**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******March
                31, 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
o  No x





16,093,016
      shares of the Company’s common stock, par value $0.001 per share, were
      outstanding as of May 12, 2008.





**SAFESTITCH
      MEDICAL, INC.**


**(A
      Developmental Stage Company)**





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


**PART
                  I. FINANCIAL INFORMATION**ITEM 1.
              FINANCIAL
                  STATEMENTS
              3Condensed
                  Consolidated Balance Sheets as of March 31, 2008 (unaudited) and
                  December
                  31, 2007
              3Condensed
                  Consolidated Statements of Operations for the Three Months ended
                  March 31,
                  2008 and 2007, and for the period from September 15, 2005 (inception)
                  to
                  March 31, 2008 (unaudited)
              4Condensed
                  Consolidated Statements of Stockholders’ Equity for the period from
                  September 15, 2005 (inception) through March 31, 2008
              5Condensed
                  Consolidated Statements of Cash Flows for the Three Months ended
                  March 31,
                  2008 and 2007, and for the period from September 15, 2005 (inception)
                  to
                  March 31, 2008 (unaudited)
              6Notes
                  to unaudited condensed consolidated financial statements
              7ITEM 2.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                  OPERATIONS
              15ITEM 3.
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
              19ITEM 4T.
              CONTROLS
                  AND PROCEDURES
              19**PART
                  II. OTHER INFORMATION**ITEM 1.
              LEGAL
                  PROCEEDINGS
              20ITEM 1A.
              RISK
                  FACTORS
              20ITEM 2.
              UNREGISTERED
                  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
              20ITEM 3.
              DEFAULTS
                  UPON SENIOR SECURITIES
              20ITEM 4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS
              20ITEM 5.
              OTHER
                  INFORMATION
              20ITEM 6.
              EXHIBITS
              20SIGNATURES
              21




2


**SAFESTITCH
      MEDICAL, INC.**


**(A
      Developmental Stage Company)**


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


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


March 31,
                
                December 31,2008
                
                2007(Unaudited)**ASSETS**CURRENT
                    ASSETSCash
                    and cash equivalents
                
                $
                658
                
                $
                631Prepaid
                    expenses
                
                
                102
                
                
                99Total
                    Current Assets
                
                
                760
                
                
                730FIXED
                    ASSETSProperty
                    and equipment, net
                
                
                186
                
                
                196OTHER
                    ASSETSSecurity
                    deposits
                
                
                56
                
                
                56Deferred
                    financing costs, net
                
                
                1,489
                
                
                1,702Total
                    Other Assets
                
                
                1,545
                
                
                1,758LONG-TERM
                    INVESTMENT, net of valuation adjustment of $1,754
                
                
                -
                
                
                -**TOTAL
                    ASSETS**
                
                **$**
                **2,491**
                
                **$**
                **2,684****LIABILITIES
                    AND STOCKHOLDERS’ EQUITY**CURRENT
                    LIABILITIESAccounts
                    payable and accrued liabilities
                
                $
                365
                
                $
                253Total
                    Current Liabilities
                
                
                365
                
                
                253Stockholder
                    loans
                
                
                1,010
                
                
                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,16,093,016
                    shares issued and outstanding
                
                
                16
                
                
                16Additional
                    Paid-in Capital
                
                
                6,721
                
                
                6,582Deficit
                    accumulated during the development stage
                
                
                (5,621
                )
                
                (4,177
                )Total
                    Stockholders’ Equity
                
                
                1,116
                
                
                2,421**TOTAL
                    LIABILITIES AND STOCKHOLDERS’ EQUITY**
                
                **$**
                **2,491**
                
                **$**
                **2,684**




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


3


**SAFESTITCH
      MEDICAL, INC.**


**(A
      Developmental Stage Company)**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS****- UNAUDITED**


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


**Three Months Ended**
                **March 31,**
              
              **September 15,**
                **2005**
                **(Inception) to****2008**
              
              **2007**
              
              **March 31, 2008**REVENUES
              
              $
              -
              
              $
              -
              
              $
              -COSTS
                  AND EXPENSESResearch and
                  development
              
              
              814
              
              
              366
              
              
              3,719General
                  and administrative
              
              
              416
              
              
              38
              
              
              1,437Total
                  Costs and Expenses
              
              
              1,230
              
              
              404
              
              
              5,156LOSS
                  FROM OPERATIONS
              
              
              (1,230
              )
              
              (404
              )
              
              (5,156
              )INTEREST
                  INCOME
              
              
              5
              
              
              4
              
              
              58AMORTIZATION
                  OF FINANCE COSTS
              
              
              (213
              )
              
              -
              
              
              (496
              )INTEREST
                  EXPENSE
              
              
              (6
              )
              
              -
              
              
              (27
              )LOSS
                  BEFORE TAX
              
              
              (1,444
              )
              
              (400
              )
              
              (5,621
              )PROVISION
                  FOR INCOME TAX
              
              
              -
              
              
              -
              
              
              -NET
                  LOSS
              
              $
              (1,444
              )
              $
              (400
              )
              $
              (5,621
              )WEIGHTED
                  AVERAGE SHARES OUTSTANDING – BASIC AND DILUTED
              
              
              16,093,016
              
              
              11,256,369NET
                  LOSS PER BASIC AND DILUTED SHARE
              
              $
              (0.09
              )
              $
              (0.04
              )





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


4


**SAFESTITCH
      MEDICAL, INC.**


**(A
      Developmental Stage Company)**


**CONDENSED
      CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**


**FOR
      THE PERIOD SEPTEMBER 15, 2005 (INCEPTION) THROUGH MARCH 31,
      2008**


(in
      000s)




**Preferred Stock**
            
            **Common Stock**
            
            **Additional**
              **Paid-in**
            
            **Deficit**
              **Accumulated**
              **During the**
              **Development****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Capital**
            
            **Stage**
            
            **Total****Inception –
                September 15, 2005**
            
            
            **-**
            
            **$**
            **-**
            
            
            **-**
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **-**Capital
                contributed
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1
            
            
            -
            
            
            1Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (76
            )
            
            (76
            )**Balance
                at December 31, 2005**
            
            
            **-**
            
            **$**
            **-**
            
            
            **-**
            
            **$**
            **-**
            
            **$**
            **1**
            
            **$**
            **(76**
            **)**
            **$**
            **(75**
            **)**Capital
                contributed
            
            
            -
            
            
            -
            
            
            11,256
            
            
            11
            
            
            1,493
            
            
            -
            
            
            1,504Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,060
            )
            
            (1,060
            )**Balance
                at December 31, 2006**
            
            
            -
            
            **$**
            **-**
            
            
            **11,256**
            
            **$**
            **11**
            
            **$**
            **1,494**
            
            **$**
            **(1,136**
            **)**
            **$**
            **369**Exercise
                of options (CTS)-September 23, 2007 at $0.79 per share
            
            
            -
            
            
            -
            
            
            42
            
            
            -
            
            
            35
            
            
            -
            
            
            35Stock-based
                compensation-September 4, 2007
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            77
            
            
            -
            
            
            77Issuance
                of shares in recapitalization - September 4, 2007 at $0.64 per
                share
            
            
            -
            
            
            -
            
            
            4,795
            
            
            5
            
            
            3,078
            
            
            -
            
            
            3,083SafeStitch
                expenses associated with recapitalization
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (156
            )
            
            -
            
            
            (156
            )Stock-based
                compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            65
            
            
            -
            
            
            65Warrants
                issued in connection with credit facility-September 4, 2007 at $2.46
                per
                share
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,985
            
            
            -
            
            
            1,985Rule
                16 payment received
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4
            
            
            -
            
            
            4Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,041
            )
            
            (3,041
            )**Balance
                at December 31, 2007**
            
            
            -
            
            **$**
            **-**
            
            
            **16,093**
            
            **$**
            **16**
            
            **$**
            **6,582**
            
            **$**
            **(4,177**
            **)**
            **$**
            **2,421**Stock-based
                compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            139
            
            
            -
            
            
            139Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,444
            )
            
            (1,444
            )**Balance
                at March 31, 2008 - Unaudited**
            
            
            -
            
            **$**
            **-**
            
            
            **16,093**
            
            **$**
            **16**
            
            **$**
            **6,721**
            
            **$**
            **(5,621**
            **)**
            **$**
            **1,116**





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 )


**Three
                  Months Ended**
                **March
                  31,**
              
              **September**
                **15,
                  2005**
                **(Inception)**
                **to
                  March****2008**
              
              **2007**
              
              **31,
                  2008**OPERATING
                  ACTIVITIESNet
                  loss
              
              $
              (1,444
              )
              $
              (400
              )
              $
              (5,621
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Amortization
                  of deferred finance costs
              
              
              213
              
              
              -
              
              
              496Stock-based
                  compensation expense
              
              
              139
              
              
              -
              
              
              281Depreciation
                  and amortization
              
              
              13
              
              
              -
              
              
              17(Increase)
                  in other current assets
              
              
              (3
              )
              
              -
              
              
              (82
              )(Increase)
                  in other assets
              
              
              -
              
              
              -
              
              
              (56
              )Increase
                  (Decrease) in accounts payable and accrued liabilities
              
              
              112
              
              
              30
              
              
              80**NET
                  CASH USED IN OPERATING ACTIVITIES**
              
              
              **(970**
              **)**
              
              **(370**
              **)**
              
              **(4,885**
              **)**CASH
                  FLOWS FROM INVESTING ACTIVITIESPurchase
                  of equipment
              
              
              (3
              )
              
              -
              
              
              (203
              )Payment
                  received under Rule 16b
              
              
              -
              
              
              -
              
              
              4**NET
                  CASH USED IN INVESTING ACTIVITIES**
              
              
              **(3**
              **)**
              
              **-**
              
              
              **(199**
              **)**CASH
                  FLOWS FROM FINANCING ACTIVITIESNet
                  cash provided in connection with the acquisition of SafeStitch
                  LLC
              
              
              -
              
              
              -
              
              
              3,192Capital
                  contributions
              
              
              -
              
              
              -
              
              
              1,505Stockholder
                  loans
              
              
              1,000
              
              
              -
              
              
              1,010Exercise
                  of options
              
              
              -
              
              
              -
              
              
              35**NET
                  CASH PROVIDED BY FINANCING ACTIVITIES**
              
              
              **1,000**
              
              
              -
              
              
              **5,742**NET
                  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
              
              
              27
              
              
              (370
              )
              
              658CASH
                  AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
              
              
              631
              
              
              546
              
              
              -CASH
                  AND CASH EQUIVALENTS AT END OF PERIOD
              
              $
              658
              
              $
              176
              
              $
              658Supplemental
                  disclosure of non cash activities:Stockholder
                  loans contributed to capital
              
              
              
              
              
              
              
              $
              74





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


6


**SAFESTITCH
      Medical, INC.**


**(A
      Developmental Stage Company)**


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





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




The
      condensed consolidated balance sheet as of December 31, 2007, which has
      been derived from audited financial statements, and the unaudited condensed
      consolidated interim financial statements of SafeStitch Medical, Inc.
      (“SafeStitch” or the “Company”) have been prepared in accordance with accounting
      principles generally accepted in the United States for interim financial
      information and the instructions to the quarterly report on Form 10-Q and
      Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
      the information and footnotes required by generally accepted accounting
      principles for complete financial statements. In the opinion of management,
      all
      adjustments (consisting of normal recurring accruals) considered necessary
      for a
      fair presentation have been included. These condensed financial statements
      should be read in conjunction with the audited consolidated financial statements
      and notes thereto for the year ended December 31, 2007 included in the Company’s
      annual report on form 10-KSB, as amended, filed with the Securities Exchange
      Commission on April 24, 2008.




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




Cellular
      Technical Services Company, Inc. (“Cellular”), a non-operating public company,
      was incorporated in 1988 as NCS Ventures Corp. under the laws of the State
      of
      Delaware. On July 25, 2007 Cellular entered into a Share Transfer, Exchange
      and
      Contribution Agreement (the “Share Exchange”) with SafeStitch LLC, a limited
      liability company formed in Virginia on September 15, 2005. On September 4,
      2007, Cellular acquired all of the members’ equity of SafeStitch LLC in exchange
      for 11,256,369 shares of its common stock, which represented a majority of
      outstanding shares after the date of acquisition. 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, comprised of
      225,000,000 shares of common stock, par value $0.001 per share, and 25,000,000
      shares of preferred stock, par value $0.01 per share.




The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. For the period from September 15, 2005
      (inception) through March 31, 2008, the Company has accumulated a
      deficit of $5,621,000 and has not generated positive cash flows from operations.
      The Company has been dependent upon equity financing and loans from stockholders
      to meet its obligations and sustain operations. The Company’s efforts have been
      principally devoted to developing its technologies and commercializing its
      products. Based upon its current cash position; its budget for business
      operations through December 31, 2008; its $4.0 million line of credit from
      The Frost Group LLC and the Company’s President and CEO, Jeffrey G. Spragens,
      and by monitoring its discretionary expenditures, management believes that
      the
      Company will be able to fund operations without revenues or additional financing
      only through December 31, 2008. Although the Company plans to secure
      additional funds through the issuance of equity and/or debt, no assurance can
      be
      given that additional financing will be available to the Company on acceptable
      terms, or at all. The Company’s ability to continue as a going concern is
      ultimately dependent upon achieving profitable operations and generating
      sufficient cash flows from operations to meet future obligations.




**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.*** We
      consider all highly liquid investments purchased with an original maturity
      of
      three months or less to be cash equivalents.


7


**SAFESTITCH
      MEDICAL, INC.**


**(A
      Developmental Stage Company)**


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




***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.*** Substantially all of the Company’s research and development activities are
      currently outsourced. Research and development costs principally represent
      costs
      associated with conducting clinical trials and manufacturing product prototypes.
      All research and development costs are charged to expense as incurred.




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




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




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




***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, accounts payable, and accrued expenses approximate
      fair value based on their short-term maturity.




***Long-Term
      investments.*** 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 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:




**March
                31, 2008**
            
            **Estimated
                Useful lives**Machinery
                and equipment
            
            $
            162,000
            
            
            5
                yearsFurniture
                and fixtures
            
            
            41,000
            
            
            5
                yearsAccumulated
                depreciation and amortization
            
            
            (17,000
            )**Property
                and equipment, net**
            
            **$**
            **186,000**





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 $13,000
      for the three months ended March 31, 2008. There was no depreciation expense
      in
      the corresponding 2007 period.




**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 by TruePosition, Inc.,
      a
      majority owned subsidiary of Liberty Media Corporation, (“Liberty Media”) in
      August 2000. Prior to the acquisition, the convertible note was exchanged for
      KSI common stock. The Company exercised the KSI warrants and purchased
      additional KSI common stock for approximately $754,000. Cellular’s investment in
      KSI common stock was exchanged for TruePosition common stock on the date of
      the
      acquisition. The Company currently holds 191,118 shares of TruePosition common
      stock, and accounts for the investment in TruePosition using the cost method.
      In
      December 2002, Cellular received certain valuation information from
      TruePosition, indicating a range of values for TruePosition. Based upon its
      review of available information and communications with Liberty Media, Cellular
      concluded there had been an other-than-temporary decline in estimated fair
      value
      of its investment, and reduced the recorded carrying value of this investment
      from its cost basis of $1,754,000 to zero, representing its best estimate of
      the
      then-current fair value of Cellular’s investment in the net equity of
      TruePosition. TruePosition’s operations have required significant infusions of
      cash by Liberty Media to date, and have not generated significant revenues.
      The
      Company’s investment in TruePosition common stock has been diluted by these
      advances, which were converted to preferred stock in late 2002. In August 2007,
      the Company and Cellular were informed that Liberty TP Acquisition, Inc., which
      held an aggregate of no less than 90% of TruePosition’s outstanding capital
      stock, was being merged into TruePosition. Pursuant to the terms of the merger,
      TruePosition’s minority stockholders, including the Company, were entitled to
      receive $3.5116 in cash in exchange for each share held. This merger is the
      subject of an appraisal action and securities litigation to which the Company
      is
      a party (see Note 9). It is possible that the Company may receive proceeds
      from
      the merger, the litigation or other disposition of this investment, but no
      such
      amount can be estimated at this time.




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




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




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


9


**SAFESTITCH
      MEDICAL, INC.**


**(A
      Developmental Stage Company)**


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


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




The
      Company granted 148,500 options under the 2007 Plan during the three months
      ended March 31, 2008. The exercise prices of the options granted ranged from
      $3.00 to $3.10 per share. The Company determined the estimated aggregate fair
      value of these options on the grant dates to be $300,000, and stock option
      compensation expense related to these grants was $125,000 for the three months
      ended March 31, 2008. Total stock-based compensation recorded for the three
      months ended March 31, 2008 was $139,000. All stock-based compensation 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
      the Company has been publicly traded since the Share Exchange, the historical
      volatilities of similar publicly traded entities are reviewed to validate the
      Company’s expected volatility assumption. The risk-free interest rate for
      periods within the contractual life of the stock option award is based on the
      yield of US Treasury bonds on the date the stock option award is granted with
      a
      maturity equal to the expected term of the stock option award granted. The
      expected life of stock option awards granted is based upon the “simplified”
method for “plain vanilla” options contained in SEC Staff Accounting Bulletin
      No. 107, as amended by SEC Staff Accounting Bulletin No. 110. Forfeiture rates
      are based on management’s estimates. During the three months ended March 31,
      2007, the Company granted no stock option awards. The fair value of each option
      granted during the three months ended March 31, 2008 was estimated using the
      following assumptions.




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




The
      following summarizes the Company’s stock option activity for the three months
      ended March 31, 2008:




**Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Term (Years)**
            
            **Aggregate**
              **Intrinsic**
              **Value**Outstanding at December 31, 2007
            
            
            88,667
            
            $
            2.60
            
            
            9.96Granted
            
            
            148,500
            
            $
            3.06
            
            
            6.97Exercised
            
            
            -
            
            
            -
            
            
            -Canceled
                or expired
            
            
            -
            
            
            -
            
            
            -Outstanding
                at March 31, 2008
            
            
            237,167
            
            $
            2.89
            
            
            7.90
            
            $
            35,467Exercisable
                at March 31, 2008
            
            
            87,667
            
            $
            2.97
            
            
            7.59
            
            $
            8,867Vested
                and expected to vest at March 31, 2008
            
            
            232,107
            
            $
            2.89
            
            
            7.92
            
            $
            35,467


10


**SAFESTITCH
      MEDICAL, INC.**


**(A
      Developmental Stage Company)**


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





Of
      the
      148,500 options granted during the first quarter of the Company’s 2008 fiscal
      year, 44% of such options were vested as of March 31, 2008. A summary of the
      status of the Company’s non-vested options and changes during the three months
      ended March 31, 2008 is presented below.





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





At
      March
      31, 2008, there was $283,000 of total unrecognized compensation cost related
      to
      non-vested employee and director share-based compensation arrangements granted
      under the 2007 Plan. That cost is expected to be recognized over a
      weighted-average period of 1.35 years.





No
      options were exercised during the three months ended March 31, 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 (the “Frost Group”) and Jeffrey G. Spragens, the Company’s Chief Executive
      Officer and President and a director. The Frost Group is a Florida limited
      liability company whose members include Frost Gamma Investments Trust, a trust
      controlled by Dr. Phillip Frost, the largest beneficial holder of the issued
      and
      outstanding shares of the Company’s common stock, Dr. Jane H. Hsiao, the
      Company’s Chairman of the Board, and Steven D. Rubin, a director. The Credit
      Facility provides for $4.0 million in total available borrowings, consisting
      of
      $3.9 million from The Frost Group and $100,000 from Mr. Spragens. The Credit
      Facility has a term of 28 months, which expires in December 2009. Outstanding
      borrowings under the Credit Facility bear interest at a 10% annual rate.




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




In
      connection with the Credit Facility, the Company granted warrants to purchase
      an
      aggregate of 805,521 shares of its common stock to The Frost Group and Mr.
      Spragens. The fair value of the warrants was determined to be $1,985,000 on
      the
      grant date based on the Black-Scholes valuation model using the following
      assumptions: expected volatility of 82%, dividend yield of 0%, risk-free
      interest rate of 4.88% and expected life of 10 years. The fair value of the
      warrants was recorded as deferred financing costs and will be amortized over
      the
      life of the Credit Facility. The Company recorded amortization expense of
      $213,000 related to these deferred financing costs for the three months ended
      March 31, 2008.




As
      of
      March 31, 2008, $1.0 million was outstanding under the Credit Facility, and
      the
      Company recognized $6,000 of interest expense related to the outstanding
      borrowings during the three months ended March 31, 2008.




**NOTE** **7 –
      CAPITAL TRANSACTIONS:**




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


11


**SAFESTITCH
      MEDICAL, INC.**


**(A
      Developmental Stage Company)**


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





**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 months ended March 31, 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.




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




**March 31, 2008**
            
            **March 31, 2007**Stock
                options
            
            
            237,167
            
            
            173,000Stock
                warrants
            
            
            805,521
            
            
            -**Total**
            
            
            **1,042,688**
            
            
            **173,000**





**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 $48,000 and $3,000 for the
      three months ended March 31, 2008 and 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,
      Inc., a Delaware corporation (“TruePosition”), which was filed November 13, 2007
      in the United States District Court for the District of Connecticut. SafeStitch
      and other plaintiffs seek damages and other relief totaling $80 million. In
      August 2007, the Company was informed that Liberty TP Acquisition, Inc., which
      held an aggregate of no less than 90% of TruePosition’s outstanding capital
      stock, was being merged into TruePosition. Pursuant to the terms of the merger,
      TruePosition’s minority stockholders, including the Company, became entitled to
      receive $3.5116 in cash in exchange for each share held, which the Company
      and
      certain other minority stockholders considered insufficient compensation. The
      Company and other minority stockholders brought forth the aforementioned
      securities fraud and appraisal action, and on August 10, 2007, the Company
      entered into a joint shareholder litigation governance and funding agreement
      (the “Funding Agreement”) with such other stockholders. Under the Funding
      Agreement, the Company agrees to fund a portion of the litigation expenses
      in
      connection with the appraisal and securities fraud action. The Company has
      contributed approximately $45,000 to date, and management anticipates that
      the
      Company will be called upon to fund additional amounts during the 2008 fiscal
      year. The Company may elect to terminate its participation in the Funding
      Agreement, whereby the Company would no longer be required to contribute funds;
      however, the Company would lose all rights under the Funding Agreement,
      including access to any additional work-product created after the date of
      termination. Additionally, the Company’s portion of any proceeds from a
      favorable disposition of the litigation may be reduced if the Company terminates
      its participation. The outcome of this litigation is not now known, nor can
      it
      be reasonably predicted at this time.




**NOTE** **10 –
      NEW ACCOUNTING PRONOUNCEMENTS**




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


12


**SAFESTITCH
      MEDICAL, INC.**


**(A
      Developmental Stage Company)**


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




Effective
      January 1, 2008, the Company adopted SFAS No. 159, *“The
      Fair Value Option for Financial Assets and Financial Liabilities- including
      an
      amendment of FASB Statement 115”* (“SFAS
      159”). This statement provides companies with an option to report selected
      financial assets and liabilities at fair value. As of March 31, 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 position, results of operations,
      cash flows or financial statement disclosures.




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




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


13


**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 March
      31,
      2008.




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


14


**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 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. We have utilized
      our
      expertise in intraperitoneal surgery to test certain of our devices in *in
      vivo* and *ex
      vivo* animal
      trials and *ex
      vivo* human
      trials, and with certain products, in limited *in
      vivo* human
      trials, and we intend to rapidly, efficiently and safely move into clinical
      trials for our devices that are utilized in surgery for the treatment of
      obesity, GERD and esophageal obstructions and for the treatment and diagnosis
      of
      Barrett’s Esophagus. Clinical trials for certain product candidates are
      anticipated to begin in 2008.




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, LLC and Jeffrey G. Spragens in connection
      with
      a line of credit of up to $4 million that was provided to us simultaneously
      with
      the closing by The Frost Group, LLC and Jeffrey G. Spragens. The warrants have
      a
      ten year term and an assumed exercise price of $0.25 per share of common stock.
      Dr. Phillip Frost has a controlling interest in The Frost Group LLC 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, LLC. 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”. We intend to apply for the listing of
      our common stock on the American Stock Exchange during our 2008 fiscal
      year.


15


***Critical
      Accounting Policies and Estimates***




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




***Accounting
      Treatment***




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




***Treatment
      of Warrants and Options***




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




***Recent
      Accounting Pronouncements***




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




Effective
      January 1, 2008, we adopted SFAS No. 159, *“The
      Fair Value Option for Financial Assets and Financial Liabilities- including
      an
      amendment of FASB Statement 115”* (“SFAS
      159”). This statement provides companies with an option to report selected
      financial assets and liabilities at fair value. As of March 31, 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 position, results of operations, cash flows or financial statement
      disclosures.




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


16


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 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 financial statements.




***Results
      of Operations***




At
      March
      31, 2008, we had an accumulated deficit of $5.6 million. This deficit included
      losses of $1,444,000 and $400,000 for the three months ended March 31, 2008
      and
      2007, respectively. Since we do not generate revenue from any of our product
      candidates, we expect to continue to generate losses in connection with the
      clinical development of our products and development activities relating to
      our
      technologies. These research and development activities are budgeted to expand
      over time and will require further resources if we are to be successful. As
      a
      result, we believe our operating losses are likely to be substantial over the
      next several years.




***Three
      Months ended March 31, 2008*** **Compared to Three Months Ended March 31, 2007**




Research
      and development expenses were $814,000 for the three months ended March 31,
      2008, as compared to $366,000 for the first quarter of 2007. This $448,000
      increase was primarily due to an increase in the amount of research being
      performed as we moved further into our research activities, the addition of
      research personnel and the establishment of our Miami prototype development
      facility. We expect research and development expenses to continue to increase
      as
      we enter into the more advanced stages of animal and human clinical trials
      for
      our product candidates.




General
      and administrative costs were $416,000 for three months ended March 31, 2008,
      as
      compared to $38,000 for the first quarter of 2007. This $378,000 increase was
      primarily related to the increase in administrative staffing and operating
      costs
      and approximately $139,000 in stock-based compensation. 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 all of 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.




Interest
      income increased from $4,000 in the first three months of 2007 to $5,000 in
      the
      first three months of 2008 due to an increase in our average cash balance as
      a
      result of advances under the $4 million credit facility with the Frost Group
      LLC
      and Jeffery Spragens (the “Credit Facility,” see Note 6 to the unaudited
      condensed consolidated financial statements). Interest expense also increased
      from $0 in the first quarter of 2007 to $6,000 in the first quarter of 2008
      due
      to the accrual of interest on amounts outstanding under the Credit
      Facility.




***Liquidity***




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. Additionally,
      we
      may 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. We do not expect to generate any revenues until
      at
      least the fourth quarter of 2008. Our ability to continue as a going concern
      is
      ultimately dependent upon achieving profitable operations and generating
      sufficient cash flows from operations to meet future obligations. We have funded
      our operations to date primarily with proceeds from the private placement of
      stock and credit facilities available to us, and our management believes that,
      absent any reductions of our discretionary expenditures, our cash balance as
      of
      March 31, 2008 of approximately $0.6 million, together with the $3.0 million
      remaining under our line of credit will be sufficient to fund our cash flow
      requirements only through the end of 2008. Our management has currently budgeted
      cash expenditures of approximately $3.6 million for the remainder of our 2008
      fiscal year, which is expected to fund the final development of three of our
      product candidates, as well as continuing research and development on our
      gastroplasty (GERD and obesity) and Barrett’s devices. Even if we are able to
      bring certain products to market prior to the end of 2008, we plan to raise
      additional capital through the issuance of equity and/or debt. There can be
      no
      assurance that such additional external funding will be available on terms
      acceptable to us or at all.


17


**Plan
      of Operations 2008**




Through
      the end of our 2008 fiscal year, we plan the following, although there is no
      assurance all of it will be completed:




·
            FDA
                Registration and initial marketing and commercialization of standard
                and
                airway bite blocks.




·
            Continued
                product development of gastroplasty device for obesity and GERD
                procedures.




·
            Manufacturing
                of gastroplasty devices for clinical trials and engineering (performance,
                validation) testing.




·
            Feasibility
                trial of gastroplasty device and commencement of multicenter US and
                international trials.




·
            Continued
                product development of Barrett’s Excision
                Device.




·
            Final
                product development, FDA approval and initial marketing and
                commercialization of smart dilator.




·
            Institutional
                Review Board (IRB) clinical evaluation trials for standard and airway
                bite
                blocks and smart dilator.




·
            Early
                development efforts on hernia device and NOTES devices, for which
                we have
                existing intellectual property and
                licenses.




***Capital
      Resources***




We
      expect
      to incur losses from operations for the foreseeable future. We also 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. We
      believe that our existing cash and cash equivalents and the $3.0 million
      remaining under the credit facility available to us will be sufficient to enable
      us to fund our operating expenses and capital expenditure requirements only
      through the end of 2008. We have based this estimate on assumptions and the
      above-described Plan of Operations that are subject to change and may prove
      to
      be wrong, and we may be required to use our available capital resources sooner
      than we currently expect. Because of the numerous risks and uncertainties
      associated with the development and commercialization of our product candidates,
      we are unable to estimate the amounts of increased capital outlays and operating
      expenditures associated with our current and anticipated clinical
      trials.




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


18


**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 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 not 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
      for
      the year ended December 31, 2007 and concluded at that time that our system
      of
      internal controls was not operating effectively primarily because we did not
      maintain a
      sufficient complement of personnel with the appropriate level of knowledge,
      experience and training in the application of accounting principles generally
      accepted in the U.S. (referred to as GAAP) and in internal control over
      financial reporting commensurate with our financial reporting obligations under
      the Exchange Act. We did not maintain effective controls over the presentation
      of our consolidated financial statements and related disclosures in preparing
      our consolidated financial statements. 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. 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. As
      of the
      date of this filing, we began implementing changes approved by the Audit
      Committee of the Board of Directors, including the hiring of a new Chief
      Financial Officer and the addition of other personnel with the appropriate
      knowledge of GAAP and the financial reporting requirements of the Exchange
      Act.


19


**PART
      II. OTHER INFORMATION**




**Item
      1. Legal Proceedings.**




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




**Item
      1A. Risk Factors.**




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




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




None.




**Item
      3. Defaults Upon Senior Securities.**




None.




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




None.




**Item
      5. Other Information.**




None.




**Item
      6. Exhibits.**





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


20


**SIGNATURES**




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





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


21