**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      DC. 20549





**FORM
      10-Q**





(Mark
      One)




x
            Quarterly
                Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
                Act of
                1934 for the Quarterly Period ended******June
                30, 2008**




or




 ̈
            Transition
                Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
                Act of
                1934 for the Transition Period from _______________ to
                ____________________





Commission
                File Number**0-19437****SAFESTITCH
                MEDICAL, INC.**(Exact
                name of registrant as specified in its
                charter)




**Delaware**
            
            
            **11-2962080**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            
            (I.R.S.
                employer identification no.)


**4400
                  Biscayne Blvd., Suite 670, Miami, Florida**
              **33137**(Address
                  of principal executive offices)
              (Zip
                  code)





Registrant’s
      telephone number, including area code: **(305)
      575-6000**





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 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
      ྑ





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 shell company (as defined in Rule
      12b-2 of the Exchange Act).  Yes
ྑ  No x





17,954,521
      shares of the Company’s common stock, par value $0.001 per share, were
      outstanding as of August 1, 2008.


1




**SAFESTITCH
      MEDICAL, INC.**


**(A
      Developmental Stage Company)**





**TABLE
      OF CONTENTS FOR FORM 10-Q**


**PART
                  I. FINANCIAL INFORMATION**ITEM
                  1.
              FINANCIAL
                  STATEMENTSCondensed
                  Consolidated Balance Sheets as of June 30, 2008 (unaudited) and
                  December
                  31, 2007
              3Unaudited
                  Condensed Consolidated Statements of Operations for the Three and
                  Six
                  Months ended June 30, 2008 and 2007, and for the period from September
                  15,
                  2005 (inception) to June 30, 2008
              4Condensed
                  Consolidated Statements of Stockholders’ Equity for the period from
                  September 15, 2005 (inception) through June 30, 2008
                  (unaudited)
              5Unaudited
                  Condensed Consolidated Statements of Cash Flows for the Six Months
                  ended
                  June 30, 2008 and 2007, and for the period from September 15, 2005
                  (inception) to June 30, 2008
              6Notes
                  to unaudited condensed consolidated financial statements
              7ITEM
                  2.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                  OPERATIONS
              16ITEM
                  3.
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              20ITEM
                  4T.
              CONTROLS
                  AND PROCEDURES
              20**PART
                  II. OTHER INFORMATION**ITEM
                  1.
              LEGAL
                  PROCEEDINGS
              21ITEM
                  1A.
              RISK
                  FACTORS
              21ITEM
                  2.
              UNREGISTERED
                  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
              21ITEM
                  3.
              DEFAULTS
                  UPON SENIOR SECURITIES
              21ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS
              21ITEM
                  5.
              OTHER
                  INFORMATION
              21ITEM
                  6.
              EXHIBITS
              21SIGNATURES
              22




2


**SAFESTITCH
      MEDICAL, INC.**


**(A
      Developmental Stage Company)**


**CONDENSED
      CONSOLIDATED BALANCE SHEET****S**


(in
      000s,
      except share and per share data)


June
                  30,
              
              December
                  31,2008
              
              2007**ASSETS**
              
              (Unaudited)CURRENT
                  ASSETSCash and cash equivalents
              
              $
              2,401
              
              $
              631Accounts Receivable - related-party
              
              
              43
              
              
              -Prepaid expenses
              
              
              82
              
              
              99Total
                  Current Assets
              
              
              2,526
              
              
              730FIXED
                  ASSETSProperty and equipment, net
              
              
              196
              
              
              196OTHER
                  ASSETSSecurity deposits
              
              
              57
              
              
              56Deferred financing costs, net
              
              
              1,276
              
              
              1,702Total Other Assets
              
              
              1,333
              
              
              1,758LONG-TERM
                  INVESTMENT, net of valuation adjustment of $1,754
              
              
              -
              
              
              -**TOTAL
                  ASSETS**(Note
                  6)
              
              **$**
              **4,055**
              
              **$**
              **2,684****LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**CURRENT
                  LIABILITIESAccounts payable and accrued liabilities
              
              $
              324
              
              $
              253Total Current Liabilities
              
              
              324
              
              
              253Stockholder
                  loans
              
              
              10
              
              
              10Commitments
                  and contingencies  (Note 9)STOCKHOLDERS’
                  EQUITYPreferred
                  Stock, $.01 par value per share, 25,000,000 shares authorized,no shares issued and outstanding
              
              
              -
              
              
              -Common
                  Stock, $.001 par value per share, 225,000,000 shares
                  authorized,17,954,521
                  and 16,093,016shares
                  issued and outstanding, respectively
              
              
              18
              
              
              16Additional
                  Paid-in Capital
              
              
              10,741
              
              
              6,582Deficit
                  accumulated during the development stage
              
              
              (7,038
              )
              
              (4,177
              )Total
                  Stockholders’ Equity
              
              
              3,721
              
              
              2,421**TOTAL
                  LIABILITIES AND STOCKHOLDERS’ EQUITY**
              
              **$**
              **4,055**
              
              **$**
              **2,684**





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


3


**SAFESTITCH
      MEDICAL, INC.**


**(A
      Developmental Stage Company)**


**UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**


(in
      000s,
      except share and per share amounts)





**Three
                Months Ended**
              **June
                30,**
            
            **Six
                Months Ended**
              **June
                30,**
            
            **September
                15, 2005 (Inception) to June 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**
            
            **2008**REVENUES
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -COSTS
                AND EXPENSESResearch
                and development
            
            
            804
            
            
            552
            
            
            1,618
            
            
            918
            
            
            4,524General
                and administrative
            
            
            390
            
            
            126
            
            
            806
            
            
            164
            
            
            1,826Total
                Costs and Expenses
            
            
            1,194
            
            
            678
            
            
            2,424
            
            
            1,082
            
            
            6,350LOSS
                FROM OPERATIONS
            
            
            (1,194
            )
            
            (678
            )
            
            (2,424
            )
            
            (1,082
            )
            
            (6,350
            )INTEREST
                INCOME
            
            
            7
            
            
            1
            
            
            12
            
            
            6
            
            
            65AMORTIZATION
                OF DEBT ISSUANCE EXPENSE
            
            
            (212
            )
            
            -
            
            
            (425
            )
            
            -
            
            
            (708
            )INTEREST
                EXPENSE
            
            
            (18
            )
            
            -
            
            
            (24
            )
            
            -
            
            
            (45
            )LOSS
                BEFORE INCOME TAX
            
            
            (1,417
            )
            
            (677
            )
            
            (2,861
            )
            
            (1,076
            )
            
            (7,038
            )PROVISION
                FOR INCOME TAX
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -NET
                LOSS
            
            $
            (1,417
            )
            $
            (677
            )
            $
            (2,861
            )
            $
            (1,076
            )
            $
            (7,038
            )WEIGHTED
                AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED
            
            
            16,843,415
            
            
            11,256,369
            
            
            16,468,215
            
            
            11,256,369NET
                LOSS PER BASIC AND DILUTED SHARE
            
            $
            (0.08
            )
            $
            (0.06
            )
            $
            (0.17
            )
            $
            (0.10
            )




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


4


**SAFESTITCH
      MEDICAL, INC.**


**(A
      Developmental Stage Company)**


**CONDENSED
      CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**


**FOR
      THE PERIOD SEPTEMBER 15, 2005 (INCEPTION) THROUGH JUNE 30,
      2008**


(in
      000s)




**Preferred
                Stock**
            
            **Common
                Stock**
            
            **Additional**
              **Paid-in**
            
            **Deficit**
              **Accumulated**
              **During
                the**
              **Development****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Capital**
            
            **Stage**
            
            **Total****Inception
                - September 15, 2005**
            
            
            **-**
            
            **$**
            **-**
            
            
            **-**
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **-**Capital
                contributed
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1
            
            
            -
            
            
            1Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (76
            )
            
            (76
            )**Balance
                at December 31, 2005**
            
            
            **-**
            
            **$**
            **-**
            
            
            **-**
            
            **$**
            **-**
            
            **$**
            **1**
            
            **$**
            **(76**
            **)**
            **$**
            **(75**
            **)**Capital
                contributed
            
            
            -
            
            
            -
            
            
            11,256
            
            
            11
            
            
            1,493
            
            
            -
            
            
            1,504Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,060
            )
            
            (1,060
            )**Balance
                at December 31, 2006**
            
            
            -
            
            **$**
            **-**
            
            
            **11,256**
            
            **$**
            **11**
            
            **$**
            **1,494**
            
            **$**
            **(1,136**
            **)**
            **$**
            **369**Exercise
                of options (CTS) -
              September
                23, 2007 at $0.79 per share
            
            
            -
            
            
            -
            
            
            42
            
            
            -
            
            
            35
            
            
            -
            
            
            35Stock-based
                compensation-September 4, 2007
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            77
            
            
            -
            
            
            77Issuance
                of shares in recapitalization - September 4, 2007 at $0.64 per
                share
            
            
            -
            
            
            -
            
            
            4,795
            
            
            5
            
            
            3,078
            
            
            -
            
            
            3,083SafeStitch
                expenses associated with recapitalization
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (156
            )
            
            -
            
            
            (156
            )Stock-based
                compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            65
            
            
            -
            
            
            65Warrants
                issued in connection with credit facility-September 4, 2007 at $2.46
                per
                share
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,985
            
            
            -
            
            
            1,985Rule
                16 payment received
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4
            
            
            -
            
            
            4Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,041
            )
            
            (3,041
            )**Balance
                at December 31, 2007**
            
            
            -
            
            **$**
            **-**
            
            
            **16,093**
            
            **$**
            **16**
            
            **$**
            **6,582**
            
            **$**
            **(4,177**
            **)**
            **$**
            **2,421**Issuance
                of shares in private offering - May 2008 at $2.15 per share, net
                of
                offering costs
            
            
            -
            
            
            -
            
            
            1,862
            
            
            2
            
            
            3,988
            
            
            -
            
            
            3,990Stock-based
                compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            171
            
            
            -
            
            
            171Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,861
            )
            
            (2,861
            )**Balance
                at June 30, 2008 - Unaudited**
            
            
            -
            
            **$**
            **-**
            
            
            **17,955**
            
            **$**
            **18**
            
            **$**
            **10,741**
            
            **$**
            **(7,038**
            **)**
            **$**
            **3,721**





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


5


**SAFESTITCH
      MEDICAL, INC.**


**(A
      Developmental Stage Company)**


**CONDENSED****CONSOLIDATED
      STATEMENTS OF CASH FLOWS****- UNAUDITED**


( in
      000s )




**Six
                Months Ended June 30,**
            
            **September
                15, 2005 (Inception) to June
                30,****2008**
            
            **2007**
            
            **2008**OPERATING
                ACTIVITIESNet
                loss
            
            
            (2,861
            )
            
            (1,076
            )
            
            (7,038
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Amortization
                of deferred finance costs
            
            
            425
            
            
            -
            
            
            708Stock-based
                compensation expense
            
            
            171
            
            
            -
            
            
            314Depreciation
                and amortization
            
            
            25
            
            
            -
            
            
            29(Increase)
                in receivables and other current assets
            
            
            (26
            )
            
            -
            
            
            (105
            )(Increase)
                in other assets
            
            
            (1
            )
            
            -
            
            
            (58
            )Increase
                in accounts payable and accrued liabilities
            
            
            72
            
            
            45
            
            
            40**NET
                CASH USED IN OPERATING ACTIVITIES**
            
            
            **(2,195**
            **)**
            
            **(1,031**
            **)**
            
            **(6,110**
            **)**CASH
                FLOWS FROM INVESTING ACTIVITIESPurchase
                of equipment
            
            
            (25
            )
            
            -
            
            
            (225
            )Payment
                received under Rule 16b
            
            
            -
            
            
            -
            
            
            4**NET
                CASH USED IN INVESTING ACTIVITIES**
            
            
            **(25**
            **)**
            
            **-**
            
            
            **(221**
            **)**CASH
                FLOWS FROM FINANCING ACTIVITIESNet
                cash provided in connection with the acquisition of SafeStitch
                LLC
            
            
            -
            
            
            -
            
            
            3,192Issuance
                of 1,861,505 shares of Common Stock, net of offering costs
            
            
            3,990
            
            
            -
            
            
            3,990Capital
                contributions
            
            
            -
            
            
            -
            
            
            1,431Proceeds
                from Stockholder loans
            
            
            1,000
            
            
            592
            
            
            1,960Repayment
                of Stockholder loans
            
            
            (1,000
            )
            
            -
            
            
            (1,876
            )Exercise
                of options
            
            
            -
            
            
            -
            
            
            35**NET
                CASH PROVIDED BY FINANCING ACTIVITIES**
            
            
            **3,990**
            
            
            **592**
            
            
            **8,732**NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            1,770
            
            
            (439
            )
            
            2,401CASH
                AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
            
            
            631
            
            
            546
            
            
            -CASH
                AND CASH EQUIVALENTS AT END OF PERIOD
            
            
            2,401
            
            
            107
            
            
            2,401Supplemental
                disclosures:Cash
                paid for interest
            
            $
            24
            
            $
            -
            
            $
            45Non
                cash activities:Stockholder
                loans contributed to capital
            
            $
            -
            
            $
            -
            
            $
            74





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


6




**SAFESTITCH
        MEDICAL, INC.**
 **(A
        Developmental Stage Company)**
 **NOTES
        TO** **UNAUDITED
        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE** **1
      - BASIS OF PRESENTATION AND LIQUIDITY**




The
      condensed consolidated balance sheet as of December 31, 2007, which has
      been derived from audited financial statements, and the unaudited condensed
      consolidated interim financial statements of SafeStitch Medical, Inc.
      (“SafeStitch” or the “Company”) have been prepared in accordance with accounting
      principles generally accepted in the United States for interim financial
      information and the instructions to the quarterly report on Form 10-Q and
      Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
      the information and footnotes required by generally accepted accounting
      principles for complete financial statements. In the opinion of management,
      all
      adjustments (consisting of normal recurring accruals) considered necessary
      for a
      fair presentation have been included. Operating results for the three and six
      months ended June 30, 2008 are not necessarily indicative of the results that
      may be expected for the year ending December 31, 2008. These condensed financial
      statements should be read in conjunction with the audited consolidated financial
      statements and notes thereto for the year ended December 31, 2007 included
      in
      the Company’s annual report on Form 10-KSB, as amended, and the Company’s
      quarterly report on Form 10-Q for the interim period ended March 31, 2008.
      Certain reclassifications have been made to prior periods’ consolidated
      financial statements to be consistent with the current period’s
      presentation.




SafeStitch
      is a developmental stage medical device company focused on the development
      of
      medical devices that manipulate tissues for endoscopic and minimally invasive
      surgery for the treatment of obesity, gastroesophageal reflux disease (“GERD”),
      Barrett’s Esophagus, esophageal obstructions, upper gastrointestinal bleeding,
      hernia formation and other intraperitoneal abnormalities.




Cellular
      Technical Services Company, Inc. (“Cellular”), a non-operating public company,
      was incorporated in 1988 as NCS Ventures Corp. under the laws of the State
      of
      Delaware. On July 25, 2007 Cellular entered into a Share Transfer, Exchange
      and
      Contribution Agreement (the “Share Exchange”) with SafeStitch LLC, a Virginia
      limited liability company. On September 4, 2007, Cellular acquired all of the
      members’ equity of SafeStitch LLC in exchange for 11,256,369 shares of its
      common stock, which represented a majority of Cellular’s outstanding shares
      immediately following the Share Exchange. For accounting purposes, the
      acquisition has been treated as a recapitalization of SafeStitch LLC, with
      SafeStitch LLC as the acquirer (reverse acquisition). The historical financial
      statements prior to September 4, 2007 are those of SafeStitch LLC, which began
      operations on September 15, 2005. The accompanying financial statements give
      retroactive effect to the recapitalization as if it had occurred on September
      15, 2005 (inception). Effective January 8, 2008, Cellular changed its name
      to
      SafeStitch Medical, Inc. and increased the aggregate number of shares of capital
      stock that may be issued from 35,000,000 to 250,000,000, comprising 225,000,000
      shares of common stock, par value $0.001 per share (the “Common Stock”), and
      25,000,000 shares of preferred stock, par value $0.01 per share. During the
      period beginning May 22, 2008 and ended May 28, 2008, the Company issued
      1,861,505 shares of Common Stock in a private placement at a price of $2.15
      per
      share. (See Note 7 - Capital Transactions.)




The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. For the period from September 15, 2005
      (inception) through June 30, 2008, the Company has accumulated a deficit of
      $7.0 million and has not generated revenue or positive cash flows from
      operations. The Company has been dependent upon equity financing and loans
      from
      stockholders to meet its obligations and sustain operations. The Company’s
      efforts have been principally devoted to developing its technologies and
      commercializing its products. Based upon its current cash position, its $4.0
      million line of credit from The Frost Group LLC (the “Frost Group”) and the
      Company’s President and CEO, Jeffrey G. Spragens, and by monitoring its
      discretionary expenditures, management believes that the Company will be able
      to
      fund operations without revenues or additional financing for at least the next
      twelve months. Although the Company plans to secure additional funds through
      the
      issuance of equity and/or debt, no assurance can be given that additional
      financing will be available to the Company on acceptable terms, or at all.
      The
      Company’s ability to continue as a going concern is ultimately dependent upon
      achieving profitable operations and generating sufficient cash flows from
      operations to meet future obligations.


7


**SAFESTITCH
      MEDICAL, INC.**


**(A
      Developmental Stage Company)**


**NOTES
      TO** **UNAUDITED
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE** **2
      - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




***Consolidation.*** The
      condensed consolidated financial statements include the accounts of the Company
      and its wholly-owned subsidiaries, Isis Tele-Communications, Inc., which has
      no
      current operations, and SafeStitch LLC. All inter-company accounts and
      transactions have been eliminated in consolidation.




***Cash
      and cash equivalents.*** The
      Company considers all highly liquid investments with a maturity of three months
      or less when purchased to be cash equivalents. The Company holds cash and cash
      equivalent balances in a bank and other financial institutions. Balances in
      excess of FDIC limitations may not be insured.




***Property
      and equipment.*** Property
      and equipment are carried at cost less accumulated depreciation. Major additions
      and improvements are capitalized, while maintenance and repairs that do not
      extend the lives of assets are expensed. Gain or loss, if any, on the
      disposition of fixed assets is recognized currently in operations. Depreciation
      is calculated primarily on a straight-line basis over estimated useful lives
      of
      the assets.




***Research
      and development.*** Research
      and development costs principally represent salaries of the Company’s medical
      and biomechanical engineering professionals, material and shop costs associated
      manufacturing product prototypes, and payments to third parties for clinical
      trials and additional product development and testing. All research and
      development costs are charged to expense as incurred.




***Patent
      costs.*** Costs
      incurred in connection with acquiring patent rights and the protection of
      proprietary technologies are charged to expense as incurred.




***Use
      of estimates.*** The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions, such as useful lives of property and equipment,
      that
      affect the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of expenses during the reporting period. Actual results
      could differ from those estimates.




***Stock-based
      compensation.*** The
      Company follows Statement of Financial Accounting Standards (“SFAS”) No. 123R,
“ *Share
      Based Payment* ”
(“SFAS
      123R”), which requires all share-based payments, including grants of stock
      options, to be recognized in the income statement as an operating expense,
      based
      on their fair values. Stock-based compensation is included in general and
      administrative expenses for all periods presented.




***Fair
      value of financial instruments.*** The
      Company follows SFAS No. 157, *“Fair
      Value Measurements”* (“SFAS
      157”), which defines fair value, establishes a framework for measuring fair
      value and requires additional disclosures about fair value measurements. The
      carrying amounts of cash and cash equivalents, accounts payable, and accrued
      expenses approximate fair value based on their short-term maturity. Stockholder
      loans are carried at cost.




***Long-lived
      assets.*** In
      accordance with SFAS No. 144, *“Accounting
      for the Impairment or Disposal of Long-Lived Assets,* ”
the
      Company reviews the carrying values of its long-lived assets, including
      long-term investments, for possible impairment whenever events or changes in
      circumstances indicate that the carrying amounts of the assets may not be
      recoverable. Any long-lived assets held for disposal are reported at the lower
      of their carrying amounts or fair value less costs to sell.




***Income
      taxes.*** The
      Company follows the liability method of accounting for income taxes, as set
      forth in SFAS No. 109, *“Accounting
      for Income Taxes”* (“SFAS
      109”). SFAS 109 prescribes an asset and liability approach, which requires the
      recognition of deferred tax liabilities and assets for the expected future
      tax
      consequences of temporary differences between the carrying amounts and the
      tax
      bases of the assets and liabilities. The Company’s policy is to record a
      valuation allowance against deferred tax assets, when the deferred tax asset
      is
      not recoverable. The Company considers estimated future taxable income or loss
      and other available evidence when assessing the need for its deferred tax
      valuation allowance.




8


**SAFESTITCH
        MEDICAL, INC.**
 **(A
        Developmental Stage Company)**
 **NOTES
        TO** **UNAUDITED
        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


***Comprehensive
      income (loss).*** SFAS No.
      130, *“Reporting
      Comprehensive Income (Loss),”* requires
      companies to classify items of other comprehensive income (loss) in a financial
      statement. Comprehensive income (loss) is defined as the change in equity of
      a
      business enterprise during a period from transactions and other events and
      circumstances from non-owner sources. The Company’s comprehensive net loss is
      equal to its net loss for all periods presented.




**NOTE
      3 - PROPERTY AND EQUIPMENT**




Machinery
      and equipment consist of the following:




**June
                30, 2008**
            **Estimated
                Useful lives**Machinery
                and equipment
            $
                151,000
            
            5
                yearsFurniture
                and fixtures
            37,000
            
            3-5
                yearsSoftware
            37,000
            
            3-5
                yearsAccumulated
                depreciation and amortization
            (29,000)**Property
                and equipment, net**
            **$
                196,000**





Depreciation
      of fixed assets utilized in research and development activities is included
      in
      research and development expense. All other depreciation is included in general
      and administrative expense. Depreciation and amortization expense was $12,000
      and $25,000, respectively, for the three and six months ended June 30, 2008.
      There was no depreciation expense in the corresponding 2007
      periods.




**NOTE** **4
      - LONG-TERM INVESTMENT**




In
      November 1999, Cellular invested in a one-year, $1.0 million 10% convertible
      note of KSI, Inc. (“KSI”) and also received warrants to purchase KSI common
      stock. All of the outstanding stock of KSI was acquired in August 2000 by
      TruePosition, Inc. (“TruePosition”), a majority owned subsidiary of Liberty
      Media Corporation (“Liberty Media”). Prior to the acquisition, the convertible
      note was exchanged for KSI common stock. Cellular exercised the KSI warrants
      and
      purchased additional KSI common stock for approximately $754,000. Cellular’s
      investment in KSI common stock was exchanged for TruePosition common stock
      on
      the date of the acquisition. The Company currently holds 191,118 shares of
      TruePosition common stock and accounts for the investment in TruePosition using
      the cost method. In December 2002, Cellular received certain valuation
      information from TruePosition, indicating a range of values for TruePosition.
      Based upon its review of available information and communications with Liberty
      Media, Cellular concluded there had been an other-than-temporary decline in
      the
      estimated fair value of its investment and reduced the recorded carrying value
      of this investment from its cost basis of $1,754,000 to zero, representing
      its
      best estimate of the then-current fair value of Cellular’s investment in the net
      equity of TruePosition. TruePosition’s operations have been funded by
      significant infusions of cash by Liberty Media to date, and the Company’s
      investment in TruePosition common stock has been diluted by these advances,
      which were converted to preferred stock in late 2002. In August 2007, the
      Company and Cellular were informed that Liberty TP Acquisition, Inc., which
      held
      an aggregate of no less than 90% of TruePosition’s outstanding capital stock,
      was being merged into TruePosition. Pursuant to the terms of the merger,
      TruePosition’s minority stockholders, including the Company, were entitled to
      receive $3.5116 in cash in exchange for each share held. This merger is the
      subject of an appraisal action and securities litigation to which the Company
      is
      a party (see Note 9). It is possible that the Company may receive proceeds
      from
      the merger, the litigation or other disposition of this investment, but no
      such
      amount can be estimated at this time.




**NOTE** **5
      - STOCK-BASED COMPENSATION**




Cellular’s
      1996 Stock Option Plan (the “1996 Plan”) authorized the grant of both incentive
      (“ISO”) and non-qualified stock options, up to a maximum of 335,000 shares of
      the Company’s Common Stock, to employees of and consultants to the Company. The
      exercise price, term and vesting provision of each option grant was fixed by
      the
      compensation committee of the Board of Directors (the “Compensation Committee”)
      with the provision that the exercise price of an ISO may not be less than the
      fair market value of the Company’s Common Stock on the date of grant, and the
      term of an ISO may not exceed ten years. The Company has not granted any options
      under the 1996 Plan since December 31, 2005. The 1996 Plan has expired and
      no
      new options may be granted under the 1996 Plan.


9


**SAFESTITCH
        MEDICAL, INC.**
 **(A
        Developmental Stage Company)**
 **NOTES
        TO** **UNAUDITED
        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




As
      of the
      date of the Share Exchange, all options issued to former officers and directors
      under the 1996 Plan with exercise prices in excess of the then-current share
      price of the Company’s Common Stock were cancelled in exchange for the issuance
      of 2,000 shares of the Company’s Common Stock per person, for an aggregate
      issuance of 6,000 shares of the Company’s Common Stock. The Company recognized
      compensation expense of $77,000 on the date of the Share Exchange for the fair
      value of the 6,000 shares issued.




The
      Company granted 88,667 options outside of plans in September 2007, all of which
      had an exercise price of $2.60. The Company determined the estimated aggregate
      fair value of these options on the grant date to be $196,000 based on the
      Black-Scholes valuation model using the following assumptions: expected
      volatility of 82%, dividend yield of 0%, risk-free interest rate of 4.88% and
      expected life of 10 years.




On
      November 13, 2007, the Board of Directors and a majority of the Company’s
      stockholders approved the SafeStitch Medical, Inc. 2007 Incentive Compensation
      Plan (the “2007 Plan”). Under the 2007 Plan, which is administered by the
      Compensation Committee, the Company may grant stock options, stock appreciation
      rights, restricted stock and/or deferred stock to employees, officers,
      directors, consultants and vendors up to an aggregate of 2,000,000 shares of
      the
      Company’s Common Stock, which are fully reserved for future issuance. The
      exercise price of stock options or stock appreciation rights may not be less
      than the fair market value of Company’s Common Stock at the date of grant and,
      within any 12 month period, no person can receive stock options or stock
      appreciation rights for more than one million shares of Common Stock.
      Additionally, no stock options or stock appreciation rights granted under the
      2007 Plan may have a term exceeding ten years.




The
      Company granted zero and 148,500 options, respectively, under the 2007 Plan
      during the three and six months ended June 30, 2008. The exercise prices of
      the
      options granted ranged from $3.00 to $3.10 per share. The Company determined
      the
      estimated aggregate fair value of these options on the grant dates to be
      $300,000, and stock option compensation expense related to these grants was
      $21,000 and $146,000, respectively, for the three and six months ended June
      30,
      2008. Total stock-based compensation recorded for the three and six months
      ended
      June 30, 2008 was $32,000 and $171,000, respectively, and is included in general
      and administrative expense. The fair values of options granted are estimated
      on
      the date of their grant using the Black-Scholes option pricing model based
      on
      the assumptions included in the table below. The fair value of the Company’s
      stock option awards is expensed over the vesting life of the underlying stock
      options using the graded vesting method, with each tranche of vesting options
      valued separately. Expected volatility is based on the historical volatility
      of
      the Company’s stock. Due to the short period of time that the Company has been
      publicly traded since the Share Exchange, the historical volatilities of similar
      publicly traded entities are reviewed to validate the Company’s expected
      volatility assumption. The risk-free interest rate for periods within the
      contractual life of the stock option award is based on the yield of US Treasury
      bonds on the date the stock option award is granted with a maturity equal to
      the
      expected term of the stock option award granted. The expected life of stock
      option awards granted is based upon the “simplified” method for “plain vanilla”
options contained in the United States Securities and Exchange Commission
      (“SEC”) Staff Accounting Bulletin No. 107, as amended by SEC Staff Accounting
      Bulletin No. 110. Forfeiture rates are based on management’s estimates. During
      the three and six months ended June 30, 2007, the Company granted no stock
      option awards. The fair value of each option granted during the six months
      ended
      June 30, 2008 was estimated using the following assumptions.




Expected
                volatility
            88.31%
                - 94.46%Expected
                dividend yield
            0.00%Risk-free
                interest rate
            1.96%
                - 2.61%Expected
                life
            3.5
                - 5.5 yearsForfeiture
                rate
            2.50%




10


**SAFESTITCH
        MEDICAL, INC.**
 **(A
        Developmental Stage Company)**
 **NOTES
        TO** **UNAUDITED
        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


The
      following summarizes the Company’s stock option activity for the six months
      ended June 30, 2008:




**Shares**
            
            **Weighted
                Average Exercise Price**
            
            **Weighted
                Average Remaining Contractual Term (Years)**
            
            **Aggregate
                Intrinsic Value**Outstanding
                at December 31, 2007
            
            
            88,667
            
            $
            2.60
            
            
            9.20Granted
            
            
            148,500
            
            $
            3.06
            
            
            6.72Exercised
            
            
            -
            
            
            -
            
            
            -Canceled
                or expired
            
            
            -
            
            
            -
            
            
            -Outstanding
                at June 30, 2008
            
            
            237,167
            
            $
            2.89
            
            
            7.65
            
            $
            -Exercisable
                at June 30, 2008
            
            
            87,667
            
            $
            2.97
            
            
            7.34
            
            $
            -Vested
                and expected to vest at June 30, 2008
            
            
            232,107
            
            $
            2.89
            
            
            7.67
            
            $
            -





Of
      the
      148,500 options granted during the three and six months ended June 30, 2008,
      44%
      of such options were vested as of June 30, 2008. A summary of the status of
      the
      Company’s non-vested options and changes during the six months ended June 30,
      2008 is presented below.




**Stock
                Options**
            
            **Weighted
                Average Grant Date Fair Value**Non-Vested
                at December 31, 2007
            
            
            66,500
            
            $
            2.21Options
                Granted
            
            
            148,500
            
            
            2.02Options
                Vested
            
            
            (65,500
            )
            
            1.88Non-Vested
                at June 30, 2008
            
            
            149,500
            
            $
            2.16





At
      June
      30, 2008, there was $250,000 of total unrecognized compensation cost related
      to
      non-vested employee and director share-based compensation arrangements under
      the
      2007 Plan. That cost is expected to be recognized over a weighted-average period
      of 2.28 years.





No
      options were exercised during the three and six months ended June 30, 2008.
      The
      Company granted 6,000 options under the 2007 Plan in July 2008 at an exercise
      price of $2.80.





**NOTE** **6
      - CREDIT FACILITY**




In
      connection with the acquisition of SafeStitch LLC, the Company entered into
      a
      Note and Security Agreement (the “Credit Facility”) with both the Frost Group,
      LLC and Jeffrey G. Spragens, the Company’s Chief Executive Officer and President
      and a director. The Frost Group is a Florida limited liability company whose
      members include Frost Gamma Investments Trust, a trust controlled by Dr. Phillip
      Frost, the largest beneficial holder of the issued and outstanding shares of
      the
      Company’s Common Stock, Dr. Jane H. Hsiao, the Company’s Chairman of the Board
      and Steven D. Rubin, a director. The Credit Facility provides for $4.0 million
      in total available borrowings, consisting of $3.9 million from the Frost Group
      and $100,000 from Mr. Spragens. The Credit Facility has a term of 28 months,
      which expires in December 2009. Outstanding borrowings under the Credit Facility
      bear interest at a 10% annual rate.




The
      Company granted a security interest in all present and subsequently acquired
      collateral in order to secure prompt, full and complete payment of the amounts
      due under the Credit Facility. The collateral includes all assets of the
      Company, inclusive of intellectual property (patents, patent rights, trademarks,
      service marks, etc.).




In
      connection with the Credit Facility, the Company granted warrants to purchase
      an
      aggregate of 805,521 shares of its Common Stock to the Frost Group and Mr.
      Spragens. The fair value of the warrants was determined to be $1,985,000 on
      the
      grant date based on the Black-Scholes valuation model using the following
      assumptions: expected volatility of 82%, dividend yield of 0%, risk-free
      interest rate of 4.88% and expected life of 10 years. The fair value of the
      warrants was recorded as deferred financing costs and will be amortized over
      the
      life of the Credit Facility. The Company recorded amortization expense of
      $212,000 and $425,000 related to these deferred financing costs during the
      three
      and six months ended June 30, 2008, respectively.




11


**SAFESTITCH
        MEDICAL, INC.**
 **(A
        Developmental Stage Company)**
 **NOTES
        TO** **UNAUDITED
        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




The
      Company borrowed $1.0 million under the Credit Facility in the three months
      ended March 31, 2008 and repaid the entire outstanding balance during the three
      months ended June 30, 2008 with the proceeds of the private placement described
      in Note 7. The Company recognized interest expense related to the outstanding
      borrowings under the Credit Facility during the three and six months ended
      June
      30, 2008 of $18,000 and $24,000, respectively. As of June 30, 2008, there was
      no
      balance outstanding under the Credit Facility.




**NOTE** **7
      - CAPITAL TRANSACTIONS**




*Share
      Exchange.* As
      described in Note 1, on September 4, 2007, the Company acquired all of the
      members’ equity of SafeStitch LLC in exchange for the issuance of 11,256,369
      shares of Cellular’s common stock. For accounting purposes the transaction has
      been treated as a recapitalization of SafeStitch LLC whereby all membership
      interests of SafeStitch LLC were eliminated, the ordinary shares received in
      exchange for those interests were recorded at par value and the difference
      between value of the membership interests and the value of the ordinary shares
      received was recorded as additional paid-in capital to give effect to the
      transaction as of the beginning of the year. Additionally, as of the date of
      the
      transaction, net assets of Cellular, its ordinary shares and additional paid-in
      capital were recorded to reflect the transaction. SafeStitch LLC incurred
      $156,000 of transaction costs, which were recorded as a reduction of additional
      paid-in capital.




*Private
      Placement.* During
      the period beginning May 22, 2008 and ended May 28, 2008, the Company entered
      into stock purchase subscription agreements (the “Subscription Agreements”) with
      certain private investors (the “Investors”), pursuant to which the Company
      agreed to issue an aggregate of 1,861,505 shares (the “Shares”) of its Common
      Stock at a purchase price of $2.15 per share. The Company’s Board of Directors
      established the $2.15 purchase price based on an approximately 10% discount
      to
      the average closing price of the Common Stock on the over-the-counter bulletin
      board during the five trading days beginning April 23, 2008 and ended April
      29,
      2008. The Company closed on the issuance of the Shares during the period
      beginning May 22, 2008 and ended May 28, 2008. The Company received aggregate
      consideration for the Shares of $4,002,000, and has incurred $12,000 of costs
      related to the offering, which were recorded as a reduction of paid-in-capital.
      Among the Investors acquiring a portion of the Shares were Dr. Hsiao, Jeffrey
      G.
      Spragens and some of his relatives, Dr. Kenneth Heithoff, a director, Kevin
      Wayne, a director, and Frost Gamma Investments Trust. The Company issued the
      Shares in reliance upon the exemption from registration under Section 4(2)
      of
      the Securities Act of 1933, as amended (the “Act”), and Rule 506 of Regulation D
      promulgated thereunder. Each Investor represented to the Company that such
      person was an “accredited investor” as defined in Rule 501(a) of the Act and
      that the Shares were being acquired for investment purposes. The Shares have
      not
      been registered under the Act and are “restricted securities” as that term is
      defined by Rule 144 under the Act. The Company has not undertaken to register
      the Shares and no registration rights have been granted to the Investors in
      respect of the Shares.




**NOTE** **8
      - BASIC AND DILUTED NET LOSS PER SHARE**




Basic
      net
      loss per common share is computed by dividing net loss by the weighted average
      number of common shares outstanding during the period. Diluted net loss per
      common share is computed giving effect to all dilutive potential common shares
      that were outstanding during the period. Diluted potential common shares consist
      of incremental shares issuable upon exercise of stock options and warrants.
      In
      computing diluted net loss per share for the three and six months ended June
      30,
      2008 and 2007, no adjustment has been made to the weighted average outstanding
      common shares as the assumed exercise of outstanding options and warrants is
      anti-dilutive.


12


**SAFESTITCH
        MEDICAL, INC.**
 **(A
        Developmental Stage Company)**
 **NOTES
        TO** **UNAUDITED
        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




Potential
      common shares not included in calculating diluted net loss per share are as
      follows:




**June
                30, 2008**
            
            **June
                30, 2007**Stock
                options
            237,167
            
            171,400Stock
                warrants
            805,521
            
            –**Total**
            **1,042,688**
            
            **171,400**





**NOTE** **9
      - COMMITMENTS AND CONTINGENCIES**




The
      Company is obligated under various operating lease agreements for office space.
      Generally, the lease agreements require the payment of base rent plus
      escalations for increases in building operating costs and real estate taxes.
      Rental expense under operating leases amounted to $30,000 and $78,000 for the
      three and six months ended June 30, 2008, respectively, and $2,000 and $5,000
      for the three and six months ended June 30, 2007, respectively.




The
      Company is presently a plaintiff in a securities fraud and appraisal action
      in
      respect of its ownership of 191,118 shares of common stock of TruePosition,
      which was filed November 13, 2007 in the United States District Court for the
      District of Connecticut. SafeStitch and other plaintiffs seek damages and other
      relief totaling $80 million. In August 2007, the Company was informed that
      Liberty TP Acquisition, Inc., which held an aggregate of no less than 90% of
      TruePosition’s outstanding capital stock, was being merged into TruePosition.
      Pursuant to the terms of the merger, TruePosition’s minority stockholders,
      including the Company, became entitled to receive $3.5116 in cash in exchange
      for each share held, which the Company and certain other minority stockholders
      considered insufficient compensation. The Company and other minority
      stockholders brought forth the aforementioned securities fraud and appraisal
      action, and on August 10, 2007, the Company entered into a joint shareholder
      litigation governance and funding agreement (the “Funding Agreement”) with such
      other stockholders. Under the Funding Agreement, the Company agrees to fund
      a
      portion of the litigation expenses in connection with the appraisal and
      securities fraud action. The Company has contributed approximately $45,000
      to
      date, and management anticipates that the Company will be called upon to fund
      additional amounts during the 2008 fiscal year. The Company may elect to
      terminate its participation in the Funding Agreement, whereby the Company would
      no longer be required to contribute funds; however, the Company would lose
      all
      rights under the Funding Agreement, including access to any additional
      work-product created after the date of termination. Additionally, the Company’s
      portion of any proceeds from a favorable disposition of the litigation may
      be
      reduced if the Company terminates its participation. The outcome of this
      litigation is not now known, nor can it be reasonably predicted at this time.




**NOTE** **10
      - RECENT ACCOUNTING PRONOUNCEMENTS**




Effective
      January 1, 2008, the Company adopted SFAS No. 157, *“Fair
      Value Measurements”* (“SFAS
      157”), which defines fair value, establishes a framework for measuring fair
      value and requires additional disclosures about fair value measurements. In
      February 2008, the FASB delayed the effective date of SFAS 157 for one year
      for
      all nonfinancial assets and nonfinancial liabilities, except for those items
      that are recognized or disclosed at fair value in the financial statements
      on a
      recurring basis. Management has determined that the adoption of SFAS 157 did
      not
      have a material effect on the Company’s consolidated financial statements.




Effective
      January 1, 2008, the Company adopted SFAS No. 159, *“The
      Fair Value Option for Financial Assets and Financial Liabilities- including
      an
      amendment of FASB Statement 115”* (“SFAS
      159”). This statement provides companies with an option to report selected
      financial assets and liabilities at fair value. As of June 30, 2008, the Company
      has not elected to use the fair value option allowed by SFAS 159. Management
      has
      determined that the adoption of SFAS 159 did not have a material effect on
      the
      Company’s consolidated financial statements.




In
      December 2007, the FASB issued SFAS No. 160, “ *Noncontrolling
      Interests in Consolidated*  *Financial
      Statements-an amendment of ARB No. 51”* (“SFAS
      160”). SFAS 160 establishes accounting and reporting standards for the
      noncontrolling interest in a subsidiary and for the deconsolidation of a
      subsidiary. It clarifies that a noncontrolling interest in a subsidiary is
      an
      ownership interest in the consolidated entity that should be reported as equity
      in the consolidated financial statements. SFAS No. 160 will be effective for
      the
      Company in its fiscal year beginning January 1, 2009. The Company is currently
      evaluating the impact of SFAS No. 160 on its consolidated financial
      statements.


13


**SAFESTITCH
        MEDICAL, INC.**
 **(A
        Developmental Stage Company)**
 **NOTES
        TO** **UNAUDITED
        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




In
      December 2007, the FASB issued SFAS No. 141 R “ *Business
      Combinations* ”
(“SFAS
      141R”). SFAS 141R establishes principles and requirements for how the acquirer
      of a business recognizes and measures in its financial statements the
      identifiable assets acquired, the liabilities assumed and any noncontrolling
      interest in the acquiree. SFAS 141R also provides guidance for recognizing
      and
      measuring the goodwill acquired in a business combination and determines what
      information to disclose to enable users of the financial statements to evaluate
      the nature and financial effects of a business combination. SFAS 141R will
      be
      effective for the Company in its fiscal year beginning January 1, 2009. While
      the Company has not yet evaluated the impact, if any, that SFAS 141R will have
      on its consolidated financial statements, the Company will be required to
      expense costs related to any acquisitions consummated after December 31, 2008.




In
      December 2007, the FASB ratified the consensus reached on Emerging Issues Task
      Force Issue No. 07-1, “ *Accounting
      for Collaborative Arrangements Related to the Development and Commercialization
      of Intellectual Property* ”
(“EITF
      07-1”).  EITF 07-1 defines collaborative arrangements and establishes
      reporting requirements for transactions between participants in a
      collaborative arrangement and between participants in the arrangement and third
      parties.  EITF 07-1 will be effective for the Company’s fiscal year
      beginning January 1, 2009.  The Company is currently evaluating the
      potential impact of this standard on its consolidated financial
      statements.




In
      May
      2008, the FASB issued SFAS No. 162, “ *The
      Hierarchy of Generally Accepted Accounting Principles* ”
(“SFAS
      162”).  SFAS 162 identifies the sources of accounting principles and
      the framework for selecting the principles used in the preparation of financial
      statements that are presented in conformity with generally accepted accounting
      principles (“GAAP”) in the United States. SFAS 162 will become effective 60 days
      following the SEC’s approval of the Public Company Accounting Oversight Board
      amendments to AU Section 411, *“The
      Meaning of Present Fairly in Conformity With Generally Accepted Accounting
      Principles.”* The
      Company does not expect the adoption of SFAS 162 to have a material impact
      on
      its consolidated financial statements.




**NOTE** **11
      - AGREEMENT WITH CREIGHTON UNIVERSITY**




On
      May
      26, 2006, SafeStitch entered into an exclusive license and development agreement
      (the “License Agreement”) with Creighton University, granting the Company a
      worldwide exclusive (even as to the university) license, with rights to
      sublicense, to all the Company’s product candidates and associated know-how,
      including the exclusive right to manufacture, use and sell the product
      candidates.




Pursuant
      to the License Agreement, the Company is obligated to pay Creighton University,
      on a quarterly basis, a royalty of 1.5% of the revenue collected worldwide
      from
      the sale of any product licensed under the License Agreement, less certain
      amounts including, without limitation, chargebacks, credits, taxes, duties
      and
      discounts or rebates. The License Agreement does not provide for minimum
      royalties. Also pursuant to the License Agreement, the Company has agreed to
      invest, in the aggregate, at least $2.5 million over 36 months, beginning May
      26, 2006, towards development of any licensed product. This $2.5 million
      investment obligation excludes the first $150,000 of costs related to the
      prosecution of patents, which the Company invested outside of the License
      Agreement. The Company is further obligated to pay to Creighton University
      an
      amount equal to 20 percent of certain of the Company’s research and development
      expenditures as reimbursement for the use of Creighton University’s
      facilities.




Failure
      to comply with the payment obligations above will result in all rights in the
      licensed patents and know-how reverting back to Creighton University. As of
      December 31, 2007, the Company had satisfied the $2.5 million investment
      obligation described above. Pursuant to the License Agreement, SafeStitch is
      entitled to exercise its own business judgment and sole and absolute discretion
      over the marketing, sale, distribution, promotion and other commercial
      exploitation of any licensed products, provided that, if the Company has not
      commercially exploited or commenced development of a licensed patent and its
      associated know-how by the seventh anniversary of the later of the date of
      the
      License Agreement or the date such technology is disclosed to and accepted
      by
      SafeStitch, then the licensed patent and associated know-how shall revert back
      to the university, with no rights retained by the Company, and the university
      will have the right to seek a third party with whom to commercialize such patent
      and associated know-how, unless the Company purchases one or more one-year
      extensions.


14


**SAFESTITCH
        MEDICAL, INC.**
 **(A
        Developmental Stage Company)**
 **NOTES
        TO** **UNAUDITED
        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE** **12
      - INCOME TAXES**




The
      Company accounts for income taxes using the asset and liability method described
      in SFAS No. 109, *“Accounting
      For Income Taxes,”* the
      objective of which is to establish deferred tax assets and liabilities for
      the
      temporary differences between the financial reporting and the tax bases of
      the
      Company’s assets and liabilities at enacted tax rates expected to be in effect
      when such amounts are realized or settled. A valuation allowance related to
      deferred tax assets is recorded when it is more likely than not that some
      portion or all of the deferred tax assets will not be realized. All of the
      Company’s deferred tax assets have been fully reserved by a valuation allowance
      due to management's uncertainty regarding the future profitability of the
      Company.




The
      Company has adopted the provisions of FASB interpretation No. 48 (“FIN 48”) *“Accounting
      for Uncertainty in Income Taxes, an interpretation of FASB Statement No.
      109.”* The
      Company has recognized no adjustment for uncertain tax provisions. SafeStitch
      recognizes interest and penalties related to uncertain tax positions in general
      and administrative expense, however no such provisions for accrued interest
      and
      penalties related to uncertain tax positions have been recorded as of June
      30,
      2008.




The
      tax
      years 2003 through 2007 remain open to examination by the major tax
      jurisdictions in which the Company operates.




**NOTE** **13
      - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS**




The
      Company signed a five year lease for office space in Miami, Florida with a
      company owned by one of the Company’s major shareholders. The rental payments
      under the Miami office lease, which commenced January 1, 2008, are approximately
      $8,000 per month for the first year and escalate 4.5% annually over the life
      of
      the lease. The Company recorded $24,000 and $61,000 of rent expense related
      to
      the Miami lease for the three and six months ended June 30, 2008.




Dr.
      Jane
      Hsiao, the Company’s Chairman of the Board, is a director of Great Eastern Bank
      of Florida, a bank where the Company maintains a bank account in the normal
      course of business. As of June 30, 2008, the Company had $1.0 million on deposit
      with Great Eastern Bank of Florida.




Dr.
      Hsiao
      and Dr. Phillip Frost, the Company’s largest beneficial shareholder, are each
      significant shareholders of Non-invasive Monitoring Systems, Inc. (“NIMS”), a
      publicly-traded company which leases office space in the same building as the
      Company’s Miami headquarters. The Company’s Chief Financial Officer also serves
      as the Chief Financial Officer and supervises the accounting staff of NIMS
      under
      a board-approved cost sharing arrangement whereby the total salaries of the
      accounting staffs of the two companies are shared equally. The Company has
      recorded reductions to General and Administrative expense for the three and
      six
      months ended June 30, 2008 of $15,000, to account for the equalization of costs
      under this arrangement. Accounts receivable from NIMS were approximately $6,000
      as of June 30, 2008.




Dr.
      Hsiao, Dr. Frost and directors Steven Rubin and Richard Pfenniger are each
      significant shareholders, officers and/or directors of OPKO Health, Inc.
      (“OPKO”), another publicly-traded company which leases office space in the same
      building as the Company’s Miami headquarters. Certain of the Company’s employees
      have from time to time provided consulting services to OPKO on a cost-plus
      basis. The Company has recorded reductions to General and Administrative expense
      for the three and six months ended June 30, 2008 of $37,000 to account for
      the
      provision of these services. The amounts charged may not be representative
      of
      those that would have been charged in an “arms-length” transaction. These
      transactions have been ratified by the Audit Committee of the Board of
      Directors. Accounts receivable from OPKO were approximately $37,000 as of June
      30, 2008.


15




**SAFESTITCH
      MEDICAL, INC.**




**Item
      2.** **Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.**




*This
      Quarterly Report on Form 10-Q contains certain forward-looking statements within
      the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”),
      Section 27A of the Securities Act of 1933, as amended (the “Securities Act”),
      and Section 21E of the Securities Exchange Act of 1934, as amended, (the
“Exchange Act”), about our expectations, beliefs or intentions regarding our
      product development efforts, business, financial condition, results of
      operations, strategies or prospects. You can identify forward-looking statements
      by the fact that these statements do not relate strictly to historical or
      current matters. Rather, forward-looking statements relate to anticipated or
      expected events, activities, trends or results as of the date they are made.
      Because forward-looking statements relate to matters that have not yet occurred,
      these statements are inherently subject to risks and uncertainties that could
      cause our actual results to differ materially from any future results expressed
      or implied by the forward-looking statements. Many factors could cause our
      actual operations or results to differ materially from the operations and
      results anticipated in forward-looking statements. These factors include, but
      are not limited to: our ability to obtain additional funding to continue our
      operations; our ability to successfully develop, clinically test and
      commercialize our product candidates; the timing and outcome of the regulatory
      review process for our product candidates; changes in the regulatory
      environments of the United States and other countries in which we intend to
      operate; our ability to attract and retain key management and scientific
      personnel; competition; our ability to successfully prepare file, prosecute,
      maintain, defend and enforce patent claims and other intellectual property
      rights; our ability to successfully transition from a research and development
      company to a marketing, sales and distribution concern, and our ability to
      identify and pursue development of additional product candidates, as well as
      the
      factors contained in “Item 1A - Risk Factors” of our Annual Report on Form
      10-KSB, as amended. We do not undertake any obligation to update forward-looking
      statements. We intend that all forward-looking statements be subject to the
      safe
      harbor provisions of the PSLRA. These forward-looking statements are only
      predictions and reflect our views as of the date they are made with respect
      to
      future events and financial performance.*




***Overview***




We
      are a
      developmental stage medical device company focused on the development of medical
      devices that manipulate tissues for endoscopic and minimally invasive surgery
      for the treatment of obesity, gastroesophageal reflux disease (“GERD”),
      Barrett’s Esophagus, esophageal obstructions, upper gastrointestinal bleeding,
      hernia formation and other intraperitoneal abnormalities.




On
      September 4, 2007, we completed the acquisition of SafeStitch LLC pursuant
      to a
      Share Transfer, Exchange and Contribution Agreement, dated as of July 25, 2007
      (referred to as the “Share Exchange Agreement”), by and among us, SafeStitch LLC
      and the members of SafeStitch LLC. At the closing of the transaction
      contemplated by the Share Exchange Agreement (the “Share Exchange”), we issued
      an aggregate of 11,256,369 shares of our Common Stock to the former members
      of
      SafeStitch LLC in exchange for all of their membership interests in SafeStitch
      LLC. We also granted warrants to purchase a total of 805,521 shares of our
      Common Stock to the Frost Group and Jeffrey G. Spragens in connection with
      a
      line of credit of up to $4 million that was provided to us simultaneously with
      the closing by the Frost Group and Mr. Spragens. The warrants have a ten year
      term and an assumed exercise price of $0.25 per share of Common Stock. Dr.
      Phillip Frost has a controlling interest in the Frost Group and is the largest
      beneficial holder of our Common Stock. Dr. Jane Hsiao and Steven D. Rubin,
      two
      of our directors, are also members of the Frost Group. Jeffrey G. Spragens
      is
      our Chief Executive Officer and President and a director. Frost Gamma
      Investments Trust, Dr. Phillip Frost, Dr. Jane Hsiao, Steven D. Rubin and
      Jeffrey G. Spragens were also beneficial owners of membership interests in
      SafeStitch LLC. We incurred customary acquisition related costs in connection
      with the Share Exchange.




In
      January 2008, we changed our name from Cellular Technical Services Company,
      Inc.
      to SafeStitch Medical, Inc., and, on February 11, 2008, our trading symbol
      on
      the OTCBB changed from “CTSC” to “SFES”. In May 2008, we issued an aggregate of
      1,861,505 shares of our Common Stock in a private placement for net proceeds
      of
      approximately $4.0 million. We intend to apply for the listing of our Common
      Stock on the American Stock Exchange at such time as we meet the initial listing
      requirements set by the exchange.




***Product
      Development***




We
      are
      developing a portfolio of endoscopic and minimally invasive surgical devices
      and
      related accessories.  Our product portfolio includes a gastroplasty
      device for endoscopic bariatric surgery (obesity surgery) and endoscopic repair
      of gastroesophageal reflux disorder (GERD), an endoscopic device for excision
      and diagnosis of Barrett's esophagus, a Smart Dilator for esophageal strictures,
      a hernia repair device, standard and airway bite blocks to be used during
      endoscopy and devices for natural orifice transluminal endoscopic surgery
      (NOTES).  We have utilized our expertise in intraperitoneal surgery to test
      certain of our devices in *ex
      vivo* and *in
      vivo* animal
      trials and *ex
      vivo* human
      trials, and with certain products, in limited *in
      vivo* human
      trials, and we intend to rapidly, efficiently and safely move into clinical
      trials and commercial development for all products .  Clinical trials have
      begun for our bite block candidates and are anticipated to begin in 2008 for
      the
      Smart Dilator, and in 2009 for the gastroplasty (obesity/GERD)
      device.  Development of the Barrett’s Esophagus, hernia and NOTES
      devices are progressing over a longer timeframe as we focus our efforts on
      the
      products that are entering the clinical trial phase. Commercial development
      of
      our products is subject to approval from the U.S. Food and Drug Administration
      and other U.S. and foreign regulatory agencies.


16


**SAFESTITCH
        MEDICAL, INC.**




***Critical
      Accounting Policies and Estimates***




The
      discussion and analysis of our financial condition and results of operations
      set
      forth below under “Results of Operations” and “Liquidity and Capital Resources”
should be read in conjunction with our financial statements and notes thereto
      appearing elsewhere in this Form 10-Q. The preparation of these financial
      statements requires us to make estimates and judgments that affect the reported
      amounts of assets, liabilities, revenues and expenses, and related disclosure
      of
      contingent assets and liabilities. On an on-going basis, we evaluate our
      estimates, including those related to investments, including the carrying value
      of our long term investments, property and equipment, contingencies and
      litigation. We base our estimates on historical experience and on various other
      assumptions that are believed to be reasonable under the circumstances, the
      results of which form the basis for making judgments about the carrying values
      of assets and liabilities that are not readily apparent from other sources.
      A
      more detailed discussion on the application of these and other accounting
      policies can be found in Note B in the Notes to the Consolidated Financial
      Statements set forth in Item 7 of our Annual Report on Form 10-KSB, as amended,
      for the year ended December 31, 2007. Actual results may differ from these
      estimates.




***Accounting
      Treatment***




Our
      acquisition of SafeStitch LLC in accordance with the Share Exchange Agreement
      has been accounted for as a recapitalization of SafeStitch LLC, and SafeStitch
      LLC is treated as the continuing reporting entity. The transaction is not
      accounted for as a business combination because we did not have an operating
      business prior to the consummation of the Share Exchange. The transaction was
      instead accounted for as a recapitalization of SafeStitch and the issuance
      of
      stock by SafeStitch (represented by our outstanding shares of Common Stock)
      at
      the book values of our assets and liabilities, which approximates fair value
      with no goodwill or other intangibles recorded.




***Treatment
      of Warrants and Options***




SafeStitch
      LLC did not have any outstanding warrants or options and no warrants or options
      were assumed by Cellular as a result of the Share Exchange, except warrants
      issued in connection with the $4 million line of credit described
      above.




***Recent
      Accounting Pronouncements***




Effective
      January 1, 2008, we adopted SFAS No. 157, *“Fair
      Value Measurements”* (“SFAS
      157”), which defines fair value, establishes a framework for measuring fair
      value and requires additional disclosures about fair value measurements. In
      February 2008, the FASB delayed the effective date of SFAS 157 for one year
      for
      all nonfinancial assets and nonfinancial liabilities, except for those items
      that are recognized or disclosed at fair value in the financial statements
      on a
      recurring basis. We have determined that the adoption of SFAS 157 did not have
      a
      material effect on our consolidated financial statements.




Effective
      January 1, 2008, we adopted SFAS No. 159, *“The
      Fair Value Option for Financial Assets and Financial Liabilities- including
      an
      amendment of FASB Statement 115”* (“SFAS
      159”). This statement provides companies with an option to report selected
      financial assets and liabilities at fair value. As of June 30, 2008, we elected
      not to use the fair value option allowed by SFAS 159. We have determined that
      the adoption of SFAS 159 did not have a material effect on our consolidated
      financial statements.




17


**SAFESTITCH
        MEDICAL, INC.**


In
      December 2007, the FASB issued SFAS No. 160, “ *Noncontrolling
      Interests in Consolidated*  *Financial
      Statements-an amendment of ARB No. 51”* (“SFAS
      160”). SFAS 160 establishes accounting and reporting standards for the
      noncontrolling interest in a subsidiary and for the deconsolidation of a
      subsidiary. It clarifies that a noncontrolling interest in a subsidiary is
      an
      ownership interest in the consolidated entity that should be reported as equity
      in the consolidated financial statements. SFAS No. 160 will be effective for
      our
      fiscal year beginning January 1, 2009. We are currently evaluating the impact
      of
      SFAS No. 160 on our consolidated financial statements.




In
      December 2007, the FASB issued SFAS No. 141 R “ *Business
      Combinations* ”
(“SFAS
      141R”), which establishes principles and requirements for how the acquirer of a
      business recognizes and measures in its financial statements the identifiable
      assets acquired, the liabilities assumed and any noncontrolling interest
      in the acquiree. SFAS 141R also provides guidance for recognizing and measuring
      the goodwill acquired in a business combination and determines what information
      to disclose to enable users of the financial statements to evaluate the nature
      and financial effects of a business combination. SFAS 141R will be effective
      for
      our fiscal year beginning January 1, 2009. While we have not yet evaluated
      the
      impact, if any, that SFAS 141R will have on our consolidated financial
      statements, we will be required to expense costs related to any acquisitions
      consummated after December 31, 2008.




In
      December 2007, the FASB ratified the consensus reached on Emerging Issues Task
      Force Issue No. 07-1, “ *Accounting
      for Collaborative Arrangements Related to the Development and Commercialization
      of Intellectual Property* ”
(“EITF
      07-1”).  EITF 07-1 defines collaborative arrangements and establishes
      reporting requirements for transactions between participants in a
      collaborative arrangement and between participants in the arrangement and third
      parties.  EITF 07-1 will be effective for our fiscal year beginning January
      1, 2009.  We are currently evaluating the potential impact of this standard
      on our consolidated financial statements.




In
      May
      2008, the FASB issued SFAS No. 162, “ *The
      Hierarchy of Generally Accepted Accounting Principles* ”
(“SFAS
      162”).  SFAS 162 identifies the sources of accounting principles and
      the framework for selecting the principles used in the preparation of financial
      statements that are presented in conformity with generally accepted accounting
      principles (“GAAP”) in the United States. SFAS 162 will become effective 60 days
      following the SEC’s approval of the Public Company Accounting Oversight Board
      amendments to AU Section 411, *“The
      Meaning of Present Fairly in Conformity With Generally Accepted Accounting
      Principles.”* We do
      not expect the adoption of SFAS 162 to have a material impact on our
      consolidated financial statements.




***Results
      of Operations***




At
      June
      30, 2008, we had an accumulated deficit of $7.0 million. This deficit included
      losses of $2.9 million for the six months ended June 30, 2008. Since we do
      not
      generate revenue from any of our product candidates, we expect to continue
      to
      generate losses in connection with the clinical development of our products
      and
      development activities relating to our technologies. These research and
      development activities are budgeted to expand over time and will require further
      resources if we are to be successful. As a result, we believe our operating
      losses are likely to be substantial over the next several years.




***Three
      and Six Months ended June 30, 2008*** ***Compared
      to Three and Six Months Ended June 30, 2007***




Research
      and development expenses were $804,000 and $1,618,000 for the three and six
      months ended June 30, 2008, respectively, as compared to $552,000 and $918,000
      for the three and six months ended June 30, 2007. These $252,000 and $700,000
      respective increases were primarily due to an increase in the amount of research
      being performed as we moved further into our research activities, the addition
      of research personnel and the establishment of our Miami prototype development
      facility in the fourth quarter of 2007. We expect research and development
      expenses to continue to increase as we enter into the more advanced stages
      of
      animal and human clinical trials for our product candidates.




General
      and administrative costs were $390,000 and $806,000 for the three and six months
      ended June 30, 2008, respectively, as compared to $126,000 and $164,000 for
      the
      three and six months ended June 30, 2007. These $264,000 and $642,000 respective
      increases were primarily related to increases in administrative staffing and
      related operating costs, increased legal, accounting and other costs associated
      with being a public company and stock-based compensation charges, which
      represented $32,000 and $171,000 for the three and six months ended June 30,
      2008, respectively. General and administrative expense consists primarily of
      salaries and other related costs for persons serving as our executive, finance,
      accounting and administration personnel. Other general and administrative
      expense includes our stock-based compensation expense, facility-related costs
      not otherwise included in research and development expense and professional
      fees
      for legal and accounting services. We expect that our general and administrative
      expense will increase as we add additional personnel and continue to comply
      with
      the reporting and other obligations applicable to public companies.




18


**SAFESTITCH
        MEDICAL, INC.**


The
      increase in interest income from $1,000 and $6,000 for the three and six months
      ended June 30, 2007, respectively, to $7,000 and $12,000 for the three and
      six
      months ended June 30, 2008, respectively, was due to higher average cash
      balances as a result of advances under the $4 million credit facility with
      the
      Frost Group and Jeffery Spragens (the “Credit Facility,” see Note 6 to the
      unaudited condensed consolidated financial statements) and the proceeds of
      the
      private placement. Interest expense also increased from $0 for the three and
      six
      months ended June 30, 2007 to $18,000 and $24,000 for the three and six months
      ended June 30, 2008, respectively, due to the accrual of interest on amounts
      outstanding under the Credit Facility during those periods.




***Liquidity*** ***and Capital Resources***




We
      have
      funded our operations to date primarily with proceeds from the private placement
      of stock and credit facilities available to us, and our management believes
      that, absent any reductions of our discretionary expenditures, our cash balance
      as of June 30, 2008 of approximately $2.4 million, together with the $4.0
      million available under our line of credit will be sufficient to fund our
      short-term cash flow requirements for the next twelve months. We have based
      this
      estimate on assumptions that are subject to change and may prove to be wrong,
      and we may be required to use our available capital resources sooner than we
      currently expect. Because of the numerous risks and uncertainties associated
      with the development and commercialization of our product candidates, we are
      unable to estimate the amounts of increased capital outlays and operating
      expenditures associated with our current and anticipated clinical trials. Our
      operations over the next twelve months will be focused on the continuing
      research and development of our products, including our gastroplasty, hernia
      and
      Barrett’s devices. Even if we are able to bring certain of our other products to
      market prior to the end of 2008, we will likely need to raise additional capital
      through the issuance of equity and/or debt to continue operations beyond the
      next twelve months. There can be no assurance that such additional funding
      will
      be available on terms acceptable to us or at all.




As
      a
      result of our significant research and development expenditures and the lack
      of
      any approved products to generate product sales revenue, we have not been
      profitable and have generated operating losses since inception. We expect to
      incur losses from operations for the foreseeable future. We do not expect to
      generate any revenues until at least the fourth quarter of 2008, and we expect
      to incur increasing research and development expenses, including expenses
      related to the hiring of personnel and additional clinical trials. We expect
      that general and administrative expenses will also increase as we expand our
      finance and administrative staff, add infrastructure and incur additional costs
      related to being a public company, including the costs of directors’ and
      officers’ insurance, investor relations programs and increased professional
      fees. Additionally, we expect to be called upon to contribute additional funds
      in connection with our involvement as a plaintiff in the TruePosition litigation
      for so long as we stay involved in the litigation. Our ability to continue
      as a
      going concern is ultimately dependent upon achieving profitable operations
      and
      generating sufficient cash flows from operations to meet future obligations.




Our
      future capital requirements will depend on many factors, including the progress
      and results of our clinical trials, the duration and cost of discovery and
      preclinical development, laboratory testing and clinical trials for our product
      candidates, the timing and outcome of regulatory review of our product
      candidates, the costs involved in preparing, filing, prosecuting, maintaining,
      defending and enforcing patent claims and other intellectual property rights,
      the number and development requirements of other product candidates that we
      pursue and the costs of commercialization activities, including product
      marketing, sales and distribution. We expect to finance some of our future
      cash
      needs through public or private equity offerings, debt financings or corporate
      collaboration and licensing arrangements. We currently do not have any binding
      commitments for such additional funding. We may need to raise additional funds
      more quickly if one or more of our assumptions prove to be incorrect or if
      we
      choose to expand our product development efforts more rapidly than we presently
      anticipate. We may also decide to raise additional funds even before we need
      them if the conditions for raising capital are favorable. The sale of additional
      equity or debt securities will likely result in dilution to our stockholders.
      The incurrence of additional indebtedness would also likely result in increased
      fixed obligations and covenants that could restrict our operations. Additional
      equity or debt financing, grants or corporate collaboration and licensing
      arrangements may not be available to us on acceptable terms, or at all. If
      adequate funds are not available, we may be required to delay, reduce the scope
      of or eliminate our research and development programs, reduce our planned
      commercialization efforts or obtain funds through arrangements with
      collaborators or others that may require us to relinquish rights to certain
      product candidates that we might otherwise seek to develop or commercialize
      independently.


19




**SAFESTITCH
        MEDICAL, INC.**




**Item
      3. Quantitative and Qualitative Disclosures about Market
      Risk** **.**




Not
      required for smaller reporting companies as defined in
      Rule
      12b-2 of the Exchange Act .




**Item
      4T. Controls and Procedures** **.**




We
      maintain a system of disclosure controls and procedures (as defined in Exchange
      Act Rules 13a-15(e) and 15d-15(e)) that is designed to provide reasonable
      assurance that information we are required to disclose in the reports we file
      or
      submit under the Exchange Act, is accumulated and communicated to management
      in
      a timely manner. Our Chief Executive Officer and Chief Financial Officer have
      evaluated this system of disclosure controls and procedures as of the end of
      the
      period covered by this quarterly report, and believe that the system
      is operating effectively to ensure appropriate disclosure. This conclusion
      was based on the following:




Our
      Chief
      Executive Officer and Chief Financial Officer conducted evaluations of our
      systems of internal control over financial reporting and disclosure control
      (as
      defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the year ended
      December 31, 2007 and concluded at that time that our system of internal
      controls was not operating effectively, primarily because we did not maintain a
      sufficient complement of personnel with the appropriate level of knowledge,
      experience and training in the application of accounting principles generally
      accepted in the U.S. (referred to as GAAP) and in internal control over
      financial reporting commensurate with our financial reporting obligations under
      the Exchange Act. We did not maintain effective controls over the presentation
      of our consolidated financial statements and related disclosures in preparing
      our consolidated financial statements. Furthermore,
      in reviewing our 10-KSB after its filing, we determined that certain information
      required to be included in the Form 10-KSB was in error, including the
      calculation and presentation of basic and diluted earnings (loss) per common
      share, resulting in the filing of an amended annual report on Form 10-KSB/A
      on
      April 24, 2008. However, b eginning
      during the first quarter of 2008 and continuing through the date of this filing,
      we have been implementing changes approved by the Audit Committee of our Board
      of Directors, including hiring a new Chief Financial Officer and other personnel
      with appropriate knowledge of GAAP and the financial reporting requirements
      of
      the Exchange Act and the ability to institute appropriate accounting and
      financial statement review procedures. Except as set forth above, there were
      no
      significant changes in our internal control over financial reporting between
      the
      aforementioned evaluation and the end of the most recent fiscal quarter that
      have materially affected, or are reasonably likely to materially affect, our
      internal control over financial reporting. Although no system of controls can
      provide absolute assurance that all control issues, if any, have been detected,
      as a result of the changes set forth above, we now believe that our system
      of
      disclosure controls is operating effectively.




20


**SAFESTITCH
        MEDICAL, INC.**


**PART
      II. OTHER INFORMATION**




**Item
      1. Legal Proceedings.**




There
      have been no material changes to legal proceedings since the filing of our
      annual report on Form 10-KSB, as amended, for the year ended December 31,
      2007.




**Item
      1A. Risk Factors.**




There
      have been no material changes in our risk factors since the filing of our annual
      report on Form 10-KSB, as amended, for the year ended December 31,
      2007.




**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.**




The
      information required by this Item 2 has been previously reported on our Current
      Report on Form 8-K, filed with the SEC on May 29, 2008.




**Item
      3. Defaults upon Senior Securities.**




None.




**Item
      4. Submission of Matters to a Vote of Security Holders.**




None.




**Item
      5. Other Information.**




None.




**Item
      6. Exhibits.**




**Exhibits:**31.1
            
            Certification
                of Chief Executive Officer pursuant to Rule
                13a-14(a)/15d-14(a)31.2
            
            Certification
                of Chief Financial Officer pursuant to Rule
                13a-14(a)/15d-14(a)32.1
            
            Certification
                of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 200232.2
            
            Certification
                of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002




21


SAFESTITCH
      MEDICAL,
      INC.




**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.





**SAFESTITCH
                MEDICAL, INC.**Date:
                August 8, 2008
            By:
            /s/
                Jeffrey G. SpragensJeffrey
                G. SpragensPresident
                and Chief Executive OfficerDate:
                August 8, 2008
            By:
            /s/
                Adam S. JacksonAdam
                S. JacksonChief
                Financial Officer


22