**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      DC. 20549




**FORM
      10-Q**





(Mark
      One)




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




or




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





Commission
                File Number**0-19437**




**SAFESTITCH
                MEDICAL, INC.**(Exact
                name of registrant as specified in its
                charter)




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




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




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





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.




Yes x  No
o





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 o
            Accelerated filer o
            Non-accelerated filer o
            **Smaller reporting company x**




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





17,954,521
      shares of the Company’s common stock, par value $0.001 per share, were
      outstanding as of November 7, 2008.




1




**SAFESTITCH
      MEDICAL, INC.**


**(A
      Developmental Stage Company)**





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




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




2




**SAFESTITCH
      MEDICAL, INC.**


**(A
      Developmental Stage Company)**


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


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




September
                30,
            
            December
                31,2008
            
            2007**ASSETS**
            
            (Unaudited)CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            1,467
            
            $
            631Accounts
                receivable - related-party
            
            
            20
            
            
            -Prepaid
                expenses
            
            
            46
            
            
            99Total
                Current Assets
            
            
            1,533
            
            
            730FIXED
                ASSETSProperty
                and equipment, net
            
            
            179
            
            
            196OTHER
                ASSETSSecurity
                deposits
            
            
            36
            
            
            56Deferred
                financing costs, net
            
            
            1,064
            
            
            1,702Total
                Other Assets
            
            
            1,100
            
            
            1,758LONG-TERM
                INVESTMENT, net of valuation adjustment of $1,754
            
            
            -
            
            
            -**TOTAL
                ASSETS**(Note
                6)
            
            $
            **2,812**
            
            **$**
            **2,684****LIABILITIES
                AND STOCKHOLDERS’ EQUITY**CURRENT
                LIABILITIESAccounts
                payable and accrued liabilities
            
            $
            154
            
            $
            253Total
                Current Liabilities
            
            
            154
            
            
            253Stockholder
                loans
            
            
            10
            
            
            10Commitments
                and contingencies (Note 9)
            
            
            -
            
            
            -STOCKHOLDERS’
                EQUITYPreferred
                stock, $.01 par value per share, 25,000,000 shares authorized,no
                shares issued and outstanding
            
            
            -
            
            
            -Common
                stock, $.001 par value per share, 225,000,000 shares
                authorized,17,954,521
                and 16,093,016shares
                issued and outstanding, respectively
            
            
            18
            
            
            16Additional
                paid-in capital
            
            
            10,772
            
            
            6,582Deficit
                accumulated during the development stage
            
            
            (8,142
            )
            
            (4,177
            )Total
                Stockholders’ Equity
            
            
            2,648
            
            
            2,421**TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY**
            
            $
            **2,812**
            
            **$**
            **2,684**





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




3


**SAFESTITCH
      MEDICAL, INC.**


**(A
      Developmental Stage Company)**


**UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**


(in
      000s,
      per share amounts)




**Three
                Months Ended**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,**
            
            **September
                15, 2005 (Inception) to September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**
            
            **2008**REVENUES
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -COSTS
                AND EXPENSESResearch
                and development
            
            
            494
            
            
            382
            
            
            2,111
            
            
            1,299
            
            
            5,017General
                and administrative
            
            
            405
            
            
            305
            
            
            1,211
            
            
            468
            
            
            2,231Total
                Costs and Expenses
            
            
            899
            
            
            687
            
            
            3,322
            
            
            1,767
            
            
            7,248LOSS
                FROM OPERATIONS
            
            
            (899
            )
            
            (687
            )
            
            (3,322
            )
            
            (1,767
            )
            
            (7,248
            )INTEREST
                INCOME
            
            
            7
            
            
            7
            
            
            19
            
            
            13
            
            
            72AMORTIZATION
                OF DEBT ISSUANCE EXPENSE
            
            
            (213
            )
            
            (71
            )
            
            (638
            )
            
            (71
            )
            
            (921
            )INTEREST
                EXPENSE
            
            
            -
            
            
            (21
            )
            
            (24
            )
            
            (21
            )
            
            (45
            )LOSS
                BEFORE INCOME TAX
            
            
            (1,105
            )
            
            (772
            )
            
            (3,965
            )
            
            (1,846
            )
            
            (8,142
            )PROVISION
                FOR INCOME TAX
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -NET
                LOSS
            
            $
            (1,105
            )
            $
            (772
            )
            $
            (3,965
            )
            $
            (1,846
            )
            $
            (8,142
            )WEIGHTED
                AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED
            
            
            17,955
            
            
            12,466
            
            
            16,967
            
            
            11,646NET
                LOSS PER BASIC AND DILUTED SHARE
            
            $
            (0.06
            )
            $
            (0.06
            )
            $
            (0.23
            )
            $
            (0.16
            )




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 SEPTEMBER 30,
      2008**


(in
      000s)




**Preferred
                Stock**
            
            **Common
                Stock**
            
            **Additional**
              **Paid-in**
            
            **Deficit**
              **Accumulated**
              **During
                the**
              **Development****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Capital**
            
            **Stage**
            
            **Total****Inception
                - September 15, 2005**
            
            
            **-**
            
            **$**
            **-**
            
            
            **-**
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **-**Capital
                contributed
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1
            
            
            -
            
            
            1Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (76
            )
            
            (76
            )**Balance
                at December 31, 2005**
            
            
            **-**
            
            **$**
            **-**
            
            
            **-**
            
            **$**
            **-**
            
            **$**
            **1**
            
            **$**
            **(76**
            **)**
            **$**
            **(75**
            **)**Capital
                contributed
            
            
            -
            
            
            -
            
            
            11,256
            
            
            11
            
            
            1,493
            
            
            -
            
            
            1,504Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,060
            )
            
            (1,060
            )**Balance
                at December 31, 2006**
            
            
            -
            
            **$**
            **-**
            
            
            **11,256**
            
            **$**
            **11**
            
            **$**
            **1,494**
            
            **$**
            **(1,136**
            **)**
            **$**
            **369**Exercise
                of options (CTS) -
              September
                23, 2007 at $0.79 per share
            
            
            -
            
            
            -
            
            
            42
            
            
            -
            
            
            35
            
            
            -
            
            
            35Stock-based
                compensation-September 4, 2007
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            77
            
            
            -
            
            
            77Issuance
                of common shares in recapitalization - September 4, 2007 at $0.64
                per
                share
            
            
            -
            
            
            -
            
            
            4,795
            
            
            5
            
            
            3,078
            
            
            -
            
            
            3,083SafeStitch
                expenses associated with recapitalization
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (156
            )
            
            -
            
            
            (156
            )Stock-based
                compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            65
            
            
            -
            
            
            65Warrants
                issued in connection with credit facility-September 4, 2007 at $2.46
                per
                share
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,985
            
            
            -
            
            
            1,985Rule
                16 payment received
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4
            
            
            -
            
            
            4Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,041
            )
            
            (3,041
            )**Balance
                at December 31, 2007**
            
            
            -
            
            **$**
            **-**
            
            
            **16,093**
            
            **$**
            **16**
            
            **$**
            **6,582**
            
            **$**
            **(4,177**
            **)**
            **$**
            **2,421**Issuance
                of common shares in private offering - May 2008 at $2.15 per share,
                net of
                offering costs
            
            
            -
            
            
            -
            
            
            1,862
            
            
            2
            
            
            3,986
            
            
            -
            
            
            3,988Stock-based
                compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            204
            
            
            -
            
            
            204Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,965
            )
            
            (3,965
            )**Balance
                at September 30, 2008 - Unaudited**
            
            
            -
            
            **$**
            **-**
            
            
            **17,955**
            
            **$**
            **18**
            
            **$**
            **10,772**
            
            **$**
            **(8,142**
            **)**
            **$**
            **2,648**





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




5


**SAFESTITCH
      MEDICAL, INC.**


**(A
      Developmental Stage Company)**


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


( in
      000s )




**Nine
                Months Ended**
              **September
                30,**
            
            **September
                15, 2005
                (Inception)****2008**
            
            **2007**
            
            **to
                September 30, 2008**OPERATING
                ACTIVITIESNet
                loss
            
            $
            (3,965
            )
            $
            (1,846
            )
            $
            (8,142
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Amortization
                of deferred finance costs
            
            
            638
            
            
            71
            
            
            921Stock-based
                compensation expense
            
            
            204
            
            
            53
            
            
            270Intrinsic
                value of exercised options
            
            
            -
            
            
            77
            
            
            77Depreciation
                and amortization
            
            
            42
            
            
            -
            
            
            46Changes
                in operating assets and liabilities:Decrease
                (Increase) in receivables and other current assets
            
            
            33
            
            
            10
            
            
            (46
            )Decrease
                (Increase) in other assets
            
            
            20
            
            
            -
            
            
            (37
            )Decrease
                in accounts payable and accrued liabilities
            
            
            (99
            )
            
            (47
            )
            
            (131
            )**NET
                CASH USED IN OPERATING ACTIVITIES**
            
            
            **(3,127**
            **)**
            
            **(1,682**
            **)**
            
            **(7,042**
            **)**CASH
                FLOWS FROM INVESTING ACTIVITIESPurchase
                of equipment
            
            
            (25
            )
            
            -
            
            
            (225
            )Payment
                received under Exchange Act Rule 16b
            
            
            -
            
            
            -
            
            
            4**NET
                CASH USED IN INVESTING ACTIVITIES**
            
            
            **(25**
            **)**
            
            **-**
            
            
            **(221**
            **)**CASH
                FLOWS FROM FINANCING ACTIVITIESNet
                cash provided in connection with the acquisition of SafeStitch
                LLC
            
            
            -
            
            
            3,192
            
            
            3,192Issuance
                of 1,861,505 shares of common stock, net of offering costs
            
            
            3,988
            
            
            -
            
            
            3,988Capital
                contributions
            
            
            -
            
            
            -
            
            
            1,431Proceeds
                from stockholder loans
            
            
            1,000
            
            
            592
            
            
            1,960Repayment
                of stockholder loans
            
            
            (1,000
            )
            
            (592
            )
            
            (1,876
            )Exercise
                of options
            
            
            -
            
            
            35
            
            
            35**NET
                CASH PROVIDED BY FINANCING ACTIVITIES**
            
            
            **3,988**
            
            
            **3,227**
            
            
            **8,730**NET
                INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            836
            
            
            1,545
            
            
            1,467CASH
                AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
            
            
            631
            
            
            546
            
            
            -CASH
                AND CASH EQUIVALENTS AT END OF PERIOD
            
            $
            1,467
            
            $
            2,091
            
            $
            1,467Supplemental
                disclosures:Cash
                paid for interest
            
            $
            24
            
            $
            -
            
            $
            45Non
                cash activities:Stockholder
                loans contributed to capital
            
            $
            -
            
            $
            -
            
            $
            74Warrants
                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, 2007, which has
      been derived from audited financial statements, and the unaudited condensed
      consolidated interim financial statements of SafeStitch Medical, Inc. (together
      with its consolidated subsidiaries, “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 10-01 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 and nine
      months ended September 30, 2008 are not necessarily indicative of the results
      that may be expected for the year ending December 31, 2008. These unaudited
      condensed consolidated financial statements should be read in conjunction with
      the audited consolidated financial statements and notes thereto for the year
      ended December 31, 2007 included in the Company’s annual report on Form 10-KSB,
      as amended. Certain reclassifications have been made to prior periods’
consolidated financial statements to be consistent with the current period’s
      presentation.




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




Cellular
      Technical Services Company, Inc. (“Cellular”), a non-operating public company,
      was incorporated in 1988 as NCS Ventures Corp. under the laws of the State
      of
      Delaware. On July 25, 2007 Cellular entered into a Share Transfer, Exchange
      and
      Contribution Agreement (the “Share Exchange”) with SafeStitch LLC, a Virginia
      limited liability company. On September 4, 2007, Cellular acquired all of the
      members’ equity interests in 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 (the “Common Stock”), and
      25,000,000 shares of preferred stock, par value $0.01 per share. During May
      2008, the Company issued 1,861,505 shares of Common Stock in a private placement
      at a price of $2.15 per share (see Note 7 - Capital Transactions).




The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. For the period from September 15, 2005
      (inception) through September 30, 2008, the Company has accumulated a
      deficit of $8.1 million, including a net loss of $4.0 million for the nine
      months ended September 30, 2008, and has not generated revenue or positive
      cash
      flows from operations. The Company has been dependent upon equity financing
      and
      loans from stockholders to meet its obligations and sustain operations. The
      Company’s efforts have been principally devoted to developing its technologies
      and commercializing its products. Based upon its current cash position,
      availability under its $4.0 million line of credit from The Frost Group LLC
      (the
“Frost Group”) and the Company’s President and CEO, Jeffrey G. Spragens and by
      monitoring its discretionary expenditures, management believes that the Company
      will be able to fund operations without revenues or additional financing through
      September 2009. 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 obtaining U.S. Food and Drug Administration approval
      to market its product candidates, generating revenues from those products 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.




***Cash
      and cash equivalents.*** The
      Company considers all highly liquid investments with a maturity of three months
      or less when purchased to be cash equivalents. The Company holds cash and cash
      equivalent balances in 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.




***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, which affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of expenses during the reporting period.
      Actual results could differ from those estimates.




***Stock-based
      compensation.*** The
      Company follows Statement of Financial Accounting Standards (“SFAS”) No. 123R,
“ *Share
      Based Payment* ”,
      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 on the date of grant. Stock-based compensation is included in general
      and
      administrative expenses for all periods presented.




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




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




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




***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**




Machinery
      and equipment consist of the following:




**September
                30, 2008**
            
            **Estimated
                Useful lives**Machinery
                and equipment
            
            $
            153,000
            
            
            5
                yearsFurniture
                and fixtures
            
            
            35,000
            
            
            3-5
                yearsSoftware
            
            
            37,000
            
            
            3-5
                years225,000Accumulated
                depreciation and amortization
            
            
            (46,000
            )**Property
                and equipment, net**
            
            **$**
            **179,000**





Depreciation
      of fixed assets utilized in research and development activities is included
      in
      research and development expense. All other depreciation is included in general
      and administrative expense. Depreciation and amortization expense was $17,000
      and $42,000, respectively, for the three and nine months ended September 30,
      2008. There was no depreciation expense in the corresponding 2007
      periods.




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




In
      November 1999, Cellular invested in a one-year, $1.0 million 10% convertible
      note of KSI, Inc. (“KSI”) and also received warrants to purchase KSI common
      stock. All of the outstanding stock of KSI was acquired in August 2000 by
      TruePosition, Inc. (“TruePosition”), a majority owned subsidiary of Liberty
      Media Corporation (“Liberty Media”). Prior to the acquisition, the convertible
      note was exchanged for KSI common stock. Cellular exercised the KSI warrants
      and
      purchased additional KSI common stock for approximately $754,000. Cellular’s
      investment in KSI common stock was exchanged for TruePosition common stock
      on
      the date of the acquisition. The Company currently holds 191,118 shares of
      TruePosition common stock and accounts for the investment in TruePosition using
      the cost method. In December 2002, Cellular received certain valuation
      information from TruePosition, indicating a range of values for TruePosition.
      Based upon its review of available information and communications with Liberty
      Media, Cellular concluded there had been an other-than-temporary decline in
      the
      estimated fair value of its investment and reduced the recorded carrying value
      of this investment from its cost basis of $1,754,000 to zero, representing
      its
      best estimate of the then-current fair value of Cellular’s investment in the net
      equity of TruePosition. TruePosition’s operations have been funded by
      significant infusions of cash by Liberty Media, 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
      securities 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**




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




9




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




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




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




On
      November 13, 2007, the Board of Directors and a majority of the Company’s
      stockholders approved the SafeStitch Medical, Inc. 2007 Incentive Compensation
      Plan (the “2007 Plan”). Under the 2007 Plan, which is administered by the
      Compensation Committee, the Company may grant stock options, stock appreciation
      rights, restricted stock and/or deferred stock to employees, officers,
      directors, consultants and vendors up to an aggregate of 2,000,000 shares of
      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 the Common Stock 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 of Common Stock. Additionally, no stock options
      or
      stock appreciation rights granted under the 2007 Plan may have a term exceeding
      ten years.




The
      Company granted 6,000 and 154,500 options, respectively, under the 2007 Plan
      during the three and nine months ended September 30, 2008. The exercise prices
      of the options granted ranged from $2.80 to $3.10 per share. The Company
      determined the estimated aggregate fair value of these options on the grant
      dates to be $309,000, and stock option compensation expense related to these
      grants was $23,000 and $169,000, respectively, for the three and nine months
      ended September 30, 2008. Total stock-based compensation recorded for the three
      and nine months ended September 30, 2008 was $33,000 and $204,000, respectively,
      and is included in general and administrative expense. The fair values of
      options granted are estimated on the date of their grant using the Black-Scholes
      option pricing model based on the assumptions included in the table below.
      The
      fair value of the Company’s stock option awards is expensed over the vesting
      life of the underlying stock options using the graded vesting method, with
      each
      tranche of vesting options valued separately. Expected volatility is based
      on
      the historical volatility of the Company’s stock. Due to the short period of
      time that the Company has been publicly traded since the Share Exchange, the
      historical volatilities of similar publicly traded entities are reviewed to
      validate the Company’s expected volatility assumption. The risk-free interest
      rate for periods within the contractual life of the stock option award is based
      on the yield of 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. For the three and nine
      months ended September 30, 2007, the Company granted no stock option awards
      under the 2007 Plan. The fair value of each option granted during the three
      and
      nine months ended September 30, 2008 was estimated using the following
      assumptions.




**Three
                months ended**
              **September
                30, 2008**
            
            **Nine
                months ended**
              **September
                30, 2008**Expected
                volatility
            63.05%
                - 68.95%
            
            63.05%
                - 94.46%Expected
                dividend yield
            0.00%
            
            0.00%Risk-free
                interest rate
            3.11%
                - 3.35%
            
            1.96%
                - 3.35%Expected
                life
            4.0
                - 5.5 years
            
            3.5
                - 5.5 yearsForfeiture
                rate
            2.50%
            
            2.50%




10




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




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




**Shares**
            
            **Weighted
                Average Exercise Price**
            
            **Weighted
                Average Remaining Contractual Term (Years)**
            
            **Aggregate
                Intrinsic Value**Outstanding
                at December 31, 2007
            
            
            88,667
            
            $
            2.60Granted
            
            
            154,500
            
            $
            3.05Exercised
            
            
            -
            
            
            -Canceled
                or expired
            
            
            -
            
            
            -Outstanding
                at September 30, 2008
            
            
            243,167
            
            $
            2.89
            
            
            7.38
            
            $
            -Exercisable
                at September 30, 2008
            
            
            109,834
            
            $
            2.90
            
            
            7.47
            
            $
            -Vested
                and expected to vest at September 30, 2008
            
            
            237,955
            
            $
            2.89
            
            
            7.40
            
            $
            -





Of
      the
      154,500 options granted during the nine months ended September 30, 2008, 42%
      of
      such options were vested as of September 30, 2008. A summary of the status
      of
      the Company’s non-vested options and changes during the nine months ended
      September 30, 2008 is presented below.




**Stock
                Options**
            
            **Weighted
                Average Grant Date Fair Value**Non-Vested
                at December 31, 2007
            
            
            66,500
            
            $
            2.21Options
                Granted
            
            
            154,500
            
            
            2.00Options
                Vested
            
            
            (87,667
            )
            
            1.96Non-Vested
                at September 30, 2008
            
            
            133,333
            
            $
            2.13





At
      September 30, 2008, there was $224,000 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 2.10 years.





No
      options were exercised during the three and nine months ended September 30,
      2008.





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




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




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




11




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




In
      connection with the Credit Facility, the Company granted warrants to purchase
      an
      aggregate of 805,521 shares of its Common Stock to the Frost Group and Mr.
      Spragens. The fair value of the warrants was determined to be $1,985,000 on
      the
      grant date based on the Black-Scholes valuation model using the following
      assumptions: expected volatility of 82%, dividend yield of 0%, risk-free
      interest rate of 4.88% and expected life of 10 years. The fair value of the
      warrants was recorded as deferred financing costs and will be amortized over
      the
      life of the Credit Facility. The Company recorded amortization expense of
      $213,000 and $638,000 related to these deferred financing costs during the
      three
      and nine months ended September 30, 2008, respectively, and $71,000 during
      the
      nine months ended September 30, 2007, all of which was recorded in the three
      months then ended.




The
      Company borrowed $1.0 million under the Credit Facility in 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
      recognized interest expense related to the outstanding borrowings under the
      Credit Facility for the three and nine months ended September 30, 2008 of $0
      and
      $24,000, respectively. As of September 30, 2008, there was no balance
      outstanding under the Credit Facility.




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




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




*Private
      Placement.* During
      the period beginning May 22, 2008 and ended May 28, 2008, the Company entered
      into stock purchase subscription agreements (the “Subscription Agreements”) with
      certain private investors (the “Investors”), pursuant to which the Company
      agreed to issue an aggregate of 1,861,505 shares (the “Shares”) of its Common
      Stock at a purchase price of $2.15 per share. The Company’s Board of Directors
      established the $2.15 purchase price based on an approximately 10% discount
      to
      the average closing price of the Common Stock on the 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 $4,002,000 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 “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 Act and that the
      Shares were being acquired for investment purposes. The Shares have not been
      registered under the Act and are “restricted securities” as that term is defined
      by Rule 144 under the Act. The Company has not undertaken to register the Shares
      and no registration rights have been granted to the Investors in respect of
      the
      Shares.




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




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




12




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




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




**September
                30, 2008**
            
            **September
                30, 2007**Stock
                options
            
            
            243,167
            
            
            88,667Stock
                warrants
            
            
            805,521
            
            
            805,521**Total**
            
            
            **1,048,688**
            
            
            **894,188**





**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 $32,000 and $110,000 for
      the
      three and nine months ended September 30, 2008, respectively, and $1,000 and
      $6,000 for the three and nine months ended September 30, 2007,
      respectively.




The
      Company is presently a plaintiff in a securities fraud and appraisal action
      in
      respect of its ownership of 191,118 shares of common stock of TruePosition,
      which was filed November 13, 2007 in the United States District Court for the
      District of Connecticut. SafeStitch and other plaintiffs seek damages and other
      relief totaling $80 million. In August 2007, the Company was informed that
      Liberty TP Acquisition, Inc., which held an aggregate of no less than 90% of
      TruePosition’s outstanding capital stock, was being merged into TruePosition.
      Pursuant to the terms of the merger, TruePosition’s minority stockholders,
      including the Company, became entitled to receive $3.5116 in cash in exchange
      for each share held, which the Company and certain other minority stockholders
      considered insufficient compensation. The Company and other minority
      stockholders brought forth the aforementioned securities fraud and appraisal
      action and, on August 10, 2007, the Company entered into a joint 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. The Company has contributed approximately $81,000
      to
      date, and 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 additional
      work-product created after the date of termination. Additionally, the Company’s
      portion of any proceeds from a favorable disposition of the litigation may
      be
      reduced if the Company terminates its participation. The outcome of this
      litigation is not now known, nor can it be reasonably predicted at this time.




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




Effective
      January 1, 2008, the Company adopted SFAS 157, which defines fair value,
      establishes a framework for measuring fair value and requires additional
      disclosures about fair value measurements. In February 2008, the Financial
      Accounting Standards Board (“FASB”) delayed the effective date of SFAS 157 for
      one year for all nonfinancial assets and nonfinancial liabilities, except for
      those items that are recognized or disclosed at fair value in the financial
      statements on a recurring basis. On October 10, 2008, the FASB issued FSP FAS
      157-3, *“Determining
      the Fair Value of a Financial Asset in a Market That Is Not
      Active.”* The FSP
      was effective upon issuance, including periods for which financial statements
      have not been issued. The FSP clarified the application of SFAS 157 in an
      inactive market and provided an illustrative example to demonstrate how the
      fair
      value of a financial asset is determined when the market for that financial
      asset is inactive. Management has determined that the adoption of SFAS 157
      and
      the FSP did not have a material impact on the Company’s financial position and
      results of operations.




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




13




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


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




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




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




In
      May
      2008, the FASB issued SFAS No. 162, “ *The
      Hierarchy of Generally Accepted Accounting Principles* ”
(“SFAS
      162”).  SFAS 162 identifies the sources of accounting principles and
      the framework for selecting the principles used in the preparation of financial
      statements that are presented in conformity with 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.




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




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




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




14




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


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




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




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




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




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




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




The
      Company entered into a five year lease for office space in Miami, Florida with
      a
      company owned by one of the Company’s major stockholders. The rental payments
      under the Miami office lease, which commenced January 1, 2008, are approximately
      $8,000 per month for the first year and escalate 4.5% annually over the life
      of
      the lease. The Company recorded $24,000 and $85,000 of rent expense related
      to
      the Miami lease for the three and nine months ended September 30, 2008,
      respectively.




Dr.
      Jane
      Hsiao, the Company’s Chairman of the Board, is a director of Great Eastern Bank
      of Florida, a bank where the Company maintains a bank account in the normal
      course of business. As of September 30, 2008, the Company had $807,000 on
      deposit with Great Eastern Bank of Florida.




Dr.
      Hsiao
      and Dr. Phillip Frost, the Company’s largest beneficial stockholder, are each
      significant shareholders of Non-Invasive Monitoring Systems, Inc. (“NIMS”), a
      publicly-traded medical device company. The Company’s Chief Financial Officer
      also serves as the Chief Financial Officer and supervises the accounting staff
      of NIMS under a board-approved cost sharing arrangement whereby the total
      salaries of the accounting staffs of the two companies are shared equally.
      The
      Company has recorded reductions to General and Administrative expense for the
      three and nine months ended September 30, 2008 of $9,000 and $24,000,
      respectively, to account for the equalization of costs under this arrangement.
      Accounts receivable from NIMS were approximately $12,000 as of September 30,
      2008.




Dr.
      Hsiao, Dr. Frost and directors Steven Rubin and Richard Pfenniger are each
      significant stockholders, officers and/or directors of OPKO Health, Inc.
      (“OPKO”), a publicly-traded specialty healthcare company. Certain of the
      Company’s employees have provided consulting services to OPKO on a cost-plus
      basis. The Company has recorded reductions to General and Administrative expense
      to account for the provision of these services totaling $8,000 and $45,000
      for
      the three and nine months ended September 30, 2008, respectively. The amounts
      charged may not be representative of those that would have been charged in
      an
“arms-length” transaction. These transactions have been ratified by the Audit
      Committee of the Board of Directors. Accounts receivable from OPKO were
      approximately $8,000 as of September 30, 2008.




15


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




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




***Overview***




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




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




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




16




***Product
      Development***




We
      are
      developing a portfolio of endoscopic and minimally invasive surgical devices
      and
      related accessories.  Our product portfolio includes a gastroplasty
      device for endoscopic bariatric surgery (obesity surgery) and endoscopic repair
      of GERD, an endoscopic device for excision and diagnosis of Barrett's Esophagus,
      a “smart” dilator for esophageal strictures, a hernia repair device, standard
      and airway bite blocks to be used during endoscopy and devices for natural
      orifice transluminal endoscopic surgery (NOTES).  We have utilized our
      expertise in intraperitoneal surgery to test certain of our devices in *ex
      vivo* and *in
      vivo* animal
      trials and *ex
      vivo* human
      trials, and with certain products, in limited *in
      vivo* human
      trials, and we intend to rapidly, efficiently and safely move into clinical
      trials and commercial development for all products.  As of the date of this
      report, clinical trials have been completed for our standard bite block and
      are
      underway for our airway bite block and dilator candidates. We expect all three
      of these products to be ready to market by the end of the year, however there
      can be no assurance that we will have received all regulatory approvals or
      that
      we will have commenced marketing activities. We anticipate commencement of
      clinical trials in 2009 for the gastroplasty (obesity/GERD) and hernia
      devices.  Development of the Barrett’s Esophagus and NOTES devices are
      progressing over a longer timeframe as we focus our efforts on the products
      that
      are entering the clinical trial phase. Commercial development of our products
      is
      subject to approval from the U.S. Food and Drug Administration ("FDA") and
      other
      U.S. and foreign regulatory agencies.




***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 unaudited condensed consolidated
      financial statements and notes thereto appearing elsewhere in this Form 10-Q.
      These financial statements have been prepared in conformity with generally
      accepted accounting principles (“GAAP”) in the United States, which require us
      to make estimates and judgments that affect the reported amounts of assets,
      liabilities, revenues and expenses and related disclosure of contingent assets
      and liabilities. On an on-going basis, we evaluate our estimates, including
      those related to the carrying value of our long term investments, property
      and
      equipment, contingencies and litigation. We base our estimates on historical
      experience and on various other assumptions that are believed to be reasonable
      under the circumstances, the results of which form the basis for making
      judgments about the carrying values of assets and liabilities that are not
      readily apparent from other sources. A more detailed discussion on the
      application of these and other accounting policies can be found in Note B in
      the
      Notes to the Consolidated Financial Statements set forth in Item 7 of our Annual
      Report on Form 10-KSB, as amended, for the year ended December 31, 2007. Actual
      results may differ materially from these estimates.




***Accounting
      Treatment***




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




***Treatment
      of Warrants and Options***




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




***Recent
      Accounting Pronouncements***




Effective
      January 1, 2008, we adopted SFAS No. 157, *“Fair
      Value Measurements”* (“SFAS
      157”), which defines fair value, establishes a framework for measuring fair
      value and requires additional disclosures about fair value measurements. In
      February 2008, the FASB delayed the effective date of SFAS 157 for one year
      for
      all nonfinancial assets and nonfinancial liabilities, except for those items
      that are recognized or disclosed at fair value in the financial statements
      on a
      recurring basis. On October 10, 2008, the FASB issued FSP FAS 157-3, *“Determining
      the Fair Value of a Financial Asset in a Market That Is Not
      Active.”* The FSP
      was effective upon issuance, including periods for which financial statements
      have not been issued. The FSP clarified the application of SFAS 157 in an
      inactive market and provided an illustrative example to demonstrate how the
      fair
      value of a financial asset is determined when the market for that financial
      asset is inactive. We have determined that the adoption of SFAS 157 and the
      FSP
      did not have a material impact on our financial position and results of
      operations.




17




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




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




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




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




In
      May
      2008, the FASB issued SFAS No. 162, “ *The
      Hierarchy of Generally Accepted Accounting Principles* ”
(“SFAS
      162”).  SFAS 162 identifies the sources of accounting principles and
      the framework for selecting the principles used in the preparation of financial
      statements that are presented in conformity with 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.”* We do
      not expect the adoption of SFAS 162 to have a material impact on our
      consolidated financial statements.




***Results
      of Operations***




At
      September 30, 2008, we had an accumulated deficit of $8.1 million. This deficit
      included a loss of $4.0 million for the nine months ended September 30, 2008.
      We
      are a development stage enterprise and do not currently generate revenue from
      any of our product candidates, we expect to continue to generate losses in
      connection with the clinical development of our products and development
      activities relating to our technologies. These research and development
      activities are budgeted to expand over time and will require further resources
      if we are to be successful. As a result, we believe our operating losses are
      likely to be substantial over the next several years.




***Three
      and Nine Months ended September 30, 2008*** **Compared to Three and Nine Months Ended September 30, 2007**




Research
      and development expenses were $494,000 and $2,111,000 for the three and nine
      months ended September 30, 2008, respectively, as compared to $382,000 and
      $1,299,000 for the three and nine months ended September 30, 2007. These
      $112,000 and $812,000 respective increases were primarily due to an increase
      in
      the amount of research performed as we moved further into our research and
      product development and testing activities, the addition of research personnel
      and the operation of our Miami prototype development facility, which was
      established in the fourth quarter of 2007. We expect research and development
      expenses to continue to increase as we enter into the more advanced stages
      of
      animal and human clinical trials for our product candidates.




18




General
      and administrative expense was $405,000 and $1,211,000 for the three and nine
      months ended September 30, 2008, respectively, as compared to $305,000 and
      $468,000 for the three and nine months ended September 30, 2007. These $100,000
      and $743,000 respective increases were primarily related to increases in
      administrative staffing and related operating costs, increased legal, accounting
      and other costs associated with being a public company and stock-based
      compensation charges, the latter of which represented $33,000 and $204,000
      for
      the three and nine months ended September 30, 2008, respectively, as compared
      to
      $130,000 for the nine months ended September 30, 2007, all of which was incurred
      in the three months ended September 30, 2007. General and administrative expense
      consists primarily of salaries and other related costs for persons serving
      as
      our executive, finance, accounting and administration personnel. Other general
      and administrative expense includes our stock-based compensation expense,
      facility-related costs not otherwise included in research and development
      expense and professional fees for legal and accounting services. We expect
      that
      our general and administrative expense will increase as we add additional
      personnel and continue to comply with the reporting and other obligations
      applicable to public companies.




The
      increase in interest income from $13,000 for the nine months ended September
      30,
      2007, to $19,000 for the nine months ended September 30, 2008, was due to higher
      average cash balances resulting from advances under the $4 million credit
      facility with the Frost Group and Jeffery Spragens (the “Credit Facility,” see
      Note 6 to the unaudited condensed consolidated financial statements) and the
      proceeds of the private placement. Interest income for the three months ended
      September 30, 2007 and 2008 was constant at $7,000. Amortization of debt
      issuance costs totaled $213,000 and $638,000, respectively, for the three and
      nine months ended September 30, 2008, as compared to $71,000 for the nine months
      ended September 30, 2007, all of which was recorded in the three months ended
      September 30, 2007. The increase in this amortization expense was the result
      of
      the debt issuance costs being amortized for only one month in the 2007 period,
      as compared to nine months in the 2008 period. Interest expense totaled $0
      and
      $24,000, respectively, for the three and nine months ended September 30, 2008,
      as compared to $21,000 and $21,000, respectively, for the three and nine months
      ended September 30, 2007.




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




We
      have
      funded our operations to date primarily with proceeds from our private placement
      of stock in May 2008 and credit facilities available to us, and our management
      believes that our cash balance as of September 30, 2008 of approximately $1.5
      million, together with the $4.0 million available under our line of credit
      will
      be sufficient to fund our short-term cash flow requirements for the next twelve
      months. We have based this estimate on assumptions that are subject to change
      and may prove to be wrong, and we may be required to use our available capital
      resources sooner than we currently expect. Because of the numerous risks and
      uncertainties associated with the development and commercialization of our
      product candidates, we are unable to estimate the amounts of increased capital
      outlays and operating expenditures associated with our current and anticipated
      clinical trials. We anticipate that our operations over the next twelve months
      will be focused on the continuing research and development of our products,
      including our gastroplasty, hernia and Barrett’s devices. Even if we are able to
      bring certain of our other products to market prior to the end of 2008, we
      will
      likely need to raise additional capital through the issuance of equity and/or
      debt to continue operations beyond the next twelve months. There can be no
      assurance that such additional external funding will be available to us on
      acceptable terms or at all.




As
      a
      result of our significant research and development expenditures and the lack
      of
      any approved products to generate product sales revenue, we have not been
      profitable and have generated operating losses since inception. We expect to
      incur losses from operations for the foreseeable future. We do not expect to
      generate any revenues until at least the end of 2008 or beginning of 2009,
      and
      we expect to incur increasing research and development expenses, including
      expenses related to the hiring of personnel and additional clinical trials.
      We
      expect that general and administrative expenses will also increase as we expand
      our finance and administrative staff, add infrastructure and incur additional
      costs related to being a public company, including the costs of directors’ and
      officers’ insurance, investor relations programs and increased professional
      fees. Additionally, we expect to be called upon to contribute additional funds
      in connection with our involvement as a plaintiff in the TruePosition litigation
      for so long as we stay involved in the litigation. Our ability to continue
      as a
      going concern is ultimately dependent upon obtaining FDA approval to market
      our
      product candidates, generating revenues from those products and achieving
      profitable operations and generating sufficient cash flows from operations
      to
      meet future obligations.




19




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




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




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




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




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




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




20




**PART
      II. OTHER INFORMATION**




**Item
      1. Legal Proceedings.**




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






**Item
      1A. Risk Factors.**




***The
      current recessionary economic environment and concurrent market instability
      may
      materially and adversely affect our ability to obtain credit or secure funds
      through sales of our stock, which may materially and adversely affect our
      ability to fund our operations.***




We
      have
      funded our operations to date primarily through sales of our stock in private
      placements and through borrowing cash under credit facilities available to
      us
      from stockholders and other individuals, including our existing $4.0 million
      line of credit. 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 economic turmoil in the World’s equity and credit
      markets. There can therefore be no assurance that we will be able to raise
      such
      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, results of operations and financial position.




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




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




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




None.




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




None.




**Item
      5. Other Information.**




None.




**Item
      6. Exhibits.**




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




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**SIGNATURES**




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







**SAFESTITCH
                MEDICAL, INC.**Date:
                November 12, 2008
            By:
            /s/
                Jeffrey G. SpragensJeffrey
                G. SpragensPresident
                and Chief Executive OfficerDate:
                November 12, 2008
            By:
            /s/
                Adam S. JacksonAdam
                S. JacksonChief
                Financial Officer




22