we may develop in the future;

manufacture products in a manner that enables us to be profitable or meets regulatory, strategic partner or customer requirements;

attract, retain and manage a qualified, diverse staff of engineers and scientists;

develop the relationships with strategic partners and key vendors that are necessary to our ability to exploit the processes and technologies that we develop;

effectively manage our operations;

develop new products and drug delivery processes and new applications for our drug delivery technology; and

respond effectively to competitive pressures.

If we cannot accomplish all or even some of these goals, our business is not likely to succeed.

Current economic conditions may adversely affect our ability to continue operations.

Current economic conditions may cause a decline in business and consumer spending and capital market performance, which could adversely affect our business and financial performance. Our ability to raise funds, upon which we are fully dependent to continue operations, may be adversely affected by current and future economic conditions, such as a reduction in the availability of credit, financial market volatility, lessened liquidity in the capital markets, lessened availability of investment funds in the capital markets and recession.

Risks from the CRO business as well as the nature of our drug delivery business may result in our being subject to liability claims by employees, customers and third parties, and we may not be able to obtain adequate insurance to cover these risks.

The nature of our business may result in our being subject to liability claims by employees, customers and third parties, including breach of contract claims, worker compensation claims and personal injury suits. Our liability insurance, but such insurance may not be adequate to cover claims asserted against us. In addition, we may be unable to maintain or purchase such insurance in the future. Any of these events could have a material adverse affect on our financial condition.

Our integration of the traditional Vyteris drug delivery business with our new MediSync CRO business poses integrational as well as operational risks.

As a result of the Merger, we will evolve from a business plan originally based on product development to a business plan which includes the acquisition and operation of a CRO business with a robust acquisition strategy.The integration and then operation of the combined businesses poses several unique risks.

Due to the Merger, we will be required to combine many aspects of two businesses, including accounting, information systems and other functions. We have limited experience in combining business operations of this nature, and there can be no assurance that we will be successful in our efforts, or as to what the cost of the combination will be. If we are unable to combine operations in a timely or cost effective manner, we may incur additional costs to combine and/or be required to obtain additional experienced personnel with the costs associated therewith.

We will be required to integrate new personnel and businesses, which have traditionally operated as distinct businesses, into Vyteris. The cost and time of integrating these businesses could have a material adverse impact on our cash flow and our ability to effectively manage our business given our limited staffing resources.

Once integrated, we will be required to manage operations at various locations across the U.S. rather than from one location in New Jersey, as was the case with our drug delivery business. We have limited experience in and resources with respect to operating a multi site business and we may be unsuccessful in managing our expanding sites without incrementally increased cost, including the need to hire qualified operations personnel, including a chief operations manager.

In order to manage our increased business operations, we will be required to increase our administrative and IT personnel and functions. We have limited resources with which to so increase our administrative capacities which could have a material adverse impact in our ability to effectively administer our combined businesses without incurrence of additional costs, above the anticipated budgeted costs.

Risks Related to our CRO Business

The outsourcing trend in the preclinical and clinical stages of drug discovery and development may decrease.

Industry analysts have identified a trend among pharmaceutical and biotechnology companies of outsourcing drug development, research and clinical trial management, thereby enabling such companies to focus on their core competencies. While industry analysts expect the outsourcing trend to continue for the immediate future, a decrease in preclinical and/or clinical outsourcing activity could adversely affect MediSync’s prospects, financial condition and results of operations. Furthermore, MediSync’s future customer contracts will likely be terminable on little or no notice. Termination of a large contract or multiple contracts could adversely affect MediSync’s sales and revenue.

Pharmaceutical and biotechnology companies may reduce their research and development budgets.

MediSync’s customers mainly consist of pharmaceutical and biotechnology companies. MediSync’s ability to maintain and grow its customer base is dependent in large part upon the ability and willingness of the pharmaceutical and biotechnology industries to continue to expend financial resources on research and development and to outsource the services MediSync will provide. Fluctuations in the research and development budgets of these organizations could have a significant effect on the demand for MediSync’s services and/or the fees MediSync can charge for services provided. Research and development budgets fluctuate due to changes in available resources, mergers of pharmaceutical and biotechnology companies, spending priorities and institutional budgetary policies. MediSync’s business could be adversely affected by any significant decrease in research and development expenditures by pharmaceutical and biotechnology companies, as well as by academic institutions, government laboratories, or private foundations.

Customers may experience a reduction or loss of government funding.

MediSync’s customer base may include academic institutions and research laboratories whose funding is partially dependent on both the level and timing of funding from government sources, such as the U.S. National Institutes of Health (NIH) and similar domestic and international agencies. Government funding of research and development is inherently unpredictable. MediSync’s sales may be adversely affected if its customers delay purchases of services as a result of uncertainties surrounding the approval of government budget proposals.

Government regulation of the pharmaceutical or biotechnological industries could change substantially.

MediSync operates in a heavily regulated industry. To effectively manage and operate its business, MediSync will be impacted by, and need to respond to changes in, applicable regulations and requirements governing its operations. These regulations include those relating to licensure, conduct of operations and accreditation. The future course of federal, state and local regulations or legislation cannot be predicted. Failure of MediSync to monitor and respond to changes in such requirements could cause MediSync to incur criminal or civil penalties and expend substantial resources responding to an investigation or other enforcement action under these laws or regulations. In addition, some changes in regulations, such as an increase in regulatory requirements that MediSync may have difficulty satisfying or that make MediSync’s services less competitive, could eliminate or substantially reduce the demand for MediSync’s future services.

Recently, the U.S. Congress and state legislatures have considered and enacted various types of health care reform intended to control growing health care costs. MediSync is unable to predict what legislative proposals will be adopted in the future, if any. Implementation of health care reform legislation that place additional cost pressure on drug development and research could adversely affect research and development expenditures by pharmaceutical and biotechnology companies, which could in turn decrease the business opportunities available to MediSync. Furthermore, if health insurers were to change their practices with respect to reimbursements for pharmaceutical products, MediSync’s customers may spend less on outsourcing, or reduce their growth in spending on research and development.

Failure to comply with applicable regulations and related guidance could harm MediSync’s reputation and operating results.

Any failure on the part of MediSync to comply with applicable regulations could result in the termination of ongoing research or the disqualification of data for submission to regulatory authorities. This could harm MediSync’s reputation, prospects for future work and operating results. For example, the issuance of a notice of observations or a warning from the Food and Drug Administration based on a finding of a material violation by MediSync of good clinical practice, good laboratory practice or good manufacturing practice requirements could materially and adversely affect MediSync.

The CRO industry is highly competitive.

The CRO industry is highly competitive. MediSync competes for business not only with other companies in the industry, but also with internal discovery and development departments within larger biotech and pharmaceutical companies, each of which may have greater resources than MediSync. MediSync also competes with universities and teaching hospitals. MediSync competes based on a variety of factors, including:

reputation for on-time quality performance;

reputation for regulatory compliance;

expertise and experience in specific areas;

scope and breadth of service offerings;

broad geographic availability;

price/value;

technological expertise and efficient development processes;

quality of services and facilities;

financial stability;

size;

ability to acquire, process, analyze and report data in an effective manner; and

ability to manage clinical trials both domestically and internationally.

If MediSync does not compete successfully, its business will suffer. Increased competition might lead to price and other concessions that might adversely affect MediSync’s operating results and could lead to significant losses. The CRO industry has continued to see a trend towards consolidation. If this trend continues, it is likely to produce more competition among the larger companies and CROs generally, with respect to both clients and acquisition candidates. In addition, private equity firms may determine that there are opportunities in acquiring companies that we would like to acquire, thus further increasing possible competition and affecting acquisition prices. These competitive pressures may adversely affect MediSync’s growth and financial results.

Contract research services create a risk of liability.

By competing in the CRO industry, MediSync faces a range of potential liabilities, including:

errors or omissions in the reporting of study detail that may lead to inaccurate reports, which may potentially advance studies absent the necessary support or inhibit studies from proceeding to the next level of testing;

litigation risk, including potential litigation resulting from MediSync’s errors or omissions, or from MediSync’s association with clinical studies that are directly or indirectly related to death, illness, personal injury or other negative side effects to clinical study participants or other persons;

risks associated with possible failure of MediSync to properly care for customers’ property, such as research models and samples, study compounds, records, work in progress, or goods and materials in transit, while in MediSync’s possession; and

errors and omissions during a trial that may undermine the usefulness of a trial or data from the trial.

MediSync will attempt to mitigate these risks through a variety of control procedures and methods. Nonetheless, it is impossible to completely eradicate such risks. Contractual indemnifications may not adequately protect MediSync against any such liabilities. MediSync could be materially and adversely affected if it were required to pay damages or bear the costs of defending any claim which is not covered by a contractual indemnification provision or insurance.

Actions or inspections by regulatory authorities may cause clients not to award future contracts to MediSync or to cancel existing contracts, which may have a material and adverse effect on MediSync’s results of operations.

MediSync may be subject to continuing inspections of its facilities and documentation in connection with studies it has conducted, or routine inspections of its facilities that have yet to be inspected by regulatory authorities. Regulatory authorities can have significant impact over the conduct of clinical trials, and they have the power to take regulatory and legal action in response to violations of clinical standards, subject protection and regulatory requirements in the form of civil and criminal fines, injunctions and other measures. Additionally, there is a risk that actions by regulatory authorities, if they result in significant inspectional observations or other measures, could cause clients not to award MediSync future contracts or to cancel existing contracts. Depending upon the amount of revenue lost, the results could have a material and adverse affect on MediSync’s results of operations.

MediSync risks potential liability when conducting clinical trials, which could cost be expensive.

Some of MediSync’s clinical trials may involve administering drugs to humans in order to determine the effects of the drugs. By doing so, MediSync will be subject to the general risks of liability to these persons, which include those relating to:

adverse side effects and reactions resulting from administering these drugs to a clinical trial participant,

unintended consequences resulting from the procedures or changes in medical practice to which a study participant may be subject as part of a clinical trial,

improper administration of these drugs, or

potential professional malpractice of MediSync’s employees or contractors, including physicians.

MediSync’s contracts may not have adequate indemnification agreements requiring their clients to indemnify MediSync in the event of adverse consequences to trial participants caused by specifically given drugs or participation in their trials. There is no certainty as to the adequacy or the continued availability to MediSync of liability insurance, at rates acceptable to MediSync. MediSync could also be held liable for other errors or omissions in connection with its services. For example, MediSync could be held liable for errors or omissions or breach of contract if MediSync inaccurately reports or fails to report various results. If MediSync does not perform its services to contractual or regulatory standards, the clinical trial process could be adversely affected. Additionally, if clinical trial services do not conform to contractual or regulatory standards, trial participants could be affected. If there is a damage claim not covered by insurance, the indemnification agreement is not enforceable or broad enough, or our client is insolvent, any resulting suit against MediSync could result in a material loss to MediSync.

If MediSync is unable to attract suitable volunteers for its clinical trials, MediSync’s clinical development business might suffer.

The clinical research studies operated by MediSync will frequently rely upon the ready accessibility and willing participation of volunteer subjects. Volunteer subjects generally include people from the communities in which the studies are conducted. MediSync’s clinical research development business could be adversely affected if it is unable to attract suitable and willing clinical study volunteers on a consistent basis.

The acquisition of future acquisition targets may not produce the anticipated benefits.

MediSync may not be able to realize all or any of the benefits that it expects to result from the acquisition of future acquisition targets, either in monetary terms or in a time and other synerginistic efficiencies. Failure to obtain these benefits could have a material adverse effect on MediSync’s business model.

MediSync’s contracts may be delayed, terminated or reduced in scope with little or no notice.

Many of MediSync’s contracts provide for services on a fixed-price basis and may be terminated or reduced in scope with little or no notice. The loss, reduction in scope or delay of a large contract or the delay of multiple contracts could have a material adverse effect on MediSync’s results of operations. Cancellation or delay of a large contract or multiple contracts could leave MediSync with under-utilized resources and thereby negatively affect such entity’s net service revenues and results of operations.

Risks Related to our Drug Delivery Business

Ferring’s termination of its License and Development Agreement with us has had and continues to have a material adverse effect on us.

Ferring’s recent termination of its License and Development Agreement with us presents several risks.

(i)

Unless we are able to secure an alternative development partner for our drug delivery product for female infertility or are otherwise able to continue development of this product on our own, we will in all likelihood have to abandon or defer development of this product line, which would likely have a material adverse effect on us both with respect to our ability to derive a stream of revenues and our ability to bring a product to market within the time frames previously anticipated by us.

(ii)

We are currently evaluating the License and Development Agreement and other agreements that we have with Ferring to determine amounts owed to Ferring, which we believe to be approximately $1.4 million. We intend to negotiate with Ferring to repay such amounts over a period of time so as to lessen the immediate burden on our cash flow, with a further goal of terminating the senior lien and security interest that Ferring maintains on our assets. In the event that we are unable to come to an amicable resolution of these obligations, Ferring could, among other remedies, foreclose on our assets which would have a material adverse effect on us. In addition, a failure to come to a satisfactory resolution with Ferring could result in litigation, which may be costly, regardless of the outcome, and which could result in a substantial diversion of our financial and management resources.

(iii)

In the litigation which we commenced against Ferring in July 2010, Ferring has counterclaimed that its termination was really under a “for cause” termination provision rather than the “not for cause” termination provision, for which received the formal termination notice in December 2010. If a court or arbitrator were to find this “for cause” termination argument to have merit, we could risk losing exclusive rights to our infertility product under the terms of the License and Development Agreement which govern disposition of rights upon a termination by Ferring under the “for cause” provisions of the License and Development Agreement.

We cannot expect that we will be able to derive material revenues from the sale of products in the near future.

While we have commenced development of products with respect to our drug delivery business and believe that our technology can and should be pursued with respect to several applications that could result in commercially viable products, the process of developing drug delivery products to the point of commercial sales takes significant time and requires a substantial commitment of financial and other resources that may not be available to us for regulatory approval. We cannot assure that we will have the financial resources necessary to bring future products to market or that developments in our industry will not preclude us from expanding our commercial product line beyond LidoSite, a product that has been discontinued. If we are unable to bring additional products to market, our entire business would be at risk, thereby increasing the risk of a business interruption or discontinuation.

We and our strategic partners may not be able to obtain FDA or foreign regulatory approval for our products in a timely manner, or at all, which could have a material adverse effect on our ability to sell and market our products.

Drug formulations and related delivery systems that we may develop in the future cannot be sold in the United States until the FDA approves such products for medical use. Similar foreign regulatory approvals will be needed in order to sell any new drug formulations and related drug delivery systems outside of the U.S. We and our strategic partners may not be able to obtain FDA or foreign regulatory approval for our products in a timely manner, or at all. Delays in obtaining FDA or foreign approvals for our products could result in substantial additional costs to us, and, therefore, could adversely affect our ability to compete with other drug delivery companies. If we and our strategic partners do not obtain such approvals at all, our revenues may be insufficient to support continuing operations. In addition, any failure to pay fees imposed by the FDA or foreign regulatory agencies may hinder or prevent our ability to obtain future approvals from those agencies.

We rely on single suppliers for certain key materials and components used in our smart patch delivery system, which makes us dependent on persons or events that we cannot control.

Certain raw materials and components used in the manufacture of our smart patch delivery system are available only from single suppliers. Some of those materials or components are custom-made for us and are the result of long periods of collaboration with our suppliers. The hydrogel that we use to hold the drugs in the patch and the electrode subcomponents that we use to carry current through our delivery system, for example, are both provided by single suppliers. There are no written contracts with these suppliers. Any curtailment of the availability of such raw materials or components could be accompanied by production or other delays and could result in a material loss of sales, with resulting adverse effects on our business and operating results. In addition, because raw material sources for pharmaceutical products must generally be approved by regulatory authorities, changes in raw material suppliers may result in production delays, higher raw material costs and loss of sales, customers and market share.

The development or identification of alternative sources, or redesigning products, could be time-consuming and expensive. We cannot assure you that price increases or interruptions in the supply of raw materials and components will not occur in the future or that we will not have to seek alternate suppliers or obtain substitute raw materials or components, which may require additional product validations and regulatory approvals. Further, our suppliers could experience price increases or interruptions in the supply of materials from their suppliers, or could fail to meet our or governmental manufacturing standards.

Any significant price increase, interruption of supply, our inability to secure an alternate source or our inability to qualify a substitute material could have a material adverse effect on our ability to manufacture our products or maintain regulatory approval.

We have limited experience in manufacturing drug delivery systems for commercial resale and may be unable to manufacture our products for commercial sale on a profitable or reliable basis.

As an organization we have had limited experience in manufacturing drug delivery systems for commercial sale. We must increase our production capabilities significantly beyond our present manufacturing capacity, which has been focused on producing small quantities of our products for clinical trial purposes, and incur significant capital expense in order to be able to produce our products in commercial volumes in a cost effective manner. The equipment and machinery that we use to manufacture the drugs and patches for our products are expensive and custom-built, and have never been used in the large-scale production of pre-filled drug delivery patches. Additionally, our PMK 150 machine is leased from Ferring Pharmaceuticals and due to the current litigation, it is not entirely clear as to the long term viability of this lease.

1821

We cannot assure you that we can:

successfully increase our manufacturing capabilities and develop large-scale manufacturing processes on a profitable basis;

hire and retain skilled personnel to oversee our manufacturing operations;

avoid design and manufacturing defects and correct or redesign components once they are in production; or

develop and maintain our manufacturing facility in compliance with governmental regulations, including the FDA's good manufacturing practices.

We may not be able to manufacture our products in a manner that ensures that the systems provide reproducible dosages of stable formulations of drugs for sufficient periods after manufacture. If we cannot ensure that our products have sufficient post-production shelf-life, we may be unable to produce our products in sufficient quantities to develop an economical supply chain. Accordingly, we may not be able to manage our inventory successfully. Currently, we are not conducting any manufacturing operations, and we are unable to predict if we shall be able to successfully do so should the need arise in the future.

The failure of any of our products to achieve market acceptance could materially and adversely impact our future success.

Our future success depends upon the acceptance of any of our potential future products by health care providers and patients. In addition, our future success may be dependent upon acceptance by third-party payors — including, without limitation, health insurance companies, Medicaid and Medicare — of products that we may develop in the future. Such market acceptance may depend on numerous factors, many of which may not be under our control, including:

the safety and efficacy of our products;

regulatory approval and product labeling;

the availability, safety, efficacy and ease of use of alternative technologies;

the price of our products relative to alternative technologies; and

for future products, the availability of third-party reimbursement.

We cannot assure you that any future product will ever gain broad market acceptance.

In addition, the adoption of new pharmaceutical products is greatly influenced by health care providers and administrators, inclusion in hospital formularies, and reimbursement by third party payors. Because our existing and proposed drug delivery systems encompass both a device and a drug and may be used by many different departments within a hospital or health care facility, buying decisions in these settings require more departmental approvals than are required for either a stand-alone drug or a stand-alone device. As a result, it may be more difficult and more time consuming to achieve market penetration with our products. We cannot assure investors that health care providers and administrators, hospitals or third party payors will accept our products on a large scale or on a timely basis, if at all, or that we will be able to obtain approvals for additional indications and labeling for our products which facilitate or expand their market acceptance or use. In addition, unanticipated side effects, patient discomfort, defects or unfavorable publicity ~~concerning~~ concerns about any of our products, or any other product incorporating technology similar to that used by our products, could have a material adverse effect on our ability to commercialize our products or achieve market acceptance.

We may be unable to secure strategic partnering relationships, which could limit our ability to effectively market, sell or distribute certain products.

In order for us to develop, market, sell and distribute certain future products, we will be dependent on entering into satisfactory arrangements with strategic partners. We cannot assure investors that we will be able to negotiate such agreements on terms that are acceptable to us, or at all. In addition, we cannot assure any investor that any strategic partner will not also engage in independent development of competitive delivery technologies.

1922

If we are unable to protect our proprietary technology and preserve our trade secrets, we will increase our vulnerability to competitors which could materially adversely impact our ability to remain in business.

Our ability to commercialize successfully our products will depend, in large measure, on our ability to protect those products and our technology with domestic and foreign patents. We will also need to continue to preserve our trade secrets. The issuance of a patent is not conclusive as to its validity or as to the enforceable scope of the claims of the patent. The patent positions of pharmaceutical, biotechnology and drug delivery companies, including our Company, are uncertain and involve complex legal and factual issues.

We cannot assure you that our patents will prevent other companies from developing similar products or products which produce benefits substantially the same as our products, or that other companies will not be issued patents that may prevent the sale of our products or require us to pay significant licensing fees in order to market our products. Accordingly, if our patent applications are not approved or, even if approved, if such patents are circumvented or not upheld in a court of law, our ability to competitively exploit our patented products and technologies may be significantly reduced. Additionally, the coverage claimed in a patent application can be significantly reduced before the patent is issued.

From time to time, we may need to obtain licenses to patents and other proprietary rights held by third parties in order to develop, manufacture and market our products. If we are unable to timely obtain these licenses on commercially reasonable terms, our ability to commercially exploit such products may be inhibited or prevented. Additionally, we cannot assure investors that any of our products or technology will be patentable or that any future patents we obtain will give us an exclusive position in the subject matter claimed by those patents. Furthermore, we cannot assure investors that our pending patent applications will result in issued patents, that patent protection will be secured for any particular technology, or that our issued patents will be valid or enforceable or provide us with meaningful protection.

If we are required to engage in expensive and lengthy litigation to enforce our intellectual property rights, the costs of such litigation could be material to our results of operations, financial condition and liquidity and, if we are unsuccessful, the results of such litigation could materially adversely impact our entire business.

We may find it necessary to initiate litigation to enforce our patent rights, to protect our trade secrets or know-how or to determine the scope and validity of the proprietary rights of others. We plan to aggressively defend our proprietary technology and any issued patents, if funding is available to do so. Litigation concerning patents, trademarks, copyrights and proprietary technologies can often be time-consuming and expensive and, as with litigation generally, the outcome is inherently uncertain.

Although we have entered into invention assignment agreements with our employees and with certain advisors, if those employees or advisors develop inventions or processes independently which may relate to products or technology under development by us, disputes may also arise about the ownership of those inventions or processes. Time-consuming and costly litigation could be necessary to enforce and determine the scope of our rights under these agreements.

We also rely on confidentiality agreements with our strategic partners, customers, suppliers, employees and consultants to protect our trade secrets and proprietary know-how. We may be required to commence litigation to enforce such agreements and it is certainly possible that we will not have adequate remedies for breaches of our confidentiality agreements.

Other companies may claim that our technology infringes on their intellectual property or proprietary rights and commence legal proceedings against us which could be time-consuming and expensive and could result in our being prohibited from developing, marketing, selling or distributing our products.

Because of the complex and difficult legal and factual questions that relate to patent positions in our industry, we cannot assure you that our products or technology will not be found to infringe upon the intellectual property or proprietary rights of others. Third parties may claim that our products or technology infringe on their patents, copyrights, trademarks or other proprietary rights and demand that we cease development or marketing of those products or technology or pay license fees. We may not be able to avoid costly patent infringement litigation, which will divert the attention of management away from the development of new products and the operation of our business, and which would materially and adversely affect our cash flow. We cannot assure investors that we would prevail in any such litigation. If we are found to have infringed on a third party's intellectual property rights, we may be liable for money damages, encounter significant delays in bringing products to market or be precluded from manufacturing particular products or using particular technology.

2023

Other parties have challenged certain of our foreign patent applications. If such parties are successful in opposing our foreign patent applications, we may not gain the protection afforded by those patent applications in particular jurisdictions and may face additional proceedings with respect to similar patents in other jurisdictions, as well as related patents. The loss of patent protection in one jurisdiction may influence our ability to maintain patent protection for the same technology in another jurisdiction.

If we do not accurately predict demand for our products when deciding to invest in the development of new products, we will likely incur substantial expenditures that will not benefit our business.

Research and development, clinical testing and obtaining regulatory approvals for new drug delivery systems takes a significant amount of time and requires significant investment in skilled engineering and scientific personnel and in expensive equipment. Furthermore, manufacturing our products requires expensive, custom-built machinery. We have made these investments, and intend to continue to make such investments, for our products based on internal projections of the potential market for that system and of our potential profit margins on sales of that system. If those projections are inaccurate, we may not be able to obtain an acceptable return on our investment in the development of our products. If our projections of the prospects of new products are inaccurate, we may make investments in the development, testing and approval of those products that may result in unsatisfactory returns.

If we are unable to develop products or technologies that will be marketable, we will not be able to remain in business.

We may not be able to develop drug delivery products or technologies that will be marketable or enter into joint venture or licensing arrangements that will be practicable for developing products or technologies. Even if we are able to obtain rights to marketable drug delivery products or technologies, we may not be able to commercially develop them or obtain patent protection, successful clinical trial results or regulatory approval for them. Our research and development efforts may be hampered by a variety of factors, many of which are outside of our control. Sustained development failures could materially adversely impact our business. Other options such as licensing or joint venture arrangements may also be unsuccessful and such failure could also materially adversely impact our business.

We face substantial competition for any future products that we may develop, as well as for strategic partner transactions. Our failure to adequately compete could have a material adverse effect on our ability to develop, market and sell our products and meet our financial projections.

There is substantial competition to develop alternative drug delivery solutions from both drug delivery technology and pharmaceutical companies, most of which are much larger and have far greater resources than we do. Further, the drug delivery, pharmaceutical and biotechnology industries are highly competitive and rapidly evolving. We expect that significant developments in those industries will continue at a rapid pace. Our success will depend on our ability to establish and maintain a strong competitive position for our products while developing new products that are effective and safe. We cannot assure you that any of our products will have advantages over alternative products and technologies that may be developed later and that may be significant enough to cause health care providers to prefer those products or technologies over ours.

In our drug delivery segment, which is focused on the process of actively delivering drugs through the skin, we are aware of several companies that are also developing or marketing products based on this process. We face indirect competition from companies that are actively involved in the development and commercialization of modified drug delivery technologies, including oral, pulmonary, bucal, nasal and needle-less injections, as well as companies working on processes that passively deliver drugs through the skin. We also expect to compete with other drug delivery companies and technologies in the establishment of strategic partnering arrangements with large pharmaceutical companies to assist in the development or marketing of products. Competition is expected to intensify as more companies enter the field.

21Most of our competitors have substantially greater financial, technical, research and other resources, are more experienced in research and development, manufacturing, pre-clinical and clinical testing, and obtaining regulatory approvals, and are larger, more established and have more collaborative partners than we do. Some of these companies have competing products that have already been approved by the FDA and foreign authorities. In addition, those other entities may offer broader product lines and have greater name recognition than we do. Those other entities may succeed in developing competing technologies and obtaining regulatory approvals and market share more rapidly than we can. We cannot assure you that those competitors will not succeed in developing or marketing products that are more effective or more commercially acceptable than any of our future products. We cannot assure you that we will have the financial resources, technical or management expertise or manufacturing and sales capability to compete in the future. Increased competition may result in price cuts, reduced gross margins and loss of market share, any of which could have a material adverse effect on our business, financial condition, results of operations and future prospects.

Most of our competitors have substantially greater financial, technical, research and other resources, are more experienced in research and development, manufacturing, pre-clinical and clinical testing, and obtaining regulatory approvals, and are larger, more established and have more collaborative partners than we do. Some of these companies have competing products that have already been approved by the FDA and foreign authorities. In addition, those other entities may offer broader product lines and have greater name recognition than we do. Those other entities may succeed in developing competing technologies and obtaining regulatory approvals and market share more rapidly than we can. We cannot assure you that those competitors will not succeed in developing or marketing products that are more effective or more commercially acceptable than any of our future products. We cannot assure you that we will have the financial resources, technical or management expertise or manufacturing and sales capability to compete in the future.24

Increased competition may result in price cuts, reduced gross margins and loss of market share, any of which could have a material adverse effect on our business, financial condition, results of operations and future prospects.

We may not be able to license complementary drug technologies or drug reformulations to expand our product offerings, in which case we will be significantly limited in our product offerings.

In order to enhance our platform technology, strengthen our intellectual property portfolio and expand our overall market opportunity, we may seek to acquire or license rights to additional drug delivery technologies or reformulations of FDA-approved drugs that complement our core drug delivery platform. We may not be able to acquire or license such other technologies or drug reformulations on terms that are acceptable to us, if at all. Further, efforts to identify such technologies and attempts to negotiate the terms of such acquisitions or licenses may divert the attention of our management away from the internal development of new applications for our existing technologies and from the operation of our business.

We do not expect to commercialize any products for the next 24 months or significantly longer.

WeOur ~~have announced~~future ~~that we de-emphasized our~~ efforts ~~away from our previously commercially available product, LidoSite. As a result, our future efforts~~ will be dependent upon the successful development of new products with new partners. There are no assurances that we will be successful in continuing the development of new products or entering into strategic partnership agreements for product development. In addition, if any of these new products is not approved in a timely manner or does not gain market acceptance, it will adversely affect our business, financial condition, results of operations and future prospects.

RISKS RELATED TO OUR COMMON STOCK

Our sale of a significant number of shares of our common stock, convertible securities or warrants or the issuance or exercise of stock options could depress the market price of our stock.

The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market or the perception that substantial sales could occur because of our sale of common stock, convertible securities or warrants, or the issuance or exercise of stock options. These sales also might make it difficult for us to sell equity securities in the future at a time when, and at a price which, we deem appropriate. As of December 31, 2010, we had stock options to purchase 16,727,510 shares of our common stock outstanding, of which options to purchase 9,169,975 shares were exercisable. Also outstanding as of the same date were warrants exercisable for 33,639,513 shares of our common stock and senior secured debentures that can convert into 9,620,185 shares of our common stock. Exercise of any current or future outstanding stock options or warrants could harm the market price of our common stock.

As of December 31, 2009, we had stock options to purchase 4,293,442 shares of our common stock outstanding, of which options to purchase 2,536,134 shares were exercisable. Also outstanding as of the same date were warrants exercisable for 8,954,203 shares of common stock. Exercise of any current or future outstanding stock options or warrants could harm the market price of our common stock.

We are a controlled company and our majority shareholder may take actions adverse to the interests of other shareholders

As of December 31, ~~2009~~2010, Spencer Trask Specialty Group, LLC or STSG, owned approximately ~~84.8~~73% of our issued and outstanding common stock on a fully diluted basis, and as of March 31, 2011, it owned 73% on a fully diluted basis. Due to this stock ownership, we are controlled by STSG and deemed a “controlled corporation”. This control occurred as a result of the December 22, 2009 restructuring of over $20.3 million of preferred stock and senior secured debt that we owed to STSG. STSG may take actions that conflict with the interests of other shareholders. Due to STSG’s voting control of our common stock, STSG has substantial control over us and has substantial power to elect directors and to generally approve all actions requiring the approval of the holders of our voting stock. The closing of the Merger with MediSync would impact the stock ownership percentage of STSG; however, even after giving effect to the Merger, we would anticipate that we would remain a controlled company.

We may be unable to list our Common Stock on the NASDAQ or any other securities exchange, in which case an investor may find it difficult to dispose of shares or obtain accurate quotations as to the market value of our Common Stock.

Although we may apply to list our common stock on NASDAQ or the NYSE Amex Equities in the future when and if we have stabilized our liquidity concerns, we may not be able to meet the initial listing standards, including the minimum per share price and minimum capitalization requirements, of either of those or any other stock exchange, and we may not be able to maintain a listing of our common stock on either of those or any other stock exchange. If we are unable to list our common stock on NASDAQ, the NYSE Amex Equities or another stock exchange, or to maintain that listing, we expect that our common stock will continue to trade on the OTC Bulletin Board maintained by NASDAQ, or possibly another over-the-counter quotation system or on the "pink sheets," where an investor may find it difficult to dispose of shares or obtain accurate quotations as to the market value of our common stock.

Our common stock is considered a “penny stock” and may be difficult to sell.

Our common stock is considered to be a “penny stock” since it meets one or more of the definitions in Rule 3a51-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These include but are not limited to the following: (i) the stock trades at a price less than $5.00 per share; (ii) it is not traded on a “recognized” national exchange; (iii) it is not quoted on the NASDAQ Stock Market, or even if so, has a price less than $5.00 per share; or (iv) is issued by a company with net tangible assets less than $2.0 million, if in business more than a continuous three years, or with average revenues of less than $6.0 million for the past three years. The principal result or effect of being designated a “penny stock” is that securities broker-dealers cannot recommend the stock but must trade in it on an unsolicited basis. Section 15(g) of the Exchange Act and Rule 15g-2 promulgated thereunder require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor’s account.

~~As a result of our 1:15 reverse stock split in June 2008~~Historically, the market for our Common Stock has been very limited and our Common Stock may continue to be difficult to sell, as well as exhibit increased price volatility, as a result of this limited market.

OnWe June 17, 2008, we effected a 1:15 reverse split of our common stock and as a result, every fifteen shares of our common stock was combined into one share of common stock. Since the reverse stock split, we have ~~experienced~~ a ~~disproportionately~~ ~~large~~low ~~decrease in the~~ trading volume offor our common stock ~~on the Over the Counter Bulletin Board,~~ which ~~exceeds~~limits the ~~mathematical decrease which would have occurred due to the 1:15 reverse stock split (i.e.: the volume decreased by more than a factor of 15). This decrease in volume has further limited the~~ trading market for our common stock, thus making it more difficult to sell our common stock on the open market. ~~Also,~~Our ~~since~~stock ~~the~~price ~~reverse~~is ~~stock~~fairly ~~split,~~volatile ~~our~~and ~~stock~~often ~~price has~~we ~~been~~see ~~fairly~~a ~~volatile, the~~ wide spread between our bid and sale price increases stock price volatility ~~and~~which may present further barriers to the ability to sell our common stock.

Standards for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 are uncertain, and if we fail to comply in a timely manner, our business could be harmed and our stock price could decline.

Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control over financial reporting, and attestation of the assessment by our independent registered public accountants. This requirement for management’s assessment of our internal control over financial reporting applies for our annual report for fiscal 2009 and the requirement for our auditor’s attestation will first apply to our annual report for fiscal 2010. The standards that must be met for management to assess the internal control over financial reporting as effective are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing activities necessary to make an assessment of our internal control over financial reporting. In addition, the attestation process by our independent registered public accountants is new and we may encounter problems or delays in completing the implementation of any requested improvements and receiving an attestation of the assessment by our independent registered public accountants. If we cannot assess our internal control over financial reporting as effective, or our independent registered public accountants are unable to provide an unqualified attestation report on such assessment, investor confidence and share value may be negatively impacted. We expect to incur additional accounting related expenses associated with compliance with Section 404.

We may not be able to attract the attention of brokerage firms, which could have a material adverse impact on the market value of our Common Stock

Security analysts of brokerage firms have not provided, and may not provide in the future, coverage of our company since there is limited incentive to brokerage firms to produce research reports and recommend the purchase or sale of our common stock. To date, we have not been able to attract the attention of brokerage firms and securities analysts. The absence of such attention limits the likelihood that an active market will develop for our common stock. It also will likely make it more difficult to attract new investors at times when we require additional capital.

The trading price of our Common Stock is volatile, which could cause the value of an investment in the Company’s securities to decline.

The market price of shares of our Common Stock has been volatile. See “Market Information.” The price of our Common Stock may continue to fluctuate in response to a number of factors, such as;

our cash resources and our ability to obtain additional funding;

announcements by us or a competitor of business developments;

our entry into or termination of strategic business relationships;

changes in government regulations; and

changes in our revenue or expense levels.

The occurrence of any of these events may cause the price of our common stock to fall. In addition, the stock market in general has experienced volatility that often has been unrelated to the operating performance or financial condition of individual companies. Any broad market or industry fluctuations may adversely affect the trading price of our Common Stock, regardless of operating performance or prospects.

2426

ITEM 2.

PROPERTIES

We lease approximately 26,000 square feet of manufacturing, warehouse, laboratory, and office space located at 13-01 Pollitt Drive in Fair Lawn, New Jersey. This lease expires in September 2011. This facility includes manufacturing space sufficient to house our current patch manufacturing and packaging equipment, and a second manufacturing line built to our specifications. Our facility also contains prototype labs for simultaneous production of clinical supplies of multiple products, and nine additional labs for research and development and quality control purposes. For the years ended December 31, ~~2009~~2010, ~~2008~~ 2009 and ~~2007~~2008, rent expense for the 13-01 lease was $0.4 million, $0.3 4 million and $0.3 million, respectively.

ITEM 3.

LEGAL PROCEEDINGS

From time to time, we are involved in lawsuits, claims, investigations and proceedings, including pending opposition proceedings involving patents that arise in the ordinary course of business. ~~There~~Except (i) as set forth below and (ii) for approximately $0.7 million in accounts payable collection claims and litigation, there are no matters pending that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows ~~except for approximately $0~~.8 ~~million in accounts payable collection claims and litigation.~~ Unless we are able to obtain sufficient funds to commence settlement of outstanding accounts payable, these numbers of claims and litigation are likely to increase.

On December 21, 2009, the Company received notice from Ferring of its termination without cause of the License and Development Agreement, dated September 30, 2004, by and between the Company and Ferring (the “LDA”), effective 30 days from the date of the notice. Pursuant to the terms of the LDA, following its termination without cause of the LDA, Ferring is required to, among other things, convert all licenses and other rights granted to the Company to develop, make, have made, use, sell, offer to sell, lease, distribute, import and export the product to exclusive, worldwide, irrevocable, perpetual, sub-licensable licenses and the Company is entitled to terminate all licenses and other rights granted to Ferring under the LDA, with limited exclusions not pertaining to the practice by Ferring of such rights in the field of the iontophoretic administration of the infertility hormone.

To date, however, Ferring has not complied with its contractual obligations to dispose of the intellectual property under the LDA. On or about July 1, 2010, the Company commenced litigation in the Superior Court of New Jersey against Ferring. Through the litigation, the Company sought an order requiring Ferring to abide by the terms of the LDA and dispose of the intellectual property as required. The Company also sought the recovery of damages from Ferring. Ferring filed a motion to compel arbitration, which was granted by the court on November 19, 2010. The Company is pursuing negotiations with Ferring aimed at resolving all issues in dispute between the Company and Ferring, including resolution of amounts owed by the Company to Ferring under a March 2009 financing arrangement. Should a negotiated resolution not be reached, the Company intends to pursue its claims against Ferring in arbitration, as required by the court’s November 19, 2010 order.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

~~During~~ As of November 3, 2010, we obtained the ~~fourth~~approval ~~quarter~~of the holders of ~~2009~~approximately 51.3% of the outstanding shares of common stock not owned by Spencer Trask Specialty Group and affiliates, ~~there~~including, ~~were~~but nonot ~~matters~~limited ~~submitted~~to, Kevin Kimberlin (collectively, “STSG”), as required by NRS Section 78.439(3), with respect to the Merger Agreement entered into as of September 2010. This Merger Agreement expired by its terms and by a ~~vote~~consensus of ~~securities~~ ~~holders~~the parties, ~~through~~and an extension was not entered into despite discussions between the ~~solicitation~~parties ofthrough ~~proxies~~February ~~or otherwise~~2011.

2527

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock became quoted on the Over the Counter Bulletin Board on May 18, 2005. The ticker symbol for our common stock is "VYTR.OB". As of March 2331, ~~2010~~2011, there were 1,~~150~~732 stockholders of record of our common stock. The following table shows the range of high and low bid prices for our common stock as reported by the OTC Pink Sheets and the OTC Bulletin Board, as the case may be, for each quarter since the beginning of ~~2008~~2009. The quotations reflect inter-dealer prices, without retail markup, markdown or commission and may not represent actual transactions.

	~~High~~	High		~~Low~~	Low
Year Ended December 31, 2010:
First Quarter		$	0.79		$	0.25
Second Quarter			0.75			0.25
Third Quarter			0.75			0.25
Fourth Quarter			0.79			0.17
Year Ended December 31, 2009:
First Quarter		$	0.28		$	0.10
Second Quarter			0.28			0.10
Third Quarter			0.75			0.11
Fourth Quarter			1.40			0.26
Year Ended December 31, 2008:
First Quarter		$	10.05		$	2.25
Second Quarter			4.80			1.65
Third Quarter			2.00			0.35
Fourth Quarter			0.87			0.20

Equity Compensation Plan Information

The following table provides information regarding options outstanding as of December 31, ~~2009~~2010.

Plan Category	(a) Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights		~~(b) Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights~~		(b) Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights	~~(c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))~~	(c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
Equity Compensation Plans Approved by Stockholders:
Vyteris Holdings 2005 Stock Option Plan	~~193,460~~	193,460	$	~~2.11~~	$	-0.61		-
Equity Compensation Plans Not Approved by Stockholders:
Vyteris Holdings 2005 Stock Option Plan (1)	~~2,834,608~~	4,551,877	$	~~2.11~~	$	~~2,423,424~~0.61		7,995,814
Outside Director Stock Incentive Plan (1)	~~1,265,374~~	11,982,173	$	~~0.92~~	$	~~1,317,959~~0.89		5,254,751
Total	~~4,293,442~~	16,727,510	$	~~1.76~~	$	~~3,741,383~~0.81		13,250,565

(1)	For further information regarding the Vyteris Stock Option Plan and the Outside Director Stock Incentive Plan, see Note 14 to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

Dividend Policy

We have never declared or paid any dividends on our common stock. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance operations and the expansion of our business. Any future determination to pay cash dividends will be at the discretion of the board of directors and will depend upon our financial condition, operating results, capital requirements and other factors the board of directors deems relevant, including the provisions of any applicable credit agreements. We are currently restricted from declaring dividends under the terms of various outstanding debentures.

ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data as of and for the year ended for each year presented has been derived from our consolidated financial statements for each of the years in the five-year period ended December, 31, 2009. The following information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.

Consolidated Statements of Operations Data:

	Years Ended December 31,
	2009			2008			2007			2006			2005
Revenues:
Product development revenue	$	1,913,080		$	2,833,217		$	2,659,408		$	2,313,527		$	1,723,380
Licensing and other revenue		2,647,629			317,179			124,679			150,583			485,626
Total revenues		4,560,709			3,150,396			2,784,087			2,464,110			2,209,006
Costs and expenses:
Cost of sales		—			103,490			1,490,847			240,714			3,407,702
Research and development		2,895,691			6,269,636			8,956,962			8,080,228			8,922,600
General and administrative		2,796,763			(125,155	)		15,369,243			6,648,813			5,720,237
Sales and marketing		—			175,507			6,251,362			1,121,261			—
Facility realignment and impairment of fixed assets		177,831			2,565,434			82,637			192,850			2,134,308
Non-cash warrant expense – financial consultants		—			81,592			17,115,000			—			—
Registration rights penalty		215,988			260,897			260,184			260,184			1,620,764
Total costs and expenses		6,086,273			9,331,401			49,526,235			16,544,050			21,805,611
Loss from operations		(1,525,564	)		(6,181,005	)		(46,742,148	)		(14,079,940	)		(19,596,605	)
Interest (income) expense:
Interest income		(552	)		(42,984	)		(210,359	)		(93,435	)		(74,549	)
Interest expense to related parties		1,451,728			1,570,054			2,208,557			1,767,885			2,221,707
Interest expense		169,610			377,942			1,790,197			3,742,612			,808,828
Interest expense, net		1,620,786			1,905,012			3,788,395			5,417,062			5,955,986
Other expenses:
Non-cash debt extinguishment		35,909,507			—			6,724,523			382,781			—
Non-cash modification of redeemable preferred stock terms		—			—			3,680,000			—			—
Gain on settlement of lease obligations		(1,953,977	)		—			—			—			—
Gain on settlement of registration rights penalty		(1,385,017	)		—			—			—			—
Revaluation of warrant liability		294,668			—			10,341,408			837,764			—
Total other expenses		32,865,181			—			20,745,931			1,220,545			—
Loss before benefit from state income taxes		(36,011,531	)		(8,086,017	)		(71,276,474	)		(20,717,547	)		(25,552,591	)
Benefit from state income taxes		2,071,168			61,777			463,786			466,887			291,722
Net loss	$	(33,940,363	)	$	(8,024,240	)	$	(70,812,688	)	$	(20,250,660	)	$	(25,260,869	)
Net loss per common share:
Basic and diluted	$	(3.77	)	$	(1.14	)	$	(13.28	)	$	(11.79	)	$	(19.64	)
Weighted average number of common shares:
Basic and diluted		9,002,816			7,032,288			5,333,834			1,718,019			1,286,257

Consolidated Balance Sheet Data:

	Years Ended December 31,
	2009			2008			2007			2006			2005
Cash and cash equivalents	$	2,173,039		$	222,821		$	1,716,671		$	2,171,706		$	826,177
Working capital (deficit)		(6,020,470	)		(11,538,154	)		(11,711,577	)		(17,507,369	)		(6,321,984	)
Total assets		2,632,946			1,053,812			3,225,701			4,258,644			6,212,763
Total liabilities		11,385,273			32,303,871			26,350,736			34,826,923			23,723,514
Total stockholders’ equity (deficit)		(8,752,327	)		(31,250,059	)		(23,125,035	)		(30,568,279	)		(17,510,751	)

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the other financial information and consolidated financial statements and related notes appearing elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors, including those discussed in “Risk Factors” and elsewhere in this Form 10-K.

Introduction

Vyteris, ~~Inc.~~ ~~(formerly Vyteris Holdings (Nevada),~~ Inc.; (the terms “Vyteris”, “we”, “our”, “us” and the “Company” refer to each of Vyteris, Inc. incorporated in the State of Nevada, its subsidiary, Vyteris, Inc. (incorporated in the State of Delaware), its subsidiary, MediSync BioServices, Inc. (“MediSync”) (incorporated in the State of Delaware) and the consolidated company) ~~has~~ developed and produced the first FDA-approved, electronically controlled transdermal drug delivery system that transports drugs through the skin comfortably, without needles. ~~This~~We believe that this platform technology can be used to administer a wide variety of therapeutics either directly into the skin or into the bloodstream although we are not currently manufacturing or marketing any iontophoretic products. We hold approximately 50 U.S. and 70 foreign patents relating to the delivery of drugs across the skin using an electronically controlled “smart patch” device. ~~with~~This ~~electric current~~Management’s Discussion and Analysis contains information as of December 31, 2010 and as of the date of filing of this Form 10-K.

~~Our Technology~~On April 6, 2011, MediSync was merged into us (“Merger”), and is now our wholly owned subsidiary. MediSync’s business plan contemplates the acquisition and operation of CRO and related service businesses, and through the Merger, we have embarked upon our initial venture into the CRO space. Thereafter, we will have two segments – the CRO business and our drug delivery business. Through MediSync, we engaged in one acquisition of a CRO in 2009, and have entered into preliminary agreements with and/or are negotiating arrangements with several other target businesses.

Our CRO Business

MediSync is a Delaware corporation formed in 2006 for the purpose of consolidating preclinical and contract research organizations (CROs) and related businesses, including site management organizations (SMOs), which sub-contract clinical trial-related responsibilities from a CRO or pharmaceutical/biotechnology company, and post marketing surveillance companies, which monitors pharmaceutical drugs or devices after release into the market. MediSync believes that its future operations may provide added value to the pharmaceutical and biomedical industries, resulting in increased value to its shareholders. MediSync further believes that each CRO and related business that it acquires (each, an “Acquired Business”) may benefit from (a) potential cost savings and efficiencies proposed by its consolidation model, (b) the sharing of, and collaboration on, clinical research studies among the Acquired Businesses and (c) new services offered by other Acquired Businesses through the building of relationships between the employees and consultants of the various businesses.

Our Drug Delivery Technology

Our active transdermal drug delivery technology is based upon a process known as electrotransport, or more specifically iontophoresis, the ability to transport drugs, including peptides, through the skin by applying a low-level electrical current. Our active patch patented technology works by applying a charge to the drug-holding reservoir of the patch. This process differs significantly from passive transdermal drug delivery which relies on the slow, steady diffusion of drugs through the skin. A significantly greater number of drugs can be delivered through active transdermal delivery than is possible with passive transdermal delivery. Our technology can also be used in conjunction with complementary technologies to further enhance the ability to deliver drugs transdermally.

Market Opportunity

We believe there are a significant number of pharmaceutical drugs with substantial annual sales for which the patents are due to expire by 2012. Based on our analysis, there are currently a significant number of these and other FDA-approved drugs that may be relatively easily formulated for transdermal delivery and thus made eligible for new patent protection. We believe that the application of our novel drug delivery technologies to such existing therapeutics is an attractive means of prolonging the commercial viability of many currently marketed drugs.

Liquidity

On December 31, 2009, our cash position was $2.2 million, and we had a working capital deficit of $6.0 million. There is substantial doubt about our ability to continue as a going concern. We implemented several cost reduction measures in 2009, including headcount and salary reductions, reducing the level of effort spent on research and development programs, general decrease in overhead costs and renegotiation of our cost structures with our vendors. In December 2009, Ferring discontinued its collaborative effort with us for our joint infertility project, and we are currently assessing our ownership rights in and feasibility ofcontinuing this project on our own.

In March 2009, we sold (and then leased-back) our PMK 150 patch manufacturing machine to Ferring for $1.0 million, of which $0.5 million was made available to us to assist in funding operations. On October 30, 2009, the Company issued 3,000,000 shares of its common stock and 3,000,000 warrants to purchase its common stock to an investor in a private placement transaction for a purchase price of $0.6 million. In December 2009, we converted over $20.3 million of secured indebtedness and preferred stock into our common stock, and we received a net cash payment of $2.1 million from the sale of our State of New Jersey income tax credits resulting from our net operating losses. In January 2010, we raised over $1.1 million through the sale of senior secured convertible debentures and warrants.

However, unless we are able to raise additional funding, we may be unable to continue operations. Especially in the current economic climate, additional funding may not be available on favorable terms or at all. Failure to obtain such financing will require management to substantially curtail operations, which will result in a material adverse effect on our financial position and results of operations. In the event that we do raise additional capital through a borrowing, the covenants associated with existing debt instruments may impose substantial impediments on us.Liquidity

~~Business Model~~On December 31, 2010, our cash position was $0.4 million, and we had a working capital deficit of $14.4 million. There is substantial doubt about our ability to continue as a going concern. We continued in 2010 to implement cost cutting measures, including headcount and salary reductions, reducing the level of effort spent on research and development programs, general decrease in overhead costs and renegotiation of our cost structures with our vendors; however, due to the increased costs incurred with respect to the Ferring litigation and the Merger, our capital resources are becoming increasingly strained. In December 2009, Ferring discontinued its collaborative effort with us for our joint infertility project, and we are currently in litigation regarding our ownership rights in and feasibility of continuing this project on our own.

~~Our~~In ~~long~~November ~~term~~2010, ~~viability~~we iswere ~~linked~~awarded ~~to our~~two ~~ability~~equal togrants ~~successfully~~totaling ~~pursue~~$0.5 ~~new~~million ~~opportunities~~under ~~with~~the ~~products~~IRS ~~that~~Qualifying ~~can~~Therapeutic Discovery Project (QTDP) program. The grants will be ~~delivered~~ byused ~~means~~to ofadvance our smart patch technology, ~~such~~for asthe ~~those~~delivery ~~facing~~of ~~patent expiration.~~therapeutic Inmedicines ~~addition~~planned for use to ~~extended~~treat ~~patent~~female infertility and ~~clinical~~diabetes. The ~~usage,~~QTDP ~~our~~program ~~platform~~was ~~may also~~created beby athe ~~useful~~U.S. ~~tool~~Congress ~~for~~as ~~pharmaceutical~~part of the Patient Protection and ~~biotechnology~~Affordable ~~companies~~Care Act passed on March 23, 2010. Eligibility for the grant requires that a project have the potential to ~~reduce their~~develop ~~research~~new ~~and~~treatments ~~development~~that ~~investment~~address "unmet medical needs" or chronic and ~~protect~~acute ~~their~~diseases; ~~brands~~reduce ~~against generics. Based~~long-term ~~upon~~health ~~these~~care ~~tenets,~~costs; ~~our~~or ~~business~~represent ~~model~~a ~~for~~significant ~~achieving corporate~~advance ~~growth~~in ~~focuses~~finding ona ~~three~~cure ~~areas:~~for cancer. ~~commercialization~~In ~~and revenue-development~~January ~~strategies~~2011, ~~technology~~we ~~initiatives~~also ~~and~~received ~~acquisition opportunities~~$0. By4 ~~focusing~~million onfrom ~~all~~the ~~three~~sale ~~areas~~of inState ~~2010,~~of weNew ~~seek~~Jersey ~~to expand~~income ~~our~~tax ~~capabilities~~net tooperating ~~generate~~losses. We ~~revenues~~also ~~over~~raised ~~the~~$2.9 ~~next~~million ~~several years~~from various private placement activities in 2010.

~~Our~~As ~~commercialization~~of ~~strategy~~April is11, ~~to develop~~2011, ~~near-term~~we ~~and~~have ~~future~~commitments ~~market~~from ~~opportunities~~our ~~utilizing~~Board ~~FDA-approved~~of Directors and ~~marketed~~ ~~drugs~~other ~~(primarily~~insiders ~~peptides~~to ~~and~~fund ~~small~~at ~~molecule~~least ~~drugs)~~$0.1 ~~with~~million ~~our proprietary~~no ~~delivery~~later ~~technology.~~than ByApril ~~targeting~~21, ~~compounds~~2011 ~~that~~("Initial ~~may~~Bridge ~~qualify~~Funding"). This ~~for accelerated~~Initial ~~development~~Bridge ~~and~~Funding ~~regulatory~~is ~~pathways~~insufficient ~~such~~to asfund ~~those~~our ~~implemented~~operations ~~under Section~~for ~~505(b)(2)~~more ofthan ~~the~~three ~~Federal Food~~weeks, ~~Drug~~ and ~~Cosmetic~~during ~~Act~~that time, we ~~strive~~will ~~to develop~~not ~~and~~pay ~~commercialize~~for ~~products~~any ~~that~~nonessential ~~can~~services, ~~reach~~including ~~the~~salaries ~~market~~for ~~faster~~our management team, and atwe ~~a reduced~~will ~~cost~~continue ~~than~~to ~~the~~incur ~~traditional~~payables, ~~development~~as ~~and~~well ~~regulatory~~as ~~approval~~be ~~processes for~~unable ~~new~~to ~~drugs~~pay other payables which are already in arrears.

~~Technology initiatives~~We are ~~also~~currently ~~under~~in ~~way~~negotiations towith ~~expand~~an ~~our~~investment ~~drug~~banking ~~delivery~~firm ~~capabilities~~with sorespect ~~that we~~its ~~may~~acting beas ~~able~~a toselling ~~utilize~~agent ~~our technology~~ for a ~~wider~~longer ~~variety~~term ofbridge ~~pharmaceutical applications. We~~financing ~~are also looking for growth opportunities through the acquisition~~ of aup ~~late~~to ~~development-stage or revenue-generating complementary business~~$2.0 Wemillion, ~~believe~~to ~~that there may~~ be ~~small~~comprised ~~private~~of ~~drug~~convertible ~~development~~notes and ~~delivery~~ ~~companies~~warrants. ~~that~~Our ~~would~~objective ~~have~~is anto ~~interest~~launch inthis ~~the~~bridge ~~benefits~~financing ofbefore ~~becoming~~April ~~part of a public company~~30, ~~such as Vyteris, including access to the capital markets as a public company and stockholder liquidity~~2011.

~~Given~~Additionally, the ~~December~~ ~~2009~~Company ~~termination~~engaged bytwo ~~Ferring~~other ofinvestment ~~its~~bankers ~~joint~~in ~~collaborative~~the ~~infertility project~~first ~~with~~quarter ~~us,~~of we2011 ~~are reevaluating our business strategy. We look~~ to ~~continue~~assist toin ~~streamline~~raising ~~our~~equity ~~operations~~capital ~~and~~needed ~~focus our resources on a narrow breadth of projects geared~~ to ~~determine~~complete ~~viability~~its ~~and/or~~business ~~sale and license of our current in-house projects~~plan. WeWhile ~~will~~no ~~also~~specific ~~evaluate~~dollar aamounts ~~finite number of licensing and/~~or ~~acquisition~~terms ~~opportunities~~have inbeen anagreed ~~effort~~ to ~~bring~~as inyet, aour ~~technology or~~discussions ~~product~~with ~~which~~these isfirms ~~closer~~relate to ~~commercialization,~~their ~~such~~raising asapproximately a$10.0 ~~complementary technology~~to ~~appropriate for Phase III testing~~$15. ~~Our~~0 ~~business~~million, ~~plan will continue~~ to ~~evolve~~fund ~~over~~CRO’s ~~the~~acquisitions, ~~next~~and ~~few~~for ~~fiscal~~working ~~quarters~~capital asand wegeneral ~~evaluate~~corporate ~~in-house projects as well as review appropriate outside opportunities~~purposes.

~~Technology~~Even if we are successful in raising the bridge capital set forth above, no inference can be made that this is an indication of potential success in raising equity capital needed to complete its business plan The bridge capital is intended as short term, interim finances, and without successful completion of the larger financing by our investment bankers, management will, more likely than not, be required to substantially curtail, if not cease, operations, which will result in a material adverse effect on the financial position and results of operations of the Company. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

~~Overview of~~However, ~~Electrotransport~~unless we are able to raise additional funding, we may be unable to continue operations, including the need to raise $4.0 million to acquire the MediSync first acquisition target and/or ~~Active~~other ~~Transdermal~~acquisition ~~Drug~~targets. Especially ~~Delivery~~in the current economic climate, additional funding may not be available on favorable terms or at all. Failure to obtain such financing will require management to substantially curtail operations, which will result in a material adverse effect on our cash flows, financial position, and results of operations.

Our Approach to Iontophoresis

We have developed a proprietary technology encompassing a series of significant improvements to drug formulation and commercial manufacturing. We used this technology with our first product LidoSite, and are currently in various stages of testing this technology to deliver peptides and small molecules. Many of our innovations center on the way we approach designing and formulating electronically controlled drug delivery patches. Our patches are pre-filled with the proper dosage of drug during the manufacturing process. They are designed to be disposable after a single application and are discreet in appearance. Further, we designed our patches so that they can be quickly and cost-effectively mass-produced using automated manufacturing processes.

To complement our patch design, we approached the design of electronic controllers with the goal of being small, wearable, simple to operate and programmable to handle simple, as well as complex, drug delivery profiles. The dose controller contains a miniature battery and circuitry, controlling delivery rate, and is capable of recording information on the amount and time of drug delivered. We believe the controllability and programmability offered by our technology are distinct competitive advantages that will enable our products to deliver more consistent and predicable results for a broad range of existing and new drugs.

Significant Accounting Policies

Our discussion and analysis of our financial position and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. Our significant accounting policies are described in Note 2 to the consolidated financial statements which form a part of this Form 10-K. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported revenues and expenses during the period. Actual results could differ from these estimates.

We consider certain accounting policies related to revenue recognition, allowance for excess and obsolete inventory, accrued expenses, stock-based compensation and deferred ~~financing~~issuance and other debt-related costs to be significant to our business operations and the understanding of our results of operations.

Revenue

Product development revenue: In accordance with ASC 605, the Company recognizes revenues for the reimbursement of development costs when it bears all the risk for selection of and payment to vendors and employees. Costs associated with such activities are included in research and development expenses on the consolidated statements of operations.

~~In accordance~~Licensing ~~with~~revenue: The Company uses revenue recognition criteria outlined in ASC 605-~~45-15~~25 (formerly ~~EITF~~SAB No. ~~01-14~~104, ~~Income~~Revenue ~~Statement Characterization~~Recognition ofin ~~Reimbursements~~Financial ~~Received~~Statements, ~~for~~and ~~“Out~~Emerging Issues Task Force, EITF, Issue 00-~~of-Pocket”~~21 ~~Expenses Incurred~~Revenue Arrangements with Multiple Deliverables). Accordingly, werevenues ~~recognize~~from ~~revenues~~licensing ~~for~~agreements are recognized based on the ~~reimbursement~~performance requirements of ~~development~~the ~~costs~~agreement. ~~when it~~Non-refundable ~~bears~~up-front ~~all~~fees, where the ~~risk~~Company ~~for~~has ~~selection~~an ofongoing ~~and~~involvement ~~payment~~or toperformance ~~vendors~~obligation, are generally recorded as deferred revenue in the balance sheet and ~~employees~~ amortized into license fees in the consolidated statement of operations over the term of the performance obligation.

~~Licensing revenue~~30

We use revenue recognition criteria outlined in ASC 605-25 (formerly SAB No. 104, Revenue Recognition in Financial Statements, and Emerging Issues Task Force, EITF, Issue 00-21 Revenue Arrangements with Multiple Deliverables).

Accordingly, revenues from licensing agreements are recognized based on the performance requirements of the agreement. Non-refundable up-front fees, where we have an ongoing involvement or performance obligation, are generally recorded as deferred revenue in the balance sheet and amortized into license fees in the statement of operations over the term of the performance obligation. Subsequent milestone payments received are either recognized immediately or ratably, over a development period, depending on the nature of the milestone collaborative agreement terms and accounting guidance for collaborative transactions.

Accrued Expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate certain expenses. This process involves identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for such service as of each balance sheet date in our financial statements. Examples of estimated expenses for which we accrue include professional service fees, contract service fees and fees paid to contract research organizations in connection with the conducting of clinical trials. Our estimates are most affected by our understanding of the status and timing of services provided relative to the actual levels of services incurred by such service providers. In the event that we do not identify certain costs which have begun to be incurred or we under-estimate or over-estimate the level of services performed or the costs of such services for a period, our reported expenses for such period would be too low or too high. The date on which certain services commence, the level of services performed on or before a given date and the cost of such services are often estimated. We make these estimates based upon the facts and circumstances known to us in accordance with accounting principles generally accepted in the United States of America.

Stock-based Compensation

We account for our stock based employee compensation plans under ASC 718~~-10~~ and ASC ~~505-50~~ ~~(formerly SFAS No~~505. ~~123 (revised 2004), "Shared-Based Payment").~~ ASC 718~~-10~~ and ASC 505~~-50~~ address the accounting for ~~shared~~share based payment transactions in which an enterprise receives employee services for equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. ASC 718~~-10~~ and ASC 505~~-50~~ require that such transactions be accounted for using a fair value based method.

In considering the fair value of the underlying stock when we grant options or restricted stock, we consider several factors, including third party valuations and the fair values established by market transactions. Stock-based compensation includes estimates of when stock options might be exercised, forfeiture rates and stock price volatility. The timing for exercise of options is out of our control and will depend, among other things, upon a variety of factors, including our market value and the financial objectives of the holders of the options. We have limited historical data to determine volatility in accordance with Black-Scholes-Merton modeling or other acceptable valuation models under ASC 718~~-10~~ and ASC 505~~-50~~. In addition, future volatility is inherently uncertain and the valuation models have its limitations. These estimates can have a material impact on stock-based compensation expense in our consolidated statements of operations but will have no impact on our cash flows. Therefore determining the fair value of our common stock involves significant estimates and judgments.

Deferred ~~Financing~~ Issuance and Other Debt-Related Costs

Deferred ~~financing~~ issuance costs are amortized over the term of its associated debt instrument. We evaluate the terms of the debt instruments to determine if any embedded derivatives or beneficial conversion features exist. We allocate the aggregate proceeds of the notes payable between the warrants and the notes based on their relative fair values in accordance with ASC 470~~-20-25 (formerly APB No~~. ~~14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”).~~ The fair value of the warrants issued to note holders or placement agents are calculated utilizing the ~~Black-Scholes-Merton~~weighted average probability option-pricing model or probability weighted outcomes using a binomial model, depending on the terms of the instruments. We amortize the resultant discount or other features over the terms of the notes through its earliest maturity date using the effective interest method. Under this method, interest expense recognized each period will increase significantly as the instrument approaches its maturity date. If the maturity of the debt is accelerated because of defaults or conversions, then the amortization is accelerated. ~~Our debt instruments do not contain any embedded derivatives at December 31, 2009.~~

Fair Value of Liabilities for Warrant and Embedded Conversion Option Derivative Instruments

Under applicable accounting guidance, an evaluation of outstanding warrants is made to determine whether warrants issued are required to be classified as either equity or a liability. Because certain warrants we have issued in connection with past financings contain certain provisions that may result in an adjustment to their exercise price, we classify them as derivative liabilities, and accordingly, we are then required to estimate the fair value of such warrants, at the end of each quarter. We use the weighted average probabilities of potential down-round scenarios and other assumptions utilizing an unmodified binomial model to estimate such fair value, which requires the use of numerous assumptions, including, among others, expected life, volatility of the underlying equity security, fair value of the underlying common stock, expectations of pricing of the future financing rounds, a risk-free interest rate and expected dividends. The use of different values by management in connection with these assumptions in the weighted average probabilities of potential down-round scenarios and other assumptions utilizing a unmodified binomial model could produce substantially different results. Because we record changes in the fair value of warrants or other features classified as liabilities as either a charge or credit in our consolidated statement of operations, significant changes in the underlying assumptions could have a material effect on our results of operations.

Recently Issued Accounting Standards

In ~~December~~ ~~2007~~January 2010, ~~ASC~~the ~~808-10~~FASB ~~(formerly~~issued ~~EITF~~guidance ~~Issue~~to Noamend the disclosure requirements related to recurring and nonrecurring fair value measurements. The ~~07-~~guidance requires new disclosures on the transfers of assets and liabilities between Level 1, ~~“Accounting~~(quoted prices in active market for ~~Collaborative~~ ~~Arrangements”~~identical assets or liabilities) ~~was~~and ~~issued. ASC~~Level ~~808-10~~2 ~~provides~~(significant ~~guidance concerning:~~other ~~determining~~observable ~~whether~~inputs) anof ~~arrangement~~the ~~constitutes~~fair avalue ~~collaborative arrangement~~measurement ~~within~~hierarchy, including the ~~scope~~reasons and the timing of the ~~Issue;~~transfers. Additionally, ~~how~~the ~~costs~~guidance ~~incurred~~requires ~~and~~a ~~revenue generated~~roll forward of activities on purchases, sales, toissuance, ~~third~~and ~~parties~~settlements ~~should~~of bethe ~~reported~~assets inand liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for us with the ~~income~~reporting ~~statement; how~~period anbeginning ~~entity~~January 1, ~~should~~2010, ~~characterize~~except ~~payments~~for the disclosure on the ~~income~~roll ~~statement;~~forward ~~and~~activities ~~what participants~~for ~~should~~Level ~~disclose~~3 infair ~~the~~value ~~notes~~measurements, towhich will become effective for us with the ~~financial~~reporting ~~statements~~period ~~about~~beginning ~~a collaborative~~January ~~arrangement~~1, 2011. ~~The~~Other ~~provisions~~than ofrequiring ~~ASC~~additional ~~808-10~~disclosures, ~~have~~adoption ~~been~~of ~~adopted~~this ~~in 2009.~~new ~~ASC~~guidance ~~808-10 has~~did ~~had~~not nohave ~~impact~~a onmaterial ~~the~~impact ~~Company’s~~ our consolidated financial statements.

In September 2006, the FASB issued ASC 820-10 (formerly FASB Statement 157, “Fair Value Measurements”). ASC 820-10 defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. ASC 820-10 applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, ASC 820-10 does not require any new fair value measurements. However, for some entities, the application of ASC 820-10 will change current practice. The changes to current practice resulting from the application of ASC 820-10 relate to the definition of fair value, the methods used to measure fair value and the expanded disclosures about fair value measurements. The provisions of ASC 820-10 are effective as of January 1, 2008, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. However, delayed application of this statement is permitted for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company adopted ASC 820-10 effective January 1, 2008 for financial assets and the adoption did not have a significant effect on its financial statements. The Company has adopted the remaining provisions of ASC 820-10 beginning in 2009. The adoption of ASC 820-10 did not have a material impact on the Company’s consolidated results of operations or financial condition.31

32In February 2010, the FASB issued ASU 2010-09 “Subsequent Event (Topic 855) Amendments to Certain Recognition and Disclosure Requirements”. ASU 2010-09 removes the requirement for an SEC filer to disclose a date in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of generally accepted accounting principles. All of the amendments in ASU 2010-09 are effective upon issuance of the final ASU, except for the use of the issued date for conduit debt obligors, which is effective for interim or annual periods ending after June 15, 2010. The Company adopted ASU 2010-09 in February 2010 and therefore omitted the disclosure previously required as referenced above.

In ~~June 2008~~April 2010, the FASB ~~ratified~~issued ~~ASC~~ASU ~~815-40-25 (formerly EITF Issue~~ No. 072010-0517, ~~“Determining~~ ~~Whether~~Revenue anRecognition ~~Instrument~~— ~~(or~~Milestone ~~Embedded~~Method. ~~Feature)~~This isASU ~~Indexed~~provides toguidance ~~an Entity's~~on ~~Own~~the ~~Stock”).~~criteria ~~ASC~~that ~~815-40-25~~should ~~mandates~~be amet ~~two-step process~~ for ~~evaluating~~ determining whether anthe ~~equity-linked~~milestone ~~financial~~method ~~instrument~~of orrevenue ~~embedded~~recognition ~~feature~~ is ~~indexed~~appropriate. Under to the ~~entity's~~milestone ~~own~~method ~~stock.~~of ~~Warrants~~revenue recognition, consideration that ais ~~company~~contingent ~~issues~~upon ~~that~~achievement ~~contain~~of a ~~strike price~~milestone ~~adjustment~~in ~~feature,~~its ~~upon~~entirety ~~the~~can ~~adoption~~be ofrecognized ~~ASC~~as ~~815-40-25,~~revenue ~~results~~ in the ~~instruments~~ noperiod ~~longer~~in ~~being~~which ~~considered~~the ~~indexed~~milestone tois achieved only if the ~~company's~~milestone ~~own~~meets ~~stock. On~~all ~~January~~criteria 1,to ~~2009,~~be ~~the~~considered ~~Company~~substantive. ~~adopted~~This ~~ASC~~standard ~~815-40-25 and re-evaluated its~~provides ~~issued~~the ~~and~~criteria ~~outstanding~~to ~~warrants~~be ~~that~~met ~~contain~~for a ~~strike price~~milestone ~~adjustment~~to ~~feature.~~be ~~The~~considered ~~Company~~substantive ~~reclassified certain~~which ~~warrants~~includes ~~from equity~~that: to a) ~~derivative~~performance ~~liability~~consideration ~~and~~earned ~~used~~by achieving the ~~Black-Scholes-Merton~~milestone ~~valuation model~~be commensurate with either performance to ~~determine~~achieve the ~~fair~~milestone ~~market~~or the enhancement of the value of the ~~warrants. Upon adoption~~item ondelivered ~~January~~as 1,a ~~2009,~~result ~~the~~of ~~Company~~a ~~calculated~~specific outcome resulting from performance to achieve the ~~impact~~milestone; and ~~the~~b) ~~amount was~~it ~~found~~relates to past performance and be ~~de-minims.~~reasonable Asrelative ofto ~~December~~all ~~31,~~deliverables ~~2009,~~and payment terms in the ~~Company recorded~~ arrangement. This standard is effective on a ~~$0.3~~prospective ~~million~~basis ~~loss~~for milestones achieved in ~~the~~fiscal ~~consolidated~~years ~~statement~~beginning ~~of operations~~on ~~due~~or toafter ~~the~~June ~~increase~~15, in2010. ~~the~~Although ~~fair~~we ~~value~~are still evaluating the impact of 5this standard,~~080,160~~ ofwe do not expect its ~~issued warrants~~adoption ~~that~~to ~~contain~~have ~~such~~a ~~anti-dilution~~material ~~provisions~~impact ~~using~~on our financial position or the ~~Black-Scholes-Merton~~ ~~option-pricing~~results ~~model~~of our operations.

Effective July 1, 2009, the Company adopted The “FASB Accounting Standards Codification” and the Hierarchy of Generally Accepted Accounting Principles (ASC 105), (formerly SFAS No. 168, The “FASB Accounting Standards Codification” and the Hierarchy of Generally Accepted Accounting Principles). This standard establishes only two levels of U.S. generally accepted accounting principles (“GAAP”), authoritative and nonauthoritative. The Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (the “Codification”) became the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification became nonauthoritative. The Company began using the new guidelines and numbering system prescribed by the Codification when referring to GAAP in the third quarter of fiscal 2009. As the Codification was not intended to change or alter existing GAAP, it did not have any impact on the Company’s consolidated financial statements.

Effective for the interim reporting period ending June 30, 2009, the Company adopted two new accounting standard updates which were intended to provide additional application guidance and enhanced disclosures regarding fair value measurements and impairments of securities as codified in ASC 820-10-65 (formerly FASB Staff Position Financial Accounting Standard 107-1 and Accounting Principles Board 28-1 and “Interim Disclosures about Fair Value of Financial Instruments”. ASC 820-10-65 requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. ASC 820-10-65 requires related disclosures in summarized financial information at interim reporting periods. ASC 820-10-65 was effective for the interim reporting period ending June 30, 2009. The adoption of ASC 820-10-65 did not have a material impact on the Company’s consolidated financial statements.

In November 2008, the SEC issued for comment a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (IFRS). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (IASB). Under the proposed roadmap, we could be required in fiscal 2014 to prepare financial statements in accordance with IFRS. The SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. We are currently assessing the impact that this potential change would have on our consolidated financial statements and we will continue to monitor the development of the potential implementation of IFRS.

Changes in Consolidated Results of Operations

	Years Ended December 31,
	2009 vs. 2008			2008 vs. 2007			2007 vs. 2006
	2010 vs. 2009			2009 vs. 2008
Revenues	$	1,410,313		$	366,309		$	319,977
	Increase / (decrease)
Cost of sales		(103,490	)		(1,387,357	)		1,250,133
Revenues	$	(4,442,917	)	$	1,410,313
Research and development		(3,373,945	)		(2,687,326	)		876,734
Cost of sales		-			(103,490	)
General and administrative		2,921,918			(15,494,398	)		8,720,430
Research and development		(280,517	)		(3,373,945	)
Sales and marketing		(175,507	)		(6,075,855	)		5,130,101
General and administrative		1,997,372			2,664,819
Impairment of fixed assets		(2,387,603	)		2,482,797			(110,213	)
Facility realignment and impairment of fixed assets		(177,831	)		(2,387,603	)
Non-cash warrant expense consultants		(81,592	)		(17,033,408	)		17,115,000
Registration rights penalty		(215,988	)		(44,909	)
Registration rights penalty		(44,909	)		713			-
Loss from operations		5,765,953			4,655,441
Loss from operations		(4,655,441	)		(40,561,143	)		32,662,208
Non cash debt extinguishment		(35,909,507	)		35,909,507
Interest expense, net	$	~~(284~~2,~~226~~272,438	)	$	(1284,~~883,383~~226	)	$	~~(1,628,667~~	)

Comparison of the Years Ended December 31, 2010 and 2009

Revenues

Revenues were $0.1 million for the year ended December 31, 2010, compared to $4.5 million for the comparable period in 2009, a decrease of 97.4% or $4.4 million. This decrease for the year ended December 31, 2010 is entirely attributable to the termination by Ferring of its License Agreement with us in December 2009. Our revenue for the year ended December 31, 2010 was mainly attributable to feasibility studies, of which will more likely than not, cease in 2011, with the Company focusing on the CRO segment. Our revenue for the year ended December 31, 2009 was primarily derived from reimbursement of product development costs from Ferring. We continue to seek other revenue sources; however, we cannot predict when and if we will be able derive new revenue sources in the near future or at all.

Research and development

Research and development expenses were $2.6 million for the year ended December 31, 2010, compared to $2.9 million for the comparable period in 2009, a decrease of 9.7% or $0.3 million. In 2009 our primary research and development project was our infertility project with Ferring. However, in 2010, due to the termination of the Ferring project, we have instead allocated our research and development resources to internal development projects in the areas of therapeutic peptides and small molecules which we intend to pursue. We expect these costs to decrease in 2011 as compared to 2010 unless we find a partner with which to further develop these products.

General and administrative

General and administrative expenses totaled $4.8 million for the year ended December 31, 2010, as compared to $2.8 million for the comparable period in 2009, an increase of 71.4%, or $2.0 million. General and administrative expense for the for the year ended December 31, 2010, included a non-cash charge of $2.3 million for the fair value of employee and director share-based payments as compared to approximately $0.6 million for the comparative period in the prior year. Including the non-cash charge for share-based payments, the remaining general and administrative expenses was $2.5 million for the year ended December 31, 2010, as compared to $2.2 million for the comparable period in 2009, an increase of 9.1%, or $0.2 million. The increase in general and administrative expenses is primarily attributable to an increase in investor relations costs, legal fees, and consulting arrangements, stemming primarily from the Ferring litigation, changes in our business strategy and our attempts to consummate the Merger.

Registration rights penalty

The registration rights penalty for failure to register common stock issued totaled $0.2 million for the year ended December 31, 2009. We did not incur registration rights penalty in the year ended December 31, 2010. On October 30, 2009, we entered into an Amendment and Waiver (“Amendment”) to the Registration Rights Agreement dated September 29, 2004 among the Company, Spencer Trask Ventures, Inc., a related party, Rodman & Renshaw, LLC, and various shareholders. The Amendment required us to compensate investors for registration rights penalties incurred of approximately $2.6 million. We issued 1,250,000 restricted shares of our common stock with a fair value of $0.8 million and warrants to purchase up to 1,250,000 restricted shares of our common stock at an exercise price of $0.75 per share with an expiration date of October 30, 2012 in order to settle the accrued liquidated damages. Accordingly we did not incur registration right penalty expense in the year ended December 31, 2010.

Interest expense, net

Interest expense, net totaled $3.9 million for the year ended December 31, 2010, as compared to $1.6 million for the comparable period in 2009, an increase of $2.3 million or 140.2%. The increase in interest expense, net, for the year ended December 31, 2010 is primarily attributable to the non-cash warrant expense issued to investors of $0.5 million and the non-cash interest expense charge of $3.2 million for the fair value of 6,986,250 warrants issued to noteholders to induce conversion of the June 30, 2010 convertible notes into common stock.

Increase in fair value of derivative financial instruments

We performed an evaluation to determine whether our equity-linked financial instruments (or embedded features) are indexed to our stock, including evaluating the instruments contingent exercise and settlement provisions in accordance with ASC Topic 815. This requirement affects the accounting for our warrants that protect holders from a decline in the stock price (or “down-round” provisions). This also affects the beneficial conversion feature of the 2010 Notes, which have an initial conversion price of $0.20 per share (but such price decreases by 1.5% each 90 day period that the instrument is outstanding, and contains a reset provision in the event subsequent equity raises are at a lower value). For the year ended December 31, 2010, we recorded an a credit of $(0.3) million in the consolidated statement of operations due to the changes in the fair value of our issued warrants that contain such down-round provisions and the variable beneficial conversion feature, using the weighted average probabilities of potential down-round scenarios and other assumptions utilizing a unmodified binomial model.

Non-cash debt extinguishment

In connection with the December 24, 2009 restructuring agreement with STSG and affiliated entities, we performed an evaluation of the conversion of approximately $20.3 million of convertible debt and Series B Convertible Mandatorily Redeemable Preferred stock, including accrued and unpaid interest and dividends, into our common stock, pursuant to rules governing accounting for induced conversions of debt, (ASC 470-20). We determined that as a result of a change in the conversion price of convertible debt and preferred stock from $22.50 per share to $0.40 per share, STSG received an incentive to induce conversion of these instruments into our common stock. Accordingly, as of the year ended December 31, 2009, we have recorded a non-cash charge of approximately $35.9 million related to the difference in fair value (based on quoted market prices at the date of the conversion) of the incremental shares received by STSG as a result of the restructuring.

Comparison of the Years Ended December 31, 2009 and 2008

Revenues

Revenues were $4.6 million for the year ended December 31, 2009, compared to $3.2 million for the comparable period in 2008, an increase of 44.8% or $1.4 million. Our revenues for the years ended December 31, 2009 and 2008 were primarily derived from reimbursement of product development costs by Ferring.

Revenues from the development and marketing agreement with Ferring (which was terminated in late December 2009) were $1.9 million for the year ended December 31, 2009, compared to $2.8 million for the comparable period in 2008, a decrease of 32.2% or $0.9 million. This decrease is primarily attributable to reduced patch development and wear studies cost reimbursements upon the initiation of a Phase II clinical trial in the second quarter of 2009.

Other revenue was $2.6 million for the year ended December 31, 2009, compared to $0.3 million for the comparable period in 2008, an increase of 704.0 % or $2.3 million. Upon Ferring’s termination, we recognized previously deferred revenue of $2.6 million resulting from milestone payments. Ferring was our sole source of revenues in 2009 and 2008. We continue to seek other revenue sources; however, we cannot predict when and if we will be able derive new revenue sources in the near future or at all.

Cost of Sales

We did not incur costs of sales for the year ended December 31, 2009; however, we did incur cost of sales of $0.1 million for the comparable period in 2008.

Research and development

Research and development expenses were $2.9 million for the year ended December 31, 2009, compared to $6.3 million for the comparable period in 2008, a decrease of 53.8% or $3.4 million. The decrease is primarily attributable to cost reduction initiatives implemented in 2009 consistent with our management’s strategy to reduce operating expenses and a decrease in patch development and wear studies for our infertility project upon the initiation of a Phase II clinical trial in the second quarter of 2009.

General and administrative

General and administrative expenses totaled $2.8 million for the year ended December 31, 2009, compared to $(0.1) million for the comparable period in 2008, an increase of 2334.6% or $2.9 million. The primary reason for the increase is due to the 2008 impact of ASC 718-10 and ASC 505-50 (formerly SFAS No. 123 (revised 2004), "Shared-Based Payment"), which requires us to measure the fair value of all employee performance share-based payments that vest as an operating expense. General and administrative expenses, for the year ended December 31, 2008 includes a non-cash (credit) of $(7.2) million, related to the issuance of stock options to employees. The credit in stock option expenses resulted from the forfeiture of unvested performance based stock options, previously granted to Tim McIntyre, our former CEO, upon his resignation on March 21, 2008 and Anthony Cherichella, our former CFO, upon his resignation on April 18, 2008, which resulted in the reversal of previously recognized expenses related to such options. Without giving effect to the non-cash (credit) general and administrative expenses would have totaled $7.1 million for the year ended December 31, 2008, which would have yielded a decrease of 60.5% or $4.3 million for 2009 over 2008. The decrease in general and administrative expenses as compared to the comparable period in the prior year is primarily attributable to a decrease in overhead, legal, consulting costs and personnel costs, which include salary, benefits and severance, consistent with management’s strategy to reduce operating expenses.

Sales and marketing

We did not incur sales and marketing expenses in for the year ended December 31, 2009, compared to incurring $0.2 million of expenses for the year ended December 31, 2008, a decrease of 100% or $0.2 million. The limited expenses for sales and marketing in 2008 were residual costs from the discontinued LidoSite product.

Facilities realignment and impairment of fixed assets

Expenses for facilities realignment and impairment of fixed assets were $0.2 million for the year ended December 31, 2009, compared to $2.6 million for the year ended December 31, 2008. In the first quarter of 2008, we consolidated all of our operations (including offices) into the 13-01 Pollitt Drive facility and recorded a facilities realignment impairment expense of $2.5 million. On September 30, 2009, we entered into a Settlement and Release Agreement with the landlord of the 17-01 Pollitt Drive facility. For discussion of the disposition of this lease, refer to gain on settlement of lease obligations below.

Registration Rights Penalty and Gain on Settlement of Registration Rights Penalty

The registration rights penalty for failure to register common stock totaled $0.2 million for the year ended December 31, 2009 and $0.3 million for the year ended December 31, 2008. In connection with our private placement transactions in September 2004, we filed a registration statement with the SEC relating to the resale of shares of our common stock. Since the SEC did not declare that registration statement effective by February 25, 2005, we became obligated to pay a registration rights penalty to certain stockholders. The registration statement was declared effective on May 12, 2005, resulting in a cumulative obligation to pay liquidated damages of approximately $1.4 million, payment of which would have materially adversely affected our financial condition and ability to remain in business. In addition, we were obligated to pay interest at a rate of 18% per annum, accruing daily, for any liquidated damages not paid in full within 7 days of the date payable, and there was no cap on the amount of interest to be so accrued.

On October 30, 2009, we entered into an Amendment and Waiver (“Amendment”) to the Registration Rights Agreement dated September 29, 2004 among the Company, Spencer Trask Ventures, Inc., a related party, Rodman & Renshaw, LLC, and various shareholders. The Amendment required us to compensate investors for registration rights penalties incurred of approximately $2.6 million. We issued 1,250,000 restricted shares of our common stock with a fair value of $0.8 million and warrants to purchase up to 1,250,000 restricted shares of our common stock at an exercise price of $0.75 per share with an expiration date of October 30, 2012 in order to settle the accrued liquidated damages. The fair value of warrants issued to purchase our common stock was estimated to be $0.4 million using the Black-Scholes-Merton pricing model. We recorded a non-cash gain on settlement of registration rights penalty of $1.4 million in the consolidated statement of operations for the year ended December 31, 2009.

Interest (income) expense, net

Interest (income) expense, net, was $1.6 million for the year ended December 31, 2009, compared to $1.9 million in 2008 a decrease of 14.9% or $0.3 million. This decrease is primarily attributable to non-cash interest expense. Non-cash interest expense totaled $1.5 million for the year ended December 31, 2009 as compared to $0.2 million for the year ended December 31, 2008. Coupon and other interest expense totaled $0.1 million for the year ended December 31, 2009 as compared to $1.7 million for the year ended December 31, 2008.

Gain on settlement of lease obligations

On September 30, 2009, we entered into a Settlement and Release Agreement with 17-01 Pollitt Drive, L.L.C. with respect to our former leasehold at 17-01 Pollitt Drive. The settlement calls for us to pay the Landlord $0.5 million, which is evidenced by the issuance of a five year interest only balloon note with interest accruing at the rate of 6% per year. In exchange the landlord released us from our obligations under the lease (for which we recorded a liability of $2.5 million upon abandonment of the lease facility in 2007) resulting in a gain of $2.0 million for the year ended December 31, 2009 in the consolidated statement of operations.

Non-cash debt extinguishment

Revaluation of warrant liability

As of December 31, 2009, we performed an evaluation to determine whether our equity-linked financial instruments (or embedded features) are indexed to our stock, including evaluating the instruments contingent exercise and settlement provisions in accordance with ASC Topic 815-10. This requirement affects the accounting for our warrants that protect holders from a decline in the stock price (or “down-round” provisions). As of December 31, 2009, we recorded a $0.3 million loss in the consolidated statement of operations due to the increase in the fair value of 5,080,160 of our issued warrants that contain such anti-dilution provisions using the Black-Scholes-Merton option-pricing model.

Comparison of the Years Ended December 31, 2008 and 2007

Revenues

Revenues were $3.2 million for the year ended December 31, 2008, compared to $2.8 million for the comparable period in 2007, an increase of 13.2% or $0.4 million. Our revenues for the years ended December 31, 2008 and 2007 were primarily derived from reimbursement of product development costs with Ferring. Due to the limited commercial success of the 2007 LidoSite launch, we de-emphasized the LidoSite product in the fourth quarter of 2007 and are actively pursuing peptide and small molecule opportunities through, among other things, drug development partnerships.

Revenues from the development and marketing agreement with Ferring were $2.8 million for the year ended December 31, 2008, compared to $2.6 million for the comparable period in 2007, an increase of 7.1% or $0.2 million. This increase is primarily attributable to additional research and development resources dedicated to this agreement in preparation for commencement of Phase II human clinical trials in 2009.

Other revenue was $0.3 million for the year ended December 31, 2008, compared to $0.1 million for the comparable period in 2007, an increase of 154.4 % or $0.2 million. This increase was primarily attributable to the recognition of all deferred revenue upon the cancellation of a contract with B. Braun in the second quarter of 2008.

Cost of Sales

Costs of sales for the year ended December 31, 2008 were $0.1 million, compared to $1.5 million for the comparable period in 2007, a decrease of 93.1% or $1.4 million. There were virtually no sales of our LidoSite product in 2008. In the second quarter of 2007, we recommenced manufacturing activities in an effort to begin commercialization of our LidoSite product. Due to the de-emphasis of the LidoSite product launch in the fourth quarter in 2007 and uncertain future sales opportunities, we recorded a valuation allowance for excess and obsolete inventory of $1.4 million for the year ended December 31, 2007.

Research and development

Research and development expenses were $6.3 million for the year ended December 31, 2008, compared to $9.0 million for the comparable period in 2007, a decrease of 30.0% or $2.7 million. The decrease is primarily attributable to cost reduction initiatives implemented in 2008 consistent with our management’s strategy to reduce operating expenses and focus only on our infertility development program.

General and administrative

General and administrative expenses totaled $(0.1) million for the year ended December 31, 2008, compared to $15.4 million for the comparable period in 2007, a decrease of 100.8% or $15.5 million. The primary reason for the decrease is due to the impact of ASC 718-10 and ASC 505-50 (formerly SFAS No. 123 (revised 2004), "Shared-Based Payment"), which requires us to measure the fair value of all employee share-based payments that vest as an operating expense. General and administrative expenses, for the year ended December 31, 2008, includes a non-cash (credit) of $(7.2) million, related to the issuance of stock options to employees. The credit in stock option expenses resulted from the forfeiture of unvested performance based stock options, previously granted to Tim McIntyre, our former CEO, upon his resignation on March 21, 2008 and Anthony Cherichella, our former CFO, upon his resignation on April 18, 2008, which resulted in the reversal of previously recognized expenses related to such options. Without giving effect to the non-cash (credit) general and administrative expenses would have totaled $7.1 million for the year ended December 31, 2008, a decrease of 53.9% or $8.0 million as compared to the comparable period in the prior. The decrease in general and administrative expenses as compared to the comparable period in the prior year is primarily attributable to a decrease in investor relations and reduced legal, consulting costs and personnel costs, which include salary, benefits and severance, consistent with management’s strategy to reduce operating expenses.

Sales and marketing

Sales and marketing expenses were $0.2 million for the year ended December 31, 2008, compared to $6.3 million for the year ended December 31, 2007, a decrease of 97.2% or $6.1 million. For the year ended December 31, 2007, we incurred approximately $2.8 million of expenses initiating our own internal sales and marketing team, hiring a senior vice president for sales and marketing and marketing materials for the LidoSite product launch. Due to the limited commercial success of LidoSite in 2007, we de-emphasized the LidoSite product launch in the fourth quarter of 2007 resulting in a marked decrease in sales and marketing activities, and all of the employees hired to support this launch are no longer employed by us.

Facilities realignment and impairment of fixed assets

Expenses for facilities realignment and impairment of fixed assets were $2.6 million for the year ended December 31, 2008, compared to $0.1 million for the year ended December 31, 2007. In 2008, due to the de-emphasis of the LidoSite product in December 2007, in 2008 we consolidated all operations (including offices) that was in our 17-01 Pollitt Drive facility, into the 13-01 Pollitt Drive facility. We have accordingly recognized the present value of future lease costs of $2.5 million and impairment of fixed assets of $0.1 million in facilities realignment costs in the consolidated statement of operations in the year ended December 31, 2008.

Non-cash warrant expense – financial consultants

Non-cash warrant expense – financial consultants totaled $0.1 million for the year ended December 31, 2008 compared to $17.1 million in the comparable period in 2007, a decrease of 99.5% or $17.0 million. In July 2007, we entered into various financial consulting agreements, whereby 700,000 warrants were collectively issued to consultants to purchase stock, all of which carry a five year term and an exercise price of $22.50 per share. In September 2008, we amended previously issued warrants issued to financial consulting for additional consulting and investor relation services. Management expensed the estimated fair value of these warrants, $0.1 million and $17.1 million in the year ended December 31, 2008 and 2007, respectively, using the Black-Scholes-Merton option-pricing model.

Registration rights penalty

The registration rights penalty for failure to register common stock issued totaled $0.3 million for each of the years ended December 31, 2008 and 2007. In connection with our private placement transactions in September 2004, we filed a registration statement with the SEC relating to the resale of shares of our common stock. Since the SEC did not declare that registration statement effective by February 25, 2005, we are obligated to pay a registration rights penalty to certain stockholders. The registration statement was declared effective on May 12, 2005, resulting in a cumulative obligation to pay liquidated damages of approximately $1.4 million, payment of which would materially adversely affect our financial condition and ability to remain in business. In addition, we are obligated to pay interest at a rate of 18% per annum, accruing daily, for any liquidated damages not paid in full within 7 days of the date payable, and there is no cap on the amount of interest to be so accrued.

Interest (income) expense, net

Interest (income) expense, net, was $1.9 million for the year ended December 31, 2008, compared to $3.8 million in 2007 a decrease of 49.7% or $1.9 million. This decrease of $1.9 million is principally attributable to non-cash interest expenses. Non-cash interest expense totaled $0.2 million for the year ended December 31, 2008 as compared to $2.4 million for the year ended December 31, 2007. Coupon and other interest expense totaled $1.7 million in for the year ended December 31, 2007 as compared to $1.6 million for the year ended December 31, 2007. Interest income, included in interest expense, net, was $0.04 million and $0.2 million for the years ended December 31, 2008 and 2007, respectively.

During the years ended December 31, 2008 and 2007, interest expense consisted of the following:

	Year Ended December 31,
	2008		2007
Non-cash interest expense:
Value of warrant amortization	$	—	$	766,112
Offering costs amortization		—		11,404
Value of warrants issued for Working Capital Facility extension		—		888,762
Value of beneficial conversion feature		231,403		231,547
Value of warrants issued for financial consultants		—		543,751
Total non-cash interest expense		231,403		2,441,576
Coupon and other interest		1,116,593		957,178
Interest on Series B mandatorily convertible redeemable preferred stock		600,000		600,000
Total interest expense	$	1,947,996	$	3,998,754

Non-cash debt extinguishment

In August 2007, we entered into an agreement with STSG and its affiliates to amend the Working Capital Facility, the January 2006 Promissory Note and the 2006 Promissory Notes (the “Referenced Debt”). We performed an evaluation of the amendment whereby we determined the relative fair values of the additional warrants issued in connection with the amendments to the terms of the Referenced Debt, the conversion feature related to the debt and accrued interest in connection therewith, and the incremental value resulting from the change in the exercise price of previously issued warrants. After determining the incremental effect of the debt discount related to these terms, we concluded that debt extinguishment accounting should apply and recorded an immediate non-cash charge of $6.7 million directly to our consolidated statement of operations in the year ended December 31, 2007 representing the incremental fair value of the instruments issued.

Non-cash modification of redeemable preferred stock terms

In August 2007, we agreed to reduce the conversion price of the Series B convertible redeemable preferred stock from $53.70 per share to $22.50 per share owned by the Spencer Trask Specialty Group, LLC or STSG, a related party, and its affiliates. This agreement was in consideration of STSG deferring mandatory redemption from March 1, 2006 to June 1, 2009. Since we accounted for the Series B convertible redeemable preferred stock as “mezzanine debt,” we concluded that an evaluation of the amended terms should be performed pursuant to ASC 820 (formerly EITF No. 06-06). In accordance with this evaluation, we concluded the amendment resulted in a substantial difference as defined in ASC 820 (formerly EITF No. 06-06)., and accordingly recorded a non-cash charge of $3.7 million to the consolidated statement of operations in year ended December 31, 2007.

Liquidity and Capital Resources

The consolidated financial statements have been prepared assuming that we will continue as a going concern; however, atwe ~~our~~had ~~current~~cash and ~~planned~~cash ~~rate~~equivalents of ~~spending,~~ we$0.4 ~~believe~~million ~~that~~and ~~our~~a ~~cash~~working ~~and~~capital ~~cash~~deficit ~~equivalents~~ of $214.24 million, as of December 31, ~~2009~~2010, which are not sufficient to allow us to continue operations without additional funding., ~~Especially~~especially given the ~~current~~fact ~~economic~~that ~~climate~~the Company has approximately $1.9 million in accounts payable which are more than 60 days past due, nowith ~~assurance can~~increasing benumbers ~~given~~of ~~that~~creditors weeither ~~will~~making beclaims ~~successful~~and/or commencing litigation against us. Our need for liquidity and capital resources is greatly augmented in ~~arranging~~conjunction ~~additional~~with ~~financing~~the ~~needed~~ Merger. We need to ~~continue~~raise ~~the~~capital ~~execution~~to fund acquisitions of ~~our~~CROs as part of the MediSync business plan,. We ~~which~~also ~~includes~~require ~~the~~additional ~~development of~~funding ~~new~~to ~~products~~support our integration efforts and increased business operations.

~~In December~~No ~~2009,~~assurance can be given that we ~~converted~~will ~~over~~be ~~$20.3~~successful ~~million~~in ofarranging ~~secured~~additional ~~indebtedness~~financing ~~and preferred~~needed ~~stock~~to ~~into~~continue the execution of our ~~common~~business ~~stock~~plan, aswhich ~~well~~includes asthe ~~received~~integration aof ~~net~~MediSync ~~cash~~and ~~payment~~funding of ~~$2.1~~ ~~million~~MediSync’s ~~from~~acquisition activities and the ~~sale~~development of ~~our~~new ~~State~~products. ofFailure ~~New~~to ~~Jersey~~obtain ~~net~~such ~~operating losses. In~~financing ~~February~~may ~~2010,~~require wemanagement ~~raised~~to ~~over~~substantially ~~$1.1~~curtail ~~million~~operations, ~~through~~cease ~~the sale~~operating ofour ~~senior~~business ~~secured~~or ~~convertible~~file ~~debentures.~~for ~~Nonetheless~~bankruptcy, ~~subsequent financings~~which ~~will~~would beresult ~~required~~in toa ~~fund~~material adverse effect on our financial position and results of operations. Since January 2009, ~~fund~~our ~~research~~primary ~~and development~~source ~~for~~of ~~new~~financing ~~products,~~has ~~repay~~been ~~past~~sales ~~due~~of ~~payables~~our common stock, loans, development fees and ~~pay~~milestone ~~debt~~payments ~~service requirements~~from our collaborative partner, Ferring. In December 2009, Ferring ~~discontinued~~terminated ~~our~~its ~~collaborative~~License ~~effort for~~Agreement ~~the~~with ~~infertility~~us ~~project~~and thus we are no longer receiving any payments from Ferring. ~~Since~~ ~~February~~These ~~2006,~~factors raise substantial doubt about our ~~primary~~ability ~~source of~~to ~~revenue~~continue ~~had~~as ~~been~~a going concern. The consolidated financial statements do not include any adjustments to reflect the ~~receipt~~possible offuture ~~milestone~~effects ~~payments~~on the recoverability and ~~reimbursement~~classification of ~~research~~ assets or the amounts and ~~development~~classification ~~expense~~of ~~from~~liabilities ~~our~~that ~~former~~might ~~collaborative~~occur ~~partner, Ferring~~if we are unable to continue in business as a going concern.

38As of April 11, 2011, we have commitments from our Board of Directors and other insiders to fund at least $0.1 million no later than April 21, 2011 ("Initial Bridge Funding"). This Initial Bridge Funding is insufficient to fund our operations for more than three weeks, and during that time, we will not pay for any nonessential services, including salaries for our management team, and we will continue to incur payables, as well as be unable to pay other payables which are already in arrears.

~~No assurance~~We ~~can~~are becurrently ~~given that we will be successful~~ in ~~procuring~~negotiations ~~the~~with ~~further financing~~an ~~needed~~investment tobanking ~~continue~~firm ~~the~~with ~~execution~~respect of its ~~business~~acting ~~plan,~~as ~~which~~a ~~includes the~~selling ~~development~~agent offor ~~new~~a ~~products.~~longer ~~Failure~~term tobridge ~~obtain such~~ financing ~~will~~of ~~require management~~up to ~~substantially~~$2.0 ~~curtail~~million, ~~if not cease, operations, which will result in a material adverse effect on our financial position and results of operations. The consolidated financial statements do not include any adjustments~~ to ~~reflect~~be ~~the~~comprised ~~possible future effects on the recoverability and classification~~ of ~~assets~~convertible ornotes ~~the amounts~~ and ~~classification~~warrants. ofOur ~~liabilities~~objective ~~that~~is ~~might occur if we are unable~~ to ~~continue~~launch inthis ~~business~~bridge asfinancing abefore ~~going~~April ~~concern~~30, 2011.

~~On December 31~~Additionally, ~~2009,~~the ~~our~~Company ~~cash~~engaged ~~position~~two ~~was~~other $2investment bankers in the first quarter of 2011 to assist in raising equity capital needed to complete its business plan.2 While ~~million~~no specific dollar amounts or terms have been agreed to as yet, ~~and~~our wediscussions ~~had~~with athese ~~working capital~~firms ~~deficit~~relate ofto their raising approximately $610.0 ~~million~~to $15.0 ~~There~~million, isto ~~substantial~~fund ~~doubt~~CRO’s ~~about~~acquisitions, ~~our~~and ~~ability~~for ~~to continue~~working ascapital aand ~~going~~general ~~concern~~corporate purposes.

In November 2010, we were awarded two equal grants totaling $0.5 million under the IRS Qualifying Therapeutic Discovery Project (QTDP) program. The grants will be used to advance our smart patch technology for the delivery of therapeutic medicines planned for use to treat female infertility and diabetes. The QTDP program was created by the U.S. Congress as part of the Patient Protection and Affordable Care Act passed on March 23, 2010. Eligibility for the grant requires that a project have the potential to develop new treatments that address "unmet medical needs" or chronic and acute diseases; reduce long-term health care costs; or represent a significant advance in finding a cure for cancer.

In 2011 our plans for cash flows from operating activities will stem from revenues obtained from proposed acquisitions of businesses deriving from the acquisitions of businesses by MediSync. We would plan on consummating at least one cash flow generating business in 2011; however, the identity and materiality of the cash flows to be generated may vary greatly depending on the identity and timing of such acquisitions.

Comparison of 2010 to 2009 and 2009 to 2008

Cash flows from operating activities

For the year ended December 31, ~~2009~~2010, we had $14.07 million of net cash ~~provided~~used by operating activities, as compared to ~~using~~ $71.60 million of net cash ~~used~~provided in by operating activities during ~~2008~~2009, a decrease in net cash ~~used~~provided of $8.5.7 million, or ~~112~~50.57%. The principal factors in both years were our net loss and non-cash items. During ~~2009~~2010, we had a net loss of $3310.95 million partially offset by $316.5 million of non-cash items and $~~3.4 million of other items resulting in net cash provided by operating activities of $1.~~0 ~~million~~. ~~During~~65 ~~2008, we had a net loss of $8.0~~ million ~~partially offset by $0.6 million~~ of ~~non-cash items and $(1.0) million of~~ other items resulting in net cash used in operating activities of $~~7.6 million. Non-cash items for 2008 include depreciation and amortization of $0.3 million, net stock based compensation charges of $(~~4.1)7 million~~, amortization of note discount of $0~~.2 million, accrued registration rights penalty of $0.3 million, impairment of fixed assets and accrued facilities realignment costs of $2.6 million and other non-cash items of $0.1 million. Consistent with management’s strategy to reduce operating expenses in 2009, we reduced our operating costs to better align with the cash received from operations.

For the year ended December 31, 2009, we had $1.0 million of net cash provided by operating activities, as compared to using $7.6 million of net cash used in operating activities during 2008, a decrease in net cash used of $8.5 million, or 112.5%. The principal factors in both years were our net loss and non-cash items. During 2009, we had a net loss of $33.9 million partially offset by $31.5 million of non-cash items and $3.4 million of other items resulting in net cash provided by operating activities of $1.0 million.

Cash flows from investing activities

For the year ended December 31, ~~2009~~2010, net cash inprovided by investing activities ~~provided~~was ~~$0.1 million~~de minimis, as compared to net ~~cash provided~~ ~~by investing activities during 2008 of $0.2 million, a decrease of approximately $0.05 million, or 28.6%. During 2009, the~~ cash provided by investing activities ~~is primarily~~during ~~related~~2009 toof ~~the corresponding net reduction in our restricted cash with respect to rental payments to our landlord by~~ $0.17 million.

For the year ended December 31, ~~2008~~2009 net cash inprovided by investing activities ~~provided~~was $0.2 7 million, as compared to net cash provided ~~used~~by in investing activities during ~~2007~~ 2008 of $0.12 million, ana increase of approximately $0.35 million, or ~~240~~150.80%. During ~~2008~~ 2009, the ~~increase in~~ cash provided by investing activities is primarily related to the ~~corresponding~~sale ~~decrease~~of inmanufacturing ~~our~~equipment ~~restricted~~of ~~cash~~approximately ~~with respect to rental payments to our landlord by~~ $0.26 million.

Cash flows from financing activities

For the year ended December 31, 2010, our financing activities provided us $2.5 million, as compared to $0.8 million of net cash provided by financing activities in the comparable period in the prior year. During the year ended December 31, 2010, we sold to accredited investors $1.8 million principal amount of senior subordinated convertible promissory notes due 2013 and $1.2 million of subordinated convertible promissory notes which was partially offset by $0.4 million in related debt issuance costs.

For the year ended December 31, 2009, our financing activities provided us with $0.8 million of net cash, as compared to $5.9 million of net cash during 2008, a decrease of $5.0 million or 85.6%. During the year ended December 31, 2009, we raised $0.6 million in net proceeds from private placements of common stock, $0.5 million in net proceeds from purchase of equipment by Ferring and repaid $0.3 million of the 2009 Promissory Note due to STSG.

~~For~~Financing ~~the year~~Events ~~ended~~in ~~December 31,~~ 2008, ~~our~~2009 financing activities provided us with $5.9 million of net cash, as compared to $21.2 million of net cash during 2007, a decrease of $15.3 million or 72.3%. During the year ended December 31, 2008, we raised $1.8 million in net proceeds from private placements of common stock, $2.8 million in net proceeds from incurrence of a milestone advance from Ferring, $1.8 million in net proceeds from the exercise of warrants and ~~offset by a repayment of $.05 principal amount of a senior secured convertible promissory note.~~ 2010

Financing Events in 2007, 2008 and 2009

2007 Private Placements

During the year ended December 31, 2007, we raised $9.1 million pursuant to which we issued to investors a total of 807,378 shares of common stock at $11.25 per share. In connection with this financing, we paid finders fees to Wolverine and to STVI, in the amount of $0.9 million and $0.04 million, respectively, representing 10% of the gross proceeds raised. Net proceeds were $8.0 million, with finder’s fees and other legal costs of $1.1 million recorded as a reduction of equity as a cost of the transaction.

During the same period, we also raised $13.8 million pursuant to which we issued to investors a total of 613,111 shares of common stock at a purchase price of $22.50 per share. The subscribers were also issued warrants to purchase our common stock in an equal amount to the number of shares purchased. Those investor warrants bear a three year term and have an exercise price of $45.00 per share, and contain a mandatory exercise provision at our election should the market price of our common stock be at least $60.00 for 20 consecutive trading days. In connection with this financing, we paid a finder’s fee to Ramp International, Inc. (“Ramp”), as assignee from Wolverine, in the amount of $1.4 million, representing 10% of the gross proceeds raised. Net proceeds were $12.4 million, with finder’s fees and other legal costs of $1.4 million recorded as a reduction of equity as a cost of the transaction.

February 2008 Private Placement

In February of 2008, we raised a total of $1.8 million in a private placement pursuant to which we issued to investors a total of 600,000 shares of common stock at a purchase price of $3.00 per share (“February 2008 Financing”). The investors were issued warrants to purchase our common stock in an amount equal to two times the number of shares purchased, or 1,200,000 total warrants. Those investor warrants bear a five year term and have an exercise price of $3.00 per share, and contain a mandatory exercise provision at our election should the market price of our common stock be at least $4.50 for 20 consecutive trading days. In connection with the February 2008 Financing, we paid a finders fee to Ramp Partners in the amount of $0.2 million, representing 10% of the gross proceeds raised. Ramp reinvested its cash fee in the February 2008 Financing and received 60,000 shares of common stock and 120,000 warrants. Net proceeds (after reinvestment of the cash finder’s fee) were $1.8 million, with no legal or other professional fees attributed thereto as offering costs.

~~Working Capital Facility~~37

On February 23, 2007, STSG loaned us an additional $0.4 million in aggregate principal amount in the form of a senior secured promissory note subject to the terms of its Working Capital Facility with STSG, which was originally put into place in September 2004. As of December 31, 2009, the Working Capital Facility had been terminated.

Funds Raised Pursuant to Temporary Reduction in Exercise Price of Warrants

On February 1, 2008, we temporarily reduced the exercise price of all of our issued and outstanding warrants to $3.00. As of February 1, 2008, we had 3,864,944 warrants issued and outstanding. On February 28, 2008, the total number of warrants exercised under this temporary reduction in exercise price was 611,895 resulting in net proceeds to us of $1.8 million. All shares issued as a result of these warrant exercises are unregistered, restricted shares of our common stock.

Milestone Advance from Ferring

Effective July 9, 2008, Ferring advanced a $2.5 million payment which would otherwise be due to us from Ferring should they elect to proceed with Phase II Clinical Trials (“Phase II”) as described in the License and Development Agreement dated as of September 27, 2004 (as heretofore amended, the “License Agreement”.) The $2.5 million was advanced in the form of a loan, and we issued a $2.5 million principal amount secured note (“Note”) to Ferring. The Note was satisfied in March 2009.

On December 16, 2008, Ferring loaned us an additional $0.2 million in the form of a promissory note issued by us to Ferring which was satisfied in March 2009.

Transaction Agreement with Ferring March 2009

In March 2009, we entered into a transaction with Ferring whereby they agreed to fund the first half of the 2009 development budget up to $3.3 million, in exchange for which we granted Ferring a senior security interest in our assets (which Ferring has agreed to subordinate to the security interest of new third party lenders for a value of over $3.3 million) ~~and which security interest expires at the earlier of the date when we deliver patches required for Phase III testing and May 31, 2010~~.

Ferring also agreed to buy our PMK 150 machine for $1.0 million, of which $0.5 million was paid at closing (half to satisfy outstanding senior secured convertible debentures due to Ferring) and $0.3 million was paid on May 14, 2009 (part to satisfy accrued and unpaid interest on loans from Ferring) and which has been leased back to us at a rental amount of $1,000 per month. We account for the lease of the PMK 150 machine as an operating lease and are recognizing the deferred gain on the sale of the machine over the 10 year lease. ~~We also granted Ferring a one year option to purchase our PMK 300 machine at a price to be negotiated in good faith.~~

Termination of Ferring Agreement

On December 21, 2009, we received notice from Ferring of its termination of the License and Development Agreement, dated September 27, 2004, by and between us and Ferring (“Agreement”)~~, effective~~ 30under ~~days~~Section ~~from~~9.04 of the ~~date~~Agreement, ofeffective ~~the~~January ~~notice~~21, 2010.

~~Pursuant to~~In ~~the~~July ~~Agreement~~2010, ~~upon~~we filed a ~~termination~~complaint byagainst Ferring entitled “Vyteris, Inc. v. Ferring Pharmaceuticals, Inc.” in the ~~following~~Superior ~~disposition~~Court of ~~intellectual~~ ~~property~~New ~~associated~~Jersey, Chancery Division – Essex County to resolve outstanding issues with ~~the~~respect ~~Agreement~~to ~~shall~~this ~~occur:~~termination.

a) all licenses and other rights granted to the Company shall, subject to the continued payment to Ferring of certain royalty payments under the Agreement, be converted to and continue as exclusive, worldwide irrevocable, perpetual, sub-licensable licenses to develop, make, have made, use, sell, offer to sell, lease, distribute, import and export the Product;

b) all licenses and other rights granted to Ferring under the Agreement shall be terminated as of the effective date of the termination,

c) Ferring shall grant to the Company an irrevocable, perpetual, exclusive, royalty-free, sub-licensable license to practice certain intellectual property jointly developed under the Agreement with respect to the iontophoretic administration of infertility hormone;

d) Ferring shall cease to use and shall assign to us all of its right, title and interest in and to all clinical, technical and other relevant reports, records, data, information and materials relating exclusively to the Product and all regulatory filings (including any NDA, 510(k) or similar regulatory filing) relating exclusively to the Product and provide to us one copy of each physical embodiment of the aforementioned items within thirty (30) days after such termination; and

e) Ferring shall cease to use any Know-How, Information or Materials arising under this Agreement to the extent such Know-How, Information or Materials is owned by Ferring shall promptly return to us all such materials.

We are currently evaluating the Agreement and its amendments to determine amounts owed to Ferring under the March 2009 financing arrangement, which we believe to be approximately $1.4 million, and resolution of Ferring’s liens on our assets. As per the Transaction Agreement with Ferring in March 2009, Ferring retains a first lien on our assets with respect to the amounts we owe to them. We are currently performing an assessment of the possibility of continued development of the Phase II product in compliance with the Agreement. The Company recognized approximately $1.9 million of revenue from Ferring related to the development agreement for the year ended December 31, 2009 and $2.8 million for the year ended December 31, 2008.

As a result of the agreement, the Company has no continuing obligations with respect to the Ferring license, and accordingly, the Company recognized any remaining deferred revenue from the $2.5 million and other milestone payments, which resulted in recognition of $2.6 million of license revenue for the year ended December 31, 2009, related to the cumulative licensing payments under the Ferring License and Development Agreement.

October 30, 2009 Private Placement

On October 30, 2009, we issued 3,000,000 shares of our common stock and 3,000,000 warrants to purchase its common stock to an investor for a purchase price of $0.6 million in a transaction exempt from registration under Section 4(2) of the Securities Act of 1933. The warrants are exercisable into shares of our common stock at an exercise price of $0.20 per share, and bear a term of five years from the date of closing. The warrants contain a cashless exercise provision and “full ratchet” anti-dilution provisions. We paid fees in the amount of $0.1 million and issued a total of 1,200,000 warrants allocated as follows: (i) 600,000 warrants representing 20% of the common stock issued to investors and (ii) 600,000 warrants representing 20% of the warrants issued to investors in connection with this private placement recorded as a reduction of equity as a cost of the transaction. All warrants issued contain terms identical to the terms of the warrants issued to the investors.

Proceeds from previously approved sale of State of New Jersey net operating tax losses

On December 23, 2009, we consummated a non-dilutive capital raise in the net amount of $2.1 million. The State of New Jersey approved the sale of our prior year’s state net operating tax losses and research tax credits through the New Jersey Economic Development Authority (NJEDA). The funding will be used for operations and capital expenditures in accordance with rules, regulations and stipulations set forth by the New Jersey program.

Senior subordinated convertible promissory notes, net of discount

In February 2010 and May 2010, we sold to accredited investors (“Investors”) in a private placement $1.1 million and $0.7 million, respectively, principal amount of Senior Subordinated Convertible Promissory Notes due 2013 (the “2010 Notes”). The 2010 Notes bear no interest and are convertible into our common stock at the option of the Investors anytime at an initial conversion price of $0.20 per share. The conversion price automatically reduces by 1.5% of the conversion price after each 90 day period that 2010 Notes are outstanding, and additionally, the conversion price resets in the event of a subsequent issuance of stock at a lower price than the then effective conversion price. In addition, the 2010 Notes automatically convert into our common stock if the closing bid price of our common stock equals or exceeds 300% of the conversion price for a period of twenty consecutive trading days.

In connection with the sale of the 2010 Notes, we also issued five-year warrants to purchase an aggregate of 5,300,000 shares with an exercise price of $0.20 per share and 3,625,000 shares of our common stock with an exercise price of $0.25 per share, respectively. In conjunction therewith, we provided customary “piggyback” registration rights for a 24-month period to the Investors with respect to the shares of common stock underlying the notes and warrants.

Subordinated convertible promissory notes, net of discount

On June 30, 2010, we consummated a private placement to accredited investors (“June Investors”) of $1.2 million principal amount of Subordinated Convertible Promissory Notes due September 30, 2010 (the “June 2010 Notes”). The sale of the June 2010 Notes also included issuance to Investors of five-year warrants to purchase an aggregate of 2,300,000 shares of our common stock with an exercise price of $0.25 per share. As of September 30, 2010, the Investors converted the June 2010 Notes into 5,836,250 shares of our common stock and 5,836,250 warrants to purchase our common stock with an exercise price of $0.25 per share.

Qualifying Therapeutic Discovery Project (QTDP) program

In November 2010, we were awarded two equal grants totaling $0.5 million under the IRS QTDP program. The grants will be used to advance our smart patch technology for the delivery of therapeutic medicines planned for use to treat female infertility and diabetes. The QTDP program was created by the U.S. Congress as part of the Patient Protection and Affordable Care Act passed on March 23, 2010. Eligibility for the grant requires that a project have the potential to develop new treatments that address "unmet medical needs" or chronic and acute diseases; reduce long-term health care costs; or represent a significant advance in finding a cure for cancer.

Cash Position

See “Liquidity and Capital Resources” under “Management’s Discussion and Analysis of Financial Condition ~~And~~and Results of Operations” for information on our cash position.

Amended Restructuring Agreement with Spencer Trask Specialty Group, LLC

On December 24, 2009, as part of our strategy to restructure our balance sheet, we entered into an Amendment to the Restructuring Agreement with Spencer Trask Specialty Group, LLC and certain affiliated entities (“STSG”).

The principal terms of the Amended Agreement are as follows:

1. The principal amount of all indebtedness and accrued and unpaid interest thereon and stated value of the Series B Preferred Stock owed by us to STSG in excess of $2.0 million ($2.0 million amount is defined as the “Remaining Debt”) which includes the January 2006 Promissory Note, the 2006 Promissory Notes, $0.9 million of Working Capital Facility were satisfied in full on December 24, 2009. STSG converted $20.3 million of indebtedness and accrued and unpaid interest and all issued and outstanding shares of Series B Preferred Stock into 50,777,015 shares our common stock at a conversion price of $0.40 per share

2. The Remaining Debt shall be evidenced by a promissory note (“2009 Promissory Note”) with interest accruing at the rate of 6% per year and with the same due date as the first debt security to expire pursuant to a Qualified Financing which is February 2, 2013. The 2009 Promissory Note is secured by a lien our assets, subordinate to the lien of any existing creditors that have a lien senior to that of STSG and to any liens resulting from a Qualified Financing.

3. On December 28, 2009, we paid to STSG $0.3 million to reduce the principal amount of the 2009 Promissory Note to $1.8 million as of December 31, 2009. Upon a Qualified Financing with gross proceeds in excess of $3.0 million, we shall make another prepayment of $0.5 million. Upon a Qualified Financing with gross proceeds in excess of $5.0 million, we shall make another prepayment of 50% of the net proceeds from any Qualified Financing in excess of such amounts.

Contractual Obligations and Other Commitments

Our contractual obligations and commitments at December 31, ~~2009~~2010 include obligations associated with capital and operating leases, manufacturing equipment, and employee agreements as set forth in the table below:

	At December 31, 2009
	At December 31, 2010
	Total		<Less than 1 ~~Year~~year		1-3 Years		3-5 Years		>Greater than 5 ~~Years~~years
Operating lease obligations	$	~~809~~402,~~668~~580	$	~~407~~321,~~088~~379	$	~~402~~81,~~580~~201	$	-	$	-
Manufacturing equipment		183,452		183,452		-		-		-
PMK 150 lease agreement		98,000		12,000		24,000		24,000		38,000
Insurance financing obligation		~~101~~103,~~224~~518		~~101~~103,~~224~~518		-		-		-
Distribution agreement		91,775		91,775		-		-		-
Debt obligations (1)		4,010,000		-		3,510,000		500,000		-
Debt obligations		2,250,000		-		1,750,000		-		500,000
Total	$	4,614,098	$	436,897	$	3,615,201	$	524,000	$	38,000
Advisory agreement		90,000		90,000		-		-		-
Total	$	3,526,119	$	873,539	$	2,152,580	$	-	$	500,000

We are required to pay Becton Dickinson a royalty in respect of sales of each iontophoresis product stemming from intellectual property received by us from Becton Dickinson as part of our formation. For each such product, on a country-by-country basis, that obligation continues for the later of 10 years after the date of the first commercial sale of such product in a country and the date of the original expiration of the last-to-expire patent related to such product granted in such country. The royalty, which is to be calculated semi-annually, will be equal to the greater of 5% of all direct revenues, as defined below, or 20% of all royalty revenues, with respect to the worldwide sales on a product-by-product basis. “Direct revenues” are the gross revenues actually received by us from the commercial sale of any iontophoresis product, including upfront payments, less amounts paid for taxes, duties, discounts, rebates, freight, shipping and handling charges or certain other expenses. “Royalty revenues” are the gross revenues actually received by us from any licensing or other fees directly relating to the licensing of any iontophoresis product, including upfront payments, less amounts paid for taxes, duties, discounts, rebates, freight, shipping and handling charges and certain other expenses. There was no accrued royalty in the consolidated balance sheet as of December 31, 2009.39

~~Subsequent Events~~(1) Debt obligations are summarized as follows:

On February 2, 2010, we consummated a private placement to accredited investors (“Investors”) of $1.1 million principal amount of Senior Subordinated Convertible Promissory Notes due 2013 (the “2010 Notes”). The 2010 Notes bear no interest and are convertible into our common stock at the option of the Investors at an initial conversion price of $0.20 per share. In addition, the 2010 Notes automatically convert into our common stock if the closing bid price of our common stock equals or exceeds 300% of the conversion price for a period of twenty consecutive trading days. The sale of the 2010 Notes also included issuance to Investors of five-year warrants to purchase an aggregate of 5,300,000 shares of our common stock with an exercise price of $0.20 per share. We received net proceeds of $0.9 million after payment of an aggregate of $0.2 million of commissions and expense allowance and other offering and related costs. We also issued to the finders warrants to purchase 2,120,000 shares of our common stock bearing substantially the same terms as the Investor warrants.

Lender	Face Amount		Due Date	Interest Rate			Description On Balance Sheet
Senior subordinated convertible promissory notes	$	1,035,000	February 2013		—		Senior subordinated convertible promissory notes, net of discount (see Note 7)
Promissory note due to a related party		1,750,000	February 2013		6	%	Promissory note due to a related party (see Note 6)
Senior subordinated convertible promissory notes		725,000	May 2013		—		Senior subordinated convertible promissory notes, net of discount (see Note 7)
Convertible notes payable		500,000	August 2014		6	%	Convertible note payable (see Note 13)
Total	$	4,010,000

4340

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

VYTERIS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm	45
Reports of Independent Registered Public Accounting Firms		42 - 43
Consolidated Balance Sheets as of December 31, 2009 and 2008	46
Consolidated Balance Sheets as of December 31, 2010 and 2009		44
Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007	47
Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008		45
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2009, 2008 and 2007	48
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2010, 2009 and 2008		46
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007	49
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008		47 - 48
Notes to Consolidated Financial Statements	51	49 - 72

4441

Report of Independent Registered Public Accounting Firm

We have audited the accompanying consolidated balance ~~sheets~~sheet of Vyteris, Inc. and Subsidiary as of December 31, ~~2009 and 2008~~2010, and the related ~~statements~~consolidated statement of operations, stockholders’ deficit, and cash flows for ~~each of~~ the ~~years in the three-~~year ~~period~~then ended ~~December 31, 2009~~. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our ~~audits~~audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vyteris, Inc. and Subsidiary at December 31, 2010, and the consolidated results of its operations and its cash flows for the year ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

As more fully described in Note 1, the Company has incurred recurring losses and is dependent upon obtaining sufficient additional financing to fund operations and has not been able to meet all of its obligations as they become due. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 1. The accompanying financial statements do not include any adjustments to reflect the possible future effects of the recoverability of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

	/s/ EisnerAmper LLP
Edison, New Jersey
April 15, 2011

Report of Independent Registered Public Accounting Firm

We have audited the accompanying consolidated balance sheet of Vyteris, Inc. and Subsidiary as of December 31, 2009, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years ended December 31, 2009 and 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vyteris, Inc. and Subsidiary at December 31, 2009 ~~and 2008~~, and the consolidated results of its operations and its cash flows for each of the years in the ~~three-~~two year period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As more fully described in Note 1, the Company has incurred recurring losses and is dependent upon obtaining sufficient additional financing to fund operations and has not been able to meet all of its obligations as they become due. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 1. These financial statements do not include any adjustments to reflect the possible future effects of the recoverability of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

/s/ Amper, Politziner & Mattia, LLP Edison, New Jersey March 24, 2010

~~Edison, New Jersey~~43

March 24, 2010

VYTERIS, INC.

CONSOLIDATED BALANCE SHEETS

	December 31,
	December 31, 2010			December 31, 2009
	2009			2008
ASSETS
Current assets:
Cash and cash equivalents	$	2402,~~173,039~~845		$	~~222~~2,~~821~~173,039
Other current assets		120,527			131,737
Other receivables		945,930			1,575
Restricted cash		—			16,245
Other current assets		123,831			118,952
Total current assets		21,~~293~~472,~~566~~606			~~370~~2,~~803~~293,566
Restricted cash, less current portion		—			108,000
Debt issuance costs, net		1,989,275			—
Property and equipment, net		~~114~~25,~~024~~497			~~298~~114,~~983~~024
Other assets		~~225~~287,~~356~~702			~~276~~225,~~026~~356
TOTAL ASSETS	$	23,~~632~~775,~~946~~080		$	12,~~053~~632,~~812~~946
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
LIABILITIES AND STOCKHOLDERS’ (DEFICIT)
Current liabilities:
Accounts payable	$	2,~~432~~188,~~976~~012		$	2,~~798~~432,~~923~~976
Senior secured convertible debentures due to Ferring		—			2,750,000
Fair value of derivative financial instruments		9,835,764			2,634,487
Accrued registration rights penalty		—			2,402,029
Accrued expenses and other		3,632,308			3,135,013
Interest payable and accrued expenses due to a related party		111,560			2,578,282
Interest payable, deferred revenue, and accrued expenses due to a related party		216,559			111,560
Revaluation of warrant liability		2,634,487			—
Total current liabilities		15,872,643			8,314,036
Accrued expenses, deferred revenue and other		3,135,013			1,379,724
Promissory note due to a related party		1,750,000			1,750,000
Total current liabilities		8,314,036			11,908,958
Senior subordinated convertible promissory notes, net of discount of $1,711,707		48,293			—
Promissory note due to a related party		1,750,000			—
Deferred revenue		721,237			821,237
Working capital facility due to a related party		—			2,850,000
Convertible note payable		500,000			500,000
Subordinated convertible notes due to a related party, net of discount		—			5,366,550
Total liabilities		18,892,173			11,385,273
Deferred revenue and other		821,237			28,605
Accrued facilities realignment costs, less current portion		—			2,099,758
Convertible note		500,000			—
Preferred stock, 3,333,333 shares authorized:
Series B convertible, mandatorily redeemable preferred stock; 500,000 shares issued and outstanding on December 31, 2008; liquidation preference $10,050,000 at December 31, 2008		—			10,050,000
Total liabilities		11,385,273			32,303,871
Commitments and contingencies
Stockholders’ equity (deficit):
Stockholders’ (deficit):
Common stock, par value $.015 per share; 400,000,000 and 33,333,333 shares authorized, at December 31, 2009 and December 31, 2008, respectively, 62,398,817 and 7,282,802 shares issued and outstanding at December 31, 2009 and December 31, 2008, respectively		935,982			109,242
Common stock, par value $0.015 per share; 400,000,000 shares authorized, at December 31, 2010 and December 31, 2009; 68,983,557 and 62,398,817 shares issued and outstanding at December 31, 2010 and December 31, 2009, respectively		1,034,753			935,982
Additional paid-in capital		~~204~~208,~~642~~726,~~912~~752			~~149~~204,~~031~~642,~~557~~912
Accumulated deficit		(~~214~~224,~~331~~878,~~221~~598	)		(~~180~~214,~~390~~331,~~858~~221	)
Total stockholders’ equity (deficit)		(8,752,327	)		(31,250,059	)
Total stockholders’ (deficit)		(15,117,093	)		(8,752,327	)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	2,632,946		$	1,053,812
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT)	$	3,775,080		$	2,632,946

The accompanying notes are an integral part of these consolidated financial statements.

4644

VYTERIS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Years Ended December 31,
	2009			2008			2007
	2010			2009			2008
Revenues:
Product development revenue	$	1102,~~913,080~~325		$	21,~~821~~913,~~098~~080		$	2,~~634~~821,~~540~~098
Licensing and other revenue		2,647,629			329,298			149,547
Licensing, product sales, and other revenue		15,467			2,647,629			329,298
Total revenues		4117,~~560,709~~792			34,~~150~~560,~~396~~709			23,~~784~~150,~~087~~396
Costs and expenses:
Cost of sales		—			~~103,490~~—			1103,490~~,847~~
Research and development		2,~~895~~615,~~691~~174			62,~~269~~895,~~636~~691			86,~~956~~269,~~962~~636
General and administrative including (credit) for reversal of performance – based stock option grants of ($6.1) million in 2008		24,~~796~~794,~~763~~135			~~(125~~2,~~155~~796,763	)		1550,~~369,243~~352
Sales and marketing		—			175,507			6,251,362
Facility realignment and impairment of fixed assets		—			177,831			2,565,434
Facility realignment and impairment of fixed assets		177,831			2,565,434			82,637
Non-cash warrant expense – financial consultants		—			—			81,592
Non-cash warrant expense – financial consultants		—			81,592			17,115,000
Registration rights penalty		—			215,988			260,897
Registration rights penalty		215,988			260,897			260,184
Total costs and expenses		7,409,309			6,086,273			9,331,401
Total costs and expenses		6,086,273			9,331,401			49,526,235
Loss from operations		(7,291,517	)		(1,525,564	)		(6,181,005	)
Loss from operations		(1,525,564	)		(6,181,005	)		(46,742,148	)
Interest (income) expense:
Interest income		(~~552~~1,623	)		(~~42,984~~552	)		(~~210~~42,~~359~~984	)
Interest expense to related parties		1,451,728			1,570,054			2,208,557
Interest expense		169,085			1,621,338			1,947,996
Interest expense		169,610			377,942			1,790,197
Non-cash interest expense for warrants issued		3,725,762			—			—
Interest expense, net		13,~~620~~893,~~786~~224			1,~~905~~620,~~012~~786			31,~~788~~905,~~395~~012
Other (income) expenses:
Gain on settlement of lease obligations		~~(1,953,977~~—	)		—(1,953,977	)		—
Gain on settlement of registration rights penalty		~~(1,385,017~~—	)		—(1,385,017	)		—
Non-cash debt extinguishment		~~35,909,507~~—			—35,909,507			~~6,724,523~~—
Non-cash modification of redeemable preferred stock terms		—			—			3,680,000
Qualified therapeutic research and development grant		(488,959	)		—			—
Revaluation of warrant liability		294,668			—			10,341,408
Increase in fair values of derivative financial instruments		273,567			294,668			—
Total other expenses		32,865,181			—			20,745,931
Total other (income) expenses		(215,392	)		32,865,181			—
Loss before benefit from state income taxes		(36,011,531	)		(8,086,017	)		(71,276,474	)
Loss before benefit from income taxes		(10,969,349	)		(36,011,531	)		(8,086,017	)
Sale of State of New Jersey net operating losses		2421,~~071,168~~972			612,~~777~~071,168			~~463~~61,~~786~~777
Net loss	$	(3310,~~940~~547,~~363~~377	)	$	(833,~~024~~940,~~240~~363	)	$	(708,~~812~~024,~~688~~240	)
Net loss per common share:
Basic and diluted	$	(30.7716	)	$	(13.1477	)	$	(131.2814	)
Weighted average number of common shares:
Basic and diluted		964,~~002~~392,~~816~~135			79,~~032~~002,~~288~~816			57,~~333~~032,~~834~~288

The accompanying notes are an integral part of these consolidated financial statements.

4745

VYTERIS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

	Common Stock				~~Additional Paid-in~~			~~Accumulated~~			~~Total Stockholders’~~
	Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Total Stockholders’ Equity (Deficit)
Balance at January 1, 2007		4,218,997	$	63,285	$	70,922,366		$	(101,553,930	)	$	(30,568,279	)
Balance at January 1, 2008		5,925,393	$	88,881	$	149,152,702		$	(172,366,618	)	$	(23,125,035	)
Non-cash stock-based compensation expense		–		–		8,166,739			–			8,166,739
Exercise of stock options		20,044		301		501,227			–			501,528
Issuance of restricted shares under outside director compensation plan		5,179		78		57,522			–			57,600
Issuance of common stock for capital raised		1,420,488		21,307		22,856,692			–			22,877,999
Disbursements related to issuance costs of common stock raise and warrants		–		–		(2,417,512	)		–			(2,417,512	)
Issuance of warrants associated with working capital facility		–		–		736,287			–			736,287
Issuance of common stock pursuant to conversion of senior secured convertible debentures		256,989		3,855		959,852			–			963,707
Transfer of warrant liability to equity upon shareholder approval of sufficient authorized shares		–		–		19,334,776			–			19,334,776
Cashless exercise of warrants		3,696		55		(55	)		–			–
Issuance of warrants to advisors		–		–		543,750			–			543,750
Issuance of warrants to financial consultants		–		–		17,115,000			–			17,115,000
Charge resulting from non-cash debt extinguishment, net of unamortized discount		–		–		6,696,058			–			6,696,058
Charge resulting from non-cash modification of redeemable preferred stock terms		–		–		3,680,000			–			3,680,000
Net loss		–		–		–			(70,812,688	)		(70,812,688	)
Balance at December 31, 2007		5,925,393		88,881		149,152,702			(172,366,618	)		(23,125,035	)
Non-cash stock based compensation expense (credits)		–		–		(4,051,359	)		–			(4,051,359	)
Issuance of common stock for capital raised, net		660,000		9,900		1,790,100			–			1,800,000
Exercise of warrants		611,895		9,178		1,826,505			–			1,835,683
Non-cash warrant expense – financial consultants		–		–		81,592			–			81,592
Issuance of warrants for services rendered		–		–		184,000			–			184,000
Issuance of common stock for services rendered		85,000		1,275		48,025			–			49,300
Adjustment to common stock related to reverse stock split		514		8		(8	)		–			–
Net loss		–		–		–			(8,024,240	)		(8,024,240	)
Balance at December 31, 2008		7,282,802		109,242		149,031,557			(180,390,858	)		(31,250,059	)
Non-cash stock based compensation expense, net		–		–		639,007			–			639,007
Issuance of common stock for services rendered		9,000		135		1,260			–			1,395
Issuance of common stock upon exercise of warrants issued for settlement with landlord		80,000		1,200		6,800			–			8,000
Issuance of warrants		–		–		154,200			–			154,200
Issuance of common stock for capital raised, net		3,000,000		45,000		477,000			–			522,000
Issuance of common stock and warrants upon settlement of registration rights penalty		1,250,000		18,750		1,214,250			–			1,233,000
Issuance of common stock pursuant to conversion of senior secured convertible debentures and preferred stock due to a related party		50,777,015		761,655		19,549,151			–			20,310,806
Reclassification of the fair value of warrants from an equity instrument to a liability instrument		–		–		(2,339,820	)		–			(2,339,820	)
Fair value of warrants upon classification from an equity instrument to a liability instrument issued in 2009		–		–		(2,339,820	)		–			(2,339,820	)
Charge resulting from non-cash debt extinguishment		–		–		35,909,507			–			35,909,507
Net loss		–		–		–			(33,940,363	)		(33,940,363	)
Balance at December 31, 2009		62,398,817	$	935,982	$	204,642,912		$	(214,331,221	)	$	(8,752,327	)
Non-cash stock based compensation expense		–		–		2,303,700			–			2,303,700
Issuance of common stock for services rendered		619,654		9,295		316,315			–			325,610
Issuance of common stock upon conversion of convertible debt		5,965,086		89,476		1,102,915			–			1,192,391
Issuance of warrants for services rendered		–		–		342,400			–			342,400
Other issuance of warrants		–		–		18,510			–			18,510
Net loss		–		–		–			(10,547,377	)		(10,547,377	)
Balance at December 31, 2010		68,983,557	$	1,034,753	$	208,726,752		$	(224,878,598	)	$	(15,117,093	)

The accompanying notes are an integral part of these consolidated financial statements.

4846

VYTERIS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2009			2008			2007
	2010			2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(3310,~~940~~547,~~363~~377	)	$	(833,~~024~~940,~~240~~363	)	$	(708,~~812~~024,~~688~~240	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		~~175~~88,~~421~~526			~~286~~175,~~300~~421			~~386~~286,~~865~~300
Stock based compensation charges		639,007			(4,051,359	)		8,166,739
Gain on settlement of lease obligations		-			(1,953,977	)		-
Amortization of senior secured convertible debentures discount		—			—			753,659
Non-cash debt extinguishment		-			35,909,507			-
Gain on settlement of lease obligations		(1,953,977	)		—			—
Inventory reserves		-			-			94,890
Amortization of discount on senior secured promissory note		—			231,403			231,547
Impairment of fixed assets and accrued facilities realignment costs		-			-			2,565,434
Gain on settlement of registration rights penalty		~~(1,385,017~~-	)		—(1,385,017	)		—-
Accrued registration rights penalty		~~215,988~~-			~~260~~215,~~897~~988			260,~~184~~897
Non-cash warrant expense – financial consultants		—			81,592			17,115,000
Amortization of long term gain on sale of manufacturing machine		(100,000	)		-			-
Non-cash debt extinguishment		35,909,507			—			6,724,523
Stock based compensation		2,303,700			639,007			(4,051,359	)
Non-cash modification of redeemable preferred stock		—			—			3,680,000
Issuance of common stock for services rendered		325,610			-			-
Inventory reserves		—			94,890			1,431,411
Issuance of common stock warrants for services rendered		342,400			-			184,000
Impairment of fixed assets and accrued facilities realignment costs		—			2,565,434			82,638
Non-cash warrant expense		-			-			81,592
Revaluation of warrant liability		294,668			—			10,341,408
Issuance of warrants related to promissory notes		(27,865	)		-			-
Warrants issued for working capital facility		—			—			736,287
Amortization of discount on promissory notes		48,293			-			231,403
Issuance of warrants to advisor and other service providers		—			184,000			543,750
Amortization of deferred offering related to promissory notes		51,429			-			-
Other		227,689			(209,851	)		(60,745	)
Write-off of deferred offering costs upon conversion of promissory notes		3,590,139			-			-
Increase (decrease) in fair value of derivative financial instruments		273,567			294,668			-
Other		35,901			227,689			(209,851	)
Change in operating assets and liabilities:
Accounts receivable		2(944,~~559~~355	)		42,~~698~~559			814,~~474~~698
Inventory		—			(94,890	)		(1,428,037	)
Inventory and other		-			-			(94,890	)
Prepaid expenses and other assets		59(67,~~320~~225	)		~~117~~59,~~341~~320			65117,~~165~~341
Accounts payable		(~~225~~244,964	)		~~901~~(225,~~564~~964	)		~~(941~~901,~~600~~564	)
Accrued expenses and other liabilities		2439,~~008,587~~991			(12,~~257~~008,~~940~~587	)		(~~425~~1,~~464~~257,940	)
Recognition of deferred revenue		(232,~~625,783~~352	)		—(2,625,783	)		—-
Interest payable and accrued expenses to related parties		1,577,534			1,356,763			1,488,242
Interest payable and accrued expenses		194,655			1,577,534			1,356,763
Net cash provided by (used in) operating activities		979,176			(7,553,398	)		(21,579,642	)
Net cash (used in) provided by operating activities	$	(4,269,927	)	$	979,176		$	(7,553,398	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Changes in restricted cash, net		—			166,182			100,566
Changes in restricted cash		-			-			166,182
Proceeds from the sale of property and equipment		~~124,245~~-			9124,~~800~~245			—9,800
Purchase of equipment		~~(1,926~~-	)		(41,~~695~~926	)		(~~222~~4,~~200~~695	)
Net cash provided by (used in) investing activities		122,319			171,287			(121,634	)
Net proceeds from sale of manufacturing equipment		-			568,723			-
Net cash provided by investing activities	$	-		$	691,042		$	171,287
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from placement of common stock and warrants		~~522,000~~-			1522,~~800,~~000			201,~~530~~800,~~759~~000
Proceeds from exercise of options and warrants		~~8,000~~-			18,~~835,683~~000			~~501~~1,~~528~~835,683
Net proceeds from issuance of secured promissory notes to a related party		—			—			350,000
Net proceeds from convertible promissory notes		-			-			2,750,000
Net proceeds from senior secured convertible debentures- Ferring		—			2,750,000			—
Issuance of Senior subordinated convertible promissory note		1,785,000			-			-
Repayment of senior secured convertible promissory note		(250,000	)		(475,000	)		—
Issuance of subordinated convertible promissory note		1,150,000			-			-
Net proceeds from sale of manufacturing equipment		568,723			—			—
Repayment of senior secured convertible promissory note		-			(250,000	)		(475,000	)
Other		—			(22,422	)		(136,046	)
Fees related to the issuance of promissory notes		(435,267	)		-			-
Net cash provided by financing activities		848,723			5,888,261			21,246,241
Other		-			-			(22,422	)
Net increase (decrease) increase in cash and cash equivalents		1,950,218			(1,493,850	)		(455,035	)
Net cash provided by financing activities	$	2,499,733		$	280,000		$	5,888,261
Cash and cash equivalents at beginning of the year		222,821			1,716,671			2,171,706
Net (decrease) increase in cash and cash equivalents		(1,770,194	)		1,950,218			(1,493,850	)
Cash and cash equivalents at end of the year	$	2,173,039		$	222,821		$	1,716,671
Cash and cash equivalents at beginning of the year		2,173,039			222,821			1,716,671
Cash and cash equivalents at end of the year	$	402,845		$	2,173,039		$	222,821

~~The accompanying notes are an integral part of these consolidated financial statements.~~47

VYTERIS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)

	Years Ended December 31,
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:	2009		2008		2007
	2010		2009		2008
Interest paid	$	181,559	$	51,859	$	38,346
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Issuance of warrants in connection with private placements of common stock		—		4,761,000		15,154,645
Interest paid	$	2,291	$	181,559	$	51,859
Conversion of senior secured convertible debentures into common stock		—		—		963,707
Issuance of warrants in connection with private placements of common stock		—		—		4,761,000
Reclassification of the fair value of warrants from an equity instrument to a liability instrument		~~2,339,820~~—		—2,339,820		~~19,334,776~~—
Issuance of warrants		~~154,200~~—		—154,200		—
Settlement of registration rights penalty upon issuance of common stock and warrants to shareholders		~~1,233,000~~—		—1,233,000		—
Conversion of senior secured convertible debentures and preferred stock due to a related party		20,310,806		—		—
Issuance of common stock upon conversion of interest on convertible debt		17,392		—		—
Cashless exercise of warrants for common stock	$	—	$	—	$	55
Issuance of common stock upon conversion of convertible debt		1,192,392		—		—
Warrants issued to investment finders included in debt issuance costs		1,954,831		—		—
Conversion of senior secured convertible debentures and preferred stock due to a related party	$	—	$	20,310,806	$	—

The accompanying notes are an integral part of these consolidated financial statements.

5048

VYTERIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. ~~Organization~~ Business, ~~and~~ Basis of Presentation , and Going Concern ~~Uncertainty~~

Basis of presentation

The accompanying consolidated financial statements have been prepared assuming that ~~Vyteris,~~ ~~Inc. (formerly~~ Vyteris ~~Holdings (Nevada)~~, Inc.), (the terms “Vyteris” and the “Company” refer to each of Vyteris, Inc. (incorporated in the State of Nevada), its subsidiary, Vyteris, Inc. (incorporated in the State of Delaware) and the consolidated ~~company~~entity) will continue as a going concern (see discussion below).

~~In December~~Spencer ~~2009,~~Trask ~~the~~Specialty ~~Company~~Group ~~converted~~and ~~$20.3~~affiliates ~~million~~(collectively, “STSG”) owns approximately 73.4% of ~~secured~~the ~~indebtedness~~issued and ~~preferred~~ ~~stock~~outstanding ~~into~~ common stock of the Company, as ~~well~~of asDecember ~~received~~31, ~~a net cash payment of $2~~2010.1 ~~million~~Due ~~from~~to ~~the~~this ~~sale~~majority oflevel ~~the Company’s State~~ of ~~New~~stock ~~Jersey net operating losses. In February 2010~~ownership, the Company ~~raised~~is ~~over $1.1 million~~controlled ~~through~~by ~~the~~STSG ~~sale~~and ofis ~~senior~~deemed ~~secured~~a ~~convertible debentures~~“controlled corporation”. ~~Nonetheless,~~ ~~subsequent~~STSG ~~financings~~may ~~will~~influence ~~be required to fund~~ the Company’s ~~operations,~~to ~~fund~~take ~~research~~actions ~~and~~that ~~development~~conflict ~~for~~with ~~new~~the ~~products, repay~~interests ~~past~~of ~~due~~other ~~payables and pay debt service requirements~~shareholders.

As a result of the conversion of $20.3 million of secured indebtedness and preferred stock into common stock of the Company, Spencer Trask Specialty Group and Affiliates (“STSG”) owned 84.8% of the issued and outstanding common stock of the Company as of December 31, 2009. Due to this stock ownership, the Company is controlled by STSG and is deemed a “controlled corporation”. STSG may influence the Company to take actions that conflict with the interests of other shareholders. In December 2009, Ferring Pharmaceuticals, Inc., “(Ferring”), discontinued its collaborative effort with the Company for their joint infertility project. The Company is currently assessing its ownership rights in and the feasibility of continuing this project on its own.

On December 21, 2009, the Company received notice from Ferring, of its termination of the License and Development Agreement, dated September 30, 2004. Ferring was the Company’s sole source of revenues in 2009 and 2008, and the Company was dependent on receipt of reimbursement of product development costs under this agreement. In 2009, the Company received reimbursement of product development costs under this agreement of $3.3 million and was able to raise approximately $2.1 million in capital through the sale of its State of New Jersey net operating losses and the sale of $0.6 million of its common stock. The Company continues to seek both capital and other revenue sources; however, the Company cannot predict when and if it will be able to raise such capital and derive such revenue sources, and if it does, the amounts and terms of such financings and revenues.

No assurance can be given that the Company will be successful in procuring the further financing needed to continue the execution of its business plan, which includes the development of new products. Failure to obtain such financing will require management to substantially curtail, if not cease, operations, which will result in a material adverse effect on the financial position and results of operations of the Company. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might occur if the Company is unable to continue in business as a going concern.

Intercompany balances and transactions have been eliminated in consolidation.

Business

The Company developed and produced the first FDA-approved electronically controlled transdermal drug delivery system that delivers drugs through the skin comfortably, without needles. This platform technology can potentially be used to administer a wide variety of therapeutics either directly into the skin or into the bloodstream. There are no products being currently sold using this iontophoretic technology. The Company holds U.S. and foreign patents relating to the delivery of drugs across the skin using an electronically controlled “smart patch” device with electric current. The Company ~~has discontinued activity with respect to its LidoSite product, although it~~ is ~~still seeking a buyer or joint venture partner for the product. Given the termination of the Ferring agreement, none of the Company products are~~ currently ~~in collaborative development; however, the Company is currently~~ seeking collaborative partners for several of its projects.

51Merger Agreement

In September 2010 our Board of Directors approved an Agreement and Plan of Merger (the “Merger Agreement”) by and among MediSync BioServices, Inc., a Delaware corporation (“MediSync”), Vyteris and a newly created, wholly owned, subsidiary of the Company (“Merger Sub“), pursuant to which the Merger Sub will be merged with and into MediSync, with MediSync continuing as the surviving corporation and a wholly-owned subsidiary of Vyteris (the “Merger”). As of November 2010, the Company had received requisite shareholder approval to consummate the Merger, subsequently the Merger Agreement expired by its terms in January 2011. A new Merger Agreement has been entered into as of April 1, 2011, with terms substantially similar to the expired agreement. The terms of the Merger Agreement are set forth in Note 16. MediSync is in the business of consolidating preclinical and contract research organizations (“CROs”) and related businesses, including site management organizations (“SMOs”), which sub-contract clinical trial-related responsibilities from a CRO or pharmaceutical/biotechnology company, and post marketing surveillance companies, which monitor pharmaceutical drugs and devices after release into the market. MediSync believes that its future operations may provide added value to the pharmaceutical and biotechnology industries as a valuable outsource service to them. The CRO business model is expected to provide cash flow which can assist in funding operations while the Company continues to develop its drug delivery technologies. It will also provide operational synergies as two business operations are combined in one infrastructure creating efficiencies in administrative functions as well as other areas. There can be no assurance that this transaction will be completed or that the Company will be able to execute the business plan.

After the merger, the Company will have two operating business segments – CRO business and transdermal drug delivery technology.

Liquidity and Going Concern

In February and May 2010, the Company raised $1.8 million through the sale of senior subordinated convertible promissory notes (see Note 7), and in June 2010 the Company raised $1.2 million through the sale of short term subordinated convertible promissory notes (see Note 8). Conversely, the Company owes or third parties claim it owes approximately $6.0 million in liabilities which are due in the 2011 calendar year, as well as the alleged approximate $1.4 million to Ferring. Additionally, subsequent financings will be required to fund the Company’s operations, fund research and development for new products, repay past due payables and pay debt service requirements.

VYTERIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company does not currently have sufficient funds to operate its business and this raises substantial doubt as to its ability to continue as a going concern. No assurance can be given that the Company will be successful in procuring the further financing needed to continue the execution of its business plan, which includes the acquisition of target companies for its CRO business and development of new products. The Company engaged two investment bankers in the first quarter of 2011 to assist in raising capital needed to complete its business plan (see Bridge Financing in NOTE 19 - Subsequent Events). Failure to obtain such financing will require management to substantially curtail, if not cease, operations, which will result in a material adverse effect on the financial position and results of operations of the Company. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might occur if the Company is unable to continue in business as a going concern.

2.	Significant Accounting Policies

The Financial Accounting Standards Board (FASB) made the Accounting Standards Codification (ASC) effective for financial statements issued for interim and annual periods ended after September 15, 2009. The ASC combines all previously issued authoritative generally accepted accounting principles (“GAAP”) into one set of guidance codified by subject area. Subsequent revisions to GAAP by the FASB are incorporated into the ASC through issuance of Accounting Standards Updates (ASU).

Cash equivalents

The Company considers all highly liquid instruments with original maturities of three months or less at the date of purchase to be cash equivalents.

~~Accounts receivable~~Other receivables

~~Accounts receivable~~Other receivables are non-trade monies owed to the Company which are unsecured and non-interest bearing, and are recorded at net realizable value. The Company establishes an allowance for doubtful accounts based upon factors pertaining to the credit risk of specific customers, historical trends and other information. Delinquent accounts are written-off when it is determined that the amounts are uncollectible.

~~Inventories~~Fair value of financial instruments

~~Inventories are~~Cash ~~stated~~and atcash equivalents, other receivables, accounts payable, accrued expenses and other liabilities reported in the ~~lower~~consolidated ofbalance ~~cost~~sheets equal or ~~market.~~approximate ~~Cost~~their isfair ~~determined~~value ~~using~~due ~~the first-in,~~to ~~first-out~~their ~~method~~short term to maturity.

The Company assesses the valuation of its inventory on a quarterly basis to provide an allowance for the value of estimated excess and obsolete inventory. The key factors in the inventory review process are the historical rates for raw material and fabricated patch meeting the Company’s product specification acceptance criteria and anticipated demand for its product. Increases in the allowance for excess and obsolete inventory result in a corresponding increase to cost of sales.

Property and equipment, net

Property and equipment, net is stated at cost. Depreciation and amortization of property and equipment is provided on a straight-line basis over the asset’s estimated useful life or related lease term as follows:

Manufacturing and laboratory equipment	5 years
Furniture and fixtures	5 years
Office equipment	3 years
Leasehold improvements	4 – 10 years
Software	3 years

Equipment held under capital leases is recorded at the present value of the minimum lease payments at the inception of the lease and is amortized on the straight-line method over the shorter of the lease term or the estimated useful life of the equipment. Amortization of equipment held under capital leases is included in depreciation and amortization expense in the accompanying consolidated financial statements. Leasehold improvements are amortized over the estimated useful life or over the term of the lease, whichever is shorter. Replacements, maintenance and repairs that do not improve or extend the life of the respective asset are expensed as incurred.

~~Revenues~~50

Product sales. The Company recognizes product revenue, net of allowances for anticipated returns, provided that (1) persuasive evidence of an arrangement exists, (2) delivery to the customer has occurred, (3) the selling price is fixed or determinable and (4) collection is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. The price is considered fixed or determinable when it is not subject to refund or adjustments. The Company’s standard shipping terms is freight on board (F.O.B.) shipping point. The Company provides a reserve for sales and returns allowances based upon estimated results, at the time of shipment.

Product development revenue. In accordance with ASC 605-45-15 (formerly EITF No. 01-14, Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred), the Company recognize revenues for the reimbursement of development costs when it bears all the risk for selection of and payment to vendors and employees. Costs associated with such activities are included in research and development expenses on the consolidated statements of operations.

VYTERIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~Licensing~~ Revenue. The Company uses revenue recognition criteria outlined in ASC 605-25 (formerly SAB No. 104, Revenue Recognition in Financial Statements, and Emerging Issues Task Force, EITF, Issue 00-21 Revenue Arrangements with Multiple Deliverables). Accordingly, revenues from licensing agreements are recognized based on the performance requirements of the agreement. Non-refundable up-front fees, where the Company has an ongoing involvement or performance obligation, are generally recorded as deferred revenue in the balance sheet and amortized into license fees in the consolidated statement of operations over the term of the performance obligation.

Licensing revenue: The Company uses revenue recognition criteria outlined in ASC 605-25 (formerly SAB No. 104, Revenue Recognition in Financial Statements, and Emerging Issues Task Force, EITF, Issue 00-21 Revenue Arrangements with Multiple Deliverables). Accordingly, revenues from licensing agreements are recognized based on the performance requirements of the agreement. Non-refundable up-front fees, where the Company has an ongoing involvement or performance obligation, are generally recorded as deferred revenue in the balance sheet and amortized into license fees in the consolidated statement of operations over the term of the performance obligation.

Stock Based Compensation

The Company accounts for its stock based employee compensation plans under ASC 718~~-10~~ and ASC 505-50 ~~(formerly SFAS No~~. ~~123 (revised 2004), "Shared-Based Payment").~~ ASC 718-10 and ASC 505-50 address the accounting for shared based payment transactions in which an enterprise receives employee services for equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. ASC 718-10 and ASC 505-50 require that such transactions be accounted for using a fair value based method.

In considering the fair value of the underlying stock when the Company grants options or restricted stock, the Company considers several factors including the fair values established by market transactions. Stock-based compensation includes significant estimates and judgments of when stock options might be exercised, forfeiture rates and stock price volatility. The timing of option exercises is out of the Company’s control and depends upon a number of factors including the Company’s market value and the financial objectives of the holders of the options. These estimates can have a material impact on the Company’s stock compensation expense but will have no impact on the Company’s cash flows.

The Company accounts for equity awards issued to non-employees in accordance with ASC Topic 505-50 (formerly EITF No. 96-18 “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with, Selling Goods or Services.”) ASC 505-~~50 requires~~50requires the Company to measure the fair value of the equity instrument using the stock prices and other measurement assumptions as of the earlier of either the date at which a performance commitment by the counterparty is reached or the date at which the counterparty's performance is complete.

Income taxes

The Company ~~accounts~~records ~~for~~deferred ~~income~~tax ~~taxes~~assets asand ~~codified~~liabilities inbased ~~ASC~~on ~~740-10-05~~the ~~(formerly~~differences ~~SFAS 109,~~between ~~“Accounting~~the ~~for~~book ~~Income~~and ~~Taxes”~~tax ~~and~~bases ~~FASB~~of ~~Interpretation~~assets ~~No.~~and ~~48,~~liabilities ~~“Accounting for~~and ~~Uncertainty~~on inoperating ~~Income~~loss ~~Taxes,”~~carryforwards anusing ~~interpretation~~enacted oftax ~~SFAS No. 109, “Accounting~~rates ~~for~~in ~~Income~~effect ~~Taxes”).~~for ~~Deferred~~the ~~tax~~year ~~assets~~in orwhich ~~liabilities~~the differences are ~~recorded~~ expected to ~~reflect~~reverse. ~~the~~A ~~future~~valuation ~~tax~~allowance ~~consequences~~is ofprovided ~~temporary~~when ~~differences~~it ~~between~~is ~~the financial~~more ~~reporting~~likely ~~basis~~than ofnot ~~assets~~that ~~and~~some ~~liabilities~~portion ~~and~~or ~~their~~all of a deferred tax ~~basis~~asset atwill ~~each year-end.~~not be realized. These amounts are adjusted, as appropriate, to reflect enacted changes in tax rates expected to be in effect when the temporary differences reverse.

The Company ~~records~~follows ~~deferred~~ASC ~~tax~~740 ~~assets~~when ~~and~~accounting ~~liabilities~~for ~~based~~tax oncontingencies. ~~the~~The ~~differences between~~guidance ~~the~~prescribes ~~financial~~a ~~statement~~comprehensive ~~and~~model ~~tax~~for ~~bases~~how ofcompanies ~~assets~~should ~~and~~recognize, ~~liabilities~~measure, present, and ~~on operating~~disclose ~~loss~~in ~~carryforwards~~their ~~using~~financial ~~enacted~~statements uncertain tax ~~rates~~positions intaken ~~effect~~or ~~for~~expected ~~the~~to ~~year~~be ~~in which~~taken ~~the~~on ~~differences~~a tax return. Under GAAP, tax benefits are ~~expected~~initially torecognized ~~reverse.~~in Athe ~~valuation~~consolidated ~~allowance~~financial isstatements ~~provided~~ when it is more likely than not ~~that~~the ~~some~~position ~~portion~~will orbe ~~all~~sustained ofupon aexamination ~~deferred~~by the tax ~~asset will~~authorities. ~~not~~Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

Research and Development

Research and development costs are charged to expense as incurred.

~~Use of Estimates~~51

The Company’s consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, which require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the revenues and expenses reported during the period. These estimates and assumptions are based on management’s judgment and available information and, consequently, actual results could differ from these estimates.

VYTERIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Use of Estimates

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the revenues and expenses reported during the period. These estimates and assumptions are based on management’s judgment and available information and, consequently, actual results could differ from these estimates.

Net loss per share

The Company computes net loss per share in accordance with ASC 26-10 ~~(formerly SFAS No~~. ~~128, “Earnings per Share”).~~ Under the provisions of ASC 26-10, basic net loss per common share, or basic EPS, is computed by dividing net loss by the weighted-average number of common shares outstanding. Diluted net loss per common share, or diluted EPS, is ~~computing~~computed by dividing net loss by the weighted average number of shares and net of dilutive common share equivalents then outstanding. Common equivalent shares consist of the incremental common shares issuable upon the exercise of stock options and warrants and the conversion of preferred stock and debentures. For all years presented on the consolidated statement of operations, diluted EPS is identical to basic EPS since common equivalent shares are excluded from the calculation, as their effect is anti-dilutive due to net losses for the years ended December 31, 2010, 2009, ~~2008,~~ and ~~2007~~2008. For the years ended December 31, ~~2009~~2010, ~~2008~~2009 and ~~2007~~2008, respectively, common stock equivalents of 59,987,208, 13,580,978, and 7,353,348, ~~and 5,391,769~~ were excluded from the net loss per common share calculation because the effect of their inclusion would be anti-dilutive (see Note 17).

Long-lived assets

The Company reviews long-lived assets, including fixed assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Impairment, if any, is assessed using discounted cash flows.

Financial instruments

Cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities reported in the consolidated balance sheets equal or approximate their fair value due to their short term to maturity.

Debt instruments, offering cost and the associated features and instruments contained therein

Deferred financing costs are amortized over the term of its associated debt instrument. The Company evaluates the terms of the debt instruments to determine if any embedded derivatives or beneficial conversion features exist. The Company allocates the aggregate proceeds of the debt instrument between the warrants and the debt based on their relative fair values as codified in ASC 470-20-25 (formerly Accounting Principle Board No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”) The fair value of the warrants issued to debt holders or placement agents are calculated utilizing the Black-Scholes-Merton option-pricing model. The Company amortizes the resultant discount or other features over the terms of the debt through its earliest maturity date using the effective interest method. Under this method, the interest expense recognized each period will increase significantly as the instrument approaches its maturity date. If the maturity of the debt is accelerated because of defaults or conversions, then the amortization is accelerated. The Company’s debt instruments do not contain any embedded derivatives at December 31, 2009.

Concentrations of credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and ~~accounts receivable~~receivables. The Company deposits its cash and cash equivalents with major financial institutions. Management believes that credit risk related to these deposits is minimal. Concentrations of credit risk ~~in the Company’s account receivables~~ are substantially mitigated by the Company’s credit evaluation process. The Company analyzes the customer’s credit worthiness and current economic trends when evaluating a customer’s credit risk.

Risk and uncertainties

The ~~Company~~ purchases some raw materials and components from single-source suppliers. Some of those materials or components are custom-made and are the result of long periods of collaboration with suppliers. Although the Company ~~has not~~is ~~experienced~~embarking ~~significant~~on ~~supply~~a ~~delays~~new ~~attributable~~business toplan ~~supply~~resulting ~~changes,~~from the ~~Company~~ ~~believes~~impending ~~that,~~MediSync ~~for electrode subcomponents and hydrogel in particular, alternative sources of supply would be difficult to develop over a short period of time~~merger. The ~~Because the~~ Company has no ~~direct~~experience ~~control~~in ~~over~~consolidating ~~its~~businesses ~~third-party suppliers, interruptions~~ or ~~delays~~ in the ~~products~~contract ~~and~~research ~~services~~organization ~~provided~~space. The ~~by these~~Company ~~third parties~~ may be ~~difficult~~unable to ~~remedy~~successfully incombine athe ~~timely~~businesses ~~fashion. In addition, if such suppliers are unable~~ or ~~unwilling~~obtain ~~to deliver~~ the necessary ~~parts~~experience ~~or products, the Company may be unable~~ to ~~redesign~~compete oreffectively ~~adapt~~in ~~its~~the ~~technology~~contract toresearch ~~work without~~organization ~~such~~industry. The ~~parts~~Company orcurrently ~~find~~has ~~alternative~~no ~~suppliers~~partnering orarrangements ~~manufacturers.~~with Inits ~~such events,~~transdermal ~~the~~technologies ~~Company~~which ~~could~~are ~~experience~~generating ~~interruptions,~~material ~~delays, increased costs, or quality control problems~~revenues.

54No assurance can be given that the Company will be successful in procuring the further financing and collaborative partners needed to continue the execution of its business plan, which includes the acquisition of target companies for its CRO business and development of new products. The CRO business model is expected to provide cash flow which can assist in funding operations for the Company while it continues to develop our drug delivery technologies, of which operations were reduced due to our lack of funding and other factors. Failure to obtain such financing will require management to substantially curtail, if not cease, operations, which will result in a material adverse effect on the financial position and results of operations of the Company.

VYTERIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Debt instruments, offering costs and the associated features and instruments contained therein

Deferred issuance costs are amortized over the term of their associated debt instruments.

The Company evaluates the terms of the debt instruments to determine if any embedded derivatives or beneficial conversion features exist. The Company allocated the aggregate proceeds of the debt instrument between the warrants and the debt based on their relative fair values as codified in ASC 470. The fair value of the warrants issued to debt holders or placement agents are calculated utilizing the Black-Scholes-Merton or probability weighted binomial method depending on the terms of the warrant agreements. The Company amortizes the resultant discount or other features over the terms of the debt through its earliest maturity date using the effective interest method. Under this method, the interest expense recognized each period will increase significantly as the instrument approaches its maturity date. If the maturity of the debt is accelerated because of defaults or conversions, then the amortization is accelerated.

Fair Value Measurements

The Company measures fair value in accordance with Statement ASC 820, Fair Value Measurements (“ASC 820”). ASC 820 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, there exists a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

• Level 1 - unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.

• Level 2 - inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.

• Level 3 - unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value

Derivative Financial Instruments

Derivatives are recognized at fair value as required by ASC 815 “Derivatives and Hedging” (“ASC 815”). ASC 815 affects the accounting for warrants and many convertible instruments with provisions that protect holders from a decline in the stock price (or “down-round” provisions). For example, warrants with such provisions will no longer be recorded in equity. Down-round provisions reduce the exercise price of a warrant or convertible instrument if a company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price. The Company evaluated whether its warrants contain provisions that protect holders from declines in its stock price or otherwise could result in modification of either the exercise price or the shares to be issued under the respective warrant agreements. The Company determined that a portion of its outstanding warrants contained such provisions thereby concluding they were not indexed to the Company’s own stock.

At December 31, 2010, the Company has recorded the fair value (Level 3) of the derivative liabilities of $9.8 million, which consists of two components (see Note 18):

• the fair value of the warrant liability amounted to $6.5 million based on a binomial pricing model of weighted average probabilities of potential down-round scenarios for our securities using similar assumptions as noted in Note 14 of the Company’s consolidated financial statements for the year ended December 31, 2010 for the valuation of stock options, except that the value of the underlying common stock has been reduced by 20% to reflect a “lack of marketability” discount arising since the underlying shares issuable upon exercise of the warrant are restricted from resale under Section 5 of the Securities Act of 1933 and subject to legend removal under Rule 144 promulgated under the Securities Act of 1933; and

VYTERIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

• the fair value of the convertible debt conversion feature amounted to $3.3 million utilizing a level 3 market value based on pricing methodologies used to determine conversion features, which includes determining the fair value of the Company’s stock as of December 31, 2010. Since the shares underlying the convertible debt may be subject to legend removal under Rule 144 by “tacking back” to the date of the original note issuance, it is not appropriate to apply a “lack of marketability” discount to the quoted stock price at the end of the measurement period.

Recently issued accounting standards

In ~~December~~ ~~2007~~January 2010, ~~ASC~~the ~~808-10~~FASB ~~(formerly~~issued ~~EITF~~guidance ~~Issue~~to Noamend the disclosure requirements related to recurring and nonrecurring fair value measurements. The ~~07-~~guidance requires new disclosures on the transfers of assets and liabilities between Level 1, ~~“Accounting~~(quoted prices in active market for ~~Collaborative~~ ~~Arrangements”~~identical assets or liabilities) ~~was~~and ~~issued. ASC~~Level ~~808-10~~2 ~~provides~~(significant ~~guidance concerning:~~other ~~determining~~observable ~~whether~~inputs) anof ~~arrangement~~the ~~constitutes~~fair avalue ~~collaborative arrangement~~measurement ~~within~~hierarchy, including the ~~scope~~reasons and the timing of the ~~Issue;~~transfers. Additionally, ~~how~~the ~~costs~~guidance ~~incurred~~requires ~~and~~a ~~revenue generated~~roll forward of activities on purchases, sales, toissuance, ~~third~~and ~~parties~~settlements ~~should~~of bethe ~~reported~~assets inand liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for us with the ~~income~~reporting ~~statement; how~~period anbeginning ~~entity~~January 1, ~~should~~2010, ~~characterize~~except ~~payments~~for the disclosure on the ~~income~~roll ~~statement;~~forward ~~and~~activities ~~what participants~~for ~~should~~Level ~~disclose~~3 infair ~~the~~value ~~notes~~measurements, towhich will become effective for us with the ~~financial~~reporting ~~statements~~period ~~about~~beginning ~~a collaborative~~January ~~arrangement~~1, 2011. ~~The~~Other ~~provisions~~than ofrequiring ~~ASC~~additional ~~808-10~~disclosures, ~~have~~adoption ~~been~~of ~~adopted~~this ~~in 2009.~~new ~~ASC~~guidance ~~808-10~~did ~~has~~not ~~had~~have noa material impact on the Company’s consolidated financial statements.

In ~~September~~ ~~2006~~February 2010, the FASB issued ~~ASC~~ASU ~~820~~2010-1009 ~~(formerly~~“Subsequent ~~FASB~~Event ~~Statement~~(Topic ~~157, “Fair Value Measurements”~~855). ~~ASC~~Amendments ~~820-10~~to ~~defines~~Certain ~~fair~~Recognition ~~value, establishes a framework for measuring fair value under GAAP~~ and ~~expands~~Disclosure ~~disclosures about fair value measurements~~Requirements”. ~~ASC~~ ASU ~~820~~2010-1009 ~~applies~~removes ~~under~~the ~~other~~requirement ~~accounting pronouncements~~for ~~that~~an ~~require~~SEC orfiler ~~permit~~to ~~fair~~disclose ~~value measurements. Accordingly,~~a ~~ASC~~date ~~820-10~~in ~~does~~both ~~not~~issued ~~require~~and ~~any~~revised ~~new~~financial ~~fair value measurements~~statements. ~~However,~~Revised ~~for~~financial ~~some~~statements ~~entities,~~include ~~the~~financial ~~application~~statements ofrevised ~~ASC 820-10~~as ~~will~~a ~~change~~result ~~current~~of ~~practice. The~~either ~~changes~~correction toof ~~current~~an ~~practice resulting~~error ~~from~~or ~~the~~retrospective application of ~~ASC~~generally ~~820-10~~accepted ~~relate~~accounting toprinciples. ~~the~~All ~~definition~~ of ~~fair value,~~ the ~~methods~~amendments ~~used~~in toASU ~~measure fair value and the expanded disclosures about fair value measurements. The provisions of ASC 820~~2010-1009 are effective asupon issuance of ~~January~~ 1,the ~~2008~~final ASU, ~~with~~except for the ~~cumulative~~use ~~effect~~ of the ~~change~~issued indate ~~accounting principle~~for ~~recorded~~conduit asdebt ~~an adjustment to opening retained earnings. However~~obligors, ~~delayed~~ ~~application~~which ~~of this statement~~ is ~~permitted~~effective for ~~nonfinancial~~interim ~~assets and nonfinancial liabilities, except for items that are recognized~~ or ~~disclosed~~annual ~~at fair~~periods ~~value~~ending ~~in the financial statements on a recurring basis (at least annually), until fiscal years beginning~~ after ~~November~~June 15, ~~2008, and interim periods within those fiscal years~~2010. The Company adopted ~~ASC~~ASU ~~820~~2010-1009 ~~effective~~in ~~January~~February ~~1, 2008~~2010 ~~for financial assets~~ and ~~the~~therefore ~~adoption~~omitted ~~did not have a significant effect on its financial statements. The Company has adopted~~ the ~~remaining~~disclosure ~~provisions of~~previously ~~ASC~~required ~~820-10~~as ~~beginning~~referenced ~~in 2009~~above. ~~The adoption of ASC 820-10 did not have a material impact on the Company’s consolidated results of operations or financial condition.~~

In ~~June 2008~~April 2010, the FASB ~~ratified~~issued ~~ASC~~ASU ~~815-40-25 (formerly EITF Issue~~ No. 072010-0517, ~~“Determining~~ ~~Whether~~Revenue anRecognition ~~Instrument~~— ~~(or~~Milestone ~~Embedded~~Method. ~~Feature)~~This isASU ~~Indexed~~provides toguidance ~~an Entity's~~on ~~Own~~the ~~Stock”).~~criteria ~~ASC~~that ~~815-40-25~~should ~~mandates~~be amet ~~two-step process~~ for ~~evaluating~~ determining whether anthe ~~equity-linked~~milestone ~~financial~~method ~~instrument~~of orrevenue ~~embedded~~recognition ~~feature~~ is ~~indexed~~appropriate. Under to the ~~entity's~~milestone ~~own~~method ~~stock.~~of ~~Warrants~~revenue recognition, consideration that ais ~~company~~contingent ~~issues~~upon ~~that~~achievement ~~contain~~of a ~~strike price~~milestone ~~adjustment~~in ~~feature,~~its ~~upon~~entirety ~~the~~can ~~adoption~~be ofrecognized ~~ASC~~as ~~815-40-25,~~revenue ~~results~~in the period in which the ~~instruments~~ nomilestone ~~longer~~is ~~being~~achieved ~~considered~~only ~~indexed~~if the milestone meets all criteria to ~~the~~be ~~company's~~considered ~~own stock~~substantive. On ~~January~~This 1,standard ~~2009,~~provides the ~~Company~~criteria ~~adopted~~to ~~ASC~~be ~~815-40-25~~met ~~and re-evaluated~~for ~~its~~a ~~issued~~milestone ~~and~~to ~~outstanding~~be ~~warrants~~considered ~~that~~substantive ~~contain~~which includes that: a) ~~strike~~performance ~~price adjustment~~consideration ~~feature.~~earned ~~The~~by ~~Company~~achieving ~~reclassified~~the ~~certain~~milestone ~~warrants~~be ~~from~~commensurate ~~equity~~with either performance to ~~a derivative~~achieve ~~liability~~the ~~and~~milestone ~~used~~or the ~~Black-Scholes-Merton~~enhancement ~~valuation~~of ~~model~~the ~~to determine~~value of the ~~fair~~item ~~market~~delivered ~~value~~as ofa ~~the~~result ~~warrants.~~of ~~Upon adoption~~a onspecific ~~January~~outcome 1,resulting ~~2009,~~from ~~the~~performance ~~Company~~to ~~calculated~~achieve the ~~impact~~milestone; and ~~the~~b) ~~amount was~~it ~~found~~relates to past performance and be ~~de-minims.~~reasonable Asrelative ofto ~~December~~all ~~31,~~deliverables ~~2009,~~and payment terms in the ~~Company recorded~~ arrangement. This standard is effective on a ~~$0.3~~prospective ~~million~~basis ~~loss~~for ~~due~~milestones achieved in ~~the~~fiscal ~~consolidated~~years ~~statement~~beginning ~~of operations~~on ~~due~~or toafter ~~the~~June ~~increase~~15, in2010. ~~the~~Although ~~fair~~we ~~value~~are still evaluating the impact of 5this standard,~~080,160~~ ofwe do not expect its ~~issued warrants~~adoption ~~that~~to ~~contain~~have ~~such~~a ~~anti-dilution~~material ~~provisions~~impact ~~using~~on our financial position or the ~~Black-Scholes-Merton~~ ~~option-pricing~~results ~~model~~of our operations.

Effective July 1, 2009, the Company adopted The “FASB Accounting Standards Codification” and the Hierarchy of Generally Accepted Accounting Principles (ASC 105), (formerly SFAS No. 168, The “FASB Accounting Standards Codification” and the Hierarchy of Generally Accepted Accounting Principles). This standard establishes only two levels of U.S. generally accepted accounting principles (“GAAP”), authoritative and nonauthoritative. The Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (the “Codification”) became the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification became non-authoritative. The Company began using the new guidelines and numbering system prescribed by the Codification when referring to GAAP in the third quarter of fiscal 2009. As the Codification was not intended to change or alter existing GAAP, it did not have any impact on the Company’s consolidated financial statements.54

VYTERIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.	Property and Equipment, net

Property and equipment, net, consist of the following:

	December 31,
	2010			2009

Manufacturing and laboratory equipment	$	1,875,930		$	1,875,930
Furniture and fixtures........		156,543			156,543
Office equipment		334,065			345,424
Leasehold improvements		367,818			367,818
Software		205,210			205,210
Property and equipment		2,939,566			2,950,925
Less: Accumulated depreciation and amortization		(2,914,069	)		(2,836,901	)
Property and equipment, net	$	25,497		$	114,024

Depreciation and amortization expense, included in costs and expenses in the accompanying consolidated statements of operations, was approximately $0.1 million, $0.2 million and $0.3 million for each of the years ended December 31, 2010, 2009 and 2008, respectively.

In March 2008, the Company recorded an impairment charge of approximately $0.1 million on furniture and fixtures due to the consolidation of office space (see Note 13), which is included in facilities realignment and impairment of fixed assets expense in the consolidated statement of operations for the year ended December 31, 2008.

4. Accrued Expenses, Deferred Revenue, and Other

Accrued expenses, deferred revenue and other consist of the following:

	December 31,
	2010		2009
Compensation, accrued bonuses and benefits payable	$	439,745	$	413,743
Continuous motion patch machine costs and delivery		169,619		183,452
Reimbursement of development costs to Ferring (1)		1,354,566		1,386,919
Accrued insurance costs		103,518		101,224
Accounting, legal and consulting fees		671,124		334,095
Outside services		330,027		371,243
Food and drug administration fees		279,013		193,521
Deferred revenue and other		284,696		150,816
Accrued expenses, deferred revenue and other	$	3,632,308	$	3,135,013

(1) Represents liability for advances in 2009 of research and development costs under the License and Development Agreement with Ferring (see Note 9).

5. Accrued Registration Rights Penalty

In connection with the delayed filing of a registration statement for securities sold pursuant to a $15.1 million private placement in 2004, the Company incurred approximately $1.4 million of liquidated damages in 2005. In addition, the Company was obligated to pay interest at a rate of 18% per annum, accruing daily, for any liquidated damages not paid in full within 7 days of the date payable. Interest expense, included in registration rights penalty in the accompanying consolidated statements of operations, was $0.2 million and $0.3 million for each the years ended December 31, 2009 and 2008, respectively.

On October 30, 2009, the Company entered into an Amendment and Waiver (“Amendment”) to the Registration Rights Agreement dated September 29, 2004 among the Company, Spencer Trask Ventures, Inc., a related party, Rodman & Renshaw, LLC, and various shareholders. The October 30, 2009Amendment required the Company to compensate investors for registration rights penalties incurred of approximately $2.6 million, in lieu of all liquidated damages, and related interest, related to the delayed filing of a registration statement for securities sold pursuant to a $15.1 million private placement in 2004. The Company issued 1,250,000 restricted shares of its common stock vested immediately with a fair value of $0.8 million and warrants for the purchase of up to 1,250,000 restricted shares of its common stock at an exercise price of $0.75 per share with an expiration date of October 30, 2012 in order to settle the accrued liquidated damages. The fair value of warrants issued to purchase the Company’s common stock was estimated to be $0.4 million using the Black-Scholes-Merton pricing model. The Company recorded a non-cash gain on settlement of registration rights penalty of $1.4 million in the consolidated statement of operations for the year ended December 31, 2009.

VYTERIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~In November~~See ~~2008,~~rollforward ~~the SEC issued for comment a proposed roadmap regarding the potential use by U.S. issuers~~ of ~~financial~~fair ~~statements~~value ~~prepared in accordance with International Financial Reporting Standards (IFRS). IFRS is a comprehensive series~~ of ~~accounting~~derivative ~~standards~~instruments ~~published~~table ~~by the International Accounting Standards Board (IASB). Under the proposed roadmap, the Company could be required~~ in ~~fiscal~~Note ~~2014~~18 toWarrants prepare financial statements in accordance with IFRS. The SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. The Company is currently assessing the impact that this potential change would have on its consolidated financial statements and itDerivative ~~will continue to monitor the development of the potential implementation of IFRS~~Instruments.

36. Related ~~Restructuring~~Party Indebtedness

~~On January~~Restructuring ~~31,~~Agreement ~~2008,~~with the Company reduced its workforce by approximately 32 employees who were solely or partially dedicated to LidoSite. The Company further reduced its workforce by three employees on June 26, 2008. These reductions in force and reductions in variable spending related to LidoSite were intended to reduce the Company’s ongoing working capital needs and monthly cash burn while reallocating resources to both peptide product delivery and other business development opportunities. The Company recorded approximately $0.2 million of severance related expenses, which are included in research and development, general and administrative and sales and marketing expenses in the consolidated statement of operations for the year ended December 31, 2008. There were no unpaid severance costs as of December 31, 2009 and 2008.STSG

4On December 24, 2009, the Company entered into an agreement to Restructure (“Restructuring Transaction”) of all the liability and equity instruments issued to STSG. ~~Inventories~~The principal amount of all indebtedness and accrued and unpaid interest thereon and stated value of the Series B Preferred Stock owed by the Company to STSG in excess of $2.0 million ($2.0 million amount is defined as the “Remaining Debt”) which includes the January 2006 Promissory Note, ~~net~~the 2006 Promissory Notes, and $0.9 million of Working Capital Facility were satisfied in full on December 24, 2009. STSG converted $20.3 million of indebtedness and accrued and unpaid interest and all issued and outstanding shares of Series B Preferred Stock into 50,777,015 shares of the Company’s common stock at a conversion price of $0.40 per share.

~~Inventories~~In connection with the December 24, ~~net~~ ~~consist~~2009 restructuring agreement with STSG, the Company performed a valuation of the ~~following:~~conversion of approximately $20.3 million owed to STSG (the January 2006 Promissory Notes, the 2006 Promissory Notes and the Series B Preferred Stock, including accrued and unpaid interest and dividends), into its common stock, pursuant to rules governing accounting for induced conversions of debt. The Company determined that as a result of a change in the conversion price from $22.50 per share to $0.40 per share, STSG received an incentive to induce conversion of these instruments into the Company’s common stock. Accordingly, the Company recorded a non-cash charge of approximately $35.9 million related to the fair value (based on quoted market prices at the date of the agreement) of the incremental shares received by STSG as a result of the restructuring in its consolidated statement of operations for the year ended December 31, 2009.

	December 31,
	2009			2008
Raw materials	$	837,803		$	1,358,388
Work in process		106,419			106,456
Finished goods		188,674			294,169
Inventory		1,132,896			1,759,013
Excess and obsolete inventory		(1,132,896	)		(1,759,013	)
Inventories, net	$	-		$	-

Promissory Note Due to a Related Party

~~The Company~~In ~~assesses~~December 2009, the ~~valuation~~Company ofissued ~~its~~to ~~inventory~~STSG on a ~~quarterly~~promissory ~~basis~~note to(“2009 ~~provide an~~Promissory ~~allowance~~Note”) ~~for~~with ~~the~~a ~~value~~principal ofamount ~~estimated excess and obsolete inventory and the lower~~ of ~~cost~~approximately ~~or market adjustment~~$2.0 ~~Due~~million, towith ~~the~~interest ~~de-emphasis~~accruing ofat the ~~LidoSite product,~~rate ~~the~~of ~~Company~~6% ~~has~~per ~~focused~~year ~~its~~and ~~resources~~a ~~and~~maturity ~~efforts~~date inof ~~other~~February ~~product development~~2, ~~areas~~2013. ~~Accordingly,~~The 2009 ~~the~~Promissory ~~Company~~Note ~~recorded~~is asecured ~~full~~by ~~inventory reserves~~a inlien ~~cost~~on ~~of sales in~~ the ~~fourth quarter of 2007. The~~ Company’s ~~did~~assets, ~~not record~~subordinate ~~any~~to ~~inventory reserves in~~ the ~~cost~~lien of ~~sales~~any ~~for~~existing ~~the~~creditors ~~year~~that ~~ended~~have ~~December 31,~~a ~~2009. However,~~lien ~~the~~senior ~~Company~~to ~~recorded~~that ~~full~~of ~~inventory~~STSG ~~reserves~~and ~~in cost~~to ofany ~~sales~~liens ofresulting ~~$0.1~~from ~~million~~a ~~and~~prospective ~~$1.4~~equity ~~million~~or ~~for~~debt ~~the~~financing ~~years~~within ~~ended~~certain ~~December~~parameters ~~31, 2008~~set ~~and~~forth ~~2007,~~(“Qualified ~~respectively~~Financing”).

5On December 28, 2009, the Company paid STSG $0.2 ~~Property~~million to reduce the principal amount of the 2009 Promissory Note to $1.8 million. The balance of the principal amount of the 2009 Promissory Note and ~~Equipment~~all accrued and unpaid interest thereon is to be repaid upon consummation of certain Qualified Financing. This is still outstanding at December 31, ~~net~~2010.

~~Property and~~7. Senior ~~equipment,~~Subordinated ~~net~~Convertible ~~consist~~Promissory ofNotes, ~~the~~Net ~~following:~~of Discount

	December 31,
	2009			2008
Manufacturing and laboratory equipment	$	1,875,930		$	1,883,753
Furniture and fixtures		156,543			156,543
Office equipment		345,423			363,142
Leasehold improvements		367,818			367,818
Software		205,210			205,210
Property and equipment		2,950,924			2,976,466
Less: Accumulated depreciation and amortization		(2,836,901	)		(2,677,483	)
Property and equipment, net	$	114,024		$	298,983

In February 2010 and May 2010, the Company sold to accredited investors (“Investors”) in a private placement $1.8 million principal amount of Senior Subordinated Convertible Promissory Notes due 2013 (the “2010 Notes”). These notes bear no interest and are convertible into the Company’s common stock at the option of the Investors at any time. The initial conversion price was $0.20, and automatically reduces by 1.5% after each 90 day period that they are outstanding, and additionally, the conversion price resets in the event of a subsequent issuance of stock at a lower price than the then effective conversion price. In addition, the 2010 Notes automatically convert into the Company’s common stock, if the closing bid price of the Company’s common stock equals or exceeds 300% of the conversion price for a period of twenty consecutive trading days. The warrants contain a cashless exercise provision and “full ratchet” anti-dilution provisions. In conjunction therewith, the Company provided customary “piggyback” registration rights for a 24-month period to the Investors with respect to the shares of common stock underlying the 2010 Notes and related warrants.

VYTERIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~Depreciation and~~The ~~amortization~~principal ~~expense,~~amounts ~~included~~of in2010 ~~costs~~Notes sold and ~~expenses in~~ the ~~accompanying consolidated~~number ~~statements~~ of ~~operations,~~warrants ~~was~~issued ~~approximately~~in ~~$0.2~~conjunction ~~million,~~therewith ~~$0.3 million~~ and ~~$0.4~~the ~~million~~exercise ~~for~~price ~~each~~thereof offor the ~~years~~year ended December 31, ~~2009,~~2010 ~~2008~~are ~~and 2007,~~set ~~respectively.~~forth below:

In January 2008, the Company announced a de-emphasis of the sales and marketing efforts of its Lidosite product. As a result, the Company incurred an impairment charge of $0.1 million for the year ended December 31, 2007 on the machinery and equipment used in the production of the Lidosite product. In March 2008, the Company recorded an impairment charge of approximately $0.1 million on furniture and fixtures due to the consolidation of office space (see Note 13), which is included in facilities realignment and impairment of fixed assets expense in the consolidated statement of operations for the year ended December 31, 2008.

Offering Date	Original Note Amount		Less Converted Amount		Note Amount as of December 31, 2010		Interest Rate			Note Conversion Price (1)		Warrants Issued to Investors		Initial Exercise Price per Share
February 2010	$	1,060,000	$	25,000	$	1,035,000		0.00	%	$	0.191		5,300,000	$	0.20
May 2010		725,000		-		725,000		0.00	%	$	0.194		3,625,000	$	0.25
	$	1,785,000	$	25,000	$	1,760,000							8,925,000

6.(1) ~~Related~~Initial ~~Party~~note ~~indebtedness~~conversion ~~owed~~price towas ~~STSG~~$0.20 and ~~Series~~the Brate ~~Convertible,~~decreases ~~Mandatorily~~1.5% ~~Redeemable~~every ~~Preferred~~90 ~~Stock~~days.

The ~~following~~ ~~table~~Company ~~summarizes~~received net proceeds of $0.8 million and $0.6 million from the ~~outstanding~~2010 ~~amounts~~Notes, asafter payment of ~~December~~commissions ~~31,~~and ~~2009~~expense ~~and December~~allowances 31to Spencer Trask Ventures, ~~2008~~Inc. (“STVI”), ~~with~~a ~~respect~~related party to ~~all~~STSG, ~~indebtedness~~a ~~owing~~principal stockholder of the Company, to ~~STSG~~other finders and other offering related costs. STVI and other finders also received in the aggregate warrants to purchase 3,570,000 shares of the Company’s ~~Series~~common Bstock ~~Convertible~~bearing substantially the same terms as the Investor warrants. The Company incurred total debt issuance costs of $2.1 million, ~~Mandatorily~~representing ~~Redeemable~~the ~~Preferred Stock~~fair value of warrants issued to finders of $1.8 million at issuance and other costs totaling $0.3 million. Such costs have been classified as deferred costs in accordance with accounting for debt issue costs (ASC 835) and are being amortized over the life of the corresponding debt, using the effective interest method.

	December 31,
	2009		2008
Principal Amounts Outstanding
January 2006 Promissory Note (1)(5)	$	-	$	250,000
2006 Promissory Notes (2)(5)		-		5,116,550
Working Capital Facility (3)(6)		-		2,850,000
Series B Preferred Stock (4)(5)		-		10,050,000
2009 Promissory Note (7)		1,750,000		-
Interest Payable
January 2006 Promissory Note (1)(5)	$	-	$	93,090
2006 Promissory Notes (2)(5)		-		1,878,267
Working Capital Facility (3)(6)		-		535,339
Series B Preferred Stock (4)(5)		-		-
2009 Promissory Note (7)		2,014		-

The following is a summary of Debt issuance costs for the February 2010 and May 2010 financings:

	December 31,
Offering Date	Value of Finder Warrants Issued		Cash Commission		Total Debt Issuance Costs		2010 Amortization of Debt Issuance Costs		Net Debt Issuance Costs at December 31, 2010
	2009		2008		2007
February 2010	$	1,181,476	$	180,917	$	1,362,393	$	66,641	$	1,295,752
Interest Expense
May 2010		605,593		104,850		710,443		16,920		693,523
January 2006 Promissory Note (1)(5)	$	32,319	$	3,042	$	250,000
	$	1,787,069	$	285,767	$	2,072,836	$	83,561	$	1,989,275
2006 Promissory Notes (2)(5)		661,456		676,237		674,390
Working Capital Facility (3)(6)		255,075		260,775		888,762
Series B Preferred Stock (4)(5)		588,710		600,000		600,000
2009 Promissory Note (7)		2,014		-		-

~~(1)~~Upon Onconsummation ~~January~~of ~~31,~~the ~~2006,~~sale ~~STSG,~~of athe ~~related~~2010 ~~party~~Notes, ~~provided~~ the Company ~~with~~determined athe ~~loan~~fair invalue of the ~~form~~aforementioned ofinstruments ~~13.0%~~and ~~subordinated~~recorded debt discount in accordance with accounting for convertible ~~unsecured~~instruments ~~promissory~~issued ~~note~~with detachable warrants (ASC 470). The following is a summary of the ~~“January~~debt ~~2006~~discount ~~Promissory~~for ~~Note”).~~the February 2010 and May 2010 financings recorded on the consolidated balance sheet as of December 31, 2010:

(2) In 2006, STSG provided the Company with a loan in the form of 13.0% subordinated convertible unsecured promissory notes (the “2006 Promissory Notes”).

Offering Date	Face Amount		Less: Notes Debt Discount		Plus: Current Year Amortization of Note Debt Discount		Carrying Value
February 2010	$	1,035,000	$	1,035,000	$	31,247	$	31,247
May 2010		725,000		725,000		17,046		17,046
	$	1,760,000	$	1,760,000	$	48,293	$	48,293

(3) In September 2004, STSG agreed to provide the Company with a working capital loan bearing interest at 9%, in the form of secured demand promissory notes (the “Working Capital Facility”).

(4) Series B, Convertible, Mandatorily Redeemable Preferred Stock (“Series B Preferred Stock”) was issued to STSG and one other holder. The holders of the Series B Preferred Stock were entitled to receive, ratably and payable quarterly, an annual cash dividend of 8%. The stated value of the Series B Preferred Stock on December 24, 2009 was $10.6 million.

(5) The January 2006 Promissory Note, the 2006 Promissory Notes and the Series B Preferred Stock were satisfied in full on December 24, 2009. See footnote 7 below for a discussion of the satisfaction of these obligations.

(6) On December 24, 2009, $0.9 million of the Working Capital Facility was satisfied in full. The remaining $2.0 million was satisfied through the issuance of the 2009 Promissory Note. See footnote 7 below for a discussion of the satisfaction of this debt and the conversion into the 2009 Promissory Notes.

(7) On December 24, 2009, the Company entered into an Amendment to the Restructuring Agreement with STSG.

VYTERIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~The principal~~In ~~terms~~addition, the Company determined the aforementioned instruments also contain features that require derivative liability accounting treatment. At December 31, 2010, the Company remeasured the fair value of these derivative liabilities and determined the ~~Amended~~fair ~~Agreement~~value ~~are~~of asthe ~~follows~~warrant liability. See Note 2 for description of the Company’s accounting policies on valuing such instruments. As a result of this remeasurement, the Company recognized the following expense on these derivative financial instruments for the year ended December 31, 2010 on the consolidated statement of operations:

1. The principal amount of all indebtedness and accrued and unpaid interest thereon and stated value of the Series B Preferred Stock owed by the Company to STSG in excess of $2.0 million ($2.0 million amount is defined as the “Remaining Debt”) which includes the January 2006 Promissory Note, the 2006 Promissory Notes, and $0.9 million of Working Capital Facility were satisfied in full on December 24, 2009. STSG converted $20.3 million of indebtedness and accrued and unpaid interest and all issued and outstanding shares of Series B Preferred Stock into 50,777,015 shares of the Company’s common stock at a conversion price of $0.40 per share.

		Beneficial Conversion Feature						Warrants With Anti-Dilution Clause
Offering Date		Fair Value of Derivative at Issuance		Fair Value of Derivative as of December 31, 2010		Gain (Loss) on Fair Valuation of Derivative as of December 31, 2010		Fair Value at Issuance		Fair Value as of December 31, 2010		Gain (Loss) on Fair Valuation as of December 31, 2010
February-2010	(a)	$	254,942	$	1,944,776	$	1,689,834	$	780,058	$	1,221,138	$	441,080
May-2010			237,083		1,364,241		1,127,158		487,917		864,745		376,828

Finders Warrants
February-2010			-		-		-		1,153,611		488,455		(665,156	)
May-2010			-		-		-		605,593		342,644		(262,949	)
		$	492,025	$	3,309,017	$	2,816,992	$	3,027,179	$	2,916,982	$	(110,197	)

~~2. The Remaining Debt shall be evidenced by a promissory note~~ (~~“2009 Promissory Note”~~a) ~~with~~Original ~~interest~~amount ~~accruing~~was ~~at the rate of 6% per year and with the same duration as the first debt security to expire pursuant to a Qualified Financing~~$279,942, orsubsequently ifconverted ~~it does not involve the sale of debt securities~~$25,000 ~~December~~(see ~~24, 2012. The 2009 Promissory~~ Note ~~is secured by a lien on the Company’s assets, subordinate to the lien of any existing creditors that have a lien senior to that of STSG and to any liens resulting from a Qualified Financing~~18).

3.See Onrollforward ~~December 28, 2009, the Company paid to STSG $0.3 million to reduce the principal amount~~ of ~~the~~fair ~~2009~~value ~~Promissory Note to $1.8 million as~~ of ~~December~~derivative ~~31,~~instruments ~~2009.~~table ~~Upon consummation of a Qualified Financing with gross proceeds~~ in ~~excess~~Note of18 ~~$3.0~~Warrants ~~million,~~and ~~the~~Derivative ~~Company is required to make another prepayment of $0~~Instruments.5 million. Upon a Qualified Financing with gross proceeds in excess of $5.0 million, the Company is required to make another prepayment of 50% of the net proceeds from any Qualified Financing in excess of such amounts.

~~In connection with the December 24, 2009 restructuring agreement with STSG, the Company performed a valuation of the conversion of approximately $20~~8.~~3 million~~ ~~owed~~June to2010 ~~STSG~~Subordinated ~~(the~~Convertible ~~January 2006~~ Promissory Notes, ~~the 2006 Promissory Notes~~ and ~~the~~Conversion ~~Series B Preferred Stock, including accrued and unpaid interest and dividends),~~ into ~~its~~Common common stock, pursuant to rules governing accounting for induced conversions of debt, (ASC 470-20, formerly FASB No. 84, “Induced Conversions of Convertible Debt, an amendment of APB Opinion No. 26”). The Company determined that as a result of a change in the conversion price from $22.50 per share to $0.40 per share, STSG received an incentive to induce conversion of these instruments into the Company’s common stock. Accordingly, the Company recorded a non-cash charge of approximately $35.9 million related to the fair value (based on quoted market prices at the date of the agreement) of the incremental shares received by STSG as a result of the restructuring in its consolidated statement of operations for the year ended December 31, 2009.Stock

~~2007 Amendment~~On June 30, 2010, the Company consummated a private placement to ~~Various~~accredited ~~Debt~~investors ~~Instruments~~(“June Investors”) of $1.2 million principal amount of Subordinated Convertible Promissory Notes due September 30, 2010 (the “June 2010 Notes”). The sale of the June 2010 Notes also included issuance to June Investors of five-year warrants to purchase an aggregate of 2,300,000 shares of the Company’s common stock with an exercise price of $0.25 per share. The warrants contain a cashless exercise provision and “full ratchet” anti-dilution provisions. STVI acted as finder in connection with the private placement. At date of issuance, the fair value of the warrants was approximately $0.8 million. The June 2010 Notes bore interest at the rate of 6% per annum. In connection with the closing, the Company received net proceeds of $1.2 million, as the payment of cash finder fees were deferred until the next offering of equity instruments by the Company. The Company incurred debt issuance costs with STVI, in its capacity as a finder for this transaction, in the amount of $0.3 million, which is included in deferred offering cost on the consolidated balance sheets. Such costs represent the fair value of the initial 460,000 warrants issued to STVI of $0.2 million and accrued finders fees of approximately $0.1 million, representing cash commission of up to 10% and a 3% expense allowance and warrants. The Company issued additional warrants to investors and STVI, based on the conversion on September 30, 2010. The Company determined that the warrants contain features which require liability accounting treatment.

InOn ~~August 2007~~September 30, 2010, the ~~Company~~June ~~entered~~Investors ~~into~~elected anto ~~agreement~~convert ~~with~~the ~~STSG~~principal ~~and~~amount ~~its~~of ~~affiliates~~the ~~to amend~~June ~~the~~2010 ~~Working~~Notes, ~~Capital~~and ~~Facility~~$17,392 of accrued and previously unpaid interest, into the ~~January~~Company’s ~~2006~~common ~~Promissory~~stock. ~~Note~~For each $0.20 of principal and ~~2006 Promissory~~interest ~~Notes. The~~converted, ~~Company~~the ~~performed~~June anInvestors ~~evaluation~~received both a share of the ~~amendments~~ Company’s common stock and a warrant to ~~these~~purchase ~~debt~~one ~~instruments~~share ~~under~~of ~~ASC~~common ~~820~~stock ~~(formerly~~at ~~EITF~~an Noexercise price of $0.25 ~~06-06 “Debtor’s~~per ~~Accounting~~share ~~for~~with a ~~Modification~~term ~~(or~~of ~~Exchange)~~five oryears. ~~Convertible~~Based ~~Debt Instruments”).~~on ~~Accordingly~~the conversion of the June 2010 Notes, the ~~Company~~company ~~concluded~~issued ~~that~~additional ~~debt~~warrants ~~extinguishment accounting~~to ~~should~~STVI ~~apply~~for ~~and~~conversion ~~recorded~~consideration. The anconversion ~~immediate~~consideration ~~non-cash~~to ~~charge~~STVI consists of 1,150,000 warrants to purchase shares of common stock at an exercise price of $60.~~7 million~~20 ~~directly~~per toshare ~~its~~and ~~consolidated~~1,150,000 ~~statement~~warrants to purchase shares of ~~operations~~common instock ~~the~~at ~~third quarter~~an exercise price of ~~2007~~$0.25 per share, ~~representing~~with ~~the~~all ~~incremental~~2,300,000 ~~“fair~~warrants ~~value”~~expiring ofin ~~instruments issued~~5 years.

7. Accrued Registration Rights Penalty

In connection with the delayed filing of a registration statement for securities sold pursuant to a $15.1 million private placement in 2004, the Company incurred approximately $1.4 million of liquidated damages in 2005. In addition, the Company was obligated to pay interest at a rate of 18% per annum, accruing daily, for any liquidated damages not paid in full within 7 days of the date payable. Interest expense, included in registration rights penalty in the accompanying consolidated statements of operations, was $0.2 million, $0.3 million and $0.3 million for each the years ended December 31, 2009, 2008 and 2007, respectively.

On October 30, 2009, the Company entered into an Amendment and Waiver (“Amendment”) to the Registration Rights Agreement dated September 29, 2004 among the Company, Spencer Trask Ventures, Inc., a related party, Rodman & Renshaw, LLC, and various shareholders. The Amendment required the Company to compensate investors for registration rights penalties incurred of approximately $2.6 million. The Company issued 1,250,000 restricted shares of its common stock with a fair value of $0.8 million and warrants to purchase up to 1,250,000 restricted shares of its common stock at an exercise price of $0.75 per share with an expiration date of October 30, 2012 in order to settle the accrued liquidated damages. The fair value of warrants issued to purchase the Company’s common stock was estimated to be $0.4 million using the Black-Scholes-Merton pricing model. The Company recorded a non-cash gain on settlement of registration rights penalty of $1.4 million in the consolidated statement of operations for the year ended December 31, 2009.

VYTERIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In the aggregate, the Company issued 5,836,250 shares of its common stock to investors, 8,136,250 warrants to investors to purchase its common stock, and 2,300,000 warrants to STVI to purchase its common stock, in connection with the conversion of the June 2010 Notes. The ~~Accrued~~fair ~~Expenses~~value of the warrants upon conversion was approximately $2.6 million. Upon conversion of the June 2010 Notes, ~~Deferred~~the ~~Revenue~~Company recorded $0.3 million in interest expense on the consolidated statement of operations from the write-off of the remaining deferred offering costs. The fair value of the 10,096,250 warrants (which include 460,000 warrants issued to finders from initial June Note offering date) was $2.7 million, as of December 31, 2010. As a result, the Company recognized a loss on derivative financial instruments of $0.8 million for the year ended December 31, 2010 (using the weighted average probabilities of potential down-round scenarios and ~~Other~~other assumptions utilizing a unmodified binomial model), on the consolidated statement of operations. This private placement to accredited investors is exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof and Regulation D, promulgated thereunder.

~~Accrued expenses,~~See ~~deferred~~rollforward ~~revenue~~of ~~and~~fair ~~other~~value ~~consist~~ of ~~the~~derivative ~~following:~~instruments table in Note 18 Warrants and Derivative Instruments.

	December 31,
	2009		2008
Compensation, accrued bonuses and benefits payable	$	413,743	$	330,715
Continuous motion patch machine costs and delivery		183,452		180,447
Reimbursement of development costs to Ferring		1,386,919		97,178
Accrued insurance costs		101,224		86,229
Accounting, legal and consulting fees		334,095		96,690
Outside services		371,243		6,504
Food and drug administration fees		193,521		125,942
Facilities realignment costs – current portion		-		251,411
Other		150,816		204,608
Accrued expenses, deferred revenue and other	$	3,135,013	$	1,379,724

9.	Agreements with Ferring

The Company entered into a license and development agreement with Ferring ~~Milestone~~ ~~Advance~~in 2004 for the development of an infertility application for its iontophoretic technology. This agreement provided for a 50%/50% cost share arrangement between the Company and Ferring for certain development costs associated with the project. The outside development cost of the product licensing and development agreements with Ferring was approximately $0.2 million and $1.1 million, for the years ended December 31, 2009 and 2008, respectively, and is included in research and development expense in the accompanying consolidated statements of operations.

Effective July 9, 2008, Ferring advanced a $2.5 million payment which would otherwise be due to the Company should Ferring elect to proceed with phase II clinical trials (“Phase II”) as described in the License and Development Agreement dated as of September 27, 2004 (as heretofore amended, the “License Agreement”) between Ferring and the Company. The $2.5 million was advanced in the form of a loan, and the Company issued a $2.5 million principal amount secured note (“Milestone Advance”) to Ferring. The Milestone Advance accrued interest at the rate of 10% per annum.

In a related transaction, Ferring loaned the Company an additional $50,000 to enable payoff of the existing $0.5 million principal amount note with Allen Capital Partners, which payoff in full took place on July 8, 2008. This Note was also paid off in March 2009. On December 16, 2008, Ferring loaned the Company an additional $0.2 million in the form of a promissory note (“December 2008 Note”) issued by the Company to Ferring. The December 2008 Note accrued interest at the rate of 10% per annum. In March 2009, the Company repaid both the Milestone advance and the December 2008 Note.

Transaction Agreement with Ferring March 2009

In March 2009, the Company entered into a transaction with Ferring whereby Ferring agreed to fund the first half of the 2009 development budget up to $3.3 million, in exchange for which the Company granted Ferring a senior security interest in its assets. ~~(which~~ Ferring ~~has~~also agreed to ~~subordinate~~buy to the ~~security~~Company’s ~~interest~~PMK 150 machine for $1.0 million, of ~~new third~~which ~~party~~$0.5 million ~~lenders~~was ~~for~~paid aat ~~value~~closing of(half ~~over~~to satisfy outstanding senior secured convertible debentures due to Ferring) and $30.3 million was paid on May 14, 2009 (part to satisfy accrued and unpaid interest on loans from Ferring) and which ~~security interest~~has ~~expires~~been atleased back to the ~~earlier~~Company at a rental amount of $1,000 per month. The Company accounts for the ~~date~~lease ~~when~~of the ~~Company~~PMK ~~delivers~~150 ~~patches required~~machine ~~for~~as ~~Phase~~an ~~III~~operating ~~testing~~lease and ~~May~~is 31amortizing the deferred gain on the sale of the machine, ~~2010~~which recorded as deferred revenue on the consolidated balance sheet, over the 10 year lease.

~~Ferring also~~Termination ~~agreed to buy the Company PMK 150 machine for $1.0 million,~~ of which $0.5 million was paid at closing (half to satisfy outstanding senior secured convertible debentures due to Ferring) and $0.3 million was paid on May 14, 2009 (part to satisfy accrued and unpaid interest on loans from Ferring) and which has been leased back to the Company at a rental amount of $1,000 per month. The Company accounts for the lease of the PMK 150 machine as an operating lease and is recognizing the deferred gain on the sale of the machine over the 10 year lease. The Company also granted Ferring ~~a one year option to purchase our PMK 300 machine at a price to be negotiated in good faith.~~Agreement

On December 21, 2009, the Company received notice from Ferring of its termination of the License and Development Agreement, dated September 27, 2004, by and between the Company and Ferring (“Agreement”) under Section 9.04 of the Agreement, effective January 21, 2010. Pursuant to the Agreement, upon a termination by Ferring under Section 9.04 after December 31, 2004, the following disposition of intellectual property associated with the Agreement shall occur under Section 9.05 of the Agreement:

b) all licenses and other rights granted to Ferring under the Agreement shall be terminated as of the effective date of the termination;

VYTERIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~Termination~~ d) Ferring shall cease to use and shall assign to the Company all of ~~Ferring~~its ~~Agreement~~rights, title and interest in and to all clinical, technical and other relevant reports, records, data, information and materials relating exclusively to the Product and all regulatory filings (including any NDA, 510(k) or similar regulatory filing) relating exclusively to the Product and provide the Company one copy of each physical embodiment of the aforementioned items within thirty (30) days after such termination;

~~On December~~e) Ferring ~~21,~~shall ~~2009,~~cease ~~the~~to ~~Company~~use ~~received~~any ~~notice~~Know-How, ~~from~~Information ~~Ferring~~or ofMaterials ~~its~~arising ~~termination of~~under ~~the~~this ~~License~~Agreement ~~and~~to ~~Development~~the ~~Agreement~~extent bysuch ~~and~~Know-How, ~~between~~Information ~~the~~or ~~Company~~Materials ~~and~~is ~~Ferring (“Agreement”),~~owned ~~effective~~by 30Ferring ~~days~~and ~~from~~shall ~~the~~promptly ~~date~~return ofto the ~~notice,~~Company ~~pursuant~~all tosuch ~~the Agreement.~~materials; and

~~Pursuant~~ f) Ferring is required to return to the ~~Agreement,~~Company ~~upon~~all ainformation ~~termination~~knowhow byand ~~Ferring,~~other ~~the~~materials ~~following~~and ~~disposition~~records ~~of intellectual~~in ~~property~~their ~~associated~~possession ~~with~~or control relating exclusively to the ~~Agreement~~Product ~~shall~~(as ~~occur:~~such term is defined in the Agreement).

In July 2010, the Company filed a) ~~all~~complaint ~~licenses~~against ~~and~~Ferring ~~other~~entitled ~~rights~~“Vyteris, ~~granted~~Inc. tov. Ferring Pharmaceuticals, Inc.” (the ~~Company~~“Lawsuit”) ~~shall~~in the Superior Court of New Jersey, ~~subject~~Chancery Division – Essex County to ~~the~~resolve ~~continued~~outstanding ~~payment~~issues with respect to this termination. Ferring offiled ~~certain~~a ~~royalty~~motion ~~payments~~to ~~under~~compel ofarbitration in the ~~Agreement,~~case bewhich ~~converted~~was togranted, and ~~continue~~the asparties ~~exclusive,~~are ~~worldwide~~now ~~irrevocable,~~embarking ~~perpetual,~~on ~~sub-licensable~~arbitration. ~~licenses~~As toof ~~develop,~~December ~~make~~31, ~~have~~2010 ~~made,~~and ~~use~~2009, ~~sell,~~the ~~offer~~Company torecorded ~~sell,~~$1.4 ~~lease,~~million ~~distribute,~~in ~~import~~accrued expenses and ~~export~~other in the ~~Product;~~consolidated balance sheet for the estimated amounts due to Ferring. (See Note 13)

b) all licenses and other rights granted to Ferring under the Agreement shall be terminated as of the effective date of the termination;

d) Ferring shall cease to use and shall assign to the Company all of its rights, title and interest in and to all clinical, technical and other relevant reports, records, data, information and materials relating exclusively to the Product and all regulatory filings (including any NDA, 510(k) or similar regulatory filing) relating exclusively to the Product and provide the Company one copy of each physical embodiment of the aforementioned items within thirty (30) days after such termination; and

The Company is currently evaluating the Agreement and its amendments to determine amounts owed to Ferring under the March 2009 financing arrangement, which it believes to be approximately $1.4 million, and resolution of Ferring’s liens on the Company’s assets. As per the Transaction Agreement with Ferring, dated March 2009, Ferring retains a first lien on the assets of the Company with respect to the amount owed to it by the Company. The Company is assessing the possibility of continued development of the Phase II product in compliance with the Agreement. The Company recognized approximately $1.9 million of revenue from Ferring related to the development agreement for the year ended December 31, 2009 and $2.8 million for the year ended December 31, 2008.

Other

The outside development cost of the product licensing and development agreements with Ferring was approximately $0.2 million, $1.1 million and $1.3 million, for the years ended December 31, 2009, 2008 and 2007, respectively, and is included in research and development expense in the accompanying consolidated statements of operations.

10.	Private Placements of Common Stock and Warrants

~~2007~~ On October 30, 2009, the Company issued 3,000,000 shares of its common stock and 3,000,000 warrants to purchase its common stock to an investor for a purchase price of $110.256 ~~Private~~million ~~Placements~~in a transaction exempt from registration under Section 4(2) of the Securities Act of 1933. The warrants are exercisable into shares of the Company’s common stock at an exercise price of $0.20 per share, and bear a term of five years from the date of closing. The warrants contain a cashless exercise provision and contain “full ratchet” anti-dilution provisions. The Company paid the following fees to finders in conjunction therewith: cash in the amount of $0.1 million and issuance of a total of 1,200,000 warrants. All warrants issued contain terms identical to the terms of the warrants issued to the investors.

InThe ~~the first~~Company ~~six~~determined ~~months~~that ~~of 2007,~~ the ~~Company~~warrants ~~raised~~contain afeatures ~~total of $9.1 million pursuant to~~ which ~~the~~require ~~Company~~liability ~~issued~~accounting ~~to investors a total of 807,378 shares of common stock at $11~~treatment.~~25 per share (the “Initial 2007 Financings”).~~ In ~~connection~~accordance with ~~the~~ASC ~~2007 Financings~~Topic 815-10, the Company ~~paid~~recorded ~~finders~~a ~~fees~~warrant toliability ~~Wolverine~~of ~~International Holdings Ltd~~$2.3 ~~(“Wolverine”)~~million ~~and~~at todate ~~Spencer Trask Ventures, Inc. (“STVI”) a related-person~~ of ~~STSG~~issuance, ~~a principal stockholder of the Company,~~ in the ~~amount~~consolidated ofbalance ~~$0.9~~sheets ~~million and~~as ~~$0.04~~derivative ~~million,~~financial ~~respectively~~instruments, ~~representing~~for ~~10% of~~ the ~~gross~~fair ~~proceeds~~value ~~raised. In~~of ~~addition,~~ the ~~Company~~warrants issued to ~~Wolverine~~the investors and ~~STVI~~finders. Management ~~warrants~~estimated tothe ~~purchase~~fair upvalue ~~to 77,444~~of ~~and~~the 3,~~294~~200,000 ~~shares~~warrants ofissued, using the ~~Company's~~Black-Scholes-Merton ~~common~~option-pricing ~~stock,~~model ~~respectively, representing~~with ~~10% of~~ the ~~common~~weighted ~~stock~~average ~~issued to investors~~assumptions. ~~Each warrant~~ ~~may~~(See beNote ~~exercised~~2 ~~for~~- ~~five~~Debt ~~years~~instruments, ~~from the date of~~ issuance tocosts ~~purchases share~~and ofthe ~~common~~associated ~~stock~~features ~~for~~and ~~$11.25~~instruments ~~per~~contained ~~share~~therein). At ~~Net~~December ~~proceeds~~31, ~~were $8.0 million~~2010, ~~with finders~~the ~~fees~~warrants ~~and~~had ~~other~~a ~~legal~~fair ~~costs~~value of approximately $1.0 million ~~recorded as a reduction of equity as a cost of the transaction~~.

See rollforward of fair value of derivative instruments table in Note 18 Warrants and Derivative Instruments.

11.	Related Party Transactions

In addition to the indebtedness described in Notes 6, 7 and 8 and the private placements of common stock and the warrants described in Note 10 and the MediSync transaction described in Note 16, the Company had the following related party transactions:

At December 31, 2010 and 2009, approximately $0.2 million is included in interest payable and accrued expenses due to related party in the accompanying consolidated balance sheets for amounts owed to STSG.

On April 26, 2005, the Company announced the appointment of Russell O. Potts, Ph.D. to its Board of Directors. Dr. Potts has served the Company as a consultant in drug delivery, glucose monitoring and medical devices since April 2003. The Company paid Dr. Potts approximately $9,000, $5,000, and $21,000 for consulting services for the years ended December 31, 2010, 2009 and 2008, respectively.

VYTERIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~2007 $22~~12.50 ~~Private~~Income ~~Placement~~Taxes

InThe ~~July 2007, the~~ Company ~~raised~~has aavailable ~~total~~for offederal ~~$13.8~~and ~~million~~New ~~pursuant~~Jersey toincome ~~which~~tax ~~the~~purposes ~~Company issued~~net tooperating ~~investors~~loss acarryforwards ~~total of 613,111 shares of common stock at a purchase price of $22.50 per share~~ (“~~July 2007 Financing~~NOLs”), ~~and~~subject ~~with the Initial 2007 Financings, the “2007 Financings”). The subscribers were also issued warrants~~ to ~~purchase~~ ~~the~~review ~~Company’s~~by ~~common stock in an amount equal to~~ the ~~number~~authorities, ofaggregating ~~shares purchased~~approximately ~~with an exercise price of~~ $45112.003 ~~per~~million ~~share.~~and ~~In connection with the July 2007 Financing, the Company paid a finders fee to Ramp International, Inc. (“Ramp”), as assignee from Wolverine for~~ $1107.38 million, ~~representing~~respectively. ~~10%~~NOLs ~~of the~~for ~~gross~~federal ~~proceeds~~purposes ~~raised.~~expire Infrom ~~addition,~~2022 ~~the Company issued~~ to ~~Wolverine~~2029 and ~~Ramp warrants~~New toJersey ~~purchase~~from up2011 to ~~61,311~~2016. ~~shares~~The ofdifference ~~the~~between ~~Company's common stock, representing 10% of~~ the ~~common~~deficit ~~stock~~accumulated ~~issued to investors. Each warrant may be exercised~~ for ~~five~~financial ~~years~~reporting ~~from~~purposes and the ~~date~~net ofoperating ~~issuance~~loss tocarryforwards ~~purchase shares of the Company’s common stock~~ for ~~$45.00~~income ~~per~~tax ~~share.~~purposes ~~Net~~is ~~proceeds~~primarily ofdue ~~the~~to ~~July~~differences ~~2007 Financing~~in ~~were~~accounting ~~$12.5 million, with finder’s fees~~ and ~~other~~tax ~~legal~~bases ~~costs~~ of ~~$1.3 million~~certain ~~recorded~~assets asresulting afrom ~~reduction~~the ofTransaction ~~equity as a cost of the transaction~~Agreement.

~~February 2008~~Utilization ~~Private~~of ~~Placement~~net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership limitations provided by the Internal Revenue Code of 1986, as amended and similar state provisions. The Company has not performed a detailed analysis to determine whether an ownership change under Section 382 of the Internal Revenue Code occurred as a result of the Merger, or the Restructuring Transaction, as the ultimate realization of such net operating losses is uncertain. The effect of the ownership change could create an imposition of an annual limitation on the use of net operating loss carryforwards attributable to periods before the change.

~~In February~~Except ofas ~~2008~~described below, the Company ~~raised~~has anot ~~total~~recorded ~~of $1.8 million in~~ a ~~private placement~~provision ~~pursuant~~for, toor ~~which~~benefit ~~the Company issued to investors a total of 600~~from,~~000 shares~~ ofincome ~~common~~taxes ~~stock at a purchase price of $3.00 per share (“February 2008 Financing”). The investors were issued warrants to purchase Company common stock~~ in the ~~amount~~accompanying ofconsolidated ~~two~~financial ~~times~~statements ~~the~~due ~~number~~to ofrecurring ~~shares~~losses ~~purchased, or 1,200,000 total warrants. Those investor warrants have a five year term~~ and ~~have~~the anuncertainty ~~exercise price~~ of ~~$3.00 per share, and contain a mandatory exercise provision at~~ the ~~Company’s~~ ~~election~~future ~~should~~realization ~~the market price~~ of ~~the~~its ~~Company’s~~deferred ~~common~~tax ~~stock be at least $4~~assets.~~50 for 20 consecutive trading days. In connection with the February 2008 Financing~~ Accordingly, the Company ~~paid~~has provided a ~~finders~~full ~~fee~~valuation toallowance ~~Ramp~~against inits ~~the~~deferred ~~amount~~tax ~~of $0~~assets.~~2 million~~ ~~representing~~The ~~10%~~valuation ofallowance ~~the~~for ~~gross proceeds raised. Ramp reinvested its cash fee in~~ the ~~February~~years ~~2008~~ended ~~Financing~~December ~~and received 60~~31,~~000~~ ~~shares~~2010 ~~of common stock~~ and ~~120,000~~2009 ~~warrants.~~increased Inby ~~addition,~~approximately ~~the Company issued to Ramp warrants to purchase up to 60,000 shares of the Company's common stock, respectively, representing 10% of the common stock to be issued to investors~~$5.8 ~~All~~million ~~warrants issued~~and todecreased ~~Ramp~~by ~~contain~~approximately ~~terms identical to the terms of the warrants issued to the investors in the February 2008 Financing. Net proceeds (after reinvestment of the cash finders fee) were~~ $19.86 million, ~~with no legal or other professional fees attributed thereto as offering costs~~respectively.

~~Funds Raised~~Significant ~~Pursuant~~components toof ~~Warrant~~the ~~Exercises~~Company’s ~~due~~deferred totax ~~Temporary~~assets ~~Reduction~~at inDecember ~~Exercise Price~~31, of2010 ~~Warrants~~and ~~Issued~~2009 are as follows:

On February 1, 2008, the Company temporarily reduced the exercise price of all of its issued and outstanding warrants to $3.00 and sent notification to all of its warrantholders to that effect. As of February 1, 2008, the Company had 3,864,944 warrants issued and outstanding. On February 28, 2008, the total number of warrants exercised under this temporary reduction in exercise price program was 611,895 resulting in net proceeds to the Company of $1.8 million. The Company concluded that the temporary reduction in exercise has no economic impact on its consolidated statements of operations because the reduction in exercise price is only an offer to sell stock at a reduced per share price. All shares issued as a result of these warrant exercises are unregistered, restricted shares of its common stock. Thus, as of February 28, 2008, 3,253,052 of the remaining warrants eligible for conversion remained issued and outstanding and reverted to their original terms.

	December 31,
	2010			2009
Deferred tax assets:
Net operating tax loss carryforwards	$	42,374,000		$	38,781,000
Research and development tax credits		2,083,000			2,113,000
Amortization of loan discount and accrued interest, related party		194,000			-
Stock warrants - beneficial warrant conversion and revaluation		1,063,000			-
Fixed asset depreciation		736,000			758,000
Inventory reserves		453,000			453,000
Deferred offering costs		149,000			-
Stock based compensation		3,394,000			2,474,000
Registration rights penalties		-			86,000
Non-cash warrants – consultants		6,762,000			6,762,000
Revenue deferral		541,000			554,000
Issuance of warrants to advisors		217,000			217,000
Issuance of warrants on settlement of registration rights penalty		168,000			168,000
Other		271,800			255,000
Total deferred tax asset	$	58,405,800		$	52,621,000
Less valuation allowance		(58,405,800	)		(52,621,000	)
Net deferred tax asset	$	—		$	—

~~Sale~~ In July 2006, the FASB, issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of ~~Common~~FASB ~~Stock~~Statement No. 109,” (“FIN 48”). FIN 48 is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. In addition, FIN 48 provides guidance on de-recognition, classification, interest and penalties, and accounting in interim periods and requires expanded disclosure with respect to any uncertainty in income taxes. The Company adopted the provisions of FIN 48 as of January 1, 2007. 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. As a result, no reserves or liabilities for uncertain income tax positions, interest or penalties have been recorded pursuant to FIN 48. As of December 31, 2010 and December 31, 2009, there were no unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate in any future periods. In addition, the Company did not record a cumulative effect adjustment related to the adoption of FIN 48. Tax returns for years beginning after December 31, 2003 remain subject to examination by major tax jurisdictions as of December 31, 2009.

On October 30, 2009, the Company issued 3,000,000 shares of its common stock and 3,000,000 warrants to purchase its common stock to an investor for a purchase price of $0.6 million in a transaction exempt from registration under Section 4(2) of the Securities Act of 1933. The warrants are exercisable into shares of the Company’s common stock at an exercise price of $0.20 per share, and bear a term of five years from the date of closing. The warrants contain a cashless exercise provision and contain “full ratchet” anti-dilution provisions. The Company paid the following fees to finders in conjunction therewith: cash in the amount of $0.1 million and issuance of a total of 1,200,000 warrants allocated as follows: (i) 600,000 warrants representing 20% of the common stock issued to investors and (ii) 600,000 warrants representing 20% of the warrants issued to investors in connection with this private placement recorded as a reduction of equity as a cost of the transaction. All warrants issued contain terms identical to the terms of the warrants issued to the investors.

In accordance with ASC Topic 815-10, (formerly EITF Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock”), the Company recorded a warrant liability of $2.3 million in the consolidated balance sheet for the fair value of the warrants issued to the investors and finders using the Black-Scholes-Merton option-pricing model. Management estimated that the fair value of the 1,200,000 warrants issued, using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions; 2.31% risk-free interest rate, 5.0 years expected holding period and 91.9% expected volatility.

VYTERIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11In 2010, 2009, and 2008 the Company sold approximately $3.4 ~~Related~~million, ~~Party~~$5.4 ~~Transactions~~million and $0.8 million, respectively, of its State Net Operating Loss carryforwards under the State of New Jersey’s Technology Business Tax Certificate Transfer Program (the “Program”). The Program allows qualified technology and biotechnology businesses in New Jersey to sell unused amounts of net operating loss carryforwards and defined research and development tax credits for cash. The proceeds from the sale in 2010, 2009, and 2008, net of commissions, were $0.4 million, $2.1 million and $0.1 million, respectively, and such amounts were recorded as a tax benefit in the accompanying consolidated statements of operations. The State of New Jersey renews the Program annually and currently limits the aggregate proceeds to $60 million. The Company cannot be certain if it will be able to sell any of its remaining or future New Jersey loss carryforwards or tax credits under the Program. The Company generated net proceeds of $0.4 million and $2.1 million in 2010 and 2009 as a result of the sale of the tax credits, which has been recognized as received as an income tax benefit in the consolidated statements of operations.

~~In addition~~A toreconciliation ~~the indebtedness described in Note 6, the private placements~~ of ~~common~~ ~~stock and warrants described in Note 10, and~~ the ~~payment~~statutory oftax ~~finders~~rates ~~fees described~~for in the ~~subsequent~~years ~~event~~ended ~~Note~~December 1831, ~~the~~2010, ~~Company~~2009 ~~had~~and ~~the~~2008 ~~following~~is ~~related party~~as ~~transactions~~follows:

· At December 31, 2009, approximately $0.2 million is included in interest payable and accrued expenses due to related party in the accompanying consolidated balance sheets for amounts owed to STSG.

	December 31,
	2010		2009		2008

Statutory rate		(34)%		(34)%		(34)%

State income tax – sale of net operating losses		(4)%		(6)%		(1)%
Research and development credits		(0)%		(0)%		(2)%
Change in valuation allowance and other items		35%		35%		36%
Benefit for income tax		(3)%		(5)%		(1)%

· On April 26, 2005, the Company announced the appointment of Russell O. Potts, Ph.D. to its Board of Directors. Dr. Potts has served the Company as a consultant in drug delivery, glucose monitoring and medical devices since April 2003. The Company paid Dr. Potts approximately $5,000, $21,000 and $87,000 for consulting services and out of pocket expenses for the years ended December 31, 2009, 2008 and 2007, respectively.

· On March 12, 2007, the Company borrowed from Donald F. Farley, Chairman of the Board of Directors of the Company at that time, $0.2 million at an interest rate of 10% per annum, plus reimbursement to Mr. Farley for his closing costs. The Company repaid this loan plus accrued interest in full on March 28, 2007. Additionally, Mr. Farley was paid $40,000 for the year ended December 31, 2008 for the performance of interim CEO services.

· At December 31, 2008, approximately $0.05 million was paid for amounts owed to Arthur Courbanou for additional services performed as Chairman of the Special Assessment Committee.

12. Income Taxes

The Company has available, for federal and State of New Jersey income tax purposes, net operating loss carryforwards (“NOLs”), subject to review by the authorities, aggregating approximately $140.5 million and $106.6 million, respectively. Federal NOLs expire at various times from 2021 to 2028 and New Jersey NOLs expire at various times from 2010 to 2015.

Utilization of net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The Company has not performed a detailed analysis to determine whether an ownership change under Section 382 of the Internal Revenue Code occurred as a result of the 2004 reverse merger, as the ultimate realization of such net operating losses is uncertain. The effect of the ownership change could create an imposition of an annual limitation on the use of net operating loss carryforwards attributable to periods before the merger.

Except as described below, the Company has not recorded a provision for or benefit from income taxes in the accompanying consolidated financial statements due to recurring losses and the uncertainty of the future realization of its deferred tax assets. Accordingly, the Company has provided for a full valuation allowance against its deferred tax assets. The valuation allowance for the years ended December 31, 2009 and 2008 increased by approximately $9.6 million and decreased by approximately $7.9 million, respectively.

VYTERIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Significant components of the Company’s deferred tax assets at December 31, 2009 and 2008 are as follows:

	December 31,
	2009			2008
Deferred tax assets:
Net operating tax loss carryforwards	$	38,781,000		$	40,737,000
Research and development tax credits		2,113,000			1,804,000
Amortization of loan discount and accrued interest, related party		-			5,180,000
Stock Warrants - Beneficial warrant conversion and revaluation		-			530,000
Fixed asset depreciation		758,000			743,000
Inventory reserves		453,000			703,000
Allowance for asset impairments		-			1,987,000
Stock based compensation		2,474,000			2,218,000
Registration rights penalties		86,000			959,000
Non-cash warrants – consultants		6,762,000			6,868,000
Revenue Deferral		554,000			-
Issuance of warrants to advisors		217,000			-
Issuance of warrants on settlement of registration rights penalty		168,000			-
Other		255,000			528,000
Total deferred tax asset	$	52,621,000		$	62,257,000
Less valuation allowance		(52,621,000	)		(62,257,000	)
Net deferred tax asset	$	—		$	—

In July 2006, the Financial Accounting Standards Board, or FASB, issued ASC 740-10-05 (formerly SFAS 109, “Accounting for Income Taxes” and FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of SFAS No. 109, “Accounting for Income Taxes”). ASC 740-10-05 seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. In addition, ASC 740-10-05 provides guidance on de-recognition, classification, interest and penalties, and accounting in interim periods and requires expanded disclosure with respect to any uncertainty in income taxes. The Company adopted the provisions of ASC 740-10-05 as of January 1, 2007. 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. As a result, no reserves or liabilities for uncertain income tax positions, interest or penalties have been recorded pursuant to ASC 740-10-05. As of December 31, 20099 and December 31, 2008, there were no unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate in any future periods. In addition, the Company did not record a cumulative effect adjustment related to the adoption of ASC 740-10-05. Tax returns for years beginning after December 31, 2003 remain subject to examination by major tax jurisdictions as of December 31, 2009.

In 2009, 2008, and 2007 the Company sold approximately $5.4 million, $0.8 million and $3.8 million, respectively, of its State Net Operating Loss carryforwards under the State of New Jersey’s Technology Business Tax Certificate Transfer Program (the “Program”). The Program allows qualified technology and biotechnology businesses in New Jersey to sell unused amounts of net operating loss carryforwards and defined research and development tax credits for cash. The proceeds from these sales in 2009, 2008, and 2007, net of commissions, were $2.1 million, $0.1 million and $0.5 million, respectively, and such amounts were recorded as a tax benefit in the accompanying consolidated statements of operations. The State of New Jersey renews the Program annually and currently limits the aggregate proceeds to $60 million. The State of New Jersey has indicated that it will not renew this program for 2010, so the Company will be unable to sell any remaining or future New Jersey loss carryforwards or tax credits under the Program.

A reconciliation of the statutory tax rates for the years ended December 31, 2009, 2008 and 2007 is as follows:

	December 31,
	2009			2008			2007
Statutory rate		(34	)%		(34	)%		(34	)%
State income tax – sale of net operating losses		(6	)%		(1	)%		(1	)%
Research and development credits		(0	)%		(2	)%		(1	)%
Change in valuation allowance and other items		35	%		36	%		35	%
Benefit for income tax		(5	)%		(1	)%		(1	)%

VYTERIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13.	Commitments and Contingencies

Legal

From time to time, the Company is involved in other lawsuits, claims, investigations and proceedings, including pending opposition proceedings involving patents that arise in the ordinary course of business. As of December 31, ~~2009~~2010, there were no matters pending that the Company expects to have a material adverse impact on the Company’s business, results of operations, financial condition or cash flows except for ~~approximately~~ several accounts payable collection claims and litigation, which amounts are unknown and will not be determined until future events occur. There are also pending claims for past due accounts payable some of which are in active litigation, which amounts are unknown and will not be determined until future events occur. ~~Such~~The ~~payables~~original ~~have~~amounts ~~been~~of these payables were accrued for at December 31, ~~2009~~2010 on the consolidated balance sheet.

In July 2010, the Company filed a complaint against Ferring entitled “Vyteris, Inc. v. Ferring Pharmaceuticals, Inc.” (the “Lawsuit”) in the Superior Court of New Jersey, Chancery Division – Essex County to resolve outstanding issues with respect to this termination. Ferring filed a motion to compel arbitration in the case which was granted in November 2010. The Lawsuit has been converted to arbitration and is in its initial stages, and we cannot predict the outcome of the Lawsuit, or what relief we may receive, if we do prevail on the merits. As of December 31, 2010 and 2009, the Company recorded $1.4 million in accrued expenses and other in the consolidated balance sheet for the estimated amounts due to Ferring. (See Note 9 Agreements with Ferring)

Leases

In August 2006, the Company entered into a five year lease agreement for its principal facility which houses its FDA approved manufacturing operations. As part of the agreement, the Company paid $0.43 million for a security deposit.

At December 31, ~~2009~~2010, the minimum lease payments under ~~this~~ non-cancelable operating ~~lease~~leases are as follows (which includes the PMK 150 lease as set forth in the Transaction Agreement with Ferring March 2009 section of Item 7 - Management’s discussion and analysis of financial condition and results of operations, of this 10K from) :

	Operating Leases
Years ended December 31,
2010	$	407,088
2011		402,580
2012		-
2013		-
2014		-
Thereafter		-
Total minimum lease payments	$	809,668

VYTERIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

	Operating Leases
Years ended December 31,
2011	$	333,379
2012		93,201
2013		12,000
2014		12,000
2015		12,000
Thereafter		38,000
Total minimum lease payments	$	500,580

Settlement and Release Agreement with 17-01 Pollitt Drive

In May 2005, the Company entered into a ten year lease for an additional 26,255 square feet of space with 17-01 Pollitt Drive, L.L.C. in a new expansion facility, approximately 200 yards from the above facility. Given the de-emphasis of LidoSite, the Company did not anticipate a current or short term need for this manufacturing facility. Therefore, during the first quarter of 2008 the Company consolidated all operations (including offices) into its main operating facility at 13-01 Pollitt Drive and approached the landlord to seek an early lease termination. The Company recognized the present value of future remaining lease costs of $2.6 million in facilities realignment and fixed asset impairment costs in the accompanying consolidated statement of operations for the year ended December 31, 2008.

As of December 31, 2008, the balance of the recorded facility realignment plan was as follows:

	Totals
Balance as of December 31, 2007	$	-
Facilities realignment charge		2,350,600
Deferred rent adjustment		179,067
Accretion		132,606
Payments		(311,104	)
Balance as of December 31, 2008		2,351,169

Less current portion included in accrued expenses, deferred revenue and other		(251,411	)
Present value of abandoned operating lease payments	$	2,099,758

64On September 30, 2009, the Company entered into a Settlement and Release Agreement with 17-01 Pollitt Drive, L.L.C. (“Landlord”) with respect to this lease. Under the settlement agreement the Company is to pay Landlord $0.5 million, which is evidenced by the issuance of a five year interest only balloon note with principal of $0.5 and interest accruing at the rate of 6% per year. Upon a default by the Company under this promissory note, the principal amount is increased to $0.6 million. The note is convertible at the Landlord’s sole discretion into unregistered common stock of the Company at the conversion price of $1.50 per share. In exchange for the note, Landlord released the Company from its obligations under the Company’s lease between Landlord and the Company. The Company recognized a gain of $2.0 million for the settlement of the lease obligation in the accompanying consolidated statements of operations for the year ended December 31, 2009. Due to this settlement agreement, the Company previously reduced its accrued restructuring liability by approximately $2.1 million and accounts payable by approximately $0.4 million in the accompanying consolidated balance sheet as of December 31, 2009.

Rent expense recorded in the accompanying consolidated statements of operations was approximately $0.4 million for each of the years ended December 31, 2010, 2009 and 2008.

VYTERIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

On September 30, 2009, the Company entered into a Settlement and Release Agreement with 17-01 Pollitt Drive, L.L.C. (“Landlord”) with respect to this lease. Under the settlement agreement the Company is to pay Landlord $0.5 million, which is evidenced by the issuance of a five year interest only balloon note with interest accruing at the rate of 6% per year. Upon a default by the Company under this promissory note, the principal amount is increased to $0.6 million. The note is convertible at the Landlord’s sole discretion into unregistered common stock of the Company at the conversion price of $1.50 per share. In exchange for the note, Landlord released the Company from its obligations under the Company’s lease between Landlord and the Company. The Company recognized a gain of $2.0 million for the settlement of the lease obligation in the accompanying consolidated statements of operations for the year ended December 31, 2009. Due to this settlement agreement, the Company previously reduced its accrued restructuring liability by approximately $2.1 million and accounts payable by approximately $0.4 million in accompanying consolidated balance sheet as of December 31, 2009.

Rent expense recorded in the accompanying consolidated statements of operations was approximately $0.4 million, $0.4 million and $0.6 million for the years ended December 31, 2009, 2008 and 2007, respectively.

14.	Stock Based Compensation Plans and Employment Agreements

2005 Stock Option Plans

In April 2005, the Board of Directors and stockholders of the Company approved the 2005 Stock Option Plan (the “2005 Stock Option Plan”). Under the 2005 Stock Option Plan, incentive stock options and non-qualified stock options to purchase shares of the Company’s common stock may be granted to directors, officers, employees and consultants. AtEffective ~~adoption,~~as aof ~~total~~March of31, ~~193~~2010,~~460~~ ~~shares~~the ofCompany amended its 2005 Stock Option Plan to increase the ~~Company’s~~number ~~common stock~~of ~~were~~options available for ~~issuance~~grant ~~pursuant~~under to the ~~2005~~plan ~~Stock~~pursuant ~~Option Plan. On~~to ~~May~~authorization ~~31,~~provided ~~2007,~~by the ~~Company’s~~unanimous ~~Board~~consent of ~~Directors~~its ~~voted~~Board ~~unanimously to~~of ~~increase~~Directors. Specifically, the number of ~~shares~~options ofavailable ~~Company~~in ~~stock~~its ~~available~~2005 ~~for~~Stock ~~issuance~~Option ~~under the~~ Plan was increased to ~~973~~20,~~417~~000,000 options available to grant.

~~Effective~~ Options granted under the 2005 Stock Option Plan vest as determined by the Compensation Committee of ~~December~~the ~~31,~~Board ~~2008,~~of Directors (the ~~Company~~“Compensation ~~amended~~Committee”) ~~its~~and ~~2005~~terminate ~~Stock~~after ~~Option~~the ~~Plan~~earliest ~~to increase~~of the ~~number~~following events: expiration of ~~options~~the ~~available~~option ~~for~~as provided in the option agreement, termination of the employee, or ten years from the date of grant ~~under~~(five years from the ~~plan~~date ~~pursuant~~of grant for incentive options granted to ~~authorization~~ ~~provided~~an byemployee who owns more than 10% of the ~~unanimous~~total ~~consent~~combined voting power of ~~its~~all ~~Board~~classes of ~~Directors~~ the Company stock at the date of grant). ~~Specifically~~In some instances, ~~the~~ ~~number~~granted ofstock options ~~available~~are immediately exercisable into restricted shares of common stock, which vest in ~~its 2005~~accordance ~~Stock~~with ~~Option~~the ~~Plan~~original ~~was~~terms ~~increased~~of ~~from~~the ~~973,417~~related options. If an optionee’s status as an employee or consultant changes due to 5termination,~~473~~ the Company has the right,~~417 options~~ but not the obligation, to purchase from the optionee all unvested shares at the original option exercise price. The Company recognizes compensation expense ratably over the requisite service period.

Options granted under the 2005 Stock Option Plan vest as determined by the Compensation Committee of the Board of Directors (the “Compensation Committee”) and terminate after the earliest of the following events: expiration of the option as provided in the option agreement, termination of the employee, or ten years from the date of grant (five years from the date of grant for incentive options granted to an employee who owns more than 10% of the total combined voting power of all classes of the Company stock at the date of grant). In some instances, granted stock options are immediately exercisable into restricted shares of common stock, which vest in accordance with the original terms of the related options. If an optionee’s status as an employee or consultant changes due to termination, the Company has the right, but not the obligation, to purchase from the optionee all unvested shares at the original option exercise price. Prior to the adoption of ASC 718-10 and ASC 505-50, the vesting period of a stock option was 33% per annum over a three-year period. Subsequent to the adoption of ASC 718-10 and ASC 505-50, the vesting period of stock options are either performance based or contain vesting periods of three years or less. The Company recognizes compensation expense ratably over the requisite service period.

The option price of each share of common stock shall be determined by the Compensation Committee, provided that with respect to incentive stock options, the option price per share shall in all cases be equal to or greater than 100% of the fair value of a share of common stock on the date of the grant, except an incentive option granted under the 2005 Stock Option Plan to a shareholder that owns more than 10% of the total combined voting power of all classes of the Company stock, shall have an exercise price of not less than 110% of the fair value of a share of common stock on the date of grant. No participant may be granted incentive stock options, which would result in shares with an aggregate fair value of more than $100,000 first becoming exercisable in one calendar year.

2010 Directors’ Incentive Plan

In March 2010, the Company’s Board of Directors unanimously approved the Company’s 2010 Outside Director Cash Compensation and Stock Incentive Plan (the “2010 Directors’ Incentive Plan”). The 2010 Directors’ Incentive Plan, which replaces the 2007 Directors’ Incentive Plan, increases the number of authorized options under the Directors’ Incentive Plan from 2,583,333 options to 10,000,000 options. As of December 31, 2010, the Company issued 4,745,249 options to purchase shares of the Company’s common stock under the 2010 Directors’ Incentive Plan.

Stock option transactions for the years ended December 31, 2010, 2009 and 2008 under all plans are as follows:

	Number of Shares			Exercise Price Per Share		Weighted Average Exercise Price		Intrinsic Value
Outstanding at December 31, 2007		701,666		$	4.20 - $45.60	$	31.35	$	44,600
Granted		2,103,238			0.25 - 5.25		0.44
Exercised		-			-		-
Forfeited		(451,780	)		0.50 - 45.60		34.88
Outstanding at December 31, 2008		2,353,124			0.25 - 45.60		3.02		-
Granted		2,022,005			0.25 - 0.72		0.33
Exercised		-			-		-
Forfeited		(81,687	)		0.29 - 45.60		2.66
Outstanding at December 31, 2009		4,293,442			0.25 - 45.60		1.76	$	1,531,693
Granted		12,594,723			0.30 – 0.65		0.50
Exercised		-			-		-
Forfeited		(160,655	)		0.29 - 45.60		1.25
Outstanding at December 31, 2010		16,727,510			0.25 - 45.60		0.81	$	598,772
Exercisable at December 31, 2010		9,169,975		$	0.25 - $45.60	$	1.09	$	380,116

VYTERIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table summarizes information about stock options outstanding and exercisable under all plans at December 31, 2010:

		Options Outstanding at December 31, 2010						Options Exercisable at December 31, 2010
Exercise Price		Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)		Number of Shares		Weighted Average Exercise Price
$	0.25-0.30		3,169,466	$	0.27		8.41		2,309,966	$	0.27
$	0.31-0.35		5,747,639		0.35		9.08		2,726,997		0.35
$	0.36-0.55		1,608,846		0.51		8.13		952,055		0.52
$	0.56-0.65		5,747,639		0.65		9.09		2,726,997		0.65
$	0.66-45.60		453,920		13.62		4.72		453,960		13.62
			16,727,510	$	0.81		8.81		9,169,975	$	1.09

The following table summarizes the Company’s unvested stock awards (see Note 15 – employment agreements for discussion of awards to certain officers) under all plans as of December 31, 2010 and 2009:

	As of December 31, 2010					As of December 31, 2009
Unvested Stock Option Awards	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Unvested at January 1,		1,757,308		$	0.69		1,240,036		$	0.69
Awards		12,594,724		$	1.00		1,847,000		$	0.29
Forfeitures		-			-		(57,437	)	$	1.03
Vestings		(6,794,497	)	$	0.49		(1,272,291	)	$	0.56
Unvested at December 31,		7,557,535		$	0.57		1,757,308		$	0.57

Stock options available for grant under all stock option plans covered a total of 13,250,565 shares of common stock at December 31, 2010. Stock options available for grant under the 2005 Stock Option Plan covered 7,995,814 shares of stock, and the 2010 Outside Director Stock Incentive Plans covered 5,254,751 shares of stock at December 31, 2010.

The fair value of stock-based awards was estimated using the Black-Scholes-Merton option-pricing model, or in the case of awards with market or performance based conditions, the binomial model with the following weighted-average assumptions for stock options granted in years ended December 31, 2010, 2009 and 2008:

	Years Ended December 31,
	2010			2009			2008
Expected holding period (years)		5.0			5.0			5.0
Risk-free interest rate		2.35	%		2.72	%		2.28	%
Dividend yield		0	%		0	%		0	%
Fair value of options granted	$	0.35		$	0.23		$	0.19
Expected volatility		91.86	%		91.86	%		91.86	%
Forfeiture rate		14.17	%		15.38	%		15.21	%

The Company’s computation of expected life is based on historical exercise and forfeiture patterns. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. The key factors in the Company’s determination of expected volatility are historical and market-based implied volatility, comparable companies with longer stock trading periods than the Company and industry benchmarks.

VYTERIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~Outside Director~~The ~~Stock~~following ~~Incentive~~table ~~Plans~~sets forth the total stock-based compensation expense resulting from stock options in the Company’s consolidated statements of operations for the years ended December 31, 2010, 2009 and 2008:

On August 1, 2007, the Company formally adopted its 2007 Outside Director Cash Compensation and Stock Incentive Plan (the “2007 Directors’ Incentive Plan”). The 2007 Directors’ Incentive Plan, which replaced the 2005 Directors’ Incentive Plan, increases the number of authorized shares under the 2007 Directors’ Incentive Plan to 333,333. As of December 31, 2009, the Company amended the 2007 Directors’ Incentive Plan pursuant to authorization provided by the unanimous consent of its Board of Directors to increase the number of authorized shares from 333,333 options to 2,583,333 options. The 2007 Directors’ Incentive Plan provides for the following compensation to outside directors:

	Years Ended December 31,
	2010		2009		2008
Research and development	$	422,970	$	107,046	$	528,419
General and administrative		1,860,825		502,236		(4,548,759	)
Sales and marketing		19,905		29,725		(31,019	)
Stock-based compensation expense before income taxes		2,303,700		639,007		(4,051,359	)
Income tax benefit		-		-		-
Total stock-based compensation expense after income taxes	$	2,303,700	$	639,007	$	(4,051,359	)

1.As ~~Cash payments consist~~ of aDecember ~~$25~~31,~~000~~ ~~annual retainer~~2010, $~~5,000~~1.1 ~~annually~~million ~~for~~of ~~serving~~total onunrecognized acompensation ~~Board~~cost ~~Committee,~~related ~~$5,000~~to ~~annually~~stock ~~for~~options ~~acting~~is asexpected ~~the~~to ~~Chairman~~be ofrecognized over a ~~Committee,~~weighted-average ~~and~~period ~~$15,000 annually for acting as Chairman~~ of ~~the~~0.8 ~~Board~~years.

2.In ~~Options~~March ~~with~~2008, athe ~~fair~~Company ~~market~~recognized ~~value~~a ~~strike~~credit ~~price~~of ~~and~~$6.2 10million ~~year~~due ~~term~~to ~~consisting~~the forfeiture of aunvested ~~3,334~~performance ~~initial~~based ~~option~~stock ~~grant~~options, ~~vesting~~previously ~~quarterly~~granted ~~over~~to ~~two~~former ~~years~~Chief Executive Officer, atTimothy ~~417~~McIntyre, ~~per~~upon ~~quarter~~his ~~and~~resignation awhich 2resulted in the reversal of previously recognized expense related to such options. In April 2008,~~000~~ ~~annual~~the ~~option~~Company ~~grant~~recognized a credit of $1.0 million due to the forfeiture of unvested performance based stock options, ~~vesting~~previously ~~quarterly~~granted ~~over~~to ~~one~~the ~~year~~former Chief Financial Officer, atAnthony ~~500~~Cherichella, ~~options~~upon ~~per~~his ~~quarter~~resignation which resulted in the reversal of previously recognized expense related to such options.

As15. ~~of December~~Material ~~31, 2009, the Company issued 1,265,374 options to purchase shares of the Company’s common stock under the 2007 Directors’ Incentive Plan.~~Agreements

~~Stock option~~Senior ~~transactions~~Executive ~~for~~Employment ~~the years ended December 31, 2009, 2008 and 2007 under all plans are as follows:~~Agreements

	Number of Shares			Exercise Price Per Share	Weighted Average Exercise Price		Intrinsic Value
Outstanding at December 31, 2006		281,391		$4.20 - $45.60	$	29.55
Granted		526,000		8.10 - 41.40		33.15
Exercised		(20,044	)	4.20 - 28.65		25.05
Forfeited		(85,681	)	4.20 - 45.60		38.25
Outstanding at December 31, 2007		701,666		4.20 - 45.60		31.35	$	44,600
Granted		2,103,238		0.25 - 5.25		0.44
Exercised		-		-		-
Forfeited		(451,780	)	0.50 - 45.60		34.88
Outstanding at December 31, 2008		2,353,124		0.25 - 45.60		3.02		-
Granted		2,022,005		0.25 - 0.72		0.33
Exercised		-		-		-
Forfeited		(81,687	)	0.29 - 45.60		2.66
Outstanding at December 31, 2009		4,293,442		0.25 - 45.60		1.76	$	1,531,693
Exercisable at December 31, 2009		2,536,134		$0.25 - $45.60	$	2.73	$	843,250

On November 21, 2008, the Company entered into an employment agreement with Dr. Hartounian effective as of May 1, 2008, which was renewed and is currently set to expire on November 30, 2011. Dr. Hartounian’s base salary is $0.3 million per year and he is eligible for a bonus of up to 40% of his salary payable in cash. In connection with the extension of the term of the employment agreement, Dr. Hartounian is to be granted up to 7,423,970 options to purchase Company common stock, with the initial 5,196,780 options having been granted and 2,227,190 options to be granted upon raising of $7.0 million by the Company. All options granted shall vest as follows: 35% immediately upon issuance and 65% quarterly over three years from date of grant.

~~The following~~On ~~table~~November ~~summarizes~~21, ~~information~~2008, ~~about~~the Company entered into an employment agreement with Joseph N. Himy effective as of May 1, 2008, which was renewed and is currently set to expire on November 30, 2011. Mr. Himy’s base salary is $0.2 million per year and he is eligible for a bonus of up to 25% of his salary payable in cash or stock. Mr. Himy is to be granted up to 2,227,191 options, ~~outstanding~~with ~~and exercisable~~the ~~under~~initial ~~all~~1,559,034 ~~plans~~options athaving ~~December~~been 31granted and 668,157 ~~2009~~options to be granted upon raising of $7.0 million by the Company. All options granted shall vest as follows: 35% immediately upon issuance and 65% quarterly over three years from date of grant.

	Options Outstanding at December 31, 2009						Options Exercisable at December 31, 2009
Exercise Price	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)		Number of Shares		Weighted Average Exercise Price
$ 0.25-18.60		4,107,611	$	0.55		8.82		2,351,936	$	0.71
$18.61-21.75		86,536		19.73		2.39		86,542		19.73
$21.76-24.00		20,267		23.26		7.66		18,604		23.26
$24.01-31.50		17,016		29.65		4.30		17,036		29.65
$31.51-45.60		62,012		42.20		5.85		62,016		42.20
		4,293,442	$	1.76		8.90		2,536,134	$	2.73

Other

Pursuant to a Settlement and Mutual Release Agreement, dated October 27, 2008, between the Company and Monumed, LLC, Monumed forgave the approximately $0.2 million in outstanding invoices owed to it for services rendered, and the parties exchanged mutual releases. In addition, in lieu of the remaining $0.2 million payment which was due Mr. McIntyre, the Company paid $75,000 on October 27, 2008, and agreed to pay an additional $25,000 on each of November 26, 2008 and December 24, 2008. The Company recorded $50,000 outstanding under this agreement in accrued expenses in the consolidated balance sheet as of December 31, 2010 and 2009.

VYTERIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~The following~~16. ~~table~~Earnings ~~summarizes the Company’s unvested stock awards~~ (~~see Note 15 – employment agreements for discussion of awards to certain officers~~Loss) ~~under~~Per ~~all plans as of December 31, 2009 and 2008:~~Share

	As of December 31, 2009					As of December 31, 2008
Unvested Stock Option Awards	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Unvested at January 1,		1,240,036		$	0.69		480,989		$	32.70
Awards		1,847,000		$	0.29		2,103,238		$	0.44
Forfeitures		(57,437	)	$	1.03		(394,914	)	$	35.51
Vestings		(1,272,291	)	$	0.56		(949,277	)	$	1.84
Unvested at December 31,		1,757,308		$	0.57		1,240,036		$	0.69

The following table sets forth the computation of basic and diluted net income (loss) attributable to common stockholders per share for the years ended December 31, 2010, 2009 and 2008.

Stock options available for grant under all stock option plans covered a total of 3,741,383 shares of common stock at December 31, 2009. Stock options available for grant under the 2005 Stock Option Plan covered 2,423,424 shares of stock, and the Outside Director Stock Incentive Plans covered 1,317,959 shares of stock at December 31, 2009.

	Years Ended December 31,
	2010			2009			2008
Numerator:
Net loss	$	(10,547,377	)	$	(33,940,363	)	$	(8,024,240	)
Denominator:
Weighted average shares		64,392,135			9,002,816			7,032,288
Basic and diluted net loss per share	$	(0.16	)	$	(3.77	)	$	(1.14	)

The ~~fair value~~following oftable ~~stock-based~~shows ~~awards~~dilutive ~~was~~common ~~estimated~~share ~~using~~equivalents ~~the Black-Scholes-Merton model~~outstanding, or inwhich ~~the~~are ~~case~~not ofincluded ~~awards~~in ~~with~~the ~~market~~above orhistorical ~~performance based conditions~~calculations, ~~the binomial~~as ~~model with~~ the ~~following~~effect ~~weighted-average~~of ~~assumptions~~their ~~for~~inclusion ~~stock~~is ~~options granted~~anti-dilutive induring ~~years~~each ~~ended December 31, 2009, 2008 and 2007:~~period.

	Years Ended December 31,
	December 31,
	2009			2008			2007
	2010			2009			2008
Expected holding period (years)		5.0			5.0			8.4
Convertible preferred stock		-			-			500,000
Risk-free interest rate		2.72	%		2.28	%		4.61	%
Convertible debt		9,620,185			333,333			491,847
Dividend yield		0	%		0	%		0	%
Warrants		33,639,513			8,954,203			4,008,377
Fair value of options granted	$	0.23		$	0.19		$	1.91
Options		16,727,510			4,293,442			2,353,124
Expected volatility		91.86	%		91.86	%		97.4	%
Total		59,987,208			13,580,978			7,353,348
Forfeiture rate		15.38	%		15.21	%		15.21	%

~~The Company’s computation of expected life is based on historical exercise and forfeiture patterns~~17. ~~The~~Warrants interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. The key factors in the Company’s determination of expected volatility are historical and ~~market-based~~Derivative implied volatility, comparable companies with longer stock trading periods than the Company and industry benchmarks. The following table sets forth the total stock-based compensation expense resulting from stock options in the Company’s consolidated statements of operations for the years ended December 31, 2009, 2008 and 2007:Instruments

	Years Ended December 31,
	2009		2008			2007
Research and development	$	107,046	$	528,419		$	372,186
General and administrative		502,236		(4,548,759	)		7,603,215
Sales and marketing		29,725		(31,019	)		191,338
Stock-based compensation expense before income taxes		639,007		(4,051,359	)		8,166,739
Income tax benefit		-		-			-
Total stock-based compensation expense after income taxes	$	639,007	$	(4,051,359	)	$	8,166,739

Warrant transactions for the years ended December 31, 2010, 2009 and 2008 are as follows:

As of December 31, 2009, $0.4 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 0.8 years.

	Number of Shares			Exercise Price Per Share		Weighted Average Exercise Price
Outstanding at December 31, 2007		3,864,921			$3.75 – $143.25	$	7.50
Granted		1,433,357			3.00 – 24.75		2.97
Exercised		(611,895	)		3.75 – 67.05		3.00
Forfeited		(678,006	)		6.75 – 6.75		6.75
Outstanding at December 31, 2008		4,008,377			1.65 –143.25		11.00
Granted		5,904,487			0.10 – 15.41		6.44
Exercised		(80,000	)		0.10 - 0.10		0.10
Forfeited		(878,661	)		3.00 – 67.05		38.58
Outstanding at December 31, 2009		8,954,203			0.10–143.25		2.98
Granted		24,935,310			0.20 – 13.49		2.60
Exercised		-			-		-
Forfeited		(250,000	)		0.50 - 0.50		0.50
Outstanding at December 31, 2010		33,639,513			$0.20–$143.25	$	1.17

InThe ~~March 2008,~~following ~~the~~table ~~Company~~summarizes ~~recognized~~information aabout ~~credit~~warrants ofoutstanding ~~$6.2 million due to the forfeiture~~ of ~~unvested~~ ~~performance~~which ~~based stock options~~28, ~~previously granted to former Chief Executive Officer~~765,469 ~~Timothy~~are ~~McIntyre,~~classified ~~upon~~as ~~his~~liability ~~resignation~~instruments ~~which~~and ~~resulted~~exercisable inat ~~the reversal~~December ~~of previously recognized expense related to such options. In April 2008~~31, the Company recognized a credit of $1.0 million due to the forfeiture of unvested performance based stock options, previously granted to the former Chief Financial Officer, Anthony Cherichella, upon his resignation which resulted in the reversal of previously recognized expense related to such options.2010:

VYTERIS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. Material Agreements

				Warrants Outstanding and Exercisable At December 31, 2010
Exercise Price		Number of Shares		Weighted Average Exercise Price		Expiration Dates		Fair Value of Warrants Classified As Derivative Liabilities
$	0.10-0.20		13,495,000	$	0.20		2012 -2015	$	3,095,871
$	0.21-0.25		14,177,390		0.25		2014- 2015		3,412,190
$	0.26-3.75		3,915,992		2.50		2011- 2015		-
$	3.76-143.25		2,051,131		18.72		2010- 2014		18,686
$	0.10-143.25		33,639,513	$	1.17		2010-2015	$	6,526,747

~~Senior Executive~~The ~~Employment~~following ~~Agreements~~table summarizes the major 2010 warrant issuances, net of forfeitures, as follows:

On November 21, 2008, the Company entered into an employment agreement with Dr. Hartounian. Dr. Hartounian was elected President of the Company effective as of May 1, 2008 with a term expiring December 1, 2009, which was deemed to have been renewed and is currently set to expire on November 30, 2011. Dr. Hartounian’s base salary is $0.3 million per year and he is eligible for a bonus of up to 40% of his salary payable in cash.

	2010 Transactions
Issued in connection with the 2010 Notes (see Note 7)		12,495,000
Issued in connection with the June 2010 Notes (see Note 8)		2,760,000
Issued upon conversion of the June 2010 Notes (see Note 8)		8,136,250
Issued to vendors and others		1,294,060
Total		24,685,310

~~On November~~The ~~21,~~fair ~~2008,~~value ~~the~~of ~~Company~~warrants ~~entered~~and ~~into~~derivative ~~an employment agreement with Joseph N. Himy. Mr. Himy~~ instruments was ~~elected~~estimated ~~CFO~~using of the ~~Company~~binomial ~~effective~~model ~~as of May 1, 2008~~ with asome ~~term~~using ~~expiring~~the ~~December~~down 1,round ~~2009,~~anti ~~which~~dilution ~~was deemed to have been renewed and is currently set to expire on November 30, 2011~~option. ~~Mr. Himy’s~~The ~~base~~following ~~salary~~assumptions iswere ~~$0.2~~used ~~million~~in ~~per~~the ~~year~~calculation ~~and~~of hethe isfair ~~eligible~~valuation ~~for~~of awarrants ~~bonus~~and ofderivative ~~up to~~instruments as ~~25%~~ of ~~his~~December ~~salary~~31, ~~payable in cash or stock.~~2010:

Consulting Agreements with Wolverine and Viking Investment Group

Expected holding period (years)	3.83 - 4.50
Risk-free interest rate	2.01	%
Dividend yield	0	%
Expected volatility	91.86	%
Down round probability at $0.15	5	%
Down round probability at $0.20	15	%
No down round probability	80	%

OnThe ~~July 25,~~interest ~~2007,~~rate ~~the~~for ~~Company~~periods ~~entered~~within ~~into~~the acontractual ~~consulting~~life ~~agreement~~of (the ~~“Wolverine Agreement”)~~award ~~with~~is ~~Wolverine~~based ~~with~~on ~~respect to consulting services and strategic relationships for both~~ the ~~capital and pharmaceutical industries~~U.S. ~~The~~Treasury ~~Wolverine Agreement~~yield ~~had~~curve acurrently ~~one~~in ~~year term~~effect. The ~~fees~~key ~~under~~factors ~~the Wolverine Agreement were: $0.5 million (paid~~ in ~~July~~the ~~2007) and warrants to purchase up to 350,000 shares of~~ Company’s ~~common~~determination ~~stock, all~~ of ~~which~~expected ~~carry~~volatility aare ~~five~~historical ~~year term~~ and anmarket-based ~~exercise price~~implied ofvolatility, ~~$22.50~~comparable ~~per~~companies ~~share.~~with ~~The~~longer ~~warrants~~stock ~~carry~~trading ~~standard~~periods ~~cashless~~than ~~exercise provisions~~the ~~and~~Company ~~contain a provision which prohibits exercise if at any time Wolverine~~ and ~~its~~industry ~~affiliates beneficially own more than 9~~benchmarks.~~9% of the Company’s common stock.~~

OnThe ~~July 26,~~following ~~2007,~~table ~~the~~summarizes ~~Company entered into a consulting agreement (~~the ~~“VIG~~fair ~~Agreement”) with~~value ~~Viking~~of ~~Investment~~warrants ~~Group~~classified IIas ~~Inc.~~liability ~~(“VIG”)~~instruments toand ~~provide~~beneficial ~~certain~~conversion ~~financial consulting~~features ~~services~~classified toas ~~the~~liability ~~Company.~~instruments, ~~The~~recorded ~~VIG~~on ~~Agreement had a one year term. The fees under~~ the ~~VIG~~consolidated ~~Agreement~~balance ~~were:~~sheet ~~$0.5~~as ~~million (paid~~of inDecember ~~July~~31, ~~2007)~~2010 and ~~warrants~~ toDecember ~~purchase up to 350~~31,~~000~~ ~~shares~~2009 ~~of Company common stock,~~ (all of which ~~carry~~ aare ~~five~~calculated ~~year~~using ~~term~~level ~~and~~3 anfair ~~exercise~~value price of $22.50 per share. The warrants carry standard cashless exercise provisions and contain a provision which prohibits exercise if at any time VIG and its affiliates beneficially own more than 9.9% of the Company’s common stock.measurements):

Management estimated that the fair value of the 700,000 warrants collectively issued to Wolverine and VIG was approximately $17.1 million and is reflected in the accompanying consolidated statements of operations for the year ended December 31, 2007. This amount was estimated using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions; 4.80% risk-free interest rate, 5.0 years expected holding period and 91.9% expected volatility. The Company recorded the full fair value of these warrants in the consolidated statement of operations for the year ended December 31, 2007 as a current expense because (i) the warrants vest immediately, (ii) the warrants are not subject to forfeiture, and (iii) substantial performance under the consulting agreements has been completed.

Offering Date		Total Fair Value of Derivative as of December 31, 2010				Total Fair Value of Derivative as of December 31, 2009
October 2009 (Note 10)		$	951,644			$	2,339,820

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