##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: September 30, 2008
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 001-32666
 MINRAD INTERNATIONAL, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    870299034(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)50 Cobham Drive, Orchard Park, New York
(Address of principal executive offices)
    
    14127
(Zip Code)
 (716) 855-1068
Issuers Telephone Number
  þ o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company þ  o þ




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##### 



TABLE OF CONTENTS
 PAGEPART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS (Unaudited)Consolidated Balance Sheets at September 30, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Operations Three and Nine month periods ended September 30, 2008 and 2007
    
    
    4Consolidated Statement of Changes in Stockholders Equity (Deficit) Nine-month period ended September 30, 2008
    
    
    5Consolidated Statement of Changes in Stockholders Equity Nine-month period ended September 30, 2007
    
    
    6Consolidated Statements of Cash Flows Nine-month periods ended September 30, 2008 and 2007
    
    
    7Notes to Consolidated Financial Statements
    
    
    8ITEM 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
    
    
    19PART II. OTHER INFORMATION
    
    
    21ITEM 1. LEGAL PROCEEDINGS
    
    
    21ITEM 2. UNREGISTERED SALES OF 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
    
    
    22EX-31.1EX-31.2EX-32.1




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##### Table of Contents



MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
 
 Item 1. Financial Statements
 September 30, 2008(unaudited)
    
    
    December 31, 2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,742
    
    
    $
    238Investments
    
    
    165
    
    
    
    Accounts receivable, net (Note 3)
    
    
    8,172
    
    
    
    3,310Inventories, net
    
    
    8,867
    
    
    
    12,402Prepaid expenses and other
    
    
    1,135
    
    
    
    2,121Total current assets
    
    
    21,081
    
    
    
    18,071Property and equipment:Machinery and equipment
    
    
    15,700
    
    
    
    15,169Computers
    
    
    1,506
    
    
    
    1,471Furniture and fixtures
    
    
    919
    
    
    
    815Leasehold improvements
    
    
    385
    
    
    
    385Construction in progress
    
    
    8,599
    
    
    
    7,69227,109
    
    
    
    25,532Less accumulated depreciation
    
    
    5,302
    
    
    
    2,247Net property and equipment
    
    
    21,807
    
    
    
    23,285Other assets, net
    
    
    3,698
    
    
    
    639Total assets
    
    $
    46,586
    
    
    $
    41,995LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Demand notes payable
    
    $
    
    
    
    $
    6,000Accounts payable
    
    
    3,076
    
    
    
    12,983Accrued expenses
    
    
    2,599
    
    
    
    1,004Current portion of long-term debt
    
    
    212
    
    
    
    206Current portion of deferred revenue
    
    
    103
    
    
    
    103Total current liabilities
    
    
    5,990
    
    
    
    20,296Long-term liabilities:Long-term debt
    
    
    41,566
    
    
    
    1,725Long-term deferred revenue
    
    
    818
    
    
    
    897Total long-term liabilities
    
    
    42,384
    
    
    
    2,622Commitments and Contingencies (Note 13)
    
    
    
    
    
    
    Stockholders equity (deficit):Common stock
    
    
    493
    
    
    
    487Additional paid-in-capital
    
    
    85,654
    
    
    
    80,869Accumulated other comprehensive loss
    
    
    (36
    )
    
    
    Accumulated deficit
    
    
    (87,899
    )
    
    
    (62,279
    )Total stockholders equity (deficit)
    
    
    (1,788
    )
    
    
    19,077Total liabilities and stockholders equity (deficit)
    
    $
    46,586
    
    
    $
    41,995
  3




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MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
 Three month periods ended
    
    
    Nine month periods endedSeptember 30, 2008
    
    
    September 30, 2007
    
    
    September 30, 2008
    
    
    September 30, 2007Revenue
    
    $
    7,086
    
    
    $
    2,691
    
    
    $
    23,033
    
    
    $
    9,921Cost of goods sold
    
    
    7,670
    
    
    
    3,286
    
    
    
    20,140
    
    
    
    8,809Gross profit (loss)
    
    
    (584
    )
    
    
    (595
    )
    
    
    2,893
    
    
    
    1,112Operating expenses:Sales and marketing
    
    
    1,711
    
    
    
    2,144
    
    
    
    7,223
    
    
    
    6,016Research and development
    
    
    734
    
    
    
    1,590
    
    
    
    2,760
    
    
    
    4,037Finance and administrative
    
    
    1,900
    
    
    
    842
    
    
    
    5,507
    
    
    
    3,135Reserve for potentially
uncollectible receivables  Note 3
    
    
    4,545
    
    
    
    
    
    
    
    5,785
    
    
    
    Total operating expenses
    
    
    8,890
    
    
    
    4,576
    
    
    
    21,275
    
    
    
    13,188Operating loss
    
    
    (9,474
    )
    
    
    (5,171
    )
    
    
    (18,382
    )
    
    
    (12,076
    )Interest expense
    
    
    (899
    )
    
    
    (98
    )
    
    
    (2,580
    )
    
    
    (118
    )Interest income
    
    
    42
    
    
    
    9
    
    
    
    87
    
    
    
    160Loss on early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (4,587
    )
    
    
    Other income and expense
    
    
    (438
    )
    
    
    
    
    
    
    (158
    )
    
    
    Total non-operating income (expense)
    
    
    (1,295
    )
    
    
    (89
    )
    
    
    (7,238
    )
    
    
    42Net loss
    
    $
    (10,769
    )
    
    $
    (5,260
    )
    
    $
    (25,620
    )
    
    $
    (12,034
    )Net Loss per share basic and diluted
    
    $
    (0.22
    )
    
    $
    (0.11
    )
    
    $
    (0.52
    )
    
    $
    (0.25
    )Weighted average common shares
outstanding basic and diluted
    
    
    49,179,961
    
    
    
    47,876,457
    
    
    
    48,929,150
    
    
    
    47,390,015
  4




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MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2008 (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
 Common Stock
    
    
    Additional
    
    
    Accumulated Other
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Paid-In Capital
    
    
    Comprehensive Loss
    
    
    Deficit
    
    
    TotalBalance at December 31, 2007
    
    
    48,688,802
    
    
    $
    487
    
    
    $
    80,869
    
    
    $
    
    
    
    $
    (62,279
    )
    
    $
    19,077Stock options exercised
    
    
    20,000
    
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    36Warrants exercised
    
    
    59,464
    
    
    
    1
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    54Discount on long-term debt,
net of tax effect
    
    
    
    
    
    
    
    
    
    
    3,056
    
    
    
    
    
    
    
    
    
    
    
    3,056Stock based compensation
    
    
    
    
    
    
    
    
    
    
    502
    
    
    
    
    
    
    
    
    
    
    
    502Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,167
    )
    
    
    (3,167
    )Other comprehensive gain
(loss):Unrealized loss on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (195
    )
    
    
    
    
    
    
    (195
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (195
    )
    
    
    (3,167
    )
    
    
    (3,362
    )Balance at March 31, 2008
    
    
    48,768,266
    
    
    $
    488
    
    
    $
    84,516
    
    
    $
    (195
    )
    
    $
    (65,446
    )
    
    $
    19,363Stock options exercised
    
    
    71,500
    
    
    
    1
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    101Warrants exercised
    
    
    87,026
    
    
    
    1
    
    
    
    99
    
    
    
    
    
    
    
    
    
    
    
    100Stock based compensation
    
    
    
    
    
    
    
    
    
    
    524
    
    
    
    
    
    
    
    
    
    
    
    524Tax effect on early
extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    417
    
    
    
    
    
    
    
    
    
    
    
    417Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,684
    )
    
    
    (11,684
    )Other comprehensive gain
(loss):Unrealized gain on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45
    
    
    
    
    
    
    
    45Total comprehensive gain (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45
    
    
    
    (11,684
    )
    
    
    (11,639
    )Balance at June 30, 2008
    
    
    48,926,792
    
    
    $
    490
    
    
    $
    85,656
    
    
    $
    (150
    )
    
    $
    (77,130
    )
    
    $
    8,866Stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrants exercised
    
    
    375,670
    
    
    
    3
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    Stock based compensation
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,769
    )
    
    
    (10,769
    )Other
comprehensive gain (loss):Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36
    )
    
    
    
    
    
    
    (36
    )Unrealized loss on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (375
    )
    
    
    
    
    
    
    (375
    )Reclassification of cumulative
loss on investments to
realized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    525
    
    
    
    
    
    
    
    525Total comprehensive gain (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114
    
    
    
    (10,769
    )
    
    
    (10,655
    )Balance at September 30, 2008
    
    
    49,302,462
    
    
    $
    493
    
    
    $
    85,654
    
    
    $
    (36
    )
    
    $
    (87,899
    )
    
    $
    (1,788
    )
  5




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MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2007 (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
 Common Stock
    
    
    Additional
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Paid-In Capital
    
    
    Deficit
    
    
    TotalBalance at December 31, 2006
    
    
    47,048,240
    
    
    $
    470
    
    
    $
    76,513
    
    
    $
    (43,481
    )
    
    $
    33,502Stock options exercised
    
    
    45,291
    
    
    
    1
    
    
    
    116
    
    
    
    
    
    
    
    117Stock based compensation
    
    
    
    
    
    
    
    
    
    
    122
    
    
    
    
    
    
    
    122Stock warrants exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,386
    )
    
    
    (3,386
    )Balance at March 31, 2007
    
    
    47,093,531
    
    
    $
    471
    
    
    $
    76,751
    
    
    $
    (46,867
    )
    
    $
    30,355Stock options exercised
    
    
    241,331
    
    
    
    2
    
    
    
    407
    
    
    
    
    
    
    
    409Stock based compensation
    
    
    
    
    
    
    
    
    
    
    275
    
    
    
    
    
    
    
    275Stock warrants exercised
    
    
    389,400
    
    
    
    3
    
    
    
    553
    
    
    
    
    
    
    
    556Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,388
    )
    
    
    (3,388
    )Balance at June 30, 2007
    
    
    47,724,262
    
    
    $
    476
    
    
    $
    77,986
    
    
    $
    (50,255
    )
    
    $
    28,207Stock options exercised
    
    
    79,559
    
    
    
    1
    
    
    
    192
    
    
    
    
    
    
    
    193Stock based compensation
    
    
    
    
    
    
    
    
    
    
    268
    
    
    
    
    
    
    
    268Stock warrants exercised
    
    
    196,164
    
    
    
    2
    
    
    
    145
    
    
    
    
    
    
    
    147Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,260
    )
    
    
    (5,260
    )Balance at September 30, 2007
    
    
    47,999,985
    
    
    $
    479
    
    
    $
    78,591
    
    
    $
    (55,515
    )
    
    $
    23,555
  6




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MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
 Nine-month period endedSeptember 30, 2008
    
    
    September 30, 2007Cash flows from operating activities:Net loss
    
    $
    (25,620
    )
    
    $
    (12,034
    )Adjustments to reconcile net loss to net cash used by operating activities:Depreciation and amortization
    
    
    3,072
    
    
    
    747Stock based compensation
    
    
    1,027
    
    
    
    665Loss on debt extinguishment
    
    
    4,058
    
    
    
    Amortization of capitalized fees associated with long-term debt
    
    
    526
    
    
    
    Provision for potentially uncollectible receivables
    
    
    5,787
    
    
    
    Provision for inventory reserves, net
    
    
    (587
    )
    
    
    Realized loss on investments-other than temporary decline in market value
    
    
    525Change in operating assets and liabilities:Accounts receivable
    
    
    (10,649
    )
    
    
    7,255Inventories
    
    
    4,122
    
    
    
    (9,816
    )Prepaid expenses and other assets
    
    
    (114
    )
    
    
    (130
    )Accounts payable
    
    
    (4,191
    )
    
    
    3,921Accrued expenses and other liabilities
    
    
    1,791
    
    
    
    (584
    )Net cash used by operating activities
    
    
    (20,253
    )
    
    
    (9,976
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (7,292
    )
    
    
    (9,360
    )Proceeds from sale of investments
    
    
    
    
    
    
    7,249Acquisition of other assets, net
    
    
    (143
    )
    
    
    (161
    )Net cash used by investing activities
    
    
    (7,435
    )
    
    
    (2,272
    )Cash flows from financing activities:Proceeds under long-term debt borrowings, net of costs
    
    
    51,055
    
    
    
    2,063Borrowings under demand notes payable
    
    
    
    
    
    
    4,300Repayments under demand notes payable
    
    
    (6,000
    )
    
    
    Principal payments on long-term debt
    
    
    (15,154
    )
    
    
    (83
    )Proceeds from options exercised
    
    
    137
    
    
    
    719Proceeds from warrants exercised
    
    
    154
    
    
    
    703Net cash provided by financing activities
    
    
    30,192
    
    
    
    7,702Net increase (decrease) in cash and cash equivalents
    
    
    2,504
    
    
    
    (4,546
    )Cash and cash equivalents  Beginning of period
    
    
    238
    
    
    
    4,664Cash and cash equivalents  End of period
    
    $
    2,742
    
    
    $
    118
  7




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MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
 NOTE 1  BASIS OF PRESENTATION
  NOTE 2 FINANCIAL CONDITION
  NOTE 3  RESERVE FOR POTENTIALLY UNCOLLECTIBLE RECEIVABLES
  NOTE 4  RECENT ACCOUNTING PRONOUNCEMENTS
 Earnings per Share.
 Accounting for
Registration Payment Arrangements Accounting for Contingencies.
 Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)
 8




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MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
 NOTE 4  RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
 The Hierarchy of Generally Accepted Accounting
Principles.
 Determination of Useful Life of Intangible
Assets
 Reporting Other
Comprehensive Income, Foreign Currency Translation
 of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair
Value Measurement for Purposes of Lease Classification or Measurement under Statement 13, and FSP
FAS 157-2, Effective Date of FASB Statement No. 157.
 Fair Value Option for Financial Assets
and Financial Liabilities
 NOTE 5  INVENTORIES
  September 30,
    
    
    December 31,2008
    
    
    2007Raw materials
    
    $
    1,139
    
    
    $
    5,003Work-in-progress
    
    
    8,317
    
    
    
    8,598Finished goods
    
    
    1,334
    
    
    
    1,311Inventory reserves
    
    
    (1,923
    )
    
    
    (2,510
    )Inventory  net
    
    $
    8,867
    
    
    $
    12,402
 NOTE 6  DEBT
   9




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MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
 NOTE 6  DEBT (CONTINUED)
   Year
    
    Commitment2008
    
    $
    532009
    
    
    2142010
    
    
    2212011
    
    
    2292012
    
    
    238Thereafter
    
    
    823Total
    
    $
    1,778
       10




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MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
 NOTE 6  DEBT (CONTINUED)
  NOTE 7 EQUITY
  NOTE 8 SUPPLEMENTAL CASH FLOW INFORMATION
  2008
    
    
    2007Non-cash investing and financing activities :Property and equipment acquisitions recorded as accounts payable
    
    $
    255
    
    
    $
    3,215Cashless exercise of warrants
    
    $
    3
    
    
    $
    1Acquisition of investments
    
    $
    690
    
    
    $
    
 NOTE 9  STOCK OPTIONS
   Nine-Month Periods EndedSeptember 30,
    
    September 30,2008
    
    2007Service Based OptionsExpected dividend yield
    
    
    0
    %
    
    
    0
    %Expected stock price volatility
    
    
    36
    %
    
    
    34
    %Risk-free interest rate
    
    
    3.2
    %
    
    
    4.7
    %Expected life of options
    
    6.0 Years
    
    3.6 Years
 11




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MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
 NOTE 9 STOCK OPTIONS (CONTINUED)
 Nine-Month Periods EndedSeptember 30,
    
    September 30,2008
    
    2007Performance Based OptionsExpected dividend yield
    
    
    0
    %
    
    
    N/AExpected stock price volatility
    
    
    36
    %
    
    
    N/ARisk-free interest rate
    
    
    3.1
    %
    
    
    N/AExpected life of options
    
    4.9 Years
    
    
    N/A
  Number of
    
    
    
    
    
    WeightedShares
    
    Weighted
    
    Average
    
    AggregateSubject To
    
    Average
    
    Remaining
    
    IntrinsicOptions
    
    Exercise Price
    
    Life (Years)
    
    ValueService Based Options:Outstanding as of December 31, 2007
    
    
    3,718,036
    
    
    $
    3.35Granted to employees  Nine-month period ended September 30, 2008
    
    
    2,345,500
    
    
    $
    2.36Forfeited  Nine-month period ended September 30, 2008
    
    
    (581,000
    )
    
    $
    4.45Exercised  Nine-month period ended September 30, 2008
    
    
    (91,500
    )
    
    $
    1.49Outstanding as of September 30, 2008
    
    
    5,391,036
    
    
    $
    2.83
    
    
    
    3.56
    
    
    $
    4Exercisable as of September 30, 2008
    
    
    2,779,536
    
    
    $
    2.74
    
    
    
    2.12
    
    
    $
    
 Number of
    
    
    
    
    
    
    WeightedShares
    
    
    Weighted
    
    
    Average
    
    
    AggregateSubject To
    
    
    Average
    
    
    Remaining
    
    
    IntrinsicOptions
    
    
    Exercise Price
    
    
    Life (Years)
    
    
    ValuePerformance Based Options:Outstanding as of December 31, 2007
    
    
    1,341,375
    
    
    $
    5.20Granted to employees  Nine-month period ended September 30, 2008
    
    
    1,278,750
    
    
    $
    2.40Forfeited  Nine-month period ended September 30, 2008
    
    
    (166,375
    )
    
    $
    4.29Exercised  Nine-month period ended September 30, 2008
    
    
    
    
    
    $
    Outstanding as of September 30, 2008
    
    
    2,453,750
    
    
    $
    3.80
    
    
    
    3.44
    
    
    $
    Exercisable as of September 30, 2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
 12




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##### Table of Contents



MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
 NOTE 9 STOCK OPTIONS (CONTINUED)
   Number ofNon-vested
    
    WeightedShares Subject To
    
    Average Grant-Service Based Options:
    
    Options
    
    Date Fair ValueNon-vested as of December 31, 2007
    
    
    1,384,500
    
    
    $
    1.56Non-vested granted  Nine-month period ended September 30, 2008
    
    
    2,335,500
    
    
    $
    0.74Vested  Nine-month period ended September 30, 2008
    
    
    (644,000
    )
    
    $
    1.34Forfeited  Nine-month period ended September 30, 2008
    
    
    (464,500
    )
    
    $
    1.51Non-vested as of September 30, 2008
    
    
    2,611,500
    
    
    $
    0.88
 Number ofNon-vested
    
    WeightedShares Subject To
    
    Average Grant-Performance Based Options:
    
    Options
    
    Date Fair ValueNon-vested as of December 31, 2007
    
    
    1,210,000
    
    
    $
    1.22Non-vested granted  Nine-month period ended September 30, 2008
    
    
    1,278,750
    
    
    $
    0.46Vested  Nine-month period ended September 30, 2008
    
    
    
    
    
    $
    Forfeited  Nine-month period ended September 30, 2008
    
    
    (35,000
    )
    
    $
    1.11Non-vested as of September 30, 2008
    
    
    2,453,750
    
    
    $
    0.83
  NOTE 10 INCOME TAXES
  Accounting for Uncertainty in Income TaxesAn Interpretation of FASB Statement No.
109.
 13




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##### Table of Contents



MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
 NOTE 11  EARNINGS PER SHARE
  NOTE 12  CUSTOMER CONCENTRATION
   NOTE 13 COMMITMENTS AND CONTINGENCIES
    14




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Overview:
  Company Background
 TM TM
 Results of Operations
 Summarized selected financial data for the three and nine months ended September 30, 2008 and 2007
 Three months ended September 30
    
    Nine Months ended September 302008
    
    2007
    
    Change
    
    % Change
    
    2008
    
    2007
    
    Change
    
    % Change(In $ millions, except per share amounts)Revenue
    
    
    7.1
    
    
    
    2.7
    
    
    
    4.4
    
    
    
    163
    %
    
    
    23.0
    
    
    
    9.9
    
    
    
    13.1
    
    
    
    132
    %Gross profit (loss)
    
    
    (0.6
    )
    
    
    (0.6
    )
    
    
    0.0
    
    
    
    -2
    %
    
    
    2.9
    
    
    
    1.1
    
    
    
    1.8
    
    
    
    160
    %Operating expenses
    
    
    8.9
    
    
    
    4.6
    
    
    
    4.3
    
    
    
    94
    %
    
    
    21.3
    
    
    
    13.2
    
    
    
    8.1
    
    
    
    61
    %Operating loss
    
    
    (9.5
    )
    
    
    (5.2
    )
    
    
    (4.3
    )
    
    
    83
    %
    
    
    (18.4
    )
    
    
    (12.1
    )
    
    
    (6.3
    )
    
    
    52
    %Non-operating income (expense)
    
    
    (1.3
    )
    
    
    (0.1
    )
    
    
    (1.2
    )
    
    NA
    
    
    (7.2
    )
    
    
    0.1
    
    
    
    (7.3
    )
    
    NANet loss
    
    
    (10.8
    )
    
    
    (5.3
    )
    
    
    (5.5
    )
    
    
    105
    %
    
    
    (25.6
    )
    
    
    (12.0
    )
    
    
    (13.6
    )
    
    
    113
    %Net loss per share
    
    
    (0.22
    )
    
    
    (0.11
    )
    
    
    (0.11
    )
    
    
    
    
    
    
    (0.52
    )
    
    
    (0.25
    )
    
    
    (0.27
    )Gross profit (loss) as % of revenue
    
    
    -8
    %
    
    
    -22
    %
    
    
    14
    %
    
    
    
    
    
    
    13
    %
    
    
    11
    %
    
    
    2
    %Operating expense as % of revenue
    
    
    125
    %
    
    
    170
    %
    
    
    -45
    %
    
    
    
    
    
    
    92
    %
    
    
    133
    %
    
    
    -41
    %Operating loss as % of revenue
    
    
    134
    %
    
    
    192
    %
    
    
    58
    %
    
    
    
    
    
    
    80
    %
    
    
    122
    %
    
    
    42
    %Net loss as % of revenue
    
    
    152
    %
    
    
    195
    %
    
    
    43
    %
    
    
    
    
    
    
    111
    %
    
    
    121
    %
    
    
    10
    %
 Revenue:
   ($ Millions)
    
    Three months ended September 30Region
    
    2008
    
    
    2007
    
    
    Change
    
    
    % ChangeUnited States
    
    
    (1.8
    )
    
    
    1.3
    
    
    
    (3.1
    )
    
    
    -240
    %Europe
    
    
    3.4
    
    
    
    0.1
    
    
    
    3.3
    
    
    
    3579
    %Western Hemisphere
    
    
    3.9
    
    
    
    0.9
    
    
    
    3.0
    
    
    
    326
    %Pacific Rim
    
    
    1.6
    
    
    
    0.4
    
    
    
    1.2
    
    
    
    295
    %Total revenue
    
    
    7.1
    
    
    
    2.7
    
    
    
    4.4
    
    
    
    163
    %
 15




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##### Table of Contents



($ Millions)
    
    Nine months ended September 30Region
    
    2008
    
    
    2007
    
    
    Change
    
    
    % ChangeUnited States
    
    
    6.5
    
    
    
    2.9
    
    
    
    3.6
    
    
    
    125
    %Europe
    
    
    5.5
    
    
    
    0.6
    
    
    
    4.9
    
    
    
    802
    %Western Hemisphere
    
    
    6.3
    
    
    
    5.2
    
    
    
    1.1
    
    
    
    21
    %Pacific Rim
    
    
    4.7
    
    
    
    1.2
    
    
    
    3.5
    
    
    
    296
    %Total revenue
    
    
    23.0
    
    
    
    9.9
    
    
    
    13.1
    
    
    
    132
    %
    ($ Millions)
    
    Three months ended September 30Product Line
    
    2008
    
    
    2007
    
    
    Change
    
    
    % ChangeSevoflurane
    
    
    5.0
    
    
    
    1.4
    
    
    
    3.6
    
    
    
    252
    %Other Inhalants
    
    
    2.1
    
    
    
    1.1
    
    
    
    1.0
    
    
    
    86
    %Total Anesthesia and Analgesia
    
    
    7.1
    
    
    
    2.5
    
    
    
    4.6
    
    
    
    179
    %Image Guidance
    
    
    0.0
    
    
    
    0.2
    
    
    
    (0.2
    )
    
    
    -82
    %Total revenue
    
    
    7.1
    
    
    
    2.7
    
    
    
    4.4
    
    
    
    163
    %
 ($ Millions)
    
    Nine months ended September 30Product Line
    
    2008
    
    
    2007
    
    
    Change
    
    
    % ChangeSevoflurane
    
    
    16.7
    
    
    
    6.2
    
    
    
    10.5
    
    
    
    170
    %Other Inhalants
    
    
    5.9
    
    
    
    3.4
    
    
    
    2.5
    
    
    
    74
    %Total Anesthesia and Analgesia
    
    
    22.6
    
    
    
    9.6
    
    
    
    13.0
    
    
    
    135
    %Image Guidance
    
    
    0.4
    
    
    
    0.3
    
    
    
    0.1
    
    
    
    34
    %Total revenue
    
    
    23.0
    
    
    
    9.9
    
    
    
    13.1
    
    
    
    132
    %
  Gross
Profit (Loss):
  16




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##### Table of Contents



Operating Expenses:
   Operating Loss:
  Non-operating income/expense:
   17




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##### Table of Contents



Liquidity and Capital:
   Nine months ended September 30($ Millions)
    
    2008
    
    2007Net Cash used by Operating Activities
    
    
    (20.3
    )
    
    
    (10.0
    )Net Cash used by Investing Activities
    
    
    (7.4
    )
    
    
    (2.3
    )Net cash provided by Financing Activities
    
    
    30.2
    
    
    
    7.7Net Increase (Decrease) in cash and cash equivalents
    
    
    2.5
    
    
    
    (4.6
    )
   
   18




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##### Table of Contents



Forward-Looking Statements
   
 Item 3. Quantitative and Qualitative Disclosure about Market Risk.
  
 Item 4T. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures.
  Managements Report on Internal Control over Financial Reporting
  19




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##### Table of Contents



Internal Control  Integrated Framework
  
    
    We were ineffective in maintaining a sufficient complement of
qualified accounting personnel and controls associated with
segregation of duties. Currently, all aspects of our financial
reporting process, are performed by a single individual with limited
segregation of duties and limited secondary review, including but not
limited to access to the underlying accounting records and systems,
the ability to post and record journal entries and responsibility for
the preparation of the financial statements. This creates certain
incompatible duties and a lack of review over the financial reporting
process that would likely fail to detect errors in spreadsheets,
calculations, or assumptions used to compile the financial statements
and related disclosures with the SEC. Specifically, we determined that
because of the latter situation, our controls over the preparation,
review and monitoring of the financial statements were ineffective to
provide reasonable assurance that financial disclosures agreed to
appropriate supporting detail, calculations or other documents.
    
    Our documentation of accounting policies and procedures is incomplete
to the level necessary to ensure accounting for transactions are
accounted by the limited accounting staff in accordance with generally
accepted accounting principles properly each reporting period.
    
    We installed a new enterprise wide information system during 2007 that
is utilized to plan and execute the business. However the accounting
modules and functionality of the new system are not fully implemented
or utilized by Company personnel to process transactions which have
contributed to weaknesses in internal control over financial
reporting.
    
    We have a complex chemical production process which was not properly
reflected in the accounting records captured in our enterprise wide
information system at the end of 2007 and at interim reporting dates
during 2007. In this regard, audit adjustments were made relating to
both the quantity and value of inventory at December 31, 2007.
Additional management time has been required to ensure that inventory
has been properly accounted for during and at the end of each
financial reporting period.
 Internal Control  Integrated Framework
  Plan for Remediation of Material Weaknesses.
   20




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##### Table of Contents



Changes in Internal Control over Financial Reporting.
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
   
 Item 2. Unregistered Sales of Securities and Use of Proceeds.
  
 Item 3. Defaults upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  For
    
    Against
    
    Abstain
    
    Total PresentTotal Votes
    
    
    26,908,915
    
    
    
    636,845
    
    
    
    58,068
    
    
    
    27,603,828Percentage of those present
    
    
    97
    %
    
    
    2
    %
    
    
    0
    %
    
    
    100
    %
 
 Item 5. Other Information.
  
 Item 6. Exhibits and Reports on Form 8-K.
 The following exhibits are filed as part of this Quarterly Report on Form 10-Q
 ExhibitNo.31.1
    
    Certification of Principal Executive Officer Pursuant to Rules 13a-14(a)/15d-14(a) under the Exchange Act.31.2
    
    Certification of Principal Financial Officer Pursuant to Rules 13a-14(a)/15d-14(a) under the Exchange Act.32.1
    
    Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 21




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##### Table of Contents



Table of Contents
 
 Signatures
  Date: November 14, 2008
    MINRAD INTERNATIONAL, INC.By:
    /s/ William H. Burns, Jr.William H. Burns, Jr.,Chairman and CEO
(Duly authorized officer and chief 
executive officer of the
Registrant) 22