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 endedMarch
      31,2009




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 0-19437SAFESTITCH
      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 A-100, Miami,
      Florida
                      
                      33137(Address
      of principal executive offices)
                      
                      (Zip
      code)





Registrant’s
telephone number, including area code: (305) 575-4145





4400 Biscayne Blvd., Suite 670, Miami,
      Florida
                        
                        33137(Former
      name, former address and former fiscal year, if changed since last
      report)





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 has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such
files).                                                                                                         
Yes  ̈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 companyx





Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ̈No x





17,962,718 shares of the Company’s
common stock, par value $0.001 per share, were outstanding as of May 12,
2009.









SAFESTITCH
MEDICAL, INC.


(A
Developmental Stage Company)





TABLE
OF CONTENTS FOR FORM 10-Q





PART
      I.FINANCIAL
      INFORMATIONITEM
      1.
                          FINANCIAL
      STATEMENTS
                          
                          3Condensed
      Consolidated Balance Sheets as of March 31, 2009 (unaudited) and
      December 31, 2008
                          
                          3Unaudited
      Condensed Consolidated Statements of Operations for the Three Months ended
      March 31, 2009 and 2008, and for the period from September 15, 2005
      (inception) to March 31, 2009
                          
                          4Condensed
      Consolidated Statements of Stockholders’ Equity for the period from
      September 15, 2005 (inception) through March 31, 2009
      (unaudited)
                          
                          5Unaudited
      Condensed Consolidated Statements of Cash Flows for the Three Months ended
      March 31, 2009 and 2008, and for the period from September 15, 2005
      (inception) to March 31, 2009
                          
                          6Notes
      to unaudited condensed consolidated financial statements
                          
                          7ITEM
      2.
                          MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                          
                          17ITEM
      3.
                          QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
                          
                          20ITEM
      4T.
                          CONTROLS
      AND PROCEDURES
                          
                          20PART
      II.OTHER
      INFORMATIONITEM
      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 SHEETS




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




March 31,
                            
                            
                            December 31,2009
                            
                            
                            2008(Unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                            
                            $
                            218
                            
                            
                            $
                            561Other
      receivable – related-party
                            
                            
                            7
                            
                            
                            $
                            13Prepaid
      expenses
                            
                            
                            163
                            
                            
                            
                            151Total
      Current Assets
                            
                            
                            388
                            
                            
                            
                            725FIXED
      ASSETSProperty
      and equipment, net
                            
                            
                            158
                            
                            
                            
                            168OTHER
      ASSETSSecurity
      deposits
                            
                            
                            2
                            
                            
                            
                            2Deferred
      financing costs, net
                            
                            
                            638
                            
                            
                            
                            851Total
      Other Assets
                            
                            
                            640
                            
                            
                            
                            853LONG-TERM
      INVESTMENT, net of valuation adjustment of $1,754
                            
                            
                            –
                            
                            
                            
                            –TOTAL
      ASSETS
                            
                            $
                            1,186
                            
                            
                            $
                            1,746LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable and accrued liabilities
                            
                            $
                            270
                            
                            
                            $
                            273Total
      Current Liabilities
                            
                            
                            270
                            
                            
                            
                            273Stockholder
      loans
                            
                            
                            300
                            
                            
                            
                            –Commitments
      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,17,962,718
      shares issued and outstanding
                            
                            
                            18
                            
                            
                            
                            18Additional
      Paid-in Capital
                            
                            
                            10,853
                            
                            
                            
                            10,817Deficit
      accumulated during the development stage
                            
                            
                            (10,255
                            )
                            
                            
                            (9,362
                            )Total
      Stockholders’ Equity
                            
                            
                            616
                            
                            
                            
                            1,473TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                            
                            $
                            1,186
                            
                            
                            $
                            1,746





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 per share amounts)




Three Months Ended
                  March 31,
              
              
              September 15,20052009
              
              
              2008
              
              
              (Inception) toMarch 31, 2009REVENUES
              
              $
              –
              
              
              $
              –
              
              
              $
              –COSTS
      AND EXPENSESResearch
      and development
              
              
              349
              
              
              
              814
              
              
              
              5,936General
      and administrative
              
              
              331
              
              
              
              416
              
              
              
              3,004Total
      Costs and Expenses
              
              
              680
              
              
              
              1,230
              
              
              
              8,940LOSS
      FROM OPERATIONS
              
              
              (680
              )
              
              
              (1,230
              )
              
              
              (8,940
              )INTEREST
      INCOME
              
              
              –
              
              
              
              5
              
              
              
              77AMORTIZATION
      OF FINANCE COSTS
              
              
              (213
              )
              
              
              (213
              )
              
              
              (1,347
              )INTEREST
      EXPENSE
              
              
              –
              
              
              
              (6
              )
              
              
              (45
              )LOSS
      BEFORE INCOME TAX
              
              
              (893
              )
              
              
              (1,444
              )
              
              
              (10,255
              )PROVISION
      FOR INCOME TAX
              
              
              –
              
              
              
              –
              
              
              
              –NET
      LOSS
              
              $
              (893
              )
              
              $
              (1,444
              )
              
              $
              (10,255
              )WEIGHTED
      AVERAGE SHARES OUTSTANDING – BASIC AND DILUTED
              
              
              17,963
              
              
              
              16,093NET
      LOSS PER BASIC AND DILUTED SHARE
              
              $
              (0.05
              )
              
              $
              (0.09
              )





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 MARCH 31, 2009




(in
000s)




DeficitAccumulatedAdditional
                                            
                                            
                                            During thePreferred Stock
                                            
                                            
                                            Common Stock
                                            
                                            
                                            Paid-in
                                            
                                            
                                            DevelopmentShares
                                            
                                            
                                            Amount
                                            
                                            
                                            Shares
                                            
                                            
                                            Amount
                                            
                                            
                                            Capital
                                            
                                            
                                            Stage
                                            
                                            
                                            TotalInception
      – 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
                                            )
                                            
                                            $
                                            369Exercise
      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
                                            )
                                            
                                            $
                                            2,421Issuance
      of common shares in private offering – May 2008 at $2.15 per share, net of
      offering costs
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            1,862
                                            
                                            
                                            
                                            2
                                            
                                            
                                            
                                            3,986
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            3,988Issuance
      of common shares as repayment of stockholder note-December 30, 2008 at
      $1.22 per share
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            8
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            10
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            10Stock-based
      compensation
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            239
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            239Net
      loss
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (5,185
                                            )
                                            
                                            
                                            (5,185
                                            )Balance
      at December 31, 2008
                                            
                                            
                                            –
                                            
                                            
                                            $
                                            –
                                            
                                            
                                            
                                            17,963
                                            
                                            
                                            $
                                            18
                                            
                                            
                                            $
                                            10,817
                                            
                                            
                                            $
                                            (9,362
                                            )
                                            
                                            $
                                            1,473Stock-based
      compensation
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            36
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            36Net
      loss
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (893
                                            )
                                            
                                            
                                            (893
                                            )Balance
      at March 31, 2009 - Unaudited
                                            
                                            
                                            –
                                            
                                            
                                            $
                                            –
                                            
                                            
                                            
                                            17,963
                                            
                                            
                                            $
                                            18
                                            
                                            
                                            $
                                            10,853
                                            
                                            
                                            $
                                            (10,255
                                            )
                                            
                                            $
                                            616




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




5




SAFESTITCH MEDICAL,
INC.




(A
Developmental Stage Company)




UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS




(in
000s)




Three Months Ended March 31,
                
                
                September 15,2005(Inception) toMarch 31,2009
                
                
                2008
                
                
                2009OPERATING
      ACTIVITIESNet
      loss
                
                $
                (893
                )
                
                $
                (1,444
                )
                
                $
                (10,255
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Amortization
      of deferred finance costs
                
                
                213
                
                
                
                213
                
                
                
                1,347Stock-based
      compensation expense
                
                
                36
                
                
                
                139
                
                
                
                340Stock-based
      compensation expense related to Share Exchange
                
                
                –
                
                
                
                –
                
                
                
                77Depreciation
      and amortization
                
                
                13
                
                
                
                13
                
                
                
                72Changes
      in operating assets and liabilitiesOther
      current assets
                
                
                (6
                )
                
                
                (3
                )
                
                
                (150
                )Other
      assets
                
                
                –
                
                
                
                –
                
                
                
                (2
                )Accounts
      payable and accrued liabilities
                
                
                (3
                )
                
                
                112
                
                
                
                (15
                )NET
      CASH USED IN OPERATING ACTIVITIES
                
                
                (640
                )
                
                
                (970
                )
                
                
                (8,586
                )CASH
      FLOWS FROM  INVESTING ACTIVITIESPurchase
      of equipment
                
                
                (3
                )
                
                
                (3
                )
                
                
                (230
                )Payment
      received under Rule 16b
                
                
                –
                
                
                
                –
                
                
                
                4NET
      CASH USED IN INVESTING ACTIVITIES
                
                
                (3
                )
                
                
                (3
                )
                
                
                (226
                )CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      cash provided in connection with the acquisition of SafeStitch
      LLC
                
                
                –
                
                
                
                –
                
                
                
                3,192Issuance
      of common stock, net of offering costs
                
                
                –
                
                
                
                –
                
                
                
                3,988Capital
      contributions
                
                
                –
                
                
                
                –
                
                
                
                1,431Proceeds
      from stockholder loans
                
                
                300
                
                
                
                1,000
                
                
                
                2,260Repayment
      of stockholder loans
                
                
                –
                
                
                
                –
                
                
                
                (1,876
                )Exercise
      of options
                
                
                –
                
                
                
                –
                
                
                
                35NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                
                
                300
                
                
                
                1,000
                
                
                
                9,030NET
      (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
                
                
                (343
                )
                
                
                27
                
                
                
                218CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                
                
                561
                
                
                
                631
                
                
                
                –CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                
                $
                218
                
                
                $
                658
                
                
                $
                218Supplemental
      disclosures:Cash
      paid for interest
                
                $
                –
                
                
                $
                –
                
                
                $
                45Non
      cash activities:Stockholder
      loans contributed to capital
                
                $
                –
                
                
                $
                –
                
                
                $
                84Warrants
      issued in connection with credit facility
                
                $
                –
                
                
                $
                1,985
                
                
                $
                1,985




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, 2008, 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 (“GAAP”) for interim
financial information and the instructions to the quarterly report on Form 10-Q
and Rule 8-03 of Regulation S-X.  Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements.  In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included.  Operating results for the three
months ended March 31, 2009 are not necessarily indicative of results that may
be expected for the year ending December 31, 2009.  These condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December
31, 2008 included in the Company’s annual report on form 10-K, filed with the
Securities Exchange Commission on March 27, 2009.




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




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 limited liability company formed in Virginia on September 15,
2005.  On September 4, 2007, Cellular acquired all of the members’
equity of SafeStitch LLC in exchange for 11,256,369 shares of Cellular’s 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, and 25,000,000 shares of preferred stock, par value
$0.01 per share.




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 March 31, 2009, the Company has
accumulated a deficit of $10.3 million and has not generated positive cash flows
from operations.  The Company has been dependent upon equity financing
and loans from stockholders to meet its obligations and sustain its
operations.  The Company’s efforts have been principally devoted to
developing its technologies and commercializing its products.  Based
upon its current cash position; its budget for business operations; availability
under its $4.0 million credit facility with The Frost Group LLC 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 at least through May
2010.  If adequate funds are not available, the Company may be
required to delay, reduce the scope of or eliminate its research and development
programs, reduce its planned commercialization efforts or obtain funds through
arrangements with collaborators or others that may require the Company to
relinquish rights to certain product candidates that it might otherwise seek to
develop or commercialize independently.  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 generating revenues from those
products that do not require further marketing clearance by the U.S. Food and
Drug Administration (“FDA”), obtaining FDA clearance to market its other product
candidates and 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.




Use of
estimates.  The preparation of financial statements in
conformity with GAAP 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.




Cash and cash
equivalents.  We consider all highly liquid investments
purchased with an original maturity of three months or less when purchased to be
cash equivalents.  The Company holds cash and cash equivalent balances
in banks 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 with 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.




Stock-based
compensation.  The Company follows Statement of Financial
Accounting Standards (“SFAS”) No. 123R, “Share Based Payment”, 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 costs and 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.  Related party receivables and 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.




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.




8




SAFESTITCH MEDICAL,
INC.




(A
Developmental Stage Company)




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




NOTE
3 – PROPERTY AND EQUIPMENT




Property
and equipment consist of the following:




Estimated Useful Lives
                    
                    March 31, 2009
                    
                    
                    December 31, 2008Machinery
      and equipment
                    
                    5
      years
                    
                    $
                    156,000
                    
                    
                    $
                    153,000Furniture
      and fixtures
                    
                    3-5
      years
                    
                    
                    37,000
                    
                    
                    
                    37,000Software
                    
                    3-5
      years
                    
                    
                    37,000
                    
                    
                    
                    37,000230,000
                    
                    
                    
                    227,000Accumulated
      depreciation and amortization
                    
                    
                    
                    
                    (72,000
                    )
                    
                    
                    (59,000
                    )Property
      and equipment, net
                    
                    
                    
                    $
                    158,000
                    
                    
                    $
                    168,000





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 costs and expenses.  Depreciation and
amortization expense was $13,000 and $13,000, respectively for the three months
ended March 31, 2009 and 2008.




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.  In August 2000, all of the outstanding stock of KSI was
acquired by TruePosition, Inc., a majority owned subsidiary of Liberty Media
Corporation (“Liberty Media”).  Prior to such acquisition, the
convertible note was exchanged for KSI common stock, and 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 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 required significant
infusions of cash by Liberty Media, 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 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, were entitled to receive $3.5116
in cash in exchange for each share held.  The Company has exercised
its statutory appraisal rights in respect of this merger, and is now a party to
an appraisal action and a securities fraud litigation (see Note
9).  The Company may possibly 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




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 is allowed to 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 shares at the
date of grant and, within any 12 month period, no person may receive stock
options or stock appreciation rights for more than one million
shares.  Additionally, no stock options or stock appreciation rights
granted under the plan may have a term exceeding ten years.




9




SAFESTITCH MEDICAL,
INC.




(A
Developmental Stage Company)




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





Total
stock-based compensation recorded for the three months ended March 31, 2009 and
2008 was $36,000 and $139,000, respectively, and is included in general and
administrative costs and expenses.  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.




The
Company granted 358,500 options under the 2007 Plan during the three months
ended March 31, 2009 at an exercise price of $0.80 per share and an estimated
aggregate grant date fair value of $180,000.  The Company granted
148,500 options under the 2007 Plan during the three months ended March 31, 2008
at exercise prices between $3.00 and $3.10 per share and an estimated aggregate
grant date fair value of $300,000.  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.  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 U.S.
Treasury bonds on the grant date with a maturity equal to the expected term of
the stock option.  The expected life of stock option awards is based
upon the “simplified” method for “plain vanilla” options described 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.  The fair value of each
option granted during the three months ended March 31, 2009 and 2008 was
estimated using the following assumptions.




Three months endedMarch 31, 2009
                                  
                                  
                                  Three months endedMarch 31, 2008Expected
      volatility
                                  
                                  74.59%
      - 86.43%
                                  
                                  
                                  88.31%
      - 94.46%Expected
      dividend yield
                                  
                                  0.00%
                                  
                                  
                                  0.00%Risk-free
      interest rate
                                  
                                  1.39%
      – 1.79%
                                  
                                  
                                  1.96%
      – 2.61%Expected
      life
                                  
                                  4.0
      – 5.5 years
                                  
                                  
                                  3.5
      – 5.5 yearsForfeiture
      rate
                                  
                                  2.50%
                                  
                                  
                                  0%
      - 2.50%




The
following summarizes the Company’s stock option activity for the three months
ended March 31, 2009:




Shares
                
                
                WeightedAverageExercisePrice
                
                
                WeightedAverageRemainingContractualTerm (Years)
                
                
                AggregateIntrinsicValueOutstanding
      at December 31, 2008
                
                
                256,667
                
                
                $
                2.80
                
                
                
                7.12Granted
                
                
                358,500
                
                
                $
                0.80
                
                
                
                6.87Exercised
                
                
                –
                
                
                
                –
                
                
                
                –Canceled
      or expired
                
                
                –
                
                
                
                –
                
                
                
                –Outstanding
      at March 31, 2009
                
                
                615,167
                
                
                $
                1.63
                
                
                
                6.87
                
                
                $
                71,700Exercisable
      at March 31, 2009
                
                
                143,834
                
                
                $
                2.93
                
                
                
                6.74
                
                
                $
                –Vested
      and expected to vest at March 31, 2009
                
                
                592,789
                
                
                $
                1.65
                
                
                
                6.88
                
                
                $
                68,066





None of
the 358,500 options granted during the first quarter of the Company’s 2009
fiscal year were vested as of March 31, 2009.  A summary of the status
of the Company’s non-vested options and changes during the three months ended
March 31, 2009 is presented below.




10




SAFESTITCH MEDICAL,
INC.




(A
Developmental Stage Company)




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




Stock Options
                
                
                Weighted Average GrantDate Fair ValueNon-Vested
      at December 31, 2008
                
                
                146,833
                
                
                $
                2.00Options
      Granted
                
                
                358,500
                
                
                
                0.50Options
      Vested
                
                
                (34,000
                )
                
                
                2.02Non-Vested
      at March 31, 2009
                
                
                471,333
                
                
                $
                0.86





At March
31, 2009, there was $301,000 of total unrecognized compensation cost related to
non-vested employee and director share-based compensation
arrangements.  That cost is expected to be recognized over a
weighted-average period of 1.85 years.





No
options were exercised during the three months ended March 31, 2009 and
2008.  The $36,000 of stock-based compensation recorded in the three
months ended March 31, 2009 is net of an approximately $15,000 credit related to
the modification of stock option awards for certain former
employees.  The Company’s Compensation Committee accelerated the
vesting of the former employees’ options, which originally vested on various
dates through 2012, to be fully vested on the modification date, and extended
the expiration of the options to one year from the modification
date.





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 (the “Frost Group”) 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 Company has 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.).  Outstanding borrowings under the Credit Facility accrue
interest at a 10% annual rate.  The Credit Facility had an initial
term of 28 months, expiring in December 2009, and was amended in March 2009 to
extend the Maturity Date to June 2010.




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 related to these deferred financing costs of $213,000 and
$213,000, respectively, for the three months ended March 31, 2009 and
2008.




The
Company borrowed $1.0 million under the Credit Facility during the three months
ended March 31, 2008 and repaid the entire outstanding balance in June 2008
using the proceeds of the private placement described in Note 7.  The
Company borrowed $300,000 under the Credit Facility during the three months
ended March 31, 2009, which amount remained outstanding as of March 31,
2009.  The Company recognized interest expense related to the
outstanding borrowings of less than $1,000 for the three months ended March 31,
2009 and approximately $6,000 for the three months ended March 31,
2008.




11





SAFESTITCH MEDICAL,
INC.




(A
Developmental Stage Company)




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




NOTE
7 – CAPITAL TRANSACTIONS:




2008 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 OTCBB 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 approximately $4.0 million and has incurred $14,000 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 “Securities 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) under the Securities Act
and that the Shares were being acquired for investment purposes.  The
Shares have not been registered under the Securities Act and are “restricted
securities” as that term is defined by Rule 144 promulgated
thereunder.  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 for the period reported.  Diluted
net loss per common share is computed giving effect to all dilutive potential
common shares that were outstanding for the period reported.  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 months ended March 31, 2009 and 2008, no adjustment has been made
to the weighted average outstanding common shares as the assumed exercise of
outstanding options and warrants is anti-dilutive.




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




March 31, 2009
                  
                  
                  March 31, 2008Stock
      options
                  
                  
                  615,167
                  
                  
                  
                  237,167Stock
      warrants
                  
                  
                  805,521
                  
                  
                  
                  805,521Total
                  
                  
                  1,420,688
                  
                  
                  
                  1,042,688





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 $28,000 and
$48,000 for the three months ended March 31, 2009 and 2008,
respectively.




The
Company is presently a plaintiff in securities fraud and appraisal actions in
respect of its ownership of 191,118 shares of common stock of TruePosition (See
Note 4).  The securities fraud action was filed November 13, 2007 in
the United States District Court for the District of Connecticut, whereby
SafeStitch and other plaintiffs seek damages and other relief totaling $80
million.  The related appraisal action was filed in the Chancery Court
of the State of Delaware on August 31, 2007.  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 stockholder litigation governance and
funding agreement (the “Funding Agreement”) with such other
stockholders.  Under the Funding Agreement, the Company has agreed to
fund a portion of the litigation expenses in connection with the appraisal and
securities fraud action.  Through March 31, 2009, the Company has
contributed approximately $81,000 in cash and has incurred additional
liabilities of approximately $69,000.  Management anticipates that the
Company will be called upon to fund additional amounts during the next twelve
months.  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 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.




12





SAFESTITCH MEDICAL,
INC.




(A
Developmental Stage Company)




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





In
February 2009, the United States District Court for the District of Connecticut
granted the defendants’ motion to dismiss the securities fraud action described
above.  In March 2009, the Company, together with the other plaintiffs
filed an appeal of the District Court’s dismissal with the United States 2nd Circuit
Court of Appeals.  The outcomes of the appeal and the appraisal action
are not now known, nor can they be reasonably predicted at this
time.




NOTE
10 – AGREEMENT WITH CREIGHTON UNIVERSITY




On May
26, 2006, our wholly-owned subsidiary, SafeStitch LLC (“LLC”) entered into an
exclusive license and development agreement (the “License Agreement”) with
Creighton University (“Creighton”) granting LLC a worldwide exclusive (even as
to Creighton) license, with rights to sublicense, to all of LLC’s product
candidates and associated know-how, including the exclusive right to
manufacture, use and sell the product candidates.  Pursuant to the
License Agreement, LLC 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
LLC 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 LLC, then the licensed patent and associated know-how shall revert
back to Creighton, with no rights retained by LLC, and Creighton will have the
right to seek a third party with whom to commercialize such patent and
associated know-how, unless LLC purchases one or more one-year
extensions.




Pursuant
to the License Agreement, LLC is obligated to pay Creighton, 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, LLC 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 LLC invested outside of the License
Agreement.  LLC is further obligated to pay to Creighton an amount
equal to 20 percent of certain of LLC’s research and development expenditures as
reimbursement for the use of Creighton’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.  As of
December 31, 2007, LLC had satisfied the $2.5 million investment obligation
described above.  For the three months ended March 31, 2009 and 2008,
the Company paid Creighton $10,000 and $66,000, respectively, in satisfaction of
the 20% facility reimbursement obligation.




NOTE
11 – 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 “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 costs and expenses;
however no such provisions for accrued interest and penalties related to
uncertain tax positions have been recorded as of March 31, 2009 and December 31,
2008.




13





SAFESTITCH MEDICAL,
INC.




(A
Developmental Stage Company)




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





The tax
years 2004 through 2008 remain open to examination by the major tax
jurisdictions in which the Company operates.




NOTE
12 – CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS




As more
fully described in Note 6, the Company entered into a $4.0 million Credit
Facility with both Jeffrey G. Spragens, the Company’s President, Chief Executive
Officer and director, and the Frost Group, a Florida limited liability company
whose members include Chairman of the Board Dr. Jane H. Hsiao, director Steven
D.  Rubin and Frost Gamma Investments Trust, a trust controlled by Dr.
Phillip Frost, the Company’s largest beneficial stockholder.  Advances
under the Credit Facility totaled $300,000 and $1.0 million for the three months
ended March 31, 2009 and 2008, respectively, and $300,000 was outstanding as of
March 31, 2009.  The Company recognized interest expense related to
the Credit Facility of less than $1,000 for the three months ended March 31,
2009 and approximately $6,000 for the three months ended March 31,
2008.




The
Company entered into a five year lease for office space in Miami, Florida with a
company controlled by Dr. Frost.  The initial rental payments under
the Miami office lease, which commenced January 1, 2008, were approximately
$8,000 per month for the first year and escalate 4.5% annually over the life of
the lease.  Pursuant to a lease amendment effective February 2009, the
Company relocated its corporate office to an alternate space within the same
building for annual rental payments of approximately $68,000.  All
other terms and conditions of the Company’s corporate office lease remain
unchanged.  The Company recorded $21,000 and $36,000 of rent expense
related to the Miami lease for the three months ended March 31, 2009 and 2008,
respectively.




Dr. Hsiao
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
March 31, 2009, the Company had approximately $17,000 on deposit with Great
Eastern Bank of Florida.




Dr.
Hsiao, Dr. Frost and Mr. Rubin are each significant shareholders and/or
directors of Non-Invasive Monitoring Systems, Inc. (“NIMS”), a publicly-traded
medical device company, and of Aero Pharmaceuticals, Inc. (“Aero”), a
privately-held pharmaceutical distribution company.  Commencing in
March 2008, the Company’s Chief Financial Officer also serves as the Chief
Financial Officer and supervises the accounting staffs of NIMS and Aero under a
board-approved cost sharing arrangement whereby the total salaries of the
accounting staffs of the three companies are shared.  The Company has
recorded reductions to general and administrative costs and expenses for the
three months ended March 31, 2009 and 2008 of $19,000 and $0, respectively, to
account for the sharing of costs under this arrangement.  Accounts
receivable from NIMS and Aero were approximately $3,000 and $3,000,
respectively, as of March 31, 2009.




NOTE
13 – EMPLOYEE BENEFIT PLANS




Effective
May 1, 2008, the SafeStitch 401(k) Plan (the “401k Plan”) permits employees
to contribute up to 100% of qualified annual compensation up to annual statutory
limitations.  Employee contributions may be made on a pre-tax basis to
a regular 401(k) account or on an after-tax basis to a “Roth” 401(k)
account.  The Company will contribute to the 401k Plan a “safe harbor”
match of 100% of each participant’s contributions to the 401k Plan up to a
maximum of 4% of the participant’s qualified annual earnings.  The
Company recorded 401(k) matching expense of approximately $6,000 and $0,
respectively, for the three months ended March 31, 2009 and
2008.




NOTE
14 – FINANCIAL INSTRUMENTS




Effective
January 1, 2008, the Company adopted SFAS 157, which defines fair value,
establishes a framework for measuring fair value and requires additional
disclosures about fair value measurements.  In accordance with FASB
Staff Position 157-2, “Effective Date of the FASB Statement
No. 157,” the Company deferred adoption of SFAS 157 for its
nonfinancial assets and nonfinancial liabilities, except those items recognized
or disclosed at fair value on an annual or more recurring basis, until
January 1, 2009.  SFAS 157 establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair
value.  These tiers include:  Level 1, defined as observable
inputs such as quoted prices in active markets; Level 2, defined as inputs other
than quoted prices in active markets that are either directly or indirectly
observable; and Level 3, defined as unobservable inputs in which little or no
market data exists, therefore requiring an entity to develop its own
assumptions.  As of March 31, 2009, the Company did not hold any
assets or liabilities that were required to be measured at fair value on a
recurring basis and did not hold any non-financial assets or liabilities that
were required to be re-measured at fair value, and therefore the adoption of the
respective provisions of SFAS 157 did not have a material impact on the
Company’s consolidated financial statements.




14





SAFESTITCH MEDICAL,
INC.




(A
Developmental Stage Company)




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




NOTE
15 – RECENT ACCOUNTING PRONOUNCEMENTS




Effective
January 1, 2009, the Company adopted 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.  The
adoption of SFAS 160 has not had a material impact on the Company’s consolidated
financial statements.




Effective
January 1, 2009, the Company adopted 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.  The adoption of SFAS 141R has not had a material
impact on the Company’s consolidated financial statements. In April
2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies”(“FSP 141(R)-1”), to amend and clarify the initial
recognition and measurement, subsequent measurement and accounting, and related
disclosures arising from contingencies in a business combination under SFAS
141R.  Under the new guidance, assets acquired and liabilities assumed
in a business combination that arise from contingencies should be recognized at
fair value on the acquisition date if fair value can be determined during the
measurement period.  If fair value cannot be determined, acquired
contingencies should be accounted for using existing guidance.  FSP
141(R)-1 is effective January 1, 2009.  As such, the adoption applies
to business combinations for which the acquisition date is on or after January
1, 2009.




Effective
January 1, 2009, the Company adopted 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.  The adoption of EITF 07-1 has not had a
material impact on the Company’s 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 GAAP.  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.




Effective
January 1, 2009, the Company adopted EITF 07-05, “Determining whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF
07-05”).  EITF 07-05 provides guidance on determining what types of
instruments or embedded features in an instrument held by a reporting entity can
be considered indexed to its own stock for the purpose of evaluating the first
criteria of the scope exception in paragraph 11(a) of SFAS 133.  The
adoption of EITF 07-05 has not had a material impact on the Company’s
consolidated financial statements.




15




SAFESTITCH MEDICAL,
INC.




(A
Developmental Stage Company)




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





In April
2009, the FASB issued FASB Staff Position FAS-157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS
157-4”).  FSP FAS 157-4 provides guidelines for making fair value
measurements more consistent with the principles presented in SFAS
157.  FSP FAS 157-4 provides additional authoritative guidance in
determining whether a market is active or inactive and whether a transaction is
distressed.  FSP FAS 157-4 is applicable to all assets and liabilities
(i.e. financial and nonfinancial) and will require enhanced
disclosures.  FSP FAS 157-4 is required to be adopted no later than
the periods ending after June 15, 2009.  The Company is currently
evaluating the potential impact of the adoption of FSP FAS 157-4 on its
consolidated financial statements.




In April
2009, the FASB issued FASB Staff Positions FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (“FSP FAS 115-2”) and (“FSP FAS
124-2”).  FSP FAS 115-2 and FSP FAS 124-2 provide additional guidance
to provide greater clarity about the credit and noncredit component of an
other-than-temporary impairment event and to improve presentation and disclosure
of other than temporary impairments in the financial statements.  FSP
FAS 115-2 and FSP FAS 124-2 are required to be adopted no later than the periods
ending after June 15, 2009.  The Company is currently evaluating the
potential impact of the adoption of FSP FAS 115-2 on its consolidated financial
statements.




In April
2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, “Interim Disclosures about Fair
Value of Financial Instruments” (“FSP FAS 107-1”) and (“APB
28-1”).  FSP FAS 107-1 amends FASB Statement No. 107, “Disclosures about Fair Value of
Financial Instruments”, to require disclosures about fair value of
financial instruments in interim as well as in annual financial statements and
amends APB Opinion No. 28 “Interim Financial
Reporting”, to require those disclosures in interim financial
statements.  FSP FAS 107-1 and APB 28-1 are required to be adopted no
later than the periods ending after June 15, 2009.  The Company is
currently evaluating the potential impact of the adoption of FSP FAS 107-1 on
its consolidated financial statements.




16




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 commercialize our existing products; 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-K.  We do not undertake any obligation
to update forward-looking statements, except as required by applicable
law.  We intend that all forward-looking statements be subject to the
safe harbor provisions of 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 obesity, GERD, hernia formation, esophageal
obstructions, Barrett’s Esophagus, upper gastrointestinal bleeding, and other
intraperitoneal abnormalities through endoscopic and minimally invasive
surgery.
  We have
utilized our expertise in intraperitoneal surgery to test certain of our devices
in in vivo and ex vivo animal trials and
ex vivo human trials,
and with certain products, in limited in vivo human
trials.  Certain of our products did not or may not require clinical
trials, including our SMART DilatorTM,
standard and airway bite blocks and hernia stapler.  Where required,
we intend to rapidly, efficiently and safely move into clinical trials for
certain other devices, including those utilized in surgery for the treatment of
obesity, GERD and for the treatment and diagnosis of Barrett’s
Esophagus.  Clinical trials for certain of these product candidates
are anticipated to begin in 2010.
  Immediately
prior to our acquisition of SafeStitch LLC, a privately held Virginia limited
liability company, on September 4, 2007, we had no business
operations.  Under the name Cellular Technical Services Company, Inc.
(“CTSC”), we had previously developed, marketed, distributed and supported a
diversified mix of products and services for the telecommunications
industry.  In 2002, CTSC ceased its product development efforts and
adopted a plan to wind down all operations related to its historical business,
which process it completed in December 2005.  Between that time and
the 2007 consummation of our acquisition of SafeStitch LLC described below, all
of CTSC’s staff and administrative positions were eliminated.  As
such, CTSC was a company with primarily cash and cash equivalents and no
operations.
  On
September 4, 2007, we completed our acquisition of SafeStitch LLC pursuant to a
Share Transfer, Exchange and Contribution Agreement, dated as of July 25, 2007,
by and among us, SafeStitch LLC and the members of SafeStitch
LLC.  The acquisition was accounted for as a recapitalization of
SafeStitch, LLC, which has been treated as the continuing reporting
entity.
  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”.  We intend to apply for the
listing of our Common Stock on the NYSE Amex Equities at such time as we meet
the initial listing requirements set by the exchange.
  17
  Products
  Three of
our products may currently be marketed in the United States without further FDA
clearance.  We received FDA clearance to market our SMART DilatorTM in
February 2009, and we believe our standard and airway bite blocks to be Class I
510(k)-exempt devices that require no preclearance from the FDA prior to
marketing.  We believe our Intraluminal Gastroplasty Device for
Obesity and GERD (the “Gastroplasty Device”), which is still in development,
will require IDE (investigational device exemption) clinical data for FDA
approval as a Class II 510k device.  We expect to commence the
necessary clinical trials for this device in 2010.  We expect to
complete principal development of the Amid Hernia Stapler in the fall of 2009,
and we expect to submit to the FDA a 510(k) premarket approval application for
the Amid Hernia Stapler in the second half of 2009.
  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 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 2 in the Notes to the
Consolidated Financial Statements set forth in Item 8 of our Annual Report on
Form 10-K for the year ended December 31, 2008.  Actual results may
differ from these estimates.
  Results
of Operations
  Our
losses totaled $10.3 million for the period commencing September 15, 2005
(inception) and ended March 31, 2009.  Such losses included $0.9
million and $1.4 million for the three months ended March 31, 2009 and 2008,
respectively.  At March 31, 2009, we had an accumulated deficit of
$10.3 million.  Since we do not currently generate revenue from any of
our product candidates, including those approved for commercial marketing by the
FDA, we expect to continue to generate losses in connection with the initial
commercial launch of such FDA-approved products and the development of our other
products and technologies.  Our 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.  In January
2009, we reduced our research and development staff by five full-time employees
to reduce costs as we completed development of three products and refocused our
development efforts on our most promising product candidates.  We plan
to add to our headcount in key functional areas as required to commence
commercialization activities and further the development of our product
candidates.
  Three
Months ended March 31, 2009 Compared to Three Months Ended March 31,
2008
  Research
and development costs and expenses were $349,000 for the three months ended
March 31, 2009 as compared to $814,000 for the same period in
2008.  This $465,000 decrease resulted primarily from the reductions
in R&D staffing discussed above and from completion of development
activities related to certain of our products.  We expect research and
development costs and expenses in 2009 to remain below 2008 levels and increase
in 2010 and beyond as we enter into more advanced stages of development for our
Gastroplasty Device and other surgical product candidates, including the
commencement of clinical trials.
  General
and administrative costs and expenses were $331,000 for the three months ended
March 31, 2009, as compared to $416,000 for the three months ended March 31,
2008.  This $85,000 decrease was primarily the result of lower
stock-based compensation expense, partially offset by an increase in accounting
and administrative staffing and related operating costs.  General and
administrative costs and expenses consist primarily of salaries and other
related costs, including stock-based compensation expense.  Other
general and administrative costs and expenses include facility-related costs not
otherwise included in research and development costs and expenses, and
professional fees for legal and accounting services.  We expect that
our general and administrative costs and expenses will increase during 2009 as
we commence commercialization activities for our SMART DilatorTM and
bite block products, as well as for the Amid Hernia Stapler, which we expect
will be cleared for marketing before the end of 2009.  Additionally,
we expect increased costs in connection with our reporting and other obligations
incident to our being a public company.
  18
  Interest
income was negligible for the three months ended March 31, 2009 as compared to
$5,000 in the comparable 2008 period, primarily due to lower invested cash
balances resulting from the use of cash in our operating
activities.  Interest expense was negligible for the three months
ended March 31, 2009 as compared to $6,000 in the comparable 2008 period, due to
lower balances outstanding under the Credit Facility.  Interest
expense is expected to increase as we draw down additional funds under the
Credit Facility to fund our operating activities.
  Liquidity
and Capital Resources
  As a
result of our significant research and development expenditures and the lack,
until February 2009, of any approved products to generate product sales revenue,
we have not been profitable and have generated operating losses since
inception.  Additionally, in connection with our involvement as a
plaintiff in the TruePosition litigation, we spent approximately $81,000 during
the eighteen months since the litigation began, which reduced our available cash
and will continue to do so for so long as we stay involved in the
litigation.  We do not expect to have any source of revenues before
the second half of 2009, and we expect to incur losses from operations for the
foreseeable future.  Beginning in 2010, we expect to incur increasing
research and development costs and expenses, including expenses related to
hiring new personnel and conducting clinical trials for our Gastroplasty
Device.  We expect that general and administrative costs and 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.
  To date,
we have funded our operations primarily with proceeds from the private placement
of stock and credit facilities available to us.  Our ability to sell
additional shares of our stock and/or borrow cash under existing or new credit
facilities could be materially adversely affected by the recent and continuing
economic turmoil in the world’s equity and credit markets.  There can
therefore be no assurance that we will be able to raise funds on acceptable
terms or at all, which may materially adversely affect our ability to continue
our operations.  Additionally, the current economic turmoil could also
reduce the demand for new and innovative medical devices, resulting in delayed
market acceptance of our product candidates.  Such delay could have a
material adverse impact on our expected cash flows, liquidity, results of
operations and financial position.  In order to address this
uncertainty, our management has taken steps to reduce our near-term cash
requirements by focusing our product development efforts primarily on the
significant product candidates, including the Gastroplasty Device and Amid
Hernia Stapler, which are expected to have the most promising market potential
and the shortest remaining development time.
  As a
result of these actions, our management has currently budgeted expenditures of
approximately $2.4 million for our 2009 fiscal year to fund the final
development of our hernia stapler and the initial marketing of the hernia
stapler and the three other product candidates already developed, as well as to
continue research and development of our Gastroplasty Device.  Our
management believes that our $218,000 cash balance as of March 31, 2009,
together with the $3.7 million availability remaining under
our  Credit Facility, will be sufficient to fund our current cash flow
requirements through at least 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 precise amounts of capital outlays and operating
expenditures associated with our current and anticipated clinical
trials.
  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, and 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 will
need to finance our future cash needs through public or private equity
offerings, debt financings or corporate collaboration and licensing
arrangements.  Our Credit Facility expires in June 2010, and we are
currently evaluating longer-term financing alternatives.  We do not
have any commitments for such future external 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
indebtedness would result in increased fixed obligations and could also result
in covenants that would restrict our operations.  Additional equity or
debt financing, grants or corporate collaboration and licensing arrangements may
not be available on acceptable terms, if 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
  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 Rule 13a-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
evaluated this system of disclosure controls and procedures as of the end of the
period covered by this quarterly report, and have concluded that the system is
operating effectively to ensure appropriate disclosure.
  There
were no significant changes in our internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of Rule
13a-15 of the Exchange Act that occurred during period covered by this report
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
  20
  PART
II.  OTHER INFORMATION
  Item
1.  Legal Proceedings.
  See Note
9 to our unaudited condensed consolidated financial statements included in this
Quarterly Report on Form 10-Q for a discussion of recent material developments
related to our legal proceedings since the filing of our Annual Report on Form
10-K for the year ended December 31, 2008.
  Item
1A.  Risk Factors.
  There
have been no material changes in our risk factors since the filing of our Annual
Report on Form 10-K for the year ended December 31, 2008.
  Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds.
  None.
  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
  SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
 
 SAFESTITCH MEDICAL,
      INC.Date:
      May 12, 2009
                    By:
                    /s/
      Jeffrey G. SpragensJeffrey
      G. SpragensPresident
      and Chief Executive OfficerDate:
      May 12, 2009
                    By:
                    /s/
      Adam S. JacksonAdam
      S. JacksonChief
      Financial Officer
  22