UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON, D.C.20549







FORM
10-K


ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934


FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008


COMMISSION
FILE NUMBER 000-51038







MEDASORB
TECHNOLOGIES CORPORATION


(Name of
Small Business Issuer in Its Charter)


Nevada
              
              98-0373793(State
      or Other Jurisdiction of Incorporation or
                Organization)
              
              (I.R.S.
      Employer identification
number)


7
Deer Park Drive, Suite K


Monmouth
Junction, New Jersey 08852


(732)
329-8885


(Address,
including zip code, and telephone number,


including
area code, of registrant’s principal executive offices)







Securities
registered pursuant to Section 12(b) of the Act: None





Securities registered pursuant to
Section 12(g) of the Act: Common Stock $0.001 par value





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.     o  Yes  þ  No


Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  o  Yes  þ  No




Indicate
by checkmark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 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.


þYes          oNo


Indicate
by check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. þ




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
(do not check if a smaller reporting company)  Smaller reporting
company þ





Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act.)  oYes          þNo




The
issuer had norevenues for its fiscal
year ended December 31, 2008.





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2008 was approximately
$1,035,000. The number of shares outstanding of the registrant’s Common Stock as
of March 27, 2009 was 30,510,819.




















MEDASORB
TECHNOLOGIES CORPORATION


2008
FORM 10-K ANNUAL REPORT


TABLE
OF CONTENTS




PagePART
      IItem
      1. Business
                        
                        
                        3Item
      1A. Risk Factors.
                        
                        
                        21Item
      2. Properties
                        
                        
                        29Item
      3. Legal Proceedings
                        
                        
                        30Item
      4. Submission of Matters to a Vote of Security Holders
                        
                        
                        30PART
      II
                        
                        
                        
                        30Item
      5. Market for Registrant’s Common Equity, Related Stockholder Matters and
      Issuer Purchases of Equity Securities
                        
                        
                        30Item
      6. Selected Financial Data
                        
                        
                        31Item
      7. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                        
                        
                        31Item
      7A. Quantitative and Qualitative Disclosures About Market
    Risk
                        
                        
                        33Item
      8. Financial Statements and Supplementary Data
                        
                        
                        33Item
      9. Changes in and Disagreements With Accountants on Accounting and
      Financial Disclosure
                        
                        
                        33Item
      9A(T). Controls and Procedures
                        
                        
                        33Item
      9B. Other Information
                        
                        
                        34PART
      III
                        
                        
                        
                        34Item
      10. Directors, Executive Officers and Corporate Governance
                        
                        
                        34Item
      11. Executive Compensation
                        
                        
                        36Item
      12. Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
                        
                        
                        41Item
      13. Certain Relationships and Related Transactions and Director
      Independence
                        
                        
                        43Item
      14. Principal Accountant Fees and Services
                        
                        
                        44Part
      IVItem
      15. Exhibits, Financial Statement Schedules
                        
                        
                        44









CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS





This
document contains “forward-looking statements”. These statements are subject to
risks and uncertainties and are based on the beliefs and assumptions of
management and information currently available to management. The use of words
such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,”
“should,” “likely” or similar expressions, indicates a forward-looking
statement. Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties and assumptions. Future results may differ
materially from those expressed in the forward-looking statements. Many of the
factors that will determine these results are beyond the ability of MedaSorb to
control or predict. Stockholders are cautioned not to put undue reliance on any
forward-looking statements, which speak only to the date made. For a discussion
of some of the factors that may cause actual results to differ materially from
those suggested by the forward-looking statements, please read carefully the
information under “Risk Factors”. However, the identification in this document
of factors that may affect future performance and the accuracy of
forward-looking statements is meant to be illustrative and by no means
exhaustive. All forward-looking statements should be evaluated with the
understanding of their inherent uncertainty.




PART
I




Item
1. Business.




Overview




We are a
medical device company that is currently in the development stage, headquartered
in Monmouth Junction, New Jersey (near Princeton). We have developed and will
seek to commercialize a blood purification technology that we believe will be
able to efficiently remove middle molecular weight toxins from circulating blood
and physiologic fluids. We will be required to obtain required regulatory
approvals from a Notified Body for the European Community (CE Mark) and the
United States Food and Drug Administration before we can sell our products in
Europe and the United States, respectively. In December 2006, we submitted a
proposed pilot study for approval to the FDA with respect to CytoSorbTM, the
first device we intend to bring to market. In the first quarter of 2007, we
received approval from the FDA to conduct a limited study of five patients in
the adjunctive treatment of sepsis. Based on management’s belief that proceeding
with the approved limited study would add at least one year to the approval
process for the United States, we made a determination to focus our efforts on
obtaining regulatory approval in Europe before proceeding with the
FDA.




We
estimate that the market potential in Europe for our products is substantially
equivalent to that in the U.S. Given the opportunity to conduct a much larger
clinical study in Europe, and management’s belief that the path to a CE Mark
should be faster than FDA approval, we have targeted Europe for the initial
market introduction of our CytoSorbTM product. To accomplish the European
introduction, in July 2007 we prepared and filed a request for a clinical trial
with a German Central Ethics Committee.




We
received approval from the German Ethics Committee in October of 2007 to conduct
a clinical study of up to 80 patients with acute respiratory distress syndrome
or acute lung injury in the setting of sepsis. At December 31, 2008 we had
initiated and opened for enrollment seven (7) hospital units to participate in
our clinical study and had identified an additional six (6) sites that may be
added to our study to accelerate enrollment. As of March 2009 we have increased
the number of hospital units participating in our study to ten
(10).
 
 In April
2009, we submitted a protocol revision to expand the options for
anti-coagulation that the clinical sites may use, and to increase the total
number of patients that may be enrolled from 80 to 100 patients.  This
revision has been approved by the German Ethics Committee. We believe that the
revised protocol will enable more potential sites to participate in the study,
and may help accelerate patient enrollment through greater access to potential
candidates.  Further, while we do not anticipate enrolling more than 80
patients, we now have the flexibility to enroll up to 100 patients if
needed.
 
 Additionally,
we have updated blood sampling and handling procedures to minimize non-device
related artifacts that may potentially arise if the samples are not processed
appropriately.
 
 To date
we have enrolled twenty two (22) patients in the clinical study, which have been
randomized yielding eleven (11) treated and eleven (11) control (non-treated)
patients. We hope to enroll approximately sixty (60) additional patients. 
While we do not anticipate enrolling the entire 100 patients that we are now
entitled to enroll, the approved increase allows us some flexibility in the
event any of the enrolled patients are not able to complete the study due to
withdrawal or inability to complete post treatment follow-up. In conducting the
German Clinical study we have utilized our CytoSorbTM device in over 75
treatments to date with no Serious Adverse Events attributable to the
device.
 
 We expect
to complete the patient enrollment by the end of 2009. Concurrent with the
clinical study, we expect to commence the CE Mark submission process. Assuming a
successful outcome of the study, management believes it will take an additional
6-9 months following its submission for CE Mark approval to receive the European
regulatory approval. Assuming availability of adequate and timely funding, and a
successful outcome to the study, management anticipates obtaining CE Mark
approval in the first half of 2010, at the earliest.





The
clinical protocol for our European clinical study has been designed to allow us
to gather information to support future U.S. studies. In the event we receive
the CE Mark and are able to successfully commercialize our products in the
European market, we will review our plans for the United States to determine
whether to conduct clinical trials in support of 510K or PMA registration. No
assurance can be given that our proposed CytoSorbTM product will work as intended
or that we will be able to obtain CE Mark (or FDA) approval to sell CytoSorbTM.
Even if we ultimately obtain CE Mark approval, because we cannot control the
timing of responses from regulators to our submissions, there can be no
assurance as to when such approval will be obtained.





We have
developed two products, CytoSorbTM and BetaSorbTM utilizing our adsorbent polymer
technology. These products are known medically as hemoperfusion devices. During
hemoperfusion, blood is removed from the body via a catheter or other blood
access device, perfused through a filter medium where toxic compounds are
removed, and returned to the body.




3





The
CytoSorbTM device consists of a cartridge containing the adsorbent polymer beads.
The cartridge incorporates industry standard connectors at either end of the
device which connect directly to an extra-corporeal circuit (bloodlines) on a
stand alone basis. The extra-corporeal circuit consists of plastic tubing
through which the blood flows, our CytoSorbTM cartridge containing adsorbent
polymer beads, pressure monitoring gauges, and a blood pump to maintain blood
flow. The patient’s blood is accessed through a catheter inserted into his or
her veins. The catheter is connected to the extra-corporeal circuit and the
blood pump draws blood from the patient, pumps it through the cartridge and
returns it back to the patient in a closed loop system. As blood passes over the
polymer beads in the cartridge, toxins (cytokines) are adsorbed from the
blood.




To date,
we have manufactured the CytoSorbTM device on a limited basis for testing
purposes, including for use in clinical studies. We believe that current state
of the art blood purification technology (such as dialysis) is incapable of
effectively clearing the various toxic compounds intended to be adsorbed by our
devices.





Our
CytoSorbTM is intended to remove toxins and other substances from blood and
physiologic fluids.  We are currently enrolling patients in a European
Sepsis trial of our CytoSorbTM device.  The study is a randomized,
controlled clinical study in twelve sites in Germany of up to 80 patients with
acute respiratory distress syndrome or acute lung injury in the setting of
sepsis.  Patients are being treated with our device once per day for
up to seven (7) consecutive days.  To date we have enrolled twenty two
(22) patients in the study. The study protocol was designed to support a request
for the European CE Mark (regulatory approval to sell medical devices in
Europe).




Following
the sepsis indication, we intend to continue our research in other acute
conditions where CytoSorbTM has indicated potential in preliminary studies to
prevent or reduce the accumulation of cytokines and other toxic compounds in the
bloodstream. These conditions include, but are not limited to, the prevention of
post-operative complications of cardiac surgery (cardiopulmonary bypass
surgery), damage to organs donated for transplant prior to organ harvest, and
removing drugs from blood.




Previous
studies using our BetaSorbTM device in patients with chronic kidney failure have
provided valuable data which we will use in conducting clinical studies using
our CytoSorbTM device. However, limited studies have been conducted using our
CytoSorbTM device to date and no assurance can be given that our proposed
CytoSorbTM product will work as intended or that we will be able to obtain the
necessary regulatory body approvals to sell CytoSorbTM. Even if we ultimately
obtain regulatory approval, because we can not control the timing of responses
to our regulatory submissions, there can be no assurance as to when such
approval will be obtained.




Our
BetaSorbTM device is intended to remove beta2-microglobulin
from the blood of patients suffering from chronic kidney failure who rely on
long term dialysis therapy to sustain their life. BetaSorbTM utilizes an
adsorbent polymer packed into an identically shaped and constructed cartridge as
utilized for our CytoSorbTM product, although the polymers used in the two
devices are physically different. The BetaSorbTM device also incorporates
industry standard connectors at either end of the device which connect directly
into the extra-corporeal circuit (bloodlines) in series with a dialyzer. To
date, we have manufactured the BetaSorbTM device on a limited basis for testing
purposes, including for use in clinical studies.




We had
initially identified end stage renal disease (ESRD) as the target market for our
polymer-based adsorbent technology. However, during the development of
BetaSorbTM, we identified several applications for our adsorbent technology in
the treatment of critical care patients. As a result, we shifted our priorities
to pursue critical care applications (such as for the treatment of sepsis) for
our technology given that BetaSorb’sTM potential for usage in chronic conditions
such as end stage renal disease is anticipated to have a longer and more complex
regulatory pathway. We currently intend to pursue our BetaSorbTM product after
the commercialization of the CytoSorbTM product. At such time as we determine to
proceed with our proposed BetaSorbTM product, if ever, we will need to conduct
additional clinical studies using the BetaSorbTM device and obtain separate
regulatory approval in Europe and/or the United States.




To date,
we have conducted clinical studies using our BetaSorbTM device in patients with
chronic kidney failure, which have provided valuable data which underpin the
development of the critical care applications for our technology. The BetaSorbTM
device has been used in a total of three human pilot studies, involving 20
patients, in the U.S. and Europe. The studies included approximately 345
treatments, with some patients using the device for up to 24 weeks (in multiple
treatment sessions lasting up to four hours, three times per week) in connection
with the application of our products to patients suffering from chronic kidney
failure. The BetaSorbTM device design was also tested on a single patient with
bacterial sepsis, producing results that our management has found encouraging
and consistent with our belief that our device design is appropriate for more
extensive sepsis study. In addition, CytoSorb’sTM ability to interact safely with
blood (hemocompatibility) has been demonstrated through ISO 10993 testing. These
studies we have done to date were not done in conjunction with obtaining FDA
approval for the use of our CytoSorbTM device, the first device we intend to
bring to market.




4




We have
not generated any revenue to date. We have incurred losses in each of our fiscal
years and expect these losses to continue for the foreseeable future. We will
need to raise significant additional funds to conduct clinical studies and
obtain regulatory approvals to commercialize our products. No assurance can be
given that we will ever successfully commercialize any products.




Corporate
History




MedaSorb
Technologies Corporation was incorporated in Nevada on April 25, 2002 as Gilder
Enterprises, Inc. and was originally engaged in the business of installing and
operating computer networks that provided high-speed access to the Internet. On
June 30, 2006, we disposed of our original business, and pursuant to an
Agreement and Plan of Merger, acquired all of the stock of MedaSorb
Technologies, Inc., a Delaware corporation in a merger, and its business became
our business. Following the merger, in July 2006 we changed our name to MedaSorb
Technologies Corporation.  In November 2008 we changed the name of our
operating subsidiary from MedaSorb Technologies, Inc. to CytoSorbents,
Inc.  Our parent company name is still MedaSorb Technologies
Corporation but we anticipate that we will change our name to better reflect the
name of our operating subsidiary.  Unless otherwise indicated, all
references in this Annual Report to “MedaSorb,”, “CytoSorbents”, “us” or “we”
with respect to events prior to June 30, 2006 are references to CytoSorbents,
Inc. and its predecessors. Our executive offices are located at 7 Deer Park
Drive, Suite K, Monmouth Junction, New Jersey 08852. Our telephone number is
(732) 329-8885.




MedaSorb
was originally organized as a Delaware limited liability company in August 1997
as Advanced Renal Technologies, LLC. MedaSorb changed its name to RenalTech
International, LLC in November 1998, and to MedaSorb Technologies, LLC in
October 2003. In
December 2005, MedaSorb converted from a limited liability company to a
corporation.




MedaSorb
has been engaged in research and development since its inception, and prior to
the merger, had raised approximately $53 millionfrom investors. These
proceeds have been used to fund the development of multiple product applications
and to conduct clinical studies. These funds have also been used to establish
in-house manufacturing capacity to meet clinical testing needs, expand our
intellectual property through additional patents and to develop extensive
proprietary know-how with regard to our products.




Immediately
prior to the merger, MedaSorb had 292 stockholders that held an aggregate of
20,340,929 shares of common stock. In connection with the merger, certain
stockholders of ours (i.e., persons who
were stockholders of Gilder Enterprises prior to the merger), including Joseph
Bowes, a former principal stockholder and the sole director and officer of
Gilder prior to the merger, sold an aggregate of 3,617,500 shares of our Common
Stock to several purchasers, and forfeited 4,105,000 shares of Common Stock,
which we cancelled. As a result, prior to giving effect to the merger, we had
outstanding 3,750,000 shares of Common Stock and, after giving effect to the
merger, we had outstanding 24,090,929 shares of Common Stock.




The
principal stockholders of MedaSorb immediately prior to the merger were Margie
Chassman, Guillermina Montiel, Al Kraus and Robert Shipley, who respectively
beneficially owned 10,000,000 shares (49.2%), 5,052,456 shares (24.6%),
1,393,631 shares (6.9%) and 1,248,372 shares (6%), of the outstanding common
stock of MedaSorb. Immediately following the merger and the closing of the
Series A Preferred Stock financing described below, Ms. Chassman beneficially
owned an additional 630,000 shares of Common Stock underlying the warrant we
issued to her in connection with her pledge of stock to the purchasers of the
Series A Preferred Stock, as described below. On July 5, 2006, Ms. Chassman
transferred 2,005,000 shares of Common Stock owned by her to her designees. In
addition, following the closing of the Series A Preferred Stock financing,
without giving effect to applicable restrictions that prohibit conversion of the
Series A Preferred Stock or exercise of warrants if as a result the holder would
hold in excess of 4.99% of our Common Stock, Longview Fund, LP beneficially
owned 3,600,000 shares (13%) of our Common Stock.




Principal Terms of the
Reverse Merger




In
connection with the merger, the stockholders of MedaSorb prior to the merger
were issued an aggregate of 20,340,929 shares of Common Stock in exchange for
the shares of MedaSorb common stock previously held by them. In addition,
pursuant to the terms of the merger, outstanding warrants and options to
purchase a total of 1,697,648 shares of the common stock of MedaSorb prior to
the merger were cancelled in exchange for warrants and options to purchase the
same number of shares of our Common Stock at the same exercise prices and
otherwise on the same general terms as the MedaSorb options and warrants that
were cancelled. Certain providers of legal services to MedaSorb who previously
had the right to be issued approximately 997,000shares of MedaSorb
common stock as payment toward accrued legal fees, became entitled to instead be
issued the same number of shares of our Common Stock as payment toward such
services.




5




Concurrently
with the closing of the merger, Joseph G. Bowes, the sole director and officer
of MedaSorb Technologies Corporation (then Gilder Enterprises) prior to the
merger, appointed Al Kraus, Joseph Rubin, Esq., and Kurt Katz to the Board of
Directors, and then resigned from the Board and from his positions as an
officer. In addition, at such time, Al Kraus was appointed our President and
Chief Executive Officer, Vincent Capponi was appointed our Chief Operating
Officer, David Lamadrid was appointed our Chief Financial Officer and James
Winchester, MD was appointed our Chief Medical Officer.




For
accounting purposes, the merger has been accounted for as a reverse merger,
since MedaSorb Technologies Corporation (then Gilder Enterprises) was a shell
company prior to the merger, the stockholders of MedaSorb prior to the merger
own a majority of the issued and outstanding shares of our Common Stock after
the merger, and the directors and executive officers of MedaSorb prior to the
merger became our directors and executive officers. Accordingly, pre-merger
MedaSorb is treated as the acquiror in the merger, which is treated as a
recapitalization of pre-merger MedaSorb, and the pre-merger financial statements
of MedaSorb are now deemed to be our historical financial
statements.




Principal Terms of the
Series A Financing Consummated upon the Closing of the
Merger




On June
30, 2006, immediately following the merger, we sold to four institutional
investors, in a private offering generating gross proceeds of $5.25 million, an
aggregate of 5,250,000 shares of our Series A 10% Cumulative Convertible
Preferred Stock initially convertible into 4,200,000 shares of Common Stock, and
five-year warrants to purchase an aggregate of 2,100,000 shares of our Common
Stock.




The
Series A Preferred Stock has a stated value of $1.00 per share. The Series A
Preferred Stock is not redeemable at the holder’s option but may be redeemed by
us at our option following the third anniversary of the issuance of the Series A
Preferred Stock for 120% of the stated value thereof plus any accrued but unpaid
dividends upon 30 days' prior written notice (during which time the Series A
Preferred Stock may be converted), provided a registration statement is
effective under the Securities Act with respect to the shares of our Common
Stock into which such Series A Preferred Stock is then convertible, and an event
of default, as defined in the Certificate of Designations relating to the Series
A Preferred Stock is not then continuing.




The
Series A Preferred Stock has a dividend rate of 10% per annum, payable
quarterly. The dividend rate increases to 20% per annum upon the occurrence of
the events of default specified in the Certificate of Designations. Dividends
may be paid in cash or, provided no event of default is then continuing, with
additional shares of Series A Preferred Stock valued at the stated value
thereof. The Series A Preferred Stock is convertible into Common Stock at the
conversion rate of one share of Common Stock for each $1.25 of stated value or
accrued but unpaid dividends converted.




The
warrants issued in the private placement have an initial exercise price of $2.00
per share. The aggregate number of shares of Common Stock covered by the
Warrants equaled, at the date of issuance, one-half the number of shares of
Common Stock issuable upon the full conversion of the Series A Preferred Stock
issued to the investors on that date.




We agreed
to file a registration statement under the Securities Act covering the Common
Stock issuable upon conversion of the Series A Preferred Stock and exercise of
the warrants within 120 days following closing of the private placement and to
cause it to become effective within 240 days of that closing. We also granted
the investors demand and piggyback registration rights with respect to such
Common Stock.




Because
the registration statement we agreed to file was not declared effective within
the time required under our agreements with the June 30, 2006 purchasers of the
Series A Preferred Stock, dividends on the shares of Series A Preferred Stock
issued to those purchasers accrued at the rate of 20% per annum from February
26, 2007 until May 7, 2007, the date the registration statement was declared
effective. During this time period, we were obligated to pay those purchasers
cash dividends and an aggregate of $105,000 per 30-day period from February 26,
2007 through the date such registration statement was declared effective (May
7,2007) in cash. Pursuant to a settlement agreement with the June 30, 2006
purchasers of Series A Preferred Stock, all cash dividends and damages were paid
for in full with additional shares of Series A Preferred Stock.


6


Both the
conversion price of the Series A Preferred Stock and the exercise price of the
warrants were subject to “full-ratchet” anti-dilution provisions, so that upon
future issuances of our Common Stock or equivalents thereof, subject to
specified customary exceptions, at a price below the conversion price of the
Series A Preferred Stock and/or exercise price of the warrants, the conversion
price and/or exercise price will be reduced to the lower price. As of the
“Qualified Closing” of our Series B Preferred Stock private placement in August
of 2008, these investors’ agreed to a modification of their rights and pricing
and gave up their anti-dilution protection – see Qualified Closing description
in Series B Preferred Stock section)




In
connection with the sale of the Series A Preferred Stock and warrants to the
four institutional investors, to induce those investors to make the investment,
Margie Chassman pledged to those investors securities of other publicly traded
companies. The pledged securities consisted of a $400,000 promissory note of
Xechem International, Inc. convertible into Xechem common stock at $.005 per
share, and 250,000 shares of the common stock of Novelos Therapeutics, Inc.
Based on the market value of the Xechem common stock ($.07 per share) and the
Novelos common stock ($1.03) per share, on June 30, 2006, the aggregate fair
market value of the pledged securities at the date of pledge was approximately
$5,857,500.




The terms
of the pledge provided that in the event those investors suffered a loss on
their investment in our securities as of June 30, 2007 (as determined by actual
sales by those investors or the market price of our Common Stock on such date),
the investors would be entitled to sell all or a portion of the pledged
securities so that the investors receive proceeds from such sale in an amount
equal to their loss on their investment in our securities. In consideration of
her pledge to these investors, we paid Ms. Chassman (i) $525,000 in cash
(representing 10% of the cash amount raised from the institutional investors),
and (ii) five-year warrants to purchase




·
                525,000
      shares of Series A Preferred Stock (representing 10% of the Series A
      Preferred Stock purchased by those investors),
  and




·
              warrants
      to purchase 210,000 shares of Common Stock at an exercise price of $2.00
      per share (representing 10% of the Series A Preferred Stock purchased by
      those investors),




for an
aggregate exercise price of $525,000.




As of the
“Qualified Closing” of our Series B Preferred Stock private placement in August
of 2008, Ms. Chassman agreed to a modification of her rights and pricing and
gave up her anti-dilution protection – see Qualified Closing description in
Series B Preferred Stock section)





Principal Terms of the
Series B Financing Consummated in 2008





Each
share of Series B Preferred Stock has a stated value of $100.00, and is
convertible at the holder’s option into that number of shares of Common Stock
equal to the Series B stated value at a conversion price of $0.0362, subject to
certain adjustments. Additionally, upon the occurrence of a stock split, stock
dividend, combination of the Common Stock into a smaller number of shares,
issuance of any of shares of Common Stock or other securities by
reclassification of the Common Stock, merger or sale of substantially all of our
assets, the conversion rate will be adjusted so that the conversion rights of
the Series B Preferred Stock stockholders will remain equivalent to those prior
to such event.





Dividend





The
holders of Series B Preferred Stock are entitled to receive preferential
dividends payable in shares of additional Series B Preferred Stock . Any
dividends payable to both the Series A and Series B Preferred shareholders shall
be paid before any dividend or other distribution will be paid to any Common
Stock shareholder. The Series B Preferred Stock dividend is based payable at a
rate of 10% per annum on the Series B Stated Value payable on the last day of
each calendar quarter after June 30, 2008. However, upon the occurrence of any
“Event of Default” as defined in the Certificate of Designation of Series B
Preferred Stock, the dividend rate increases to 20% per annum, and revert back
to 10% after the “Event of Default” is cured. An Event of Default includes, but
is not limited to,





 ̈
                the
      occurrence of “Non-Registration Events”; ̈
                an
      uncured breach by us of any material covenant, term or condition in the
      Certificate of Designation or any of the related transaction documents;
      and ̈
                any
      money judgment or similar final process being filed against us for more
      than $100,000.




Dividends
must be delivered to the holder of the Series B Preferred Stock no later than
five (5) business days after the end of each period for which dividends are
payable. Dividends on the Series B Preferred Stock will be made in additional
shares of Series B Preferred Stock, valued at the Series B Preferred Stock
stated value. Notwithstanding the foregoing, during the first three-years
following the initial closing, upon the approval of the holders of a majority of
the Series B Preferred Stock, including the lead investor, NJTC Venture Fund, if
it then owns 25% of the shares of Series B Preferred Stock initially purchased
by it, we may pay dividends in cash instead of additional shares of Series B
Preferred Stock, and after such three-year period, the holders of a majority of
the Series B Preferred Stock, including NJTC if it then owns the 25% of the
shares of the Series B Preferred Stock initially purchased by it, may require us
to make such payments in cash.





Liquidation





In the
event of the Company’s dissolution, liquidation or winding up, the holders of
the Series B Preferred Stock will receive, in priority over the holders of
Series A Preferred Stock and Common Stock, a liquidation preference equal to the
stated value of such shares plus accrued dividends on the shares.





Voting Rights; Board
Rights





Holders
of Series B Preferred Stock have the right to vote on matters submitted to the
holders of Common Stock on an as converted basis. However, the consent of the
holders of at least a majority of the shares of the Series B Preferred Stock as
a separate class, including NJTC if it is then a holders of at least 25% of the
shares of Series B Preferred Stock purchased by it on the Initial Closing Date,
shall be required on matters related to the rights of the Series B Preferred
Stock.





In
addition, so long as NJTC holds 25% of the Series B Preferred Stock it purchased
before the initial closing, NJTC is entitled to elect (i) two directors to our
Board of Directors, which shall consist of six members, and (ii) two members to
our compensation committee, which shall consist of no less than three
members.  Within the first twelve (12) months following the Initial
Closing, the Company must reduce the Board of Directors to five (5)
members.





Moreover,
so long as Cahn Medical Technologies, LLC is the holder of at least 25% of the
shares of the Series B Preferred Stock purchased by it on the initial closing
date, it has the right to have its designee receive notices of, and attend as an
observer, all meetings of our Board of Directors.





Registration
Rights





We have
filed a registration statement under the Securities Act covering the Common
Stock issuable upon conversion of the Series B Preferred Stock.  We
have received comments from the Securities and Exchange Commission related to
this filing and are in the process of addressing each comment
raised.  Pursuant to the terms of the Registration Rights Agreement,
we are required to cause the Registration Statement to become effective within
240 days of such closing. We also granted the investors demand and piggyback
registration rights with respect to such Common Stock. The investors in the
Series B Financing are entitled to liquidated damages in an amount equal to two
percent (2%) of the purchase price of the Series B Preferred Stock if we fail to
timely file that registration statement with, or have it declared effective by,
the SEC.





The
Company has received a waiver from a majority of the Series B holders for the
non-registration event and the timing of the Series B registration does not
create a cross-default of the Series A Preferred Series.





Redemption
Rights





Following
the fifth anniversary of the initial closing, the holders of a majority of the
Series B Preferred Stock, including NJTC if it then holds 25% of the shares of
Series B Preferred Stock initially purchased by it, may elect to require us to
redeem all, but not less than all, of their shares of Series B Preferred Stock
at the original purchase price for such shares plus all accrued and unpaid
dividends whether or not declared, if the market price of our Common Stock is
then below the conversion price of the Series B Preferred Stock.





Dilution and
Subordination





As one of
the conditions to the closing of the Series B financing with an initial closing
on June 25, 2008, we entered into an Agreement and Consent as of the same date
with the holders of more than 80% of our Series A Preferred Stock, par value
0.001 per share and the holders of more than 80% of the outstanding common stock
purchase warrants issued to the purchasers of our Series A Preferred Stock (the
“Class A
Warrant”). Pursuant to the Agreement and Consent, our holders of the
Series A Preferred Stock consented to the permanent waiver of the anti-dilution
protection previously provided to the holders of the Series A Preferred Stock
and the holders of the Class A Warrant.





In
connection with such Agreement and Consent, the conversion price with respect to
the June 30, 2006 purchasers of Series A Preferred Stock held by the Holders was
reduced effective June 25, 2008, the initial closing of the Series B Financing
according to the Schedule A to the Agreement and Consent as set forth below. In
the event that within the 60-day period following the Initial Closing, at
additional closings, the Company issued additional shares of Series B Preferred
Stock so that the aggregate gross proceeds that were raised on the Initial
Closing and such additional closings (excluding the principal amount of our
outstanding debt converted into the Series B Preferred Stock) from the holders
of the Series A Preferred Stock or their affiliates, is $1,500,000 or more, the
conversion price with respect to the Series A Preferred Stock held by these
holders was agreed to be further reduced in accordance with Schedule A to the
Agreement and Consent as set forth below. Based on the total amount raised and
in accordance with our investor agreements, MedaSorb’s Series B Preferred Stock
private placement was considered a “Qualified” closing.





In
addition, June 30, 2006 purchasers of the Series A Preferred Stock also agreed
the conversion price with respect to the Class A Warrant shall be reduced
effectively on the initial closing. Pursuant to our agreement for a Qualified
closing, Conversion pricing and warrant exercise pricing was further reduced as
disclosed in the following chart.





06/30/06
      Purchasers of
Series A Preferred Stock
                                                  
                                                  Initial Closing (06/25/08)
                                                  
                                                  
                                                  Qualified Closing (08/25/08)Preferred Stock
                                                    Conversion Price
                                                  
                                                  
                                                  Warrant
                                                    Exercise Price
                                                  
                                                  
                                                  Preferred Stock
                                                    Conversion Price
                                                  
                                                  
                                                  Warrant
                                                    Exercise PriceAlpha
      Capital Aktiengesellschaft
                                                  
                                                  $
                                                  0.26
                                                  
                                                  
                                                  $
                                                  0.52
                                                  
                                                  
                                                  $
                                                  0.20
                                                  
                                                  
                                                  $
                                                  0.40Longview
      Fund, LP
                                                  
                                                  $
                                                  1.25
                                                  
                                                  
                                                  $
                                                  2.00
                                                  
                                                  
                                                  $
                                                  0.45
                                                  
                                                  
                                                  $
                                                  0.90Platinum
      Partners Long Term Growth III LLC
                                                  
                                                  $
                                                  1.25
                                                  
                                                  
                                                  $
                                                  2.00
                                                  
                                                  
                                                  $
                                                  0.10
                                                  
                                                  
                                                  $
                                                  0.40Ellis
      International Ltd.
                                                  
                                                  $
                                                  0.26
                                                  
                                                  
                                                  $
                                                  0.52
                                                  
                                                  
                                                  $
                                                  0.20
                                                  
                                                  
                                                  $
                                                  0.40Margie
      Chassman
                                                  
                                                  $
                                                  1.25
                                                  
                                                  
                                                  $
                                                  2.00
                                                  
                                                  
                                                  $
                                                  0.10
                                                  
                                                  
                                                  $
                                                  0.40




Research
and Development




We have
been engaged in research and development since inception. Our research and
development costs were approximately $1,983,000 and $1,416,000 for the years
ended December 31, 2008 and 2007, respectively.




Technology,
Products and Applications




For
approximately the past half-century, the field of blood purification has been
focused on hemodialysis, a mature, well accepted medical technique primarily
used to sustain the lives of patients with permanent or temporary loss of kidney
function. It is widely understood by the medical community that dialysis has
inherent limitations in that its ability to remove toxic substances from blood
drops precipitously as the size of toxins increases. Our hemocompatible
adsorbent technology is expected to address this shortcoming by removing toxins
and toxic compounds largely untouched by dialysis technology.




Our
initial products, CytoSorbTM and BetaSorbTM, are known in the medical field as
hemoperfusion devices. During hemoperfusion, blood is removed from the body via
a catheter or other blood access device, perfused through a filter medium where
toxic compounds are removed, and returned to the body.




We
believe that our polymer adsorbent technology may remove middle molecular weight
toxins and toxic compounds, such as cytokines, from blood and physiologic
fluids. We believe that our technology may have many applications in the
treatment of common, chronic and acute healthcare complications including the
adjunctive treatment and/or prevention of sepsis; the treatment of chronic
kidney failure; the treatment of liver failure; the prevention of post-operative
complications of cardiopulmonary bypass surgery; and the prevention of damage to
organs donated by brain-dead donors prior to organ harvest. These applications
vary by cause and complexity as well as by severity but share a common
characteristic i.e. high concentrations of toxins in the circulating
blood.




7





Both the
CytoSorbTM and BetaSorbTM devices consist of a cartridge containing adsorbent
polymer beads, although the polymers used in the two devices are physically
different. The cartridges in both devices incorporate industry standard
connectors at either end of the device, which connect directly to the
extra-corporeal circuit (bloodlines) in series with a dialyzer, in the case of
the BetaSorbTM device, or as a stand alone device in the case of the CytoSorbTM
device. Both devices will require no additional expensive equipment, and will
require minimal training.




The
extra-corporeal circuit consists of plastic blood tubing, our CytoSorbTM or
BetaSorbTM cartridge, as applicable, containing adsorbent polymer beads, pressure
monitoring gauges, and a blood pump to maintain blood flow. The patient’s blood
is accessed through a catheter inserted into his or her veins. The catheter is
connected to the extra-corporeal circuit and the blood pump draws blood from the
patient, pumps it through the cartridge and returns it back to the patient in a
closed loop system.




Markets




Sepsis




In the
United States alone, there are more than one million new cases of sepsis
annually; based on the reported incidence in a number of developed countries,
the worldwide incidence is estimated to be 18 million cases per year. Severe
trauma and community acquired pneumonia are often associated with sepsis. The
Company estimates that the market potential in Europe for its products is
substantially equivalent to that in the U.S.


Sepsis
patients are critically ill and suffer a very high mortality rate of between 28%
and 60%. Because they are so expensive to treat, we believe that efficacy rather
than cost will be the determining factor in the adoption of CytoSorbTM in the
treatment of sepsis. Based on current pricing of charcoal hemoperfusion devices
in the market today, we estimate that our CytoSorbTM device will sell for $500
per unit. Our current pricing model represents a fraction of what is currently
spent on the treatment of a sepsis patient.




Brain-Dead Organ
Donors




There are
in excess of 6,000 brain dead organ donors each year in the United States;
worldwide, the number of these organ donors is estimated to be at least double
the U.S. brain dead organ donor population. There is a severe shortage of donor
organs. Currently, there are more than 100,000 individuals on transplant waiting
lists in the United States. We expect that the use of our CytoSorbTM device in
brain dead organ donors will increase the number of viable organs harvested from
the donor pool and improve the survival of transplanted organs.




Cardiopulmonary Bypass
Procedures




There are
approximately 400,000 cardiopulmonary bypass (CPB) and cardiac surgery
procedures performed annually in the U.S. and more than 800,000 worldwide. Some
patients, nearly one-third, suffer from post-operative complications of
cardiopulmonary bypass surgery, including complications from infection,
pneumonia, pulmonary, and neurological dysfunction. A common characteristic of
these post operative complications is the presence of cytokines in the blood.
Extended surgery time leads to longer ICU recovery time and hospital stays, both
leading to higher costs – approximately $32,000 per coronary artery bypass graft
procedure. We believe that the use of CytoSorbTM during and after the surgical
procedure may prevent or mitigate post-operative complications for many CPB
patients.




We
anticipate that the CytoSorbTM device, incorporated into the extra-corporeal
circuit used with the by-pass equipment during surgery, and/or employed
post-operatively for a period of time, will mitigate inflammation and speed
recovery.


8





Chronic Kidney
Failure




The
National Kidney Foundation estimates that more than 20 million Americans have
chronic kidney disease. Left untreated, chronic kidney disease can ultimately
lead to chronic kidney failure, which requires a kidney transplant or chronic
dialysis (generally three times per week) to sustain life. There are more than
340,000 patients in the United States currently receiving chronic dialysis and
more than 1.5 million worldwide. Approximately 66% of patients with chronic
kidney disease are treated with hemodialysis.




Our
BetaSorbTM device has been designed for use in conjunction with standard
dialysis. Standard dialysis care typically involves three sessions per week,
averaging approximately 150 sessions per year. Assuming BetaSorbTM use in each
session, every 100,000 patients would require approximately 15 million devices
annually.




Products




We
believe that the polymer adsorbent technology used in our products has the
potential to remove middle molecular weight toxins, such as cytokines, from
blood and physiologic fluids. All of the potential applications described below
(i.e., the
adjunctive treatment and/or prevention of sepsis; the treatment of chronic
kidney failure; the treatment of liver failure; the prevention of post-operative
complications of cardiopulmonary bypass surgery; and the prevention of damage to
organs donated by brain-dead donors prior to organ harvest) share in common high
concentrations of toxins in the circulating blood. However, because of the
limited studies we have conducted to date, we are subject to substantial risk
that our technology will have little or no effect on the treatment of any of
these indications. We are currently enrolling patients in a European Sepsis
trial of our CytoSorbTM device.  The study is a randomized, open label,
controlled clinical study in ten (10) sites in Germany of up to eighty (80)
patients with acute respiratory distress syndrome or acute lung injury in the
setting of sepsis. If these studies are successful and we obtain European
regulatory approval, we anticipate that we will be able to begin sales of
CytoSorbTM during 2010, at the earliest. However, there can be no assurance we
will ever obtain regulatory approval for CytoSorbTM or any other
device.




The CytoSorbTM Device
(Critical Care)




APPLICATION:
Adjunctive Therapy in the Treatment of Sepsis




Sepsis is
a potentially life threatening disease defined as a systemic inflammatory
response in the presence of a known or suspected infection.  Sepsis is
mediated by high levels of toxic compounds (“cytokines”) which are released into
the blood stream as part of the body’s auto-immune response to severe infection
or injury. These toxins cause severe inflammation and damage healthy tissues,
which can lead to organ dysfunction and failure. Sepsis is very expensive to
treat and has a high mortality rate.




Potential Benefits:
To the extent our adsorbent blood purification technology is able to prevent or
reduce the accumulation of cytokines in the circulating blood, we believe our
products may be able to prevent or mitigate severe inflammation, organ
dysfunction and failure in sepsis patients. Therapeutic goals as an adjunctive
therapy include reduced ICU and total hospitalization time.




Background and
Rationale: We believe that the effective treatment of sepsis is the most
valuable potential application for our technology. Severe sepsis (sepsis with
organ dysfunction) and septic shock (severe sepsis with persistent hypotension
despite fluid resuscitation) carries mortality rates of between 28% and 80%.
Death can occur within hours or days, depending on many variables, including
cause, severity, patient age and co-morbidities. Researchers estimate that there
are approximately one million new cases of sepsis in the U.S. each year; and
based on the reported incidence in a number of developed countries, the
worldwide incidence is estimated to be 18 million cases annually. The incidence
of sepsis is also rising due to:
 
 1)
              An
      aging population
 2)
              Increased
      incidence of antibiotic resistance
 3)
              Increase
      in co-morbid conditions like cancer and
diabetes
 4)
              Increased
      use of indwelling medical devices that are susceptible to
      infections
 
 In the
U.S. alone, treatment of sepsis costs nearly $18 billion annually. According to
the Centers for Disease Control, sepsis is a top ten cause of death in the
U.S.  The incidence of sepsis is believed to be under-reported as the
primary infection (i.e. pneumonia, pyelonephritis, etc.) is often cited as the
cause of death.
  An
effective treatment for sepsis has been elusive. Pharmaceutical companies have
been trying to develop drug therapies to treat the condition. With the exception
of a single drug, Xigris® from Eli Lilly, which demonstrated a small improvement
in survival in a small segment of the patient population, to our knowledge, all
other efforts to date have failed to significantly improve patient survival in
the U.S.




9





We
believe that our technology presents a new therapeutic approach in the treatment
of sepsis. The potential benefits of blood purification in the treatment of
sepsis patients are widely acknowledged by medical professionals and have been
studied using dialysis and hemofiltration technology. These studies, while
encouraging, demonstrated that dialysis alone produced only limited benefit to
sepsis patients. The reason for this appears to be rooted in a primary
limitation of dialysis technology itself: the inability of standard dialysis to
effectively and efficiently remove significant quantities of larger toxins from
circulating blood. Limited studies of our CytoSorbTM device have provided us with
data consistent with our belief that CytoSorbTM has the ability to remove these
larger toxins. CytoSorb’sTM ability to interact safely with blood
(hemocompatibility) has been demonstrated through ISO 10993 testing. Data
collected during the “emergency and compassionate use” treatment of a single
sepsis patient has been encouraging to us.




CytoSorbTM
has been designed to achieve broad-spectrum removal of both pro- and
anti-inflammatory cytokines, preventing or reducing the accumulation of high
concentrations in the bloodstream. This approach is intended to modulate the
immune response without blocking or suppressing the function of any of its
mediators. For this reason, researchers have referred to the approach reflected
in our technology as ‘immunomodulatory’ therapy.




Projected Timeline:
Previous clinical studies using our BetaSorbTM device in patients with chronic
kidney failure have provided valuable data which underpin the development of the
critical care applications for our technology. The BetaSorbTM device has been
used in a total of three human pilot studies, involving 20 patients, in the U.S.
and Europe. The studies included approximately 345 treatments, with some
patients using the device for up to 24 weeks (in multiple treatment sessions
lasting up to four hours, three times per week) in connection with the
application of our products to patients suffering from chronic kidney failure.
The BetaSorbTM device design was also tested on a single patient with bacterial
sepsis, producing results that our management has found encouraging and
consistent with our belief that our device design is appropriate for more
extensive sepsis study.




We
received approval from the German Ethics Committee in October of 2007 to conduct
a clinical study of up to 80 patients with acute respiratory distress syndrome
or acute lung injury in the setting of sepsis. At December 31, 2008 we had
initiated and opened for enrollment seven (7) hospital units to participate in
our clinical study and had identified an additional six (6) sites that may be
added to our study to accelerate enrollment. As of March 2009 we have increased
the number of hospital units participating in our study to ten
(10).
 
 In April
2009, we submitted a protocol revision to expand the options for
anti-coagulation that the clinical sites may use, and to increase the total
number of patients that may be enrolled from 80 to 100 patients.  This
revision has been approved by the German Ethics Committee. We believe that the
revised protocol will enable more potential sites to participate in the study,
and may help accelerate patient enrollment through greater access to potential
candidates.  Further, while we do not anticipate enrolling more than 80
patients, we now have the flexibility to enroll up to 100 patients if
needed.
 
 Additionally,
we have updated blood sampling and handling procedures to minimize non-device
related artifacts that may potentially arise if the samples are not processed
appropriately.
 
 To date
we have enrolled twenty two (22) patients in the clinical study, which have been
randomized yielding eleven (11) treated and eleven (11) control (non-treated)
patients. We hope to enroll approximately sixty (60) additional patients. 
While we do not anticipate enrolling the entire 100 patients that we are now
entitled to enroll, the approved increase allows us some flexibility in the
event any of the enrolled patients are not able to complete the study due to
withdrawal or inability to complete post treatment follow-up. In conducting the
German Clinical study we have utilized our CytoSorbTM device in over 75
treatments to date with no Serious Adverse Events attributable to the
device.
 
 We expect
to complete the patient enrollment by the end of 2009. Concurrent with the
clinical study, we expect to commence the CE Mark submission process. Assuming a
successful outcome of the study, management believes it will take an additional
6-9 months following its submission for CE Mark approval to receive the European
regulatory approval. Assuming availability of adequate and timely funding, and a
successful outcome to the study, management anticipates obtaining CE Mark
approval in the first half of 2010, at the earliest.




Because
our technology pertains to a medical device, the regulatory pathway and approval
process are faster and more straightforward than the process related to the
approval of a drug. However, even if we ultimately obtain the CE Mark, because
we cannot control the timing of the regulatory approval process, there can be no
assurance as to when such approval will be obtained.




APPLICATION:
Prevention
and treatment of organ dysfunction in brain-dead organ donors to increase the
number and quality of viable organs harvested from donors




Potential Benefits:
If CytoSorbTM is able to prevent or reduce high-levels of cytokines from
accumulating in the bloodstream of brain-dead organ donors, we believe CytoSorbTM
will be able to mitigate organ dysfunction and failure which results from severe
inflammation following brain-death. The primary goals for this application
are:




·
              improving
      the viability of organs which can be harvested from brain-dead organ
      donors, and




·
              increasing
      the likelihood of organ survival following
  transplant.




Background and
Rationale: When brain death occurs, the body responds by generating large
quantities of inflammatory cytokines. This process is similar to sepsis. A high
percentage of donated organs are never transplanted due to this response, which
damages healthy organs and prevents transplant. In addition, inflammation in the
donor may damage organs that are harvested and reduce the probability of graft
survival following transplant.


10





There is
a shortage of donated organs worldwide, with approximately 100,000 people
currently on the waiting list for organ transplants in the United States alone.
Because there are an insufficient number of organs donated to satisfy demand, it
is vital to maximize the number of viable organs donated, and optimize the
probability of organ survival following transplant.




Projected Timeline:
Studies have been conducted under a $1 million grant from the Health Resources
and Services Administration (HRSA), an agency of the U.S. Department of
Health and Human Services. Researchers at the University of Pittsburgh Medical
Center and the University of Texas, Houston Medical Center have completed the
observational and dosing phases of the project. The results were published in
Critical Care Medicine, January 2008. The next phase of this study, the
treatment phase, will involve viable donors treated with the CytoSorbTM device.
In this phase of the project, viable donors will be treated and the survival and
function of organs in transplant recipients will be tracked and measured. We are
not currently focusing our efforts on the commercialization of CytoSorbTM for
application in organ donors.  The treatment phase would be contingent
upon further discussion with the FDA and HRSA regarding study design, as well as
obtaining additional funding.




APPLICATION:
Prevention and treatment of post-operative complications of cardiopulmonary
bypass surgery




Potential Benefits:
If CytoSorbTM is able to prevent or reduce high-levels of cytokines from
accumulating in the blood system during and following cardiac surgery, we
anticipate that post-operative complications of cardiopulmonary bypass surgery
may be able to be prevented or mitigated. The primary goals for this application
are to:




·
              reduce
      ventilator and oxygen therapy
requirements;




·
              reduce
      length of stay in hospital intensive care units;
  and




·
              reduce
      the total cost of patient
care.




Background and
Rationale: Due to the highly invasive nature of cardiopulmonary bypass
surgery, high levels of cytokines are produced by the body, triggering severe
inflammation. If our products are able to prevent or reduce the accumulation of
cytokines in a patient’s blood stream, we expect to prevent or mitigate
post-operative complications caused by an excessive or protracted inflammatory
response to the surgery. While not all patients undergoing cardiac surgery
suffer these complications, it is impossible to predict before surgery which
patients will be affected.




Projected Timeline:
We commissioned the University of Pittsburgh to conduct a study to characterize
the production of cytokines as a function of the surgical timeline for
cardiopulmonary bypass surgery. An observational study of 32 patients was
completed, and information was obtained with respect to the onset and duration
of cytokine release. We expect that this information will aid us in defining the
appropriate time to apply the CytoSorbTM device to maximize therapeutic impact.
We are not currently focusing our efforts on the commercialization of CytoSorbTM
for application to cardiac surgery. Upon successful commercialization of the
sepsis application, we will pursue the use of our polymer adsorbent technology
for other critical care uses, such as cardiopulmonary bypass
surgery.




The BetaSorbTM Device
(Chronic Care)




APPLICATION:
Prevention and treatment of health complications caused by the accumulation of
metabolic toxins in patients with chronic renal failure




Potential Benefits:
If BetaSorbTM is able to prevent or reduce high levels of metabolic waste
products from accumulating in the blood and tissues of long-term dialysis
patients, we anticipate that the health complications characteristic to these
patients can be prevented or mitigated. The primary goals for this application
are to




·
              improve
      and maintain the general health of dialysis
  patients;




·
              improve
      the quality of life of these
patients




·
              reduce
      the total cost of patient care;
and




·
              increase
      life expectancy.


11




Background and
Rationale: Our BetaSorbTM device is intended for use on patients suffering
from chronic kidney failure who rely on long-term dialysis therapy to sustain
life. Due to the widely recognized inability of dialysis to remove larger
proteins from blood, metabolic waste products, such as Beta-2 microglobulin,
accumulate to toxic levels and are deposited in the joints and tissues of
patients. Specific toxins known to accumulate in these patients have been linked
to their severe health complications, increased healthcare costs, and reduced
quality of life.




Researchers
also believe that the accumulation of toxins may play an important role in the
significantly reduced life expectancy experienced by dialysis patients. In the
U.S., the average life expectancy of a dialysis patient is five years. Industry
research has identified links between many of these toxins and poor patient
outcomes. If our BetaSorbTM device is able to routinely remove these toxins
during dialysis and prevent or reduce their accumulation, we expect our
BetaSorbTM device to maintain or improve patient health in the long-term. We
believe that by reducing the incidence of health complications, the annual cost
of patient care will be reduced and life expectancy increased.




The poor
health experienced by chronic dialysis patients is illustrated by the fact that
in the U.S. alone, more than $20 billion is spent annually caring for this
patient population. While the cost of providing dialysis therapy alone is
approximately $23,000 per patient per year, the total cost of caring for a
patient ranges from $60,000 to more than $120,000 annually due to various health
complications associated with dialysis.




Projected Timeline:
We have collected a significant amount of empirical data for the development of
this application. As the developer of this technology, we had to undertake
extensive research, as no comparable technology was available for reference
purposes. We have completed several pilot studies, including a clinical pilot of
six patients in California for up to 24 weeks in which our BetaSorbTM device
removed the targeted toxin, beta2-microglobulin,
as expected. In total, we have sponsored clinical studies utilizing our
BetaSorbTM device on 20 patients involving approximately 345 total treatments.
Each study was conducted by a clinic or hospital personnel with MedaSorb
providing technical assistance as requested.




As
discussed above, due to practical and economic considerations, we are focusing
our efforts and resources on commercializing our CytoSorbTM device for critical
care application. Following commercial introduction of the CytoSorbTM device, we
expect to conduct additional clinical studies using the BetaSorbTM device in the
treatment of end stage renal disease patients.




Commercial
and Research Partners




University of Pittsburgh
Medical Center




Two
government research grants by the National Institutes of Health (NIH) and Health
and Human Services (HHS) have been awarded to investigators at the University of
Pittsburgh to explore the use of adsorbent polymers in the treatment of sepsis
and organ transplant preservation. Under “SubAward Agreements” with the
University of Pittsburgh, we have been developing polymers for use in these
studies.




A grant
of $1million was
awarded to the University of Pittsburgh Medical Center in 2003. The project
seeks to improve the quantity and viability of organs donated for transplant by
using CytoSorbTM to detoxify the donor’s blood. The observational and dosing
phases of the study, involving 30 viable donors and eight non-viable donors,
respectively, have been completed. The next phase of this study, the treatment
phase, will involve viable donors.  We are not currently focusing our
efforts on the commercialization of CytoSorbTM for application in organ donors.
The treatment phase would be contingent upon further discussion with the FDA and
HRSA regarding study design, as well as obtaining additional
funding.





In
addition, in September 2005, the University of Pittsburgh Medical Center was
awarded a grant of approximately $7 million from NIH entitled “Systems
Engineering of a Pheresis Intervention for Sepsis (SEPSIS)” to study the use of
adsorbent polymer technology in the treatment of severe sepsis. The study,
expected to last for a total of five years, commenced in September, 2005 and
remains in progress. Under a SubAward Agreement, we are working with researchers
at the University of Pittsburgh - Critical Care Medicine Department. Currently,
we believe that the only polymers being used in this study are polymers we have
developed specifically for use in the study, which are similar to the polymers
used in our devices. Under the SubAward Agreement, for each of 2006 and 2007, we
received approximately $102,000 for our efforts in support of the grant.
Additionally for 2008 we received an approximate $59,000 for our supporting
efforts. We continue to supply UPMC with new samples based on our adsorbent
polymer technology under the same terms as the initial SubAward Agreement, and
expect to do so for the duration of the study. UPMC has indicated to us that the
amounts budgeted for our participation under the study are approximately $78,000
and $163,000, respectively for the remaining two grant periods commencing
September 2008 and ending September 2010.  The amounts are subject to
change on an annual basis by the NIH, and our continued participation in the
study is subject to our performance and an annual review by UPMC.





These
grants represent a substantial research cost savings to us and demonstrate the
strong interest of the medical and scientific communities in our
technology.


12





Researchers
at UPMC have participated in nearly every major clinical study of potential
sepsis intervention during the past twenty years. Drs. Derek Angus and John
Kellum were investigators for Eli Lilly’s sepsis drug, Xigris®. Dr. Kellum, a
member of the UPMC faculty since 1994, is the Chairman of our Severe Sepsis and
Inflammatory Disease Advisory Board. Dr. Kellum’s research interests span
various aspects of Critical Care Medicine, but center on critical care
nephrology (including acid-base, and renal replacement therapy), sepsis and
multi-organ failure, and clinical epidemiology. He is Chairman of the Fellow
Research Committee at the University of Pittsburgh Medical Centerandhas authored more than
70 publications and has received numerous research grants from foundations and
industry.




Fresenius Medical Care
AG




In 1999,
we entered into an exclusive, long-term agreement with Fresenius Medical Care
for the global marketing and distribution of our BetaSorbTM device and any
similar product we may develop for the treatment of renal disease. We currently
intend to pursue our BetaSorbTM product after the commercialization of the
CytoSorbTM product. At such time as we determine to proceed with our proposed
BetaSorbTM product, if ever, we will need to conduct additional clinical studies
using the BetaSorbTM device to obtain European or FDA approval.




Fresenius
Medical Care is the world's largest, integrated provider of products and
services for individuals with chronic kidney failure. Through its network of
more than 2,100 dialysis clinics in North America, Europe, Latin America and
Asia-Pacific, Fresenius Medical Care provides dialysis treatment to more than
163,000 patients around the globe. Fresenius Medical Care is also the world's
largest provider of dialysis products, such as hemodialysis machines, dialyzers
and related disposable products.




Advisory
Boards




From time
to time our management meets with scientific advisors who sit on our Scientific
Advisory Board, our Medical Advisory Board – Critical Care Medicine, and our
Medical Advisory Board – Chronic Kidney Failure / Dialysis.




Our
Scientific Advisory Board consists of three scientists with expertise in the
fields of fundamental chemical research, and polymer research and
development.




Our
Medical Advisory Board for Severe Sepsis / Inflammatory Disease consists of four
medical doctors, one of whom is affiliated with UPMC, with expertise in critical
care medicine, sepsis, multi-organ failure and related clinical study
design.




Our
Medical Advisory Board for Chronic Kidney Failure / Dialysis consists of four
medical doctors with expertise in kidney function, kidney diseases and their
treatment, and dialysis technology.




We
compensate members of our Advisory Boards at the rate of $2,000 for each
full-day meeting they attend in person; $1,200 if attendance is by telephone.
When we consult with members of our Advisory Board (whether in person or by
telephone) for a period of less than one day, we compensate them at the rate of
$200 per hour. We also reimburse members of our Advisory Boards for their travel
expenses for attending our meetings.




Royalty
Agreements




With Principal
Stockholder




In August
2003, in order to induce Guillermina Vega Montiel, a principal stockholder of
ours, to make a $4 million investment in MedaSorb, we granted Ms. Montiel a
perpetual royalty equal to three percent of all gross revenues received by us
from sales of CytoSorbTMin the
applications of sepsis, cardiopulmonary bypass surgery, organ donor,
chemotherapy and inflammation control. In addition, for her investment, Ms.
Montiel received 1,230,770 membership units of MedaSorb, which at the time was a
limited liability company. Those membership units ultimately became 185,477
shares of our Common Stock following our June 30, 2006 merger.




13




With
Purolite




In 2003,
Purolite filed a lawsuit against us asserting, among other things, co-ownership
and co-inventorship of certain of our patents. On September 1, 2006, the United
States District Court for the Eastern District of Pennsylvania approved a
Stipulated Order and Settlement Agreement under which we and Purolite agreed to
the settlement of the action. The Settlement Agreement provides us with the
exclusive right to use our patented technology and proprietary know how relating
to adsorbent polymers for a period of 18 years. In particular, the Settlement
Agreement relates to several of our issued patents and several of our pending
patent applications covering our biocompatible polymeric resins, our methods of
producing these polymers, and the methods of using the polymers to remove
impurities from physiological fluids, such as blood.




Under the
terms of the Settlement Agreement, we have agreed to pay Purolite royalties of
2.5% to 5% on the sale of those of our products, if and when those products are
sold commercially, that are used in direct contact with blood. However, if the
first product we offer for commercial sale is a biocompatible polymer to be used
in direct contact with a physiological fluid other than blood, royalties will be
payable with respect to that product as well. The royalty payments provided for
under the Settlement Agreement would apply to our currently envisioned CytoSorbTM
and BetaSorbTM products.




Following
the expiration of the eighteen year term of the Settlement Agreement, the
patents and patent applications that are the subject of the Settlement Agreement
should have expired under current patent laws, and the technology claimed in
them will be available to the public. However, following such time, we would
continue to exclusively own any confidential and proprietary know
how.




Product
Payment & Reimbursement




Critical Care
Applications




Europe




Payment
for our CytoSorbTM device for the removal of cytokines in patients with acute
respiratory distress syndrome or acute lung injury in the setting of sepsis and
other related acute care applications will be applied for on a country by
country basis in Europe. We intend to initially apply for reimbursement in
Germany where we are conducting our clinical trial. If we are able to
successfully introduce the CytoSorbTM device into the German market we intend to
apply for reimbursement in France, England, Italy and Spain representing the
five economic leaders in Europe and introduce our products in those countries
accordingly. We will first need to establish the CE Mark for the CytoSorbTM
device, then pursue reimbursement on a country by country basis. Each country
will determine reimbursement status of the device based on the data obtained
from the clinical trial. There can be no assurances that reimbursement will be
granted or that additional clinical data may not be required to establish
reimbursement.




United
States




Payment
for our CytoSorbTM device in the treatment and prevention of sepsis and other
related acute care applications is anticipated to fall under the
“diagnosis-related group” (DRG) in-patient reimbursement system, which is
currently the predominant basis of hospital medical billing in the United
States. Under this system, predetermined payment amounts are assigned to
categories of medical patients with respect to their treatments at medical
facilities based on the DRG that they fall within (which is a function of such
characteristics as medical condition, age, sex, etc.) and the length of time
spent by the patient at the facility. Reimbursement is not determined by the
actual procedures used in the treatment of these patients, and a separate
reimbursement decision would not be required to be made by Medicare, the HMO or
other provider of medical benefits in connection with the actual method used to
treat the patient.


14




Critical
care applications such as those targeted by our CytoSorbTM device involve a high
mortality rate and extended hospitalization, coupled with extremely expensive
ICU time. In view of these high costs and high mortality rates, we believe
acceptance of our proprietary technology by critical care practitioners and
hospital administrators will primarily depend on safety and efficacy factors
rather than cost.




Chronic Renal
Failure




In Europe
chronic dialysis is predominately provided by government supported clinics
accounting for approximately 75% of dialysis treatment, with the remainder being
provided by private clinics. However, these figures vary widely among countries
within Europe. For example dialysis clinics in Denmark and Finland are 100%
publicly managed facilities while those in Portugal are 90% privately managed
facilities. Generally speaking, dialysis services are always regulated and
controlled by the healthcare authorities and not homogeneous between the various
European countries.




There are
three main types of reimbursement in Europe: budget transfer, fee for service
and flat rate. In some cases, the reimbursement method varies within the same
country depending on the type of provider (public or private). Europe is similar
to the U.S. in that a product such as BetaSorbTM may be part of a composite rate
or separate line item reimbursement. In either case, a country by country
application for reimbursement must be made.





It is
expected that in the U.S., Medicare will be the primary payer for the BetaSorbTM
device, either through the current “fee for service” mechanism or managed care
programs. The large majority of costs not covered by federal programs are
covered by the private insurance sector.




While the
fee-for-service composite rate system is currently the dominant payment
mechanism, many industry participants believe that a managed care system will
become the dominant payment mechanism. We believe that movement to a full or
shared-risk managed care system would speed market acceptance of BetaSorbTM
because, under such a system, providers will have a strong incentive to adopt
technologies that lower overall treatment costs. Fresenius is a leading
participant in the move to managed care and may play a leading role in the
demonstration and introduction of our product to Medicare.




Competition




General




We
believe that our products represent a unique approach to disease states and
health complications associated with the presence of larger toxins (often
referred to as middle molecular weight toxins) in the bloodstream, including
sepsis, post-operative complications of cardiac surgery (cardiopulmonary bypass
surgery), damage to organs donated for transplant prior to organ harvest, and
renal disease. Researchers have explored the potential of using existing
membrane-based dialysis technology to treat patients suffering from sepsis.
These techniques are unable to effectively remove the middle molecular weight
toxins. We believe that our devices may be able to remove middle molecular
weight toxins from circulating blood. This concept has been successfully tested
at the University of Pittsburgh using septic rat models with our CytoSorbTM
polymer, which were based on lipopolysaccharide (a particular kind of toxin,
known as a bacterial endotoxin) and cecal ligation puncture.


Both the
CytoSorbTM and BetaSorbTM devices consist of a cartridge containing adsorbent
polymer beads. The cartridge incorporates industry standard connectors at either
end of the device which connect directly to an extra-corporeal circuit
(bloodlines) on a stand alone basis. The extra-corporeal circuit consists of
plastic tubing through which the blood flows, our cartridge (CytoSorbTM or
BetaSorbTM depending on the condition being treated) containing our adsorbent
polymer beads, pressure monitoring gauges, and a blood pump to maintain blood
flow. The patient’s blood is accessed through a catheter inserted into his or
her veins. The catheter is connected to the extra-corporeal circuit and the
blood pump draws blood from the patient, pumps it through the cartridge and
returns it back to the patient in a closed loop system. As blood passes over the
polymer beads in the cartridge, toxins are adsorbed from the blood, without
filtering any fluids from the blood or the need for replacement fluid or
dialysate.


15




Although
standard dialysis also uses extra-corporeal circuits and blood pumps, the
technology used in dialysis to remove toxins (osmosis and convection) drains
fluids out of the bloodstream in a process called ultrafiltration, and uses
semi-permeable membranes as a filter, allowing the passage of certain sized
molecules across the membrane, but preventing the passage of other, larger
molecules.




MedaSorb’s
technology uses the same extra-corporeal circuits as dialysis, however, our
devices do not rely on membrane technology but instead use an adsorbent of
specified pore size, which controls the size of the molecules which can pass
into the adsorbent. As blood flows over our polymer adsorbent, middle molecules
such as cytokines flow into the polymer adsorbent and are adsorbed. Our devices
do not use semipermeable membranes or dialysate. In addition, our devices do not
remove fluids from the blood like a dialyzer. Accordingly, we believe that our
technology has significant advantages as compared to traditional dialysis
techniques.




Sepsis




Researchers
have explored the potential of using existing membrane-based dialysis technology
to treat patients suffering from sepsis. These techniques are unable to
effectively remove middle molecular weight toxins, which leading researchers
have shown to cause and complicate sepsis. The same experts believe that a blood
purification technique that efficiently removes, or significantly reduces, the
circulating concentrations of such toxins might represent a successful
therapeutic option. We believe that the CytoSorbTM device may have the ability to
remove middle molecular weight toxins from circulating blood.




Medical
research during the past two decades has focused on drug interventions aimed at
chemically blocking or suppressing the function of one or two inflammatory
agents. In hindsight, some researchers now believe this approach has little
chance of significantly improving patient outcomes because of the complex
pathways and multiple chemical factors at play. Clinical studies of these drug
therapies have been largely unsuccessful. An Eli Lilly drug, Xigris®, cleared by
the FDA in November 2001, is the first and only drug to be approved for the
treatment of severe sepsis. Clinical studies demonstrated that use of Xigris®
resulted in a 6% reduction in the absolute risk of death, and a 13% risk
reduction in the most severe sepsis patients. The drug remains controversial and
is considered expensive when compared to the percentage of patients who
benefit.




Pharmaceutical
research for the treatment of sepsis continues with a number of clinical stage
drug trials being presently conducted including, but not limited to, drug
candidates from Takeda Pharmaceutical Company, Eisai, and BTG
plc.  Using a medical device to treat sepsis remains a relatively
novel approach for the treatment of sepsis. There are a number of companies that
claim enabling blood purification technology for the treatment of
sepsis.  Toray Industries currently markets an endotoxin removal
cartridge called Toraymyxin for the treatment of sepsis in Europe and
Japan.  To date, it has been used to treat more than 70,000
patients.  However, the ability of Toraymyxin to remove cytokines, the
key mediators of sepsis, has not been well documented.  Kaneka
Corporation currently markets Lixelle, a modified porous cellulosic bead, for
the removal of beta2–microglobulin
during hemodialysis in Japan.  In 2002, Kaneka published a small pilot
study in 5 patients with sepsis demonstrating that treatment with Lixelle was
correlated with cytokine reduction.  To our knowledge, Kaneka has not
published a follow-up clinical study with Lixelle.  Kaneka has since
developed a modified cellulosic resin called CTR that can also remove cytokines
from experimental pre-clinical systems.  To our knowledge, Kaneka has
not conducted or published any study using CTR to treat human sepsis
patients.  Ube Industries, LTD is currently developing an adsorbent
resin called CF-X for the removal of cytokines.  To our knowledge, Ube
has not published any study using CF-X to treat human sepsis
patients.  Other potential competitors include the now defunct Arbios
Systems, Inc. Hemolife Medical, Inc. and Hemocleanse Technologies,
LLC.  We believe our CytoSorbTM cartridge has significant competitive,
technological, and economic advantages over systems by these other
companies.


Cardiopulmonary Bypass
Surgery




We are
not aware of any practical competitive approaches for removing cytokines in CPB
patients. Alternative therapies such as “off-pump” surgeries are available but
“post-bypass” syndrome has not been shown to be reduced in this less invasive
procedure. If successful, CytoSorbTM is expected to be useful in both on-pump and
off-pump procedures.




Chronic
Dialysis




Although
standard dialysis treatment effectively removes urea and creatinine from the
blood stream (which are normally filtered by functioning kidneys), standard
dialysis has not been effective in removing beta2-microglobulin
toxins from the blood of patients suffering from chronic kidney failure. We know
of no other device, medication or therapy considered directly competitive with
our technology. Research and development in the field has focused primarily on
improving existing dialysis technologies. The introduction of the high-flux
dialyzer in the mid-1980s and the approval of Amgen’s EpogenTM, a recombinant
protein used to treat anemia, are the two most significant developments in the
field over the last two decades.


16




Efforts
to improve removal of middle molecular weight toxins with enhanced dialyzer
designs have achieved modest success. Many experts believe that dialyzer
technology has reached its limit in this respect. A variation of high-flux
hemodialysis, known as hemodiafiltration, has existed for many years. However,
due to the complexity, cost and increased risks, this dialysis technique has not
gained significant acceptance worldwide. In addition, many larger toxins are not
effectively filtered by hemodiafiltration, despite its more open pore structure.
As a result, hemodiafiltration does not approach the quantity of toxins removed
by the BetaSorbTM device. In terms of resin technology, Kaneka Corporation is the
only company currently marketing a resin cartridge (Lixelle) in Japan designed
to address this need.




Treatment of Organ
Dysfunction in Brain-Dead Organ Donors




We are
not aware of any directly competitive products to address the application of our
technology for the mitigation of organ dysfunction and failure resulting from
severe inflammation following brain-death.




Clinical
Studies




Our first
clinical studies were conducted in patients with chronic renal failure. The
health of these patients is challenged by high levels of toxins circulating in
their blood but, unlike sepsis patients, they are not at imminent risk of death.
The toxins involved in chronic renal failure are completely different from those
involved in sepsis, eroding health gradually over time. The treatment of
patients with chronic renal failure is a significant target market for us,
although not the current focus of our efforts and resources. Our clinical
studies and product development work in this application functioned as a low
risk method of evaluating the safety of the technology in a clinical setting,
with direct benefit to development of the critical care applications on which we
are now focusing our efforts.




The Company is focusing its research
efforts on critical care applications of it technology.  We are
currently enrolling patients in a European Sepsis clinical study.




We
received approval from the German Ethics Committee in October of 2007 to conduct
a clinical study of up to 80 patients with acute respiratory distress syndrome
or acute lung injury in the setting of sepsis. At December 31, 2008 we had
initiated and opened for enrollment seven (7) hospital units to participate in
our clinical study and had identified an additional six (6) sites that may be
added to our study to accelerate enrollment. As of March 2009 we have increased
the number of hospital units participating in our study to ten
(10).


In April
2009, we submitted a protocol revision to expand the options for
anti-coagulation that the clinical sites may use, and to increase the total
number of patients that may be enrolled from 80 to 100 patients.  This
revision has been approved by the German Ethics Committee. We believe that the
revised protocol will enable more potential sites to participate in the study,
and may help accelerate patient enrollment through greater access to potential
candidates.  Further, while we do not anticipate enrolling more than 80
patients, we now have the flexibility to enroll up to 100 patients if
needed.
 
 Additionally,
we have updated blood sampling and handling procedures to minimize non-device
related artifacts that may potentially arise if the samples are not processed
appropriately.
 
 To date
we have enrolled twenty two (22) patients in the clinical study, which have been
randomized yielding eleven (11) treated and eleven (11) control (non-treated)
patients. We hope to enroll approximately sixty (60) additional patients. 
While we do not anticipate enrolling the entire 100 patients that we are now
entitled to enroll, the approved increase allows us some flexibility in the
event any of the enrolled patients are not able to complete the study due to
withdrawal or inability to complete post treatment follow-up. In conducting the
German Clinical study we have utilized our CytoSorbTM device in over 75
treatments to date with no Serious Adverse Events attributable to the
device.
 
 We expect
to complete the patient enrollment by the end of 2009. Concurrent with the
clinical study, we expect to commence the CE Mark submission process. Assuming a
successful outcome of the study, management believes it will take an additional
6-9 months following its submission for CE Mark approval to receive the European
regulatory approval. Assuming availability of adequate and timely funding, and a
successful outcome to the study, management anticipates obtaining CE Mark
approval in the first half of 2010, at the earliest.





Because
of the limited studies we have conducted, we are subject to substantial risk
that our technology will have little or no effect on the treatment of any
indications that we have targeted.





Government
Research Grants




Two
government research grants by the National Institutes of Health (NIH) and Health
and Human Services (HHS) have been awarded to investigators at the University of
Pittsburgh to explore the use of adsorbent polymers in the treatment of sepsis
and organ transplant preservation. Under “SubAward Agreements” with the
University of Pittsburgh, we have been developing polymers for use in these
studies.




A grant
of $1million was
awarded to the University of Pittsburgh Medical Center in 2003. The project
seeks to improve the quantity and viability of organs donated for transplant by
using CytoSorbTM to detoxify the donor’s blood. The observational and dosing
phases of the study, involving 30 viable donors and eight non-viable donors,
respectively, have been completed. The next phase of this study, the treatment
phase, will involve viable donors. We are not currently focusing our efforts on
the commercialization of CytoSorbTM for application in organ donors. The
treatment phase would be contingent upon further discussion with the FDA and
HRSA regarding study design, as well as obtaining additional
funding.




In
addition, in September 2005, the University of Pittsburgh Medical Center was
awarded a grant of approximately $7 million from NIH entitled “Systems
Engineering of a Pheresis Intervention for Sepsis (SEPsIS)” to study the use of
adsorbent polymer technology in the treatment of severe sepsis. The study,
expected to last for a total of five years, commenced in September, 2005 and
remains in progress. Under a SubAward Agreement, we are working with researchers
at the University of Pittsburgh - Critical Care Medicine Department. Currently,
we believe that the only polymers being used in this study are polymers we have
developed specifically for use in the study, which are similar to the polymers
used in our devices. Under the SubAward Agreement, for each of 2006 and 2007, we
received approximately $102,000 for our efforts in support of the grant.
Additionally for 2008 we received an approximate $59,000 for our supporting
efforts. We continue to supply UPMC with new samples based on our adsorbent
polymer technology under the same terms as the initial SubAward Agreement, and
expect to do so for the duration of the study. UPMC has indicated to us that the
amounts budgeted for our participation under the study are approximately $78,000
and $163,000, respectively for the grant periods commencing September 2008 and
ending September 2010.  The amounts are subject to change on an annual
basis by the NIH, and our continued participation in the study is subject to our
performance and an annual review by UPMC. These grants represent a substantial
research cost savings to us and demonstrate the strong interest of the medical
and scientific communities in our technology.


17


Regulation




The
medical devices that we manufacture are subject to regulation by numerous
regulatory bodies, including the FDA and comparable international regulatory
agencies. These agencies require manufacturers of medical devices to comply with
applicable laws and regulations governing the development, testing,
manufacturing, labeling, marketing and distribution of medical devices. Devices
are generally subject to varying levels of regulatory control, the most
comprehensive of which requires that a clinical evaluation program be conducted
before a device receives approval for commercial distribution.




In the
European Union, medical devices are required to comply with the Medical Devices
Directive and obtain CE Mark certification in order to market medical devices.
The CE Mark certification, granted following approval from an independent
Notified Body, is an international symbol of adherence to quality assurance
standards and compliance with applicable European Medical Devices Directives.
Distributors of medical devices may also be required to comply with other
foreign regulations such as Ministry of Health Labor and Welfare approval in
Japan. The time required to obtain these foreign approvals to market our
products may be longer or shorter than that required in the U.S., and
requirements for those approvals may differ from those required by the
FDA.




As
discussed above, we intend to initially pursue CE Mark certification for the
CytoSorbTM device in conjunction with German clinical studies before continuing
with the approval process in the United States.





In the
U.S., permission to distribute a new device generally can be met in one of two
ways. The first process requires that a pre-market notification (510(k)
Submission) be made to the FDA to demonstrate that the device is as safe and
effective as, or substantially equivalent to, a legally marketed device that is
not subject to pre-market approval (PMA). A legally marketed device is a device
that (i) was legally marketed prior to May 28, 1976, (ii) has
been reclassified from Class III to Class II or I, or (iii) has been
found to be substantially equivalent to another legally marketed device
following a 510(k) Submission. The legally marketed device to which equivalence
is drawn is known as the “predicate” device. Applicants must submit descriptive
data and, when necessary, performance data to establish that the device is
substantially equivalent to a predicate device. In some instances, data from
human clinical studies must also be submitted in support of a 510(k) Submission.
If so, these data must be collected in a manner that conforms with specific
requirements in accordance with federal regulations. The FDA must issue an order
finding substantial equivalence before commercial distribution can occur.
Changes to existing devices covered by a 510(k) Submission which do not
significantly affect safety or effectiveness can generally be made by us without
additional 510(k) Submissions.




The
second process requires that an application for PMA be made to the FDA to
demonstrate that the device is safe and effective for its intended use as
manufactured. This approval process applies to certain Class III devices.
In this case, two steps of FDA approval are generally required before marketing
in the U.S. can begin. First, investigational device exemption (IDE) regulations
must be complied with in connection with any human clinical investigation of the
device in the U.S. Second, the FDA must review the PMA application which
contains, among other things, clinical information acquired under the IDE. The
FDA will approve the PMA application if it finds that there is a reasonable
assurance that the device is safe and effective for its intended
purpose.




In the
United States, our CytoSorbTM and BetaSorbTM devices are classified as Class III
(CFR 876.5870—Sorbent Hemoperfusion System) and may require pre-market approval
(PMA) by the FDA.  In Europe, our devices are expected to be
classified as class IIb, and will conform to the ISO 13485 Quality Standard in
support of our planned applications to obtain CE Mark certification in
Europe.




18


The
process of obtaining clearance to market products is costly and time-consuming
in virtually all of the major markets in which we expect to sell products and
may delay the marketing and sale of our products. Countries around the world
have recently adopted more stringent regulatory requirements which are expected
to add to the delays and uncertainties associated with new product releases, as
well as the clinical and regulatory costs of supporting those releases. No
assurance can be given that any of our medical devices will be approved on a
timely basis, if at all. In addition, regulations regarding the development,
manufacture and sale of medical devices are subject to future change. We cannot
predict what impact, if any, those changes might have on our business. Failure
to comply with regulatory requirements could have a material adverse effect on
our business, financial condition and results of operations.




Exported
devices are subject to the regulatory requirements of each country to which the
device is exported. Some countries do not have medical device regulations, but
in most foreign countries medical devices are regulated. Frequently, regulatory
approval may first be obtained in a foreign country prior to application in the
U.S. to take advantage of differing regulatory requirements.




Sales
and Marketing




We
currently estimate, provided that we receive adequate and timely funding to
support our planned activities and that our products perform as expected in
clinical studies, that we will obtain CE Mark approval of our CytoSorbTM device
in the treatment of sepsis in the first half of 2010, at the earliest, assuming
a successful pivotal study. We plan to initiate sales in several European
countries which are known as early adopters of new medical device technology.
These countries primarily include Italy, Germany, France, Spain and the United
Kingdom. We plan to initially operate through local distributors in each
European country where we launch sales operations. Only after establishment of a
limited network of local distributors and actual generation of sales, will we
formulate a broader distribution strategy on a global basis.




Intellectual
Property and Patent Litigation




The
medical device market in which we primarily participate is in large part
technology driven. As a result, intellectual property rights, particularly
patents and trade secrets, play a significant role in product development and
differentiation. However, intellectual property litigation to defend or create
market advantage is inherently complex, unpredictable and is expensive to
pursue. Litigation often is not ultimately resolved until an appeal process is
completed and appellate courts frequently overturn lower court patent
decisions.




Moreover,
competing parties frequently file multiple suits to leverage patent portfolios
across product lines, technologies and geographies and to balance risk and
exposure between the parties. In some cases, several competitors are parties in
the same proceeding, or in a series of related proceedings, or litigate multiple
features of a single class of devices. These forces frequently drive settlement
not only of individual cases, but also of a series of pending and potentially
related and unrelated cases. In addition, although monetary and injunctive
relief is typically sought, remedies are generally not determined until the
conclusion of the proceedings, and are frequently modified on appeal.
Accordingly, the outcomes of individual cases are difficult to time, predict or
quantify and are often dependent upon the outcomes of other cases in other
forums, both domestic and international.




We rely
on a combination of patents, trademarks, trade secrets and non-disclosure
agreements to protect our intellectual property. We hold 25U.S. patents, some of
which have foreign counterparts, and additional patent applications pending
worldwide that cover various aspects of our technology. There can be no
assurance that pending patent applications will result in issued patents, that
patents issued to us will not be challenged or circumvented by competitors, or
that such patents will be found to be valid or sufficiently broad to protect our
technology or to provide us with a competitive advantage. Our portfolio of
patents includes:




·
              U.S. Pat. No. 5,545,131, which
      expires on November 30, 2014. This patent concerns an artificial kidney
      containing a polymeric resin to filter impurities from
      blood.
 
 ·
              U.S. Pat. Nos. 5,773,384,
      5,904,663, 6,127,311, 6,136,424, 6,159,377 and 6,582,811, which expire on
      or before February 6, 2018. These patents concern the use of macronet
      polymeric resins that are subsequently treated to make them biocompatible
      for the removal of impurities from physiological
      fluids.




19




·
              U.S. Pat. Nos. 6,087,300,
      6,114,466, 6,133,393, 6,153,707, 6,156,851 and 6,303,702, which expire on
      or before February 6, 2018. These patents concern the use of mesoporous
      polydivinylbenzene polymeric resins that are subsequently treated to make
      them biocompatible for the removal of impurities from physiological
      fluids.
 
 ·
              U.S. Pat. No. 6,416,487, which
      expires on July 30, 2017. This patent concerns a method of removing Beta-2
      microglobulin using polymers with surface-exposed vinyl groups modified
      for biocompatibility.
 
 ·
              U.S. Pat. No. 6,878,127, which
      expires in 2021 and U.S. Pat. No.7,312,023, which expires in 2024. These
      patents concern devices, systems and methods for reducing levels of
      pro-inflammatory or anti-inflammatory stimulators or mediators in the
      blood.
 
 ·
              U.S. Pat. No. 6,884,829, which
      expires in 2022, U.S. Pat. No. 7,112,620 which expires in 2023 and U.S.
      Pat. No. 7,201,962 which expires in 2025. These patents concern a
      hemocompatible polymer and a one-step method of producing
      it.




We also
rely on non-disclosure and non-competition agreements with employees,
consultants and other parties to protect, in part, trade secrets and other
proprietary technology. There can be no assurance that these agreements will not
be breached, that we will have adequate remedies for any breach, that others
will not independently develop equivalent proprietary information or that third
parties will not otherwise gain access to our trade secrets and proprietary
knowledge.




Several
years ago we engaged in discussions with the Dow Chemical Company, which had
indicated a strong interest in being our polymer manufacturer. After a Dow
representative on our Advisory Board resigned, Dow filed and received five
patents naming our former Advisory Board member as an inventor. These patents,
two of which subsequently lapsed for failure to pay maintenance fees, concern
the area of coating high divinylbenzene-content polymers to render them
hemocompatible, and using such coated polymers to treat blood or plasma. In
management’s view the Dow patents improperly incorporate our technology, are
based on our proprietary technology, and should not have been granted to Dow.
While we believe that our own patents would prevent Dow from producing our
products as they are currently envisioned, Dow could attempt to assert its
patents against us. To date, to our knowledge, Dow has not utilized their
patents for the commercial manufacture of products that would be competitive
with us, and we currently have no plans to challenge Dow’s patents. However, the
existence of these Dow patents could result in a potential dispute with Dow in
the future and additional expenses for us.




We may
find it necessary to initiate litigation to enforce our patent rights, to
protect our trade secrets or know-how and to determine the scope and validity of
the proprietary rights of others. Patent litigation can be costly and
time-consuming, and there can be no assurance that our litigation expenses will
not be significant in the future or that the outcome of litigation will be
favorable to us. Accordingly, we may seek to settle some or all of our pending
litigation described below. Settlement may include cross-licensing of the
patents which are the subject of the litigation as well as our other
intellectual property and may involve monetary payments to or from third
parties.




Employees




As of
December 31, 2008, we had seven employees. None of our employees are represented
by a labor union or are subject to collective-bargaining agreements. We believe
that we maintain good relationships with our employees.




20


Item
1A.  Risk Factors
  An
investment in our Common Stock involves a high degree of risk. You should
carefully consider the risks described below before deciding to purchase shares
of our Common Stock. If any of the events, contingencies, circumstances or
conditions described in the risks below actually occur, our business, financial
condition or results of operations could be seriously harmed. The trading price
of our Common Stock could, in turn, decline and you could lose all or part of
your investment.
 
 RISKS
RELATED TO OUR INDUSTRY AND OUR BUSINESS
 
 We
require additional capital to continue operations.
  As of
December 31, 2008 we had cash on hand of $2,749,208, and current liabilities of
$977,704.  We believe that we have sufficient cash to fund our
operation through the third quarter of 2009, following which we will need
additional financing before we can complete clinical studies and the
commercialization of our proposed products.  There can be no assurance
that we will be successful in our capital raising efforts.
 
 Our
long-term capital requirements are expected to depend on many factors,
including:
  ·           continued progress and cost of our
research and development programs;
 ·           progress with pre-clinical studies and
clinical studies;
 ·           the time and costs involved in
obtaining regulatory clearance;
 ·           costs involved in preparing, filing,
prosecuting, maintaining, defending and enforcing patent
claims;
 ·           costs of developing sales, marketing
and distribution channels;
 ·           market acceptance of our products;
and
 ·           cost for training physicians and other
health care personnel.
 
 In
addition, in the event that additional funds are obtained through arrangements
with collaborative partners or other sources, we may have to relinquish economic
and/or proprietary rights to some of our technologies or products under
development that we would otherwise seek to develop or commercialize by
ourselves.
  We currently have no commercial
operations and there can be no assurance that we will be successful in
developing commercial operations.
  We are a
development stage company and have been engaged primarily in research and
development activities and have not generated any revenues to date. There can be
no assurance that we will be able to successfully manage the transition to a
commercial enterprise. Potential investors should be aware of the problems,
delays, expenses and difficulties frequently encountered by an enterprise in the
early stage of development, which include unanticipated problems relating to
development of proposed products, testing, regulatory compliance, manufacturing,
competition, marketing problems and additional costs and expenses that may
exceed current estimates. Our proposed products will require significant
additional research and testing, and we will need to overcome significant
regulatory burdens prior to commercialization. We will also need to raise
significant additional funds to complete clinical studies and obtain regulatory
approvals before we can begin selling our products. There can be no assurance
that after the expenditure of substantial funds and efforts, we will
successfully develop and commercialize any products, generate any revenues or
ever achieve and maintain a substantial level of sales of our
products.
  21


We have a history
of losses and expect to incur substantial future losses, and the report of our
auditor on our consolidated financial statements expresses substantial doubt
about our ability to continue as a going concern.




We have
experienced substantial operating losses since inception. As of December 31,
2008, we had an accumulated deficit of $75,461,481, which included net losses of
$3,017,890 for the year ended December 31, 2008 and $3,350,754 for the year
ended December 31, 2007. In part due to these losses, our audited consolidated
financial statements have been prepared assuming we will continue as a going
concern, and the auditors’ report on those financial statements express
substantial doubt about our ability to continue as a going concern. Our losses
have resulted principally from costs incurred in the research and development of
our polymer technology and general and administrative expenses. Because our
predecessor was a limited liability company until December 2005, substantially
all of these losses were allocated to that company’s members and will not be
available for tax purposes to us in future periods. We intend to conduct
significant additional research, development, and clinical study activities
which, together with expenses incurred for the establishment of manufacturing
arrangements and a marketing and distribution presence and other general and
administrative expenses, are expected to result in continuing operating losses
for the foreseeable future. The amount of future losses and when, if ever, we
will achieve profitability are uncertain. Our ability to achieve profitability
will depend, among other things, on successfully completing the development of
our technology and commercial products, obtaining the requisite regulatory
approvals, establishing manufacturing and sales and marketing arrangements with
third parties, and raising sufficient funds to finance our activities. No
assurance can be given that our product development efforts will be successful,
that required regulatory approvals will be obtained, that any of our products
will be manufactured at a competitive cost and will be of acceptable quality, or
that the we will be able to achieve profitability or that profitability, if
achieved, can be sustained.




We depend upon
key personnel who may terminate their employment with us at any
time.




We
currently have only seven employees. Our success will depend to a significant
degree upon the continued services of our key management and advisors,
including, Dr. Phillip Chan, our Chief Executive Officer; David Lamadrid, our
Chief Financial Officer; Vincent Capponi, our Chief Operating Officer and Dr.
Robert Bartlett our Chief Medical Officer, who works with us on a consulting
basis. These individuals do not have long-term employment agreements, and there
can be no assurance that they will continue to provide services to us. In
addition, our success will depend on our ability to attract and retain other
highly skilled personnel. We may be unable to recruit such personnel on a timely
basis, if at all. Management and other employees may voluntarily terminate their
employment with us at any time. The loss of services of key personnel, or the
inability to attract and retain additional qualified personnel, could result in
delays in development or approval of our products, loss of sales and diversion
of management resources.





Our
Chief Medical Officer works with us on a consulting basis.





Our Chief
Medical Officer, Dr. Robert Bartlett, works with us on a consulting
basis.  Because of the part time nature of his consulting agreement,
Dr. Bartlett may not always be available to provide us with his services when
needed by us in a timely manner.





Acceptance
of our medical devices in the marketplace is uncertain, and failure to achieve
market acceptance will prevent or delay our ability to generate
revenues.




Our
future financial performance will depend, at least in part, upon the
introduction and customer acceptance of our polymer products. Even if approved
for marketing by the necessary regulatory authorities, our products may not
achieve market acceptance. The degree of market acceptance will depend upon a
number of factors, including:




·
            the receipt of regulatory
      clearance of marketing claims for the uses that we are
      developing;


·
            the establishment and
      demonstration of the advantages, safety and efficacy of the our polymer
      technology;


·
            pricing and reimbursement
      policies of government and third-party payers such as insurance companies,
      health maintenance organizations and other health plan
      administrators;


22





·
            our ability to attract corporate
      partners, including medical device companies, to assist in commercializing
      our products; and


·
            our ability to market our
      products.





Physicians,
patients, payers or the medical community in general may be unwilling to accept,
utilize or recommend any of our products. If we are unable to obtain regulatory
approval or commercialize and market our products when planned, we may not
achieve any market acceptance or generate revenue.




Even if
we receive the CE Mark, there can be no assurance that the data from our
clinical studies will be viewed as sufficient by the medical community to
support the purchase of our products in substantial quantities or at
all.




We
may face litigation from third parties claiming that our products infringe on
their intellectual property rights, or seek to challenge the validity of our
patents.




Our
future success is also dependent on the strength of our intellectual property,
trade secrets and know-how, which have been developed from years of research and
development. In addition to the “Purolite” litigation discussed below, we may be
exposed to additional future litigation by third parties seeking to challenge
the validity of our rights based on claims that our technologies, products or
activities infringe the intellectual property rights of others or are invalid,
or that we have misappropriated the trade secrets of others.




Since our
inception, we have sought to contract with large, established manufacturers to
supply commercial quantities of our adsorbent polymers. As a result, we have
disclosed, under confidentiality agreements, various aspects of our technology
with potential manufacturers. We believe that these disclosures, while necessary
for our business, have resulted in the attempt by potential suppliers to assert
ownership claims to our technology in an attempt to gain an advantage in
negotiating manufacturing rights.




We have
previously engaged in discussions with the Brotech Corporation and its
affiliate, Purolite International, Inc. (collectively “Purolite”), which had
demonstrated a strong interest in being our polymer manufacturer. For a period
of time beginning in December 1998, Purolite engaged in efforts to develop and
optimize the manufacturing process needed to produce our polymer products on a
commercial scale. However, the parties eventually decided not to proceed. In
2003, Purolite filed a lawsuit against us asserting, among other things,
co-ownership and co-inventorship of certain of our patents. On September 1,
2006, the United States District Court for the Eastern District of Pennsylvania
approved a Stipulated Order and Settlement Agreement under which we and Purolite
agreed to the settlement of the action. The Settlement Agreement provides us
with the exclusive right to use our patented technology and proprietary know how
relating to adsorbent polymers for a period of 18 years. Under the terms of the
Settlement Agreement, we have agreed to pay Purolite royalties of 2.5% to 5% on
the sale of certain of our products if and when those products are sold
commercially.




Several
years ago we engaged in discussions with the Dow Chemical Company, which had
indicated a strong interest in being our polymer manufacturer. After a Dow
representative on our Advisory Board resigned, Dow filed and received several
patents naming our former Advisory Board member as an inventor. In management’s
view the Dow patents improperly incorporate our technology and should not have
been granted to Dow. The existence of these Dow patents could result in a
potential dispute with Dow in the future and additional expenses for
us.




We
have not yet commenced the process of seeking regulatory approval of our
products. The approval process will involve clinical studies and is lengthy and
costly. The failure to obtain government approvals, internationally or
domestically, for our polymer products, or to comply with ongoing governmental
regulations could prevent, delay or limit introduction or sale of our products
and result in the failure to achieve revenues or maintain our
operations.




The
manufacturing and marketing of our products will be subject to extensive and
rigorous government regulation in the European market, the United States, in
various states and in other foreign countries. In the United States and other
countries, the process of obtaining and maintaining required regulatory
approvals is lengthy, expensive, and uncertain. There can be no assurance that
we will ever obtain the necessary approvals to sell our products. Even if we do
ultimately receive CE Mark and/or FDA approval for any of our products, we will
be subject to extensive ongoing regulation.


23





Our
products will be subject to international regulation as medical devices under
the Medical Device Directive. In Europe, which we expect to provide the initial
market for our products, the Notified Body and Competent Authority govern, where
applicable, development, clinical studies, labeling, manufacturing,
registration, notification, clearance or approval, marketing, distribution,
record keeping, and reporting requirements for medical devices. Different
regulatory requirements may apply to our products depending on how they are
categorized by the Notified Body under these laws. Current international
regulations classify our CytoSorbTM device (the first product we intend to seek
international approval for) as a Class IIb device. Concurrent with the clinical
trial in Germany, we plan to pursue CE Mark certification of the CytoSorbTM
device. There can be no assurance that the clinical studies we conduct will
demonstrate sufficient safety and efficacy to obtain the required regulatory
approvals for marketing, or that we will be able to comply with international
regulatory requirements. In addition, there can be no assurance that government
regulations applicable to our products or the interpretation of those
regulations will not change. The extent of potentially adverse government
regulation that might arise from future legislation or administrative action
cannot be predicted. There can be no assurances that reimbursement will be
granted or that additional clinical data may be required to establish
reimbursement.




We
have conducted limited clinical studies of our CytoSorbTM and BetaSorbTM device.
Clinical and pre-clinical data is susceptible to varying interpretations, which
could delay, limit or prevent regulatory clearances.




To date,
we have conducted limited clinical studies on our products. Patient enrollment
in our current study has been slower than originally anticipated.  The
Company has initiated additional hospital units, but there can be no assurance
that these sites will be able to enroll patients and meet the projected
enrollment.  There can be no assurance that we will successfully
complete the clinical studies necessary to receive regulatory approvals. While
studies conducted by us and others have produced results we believe to be
encouraging and indicative of the potential efficacy of our products and
technology, data already obtained, or in the future obtained, from pre-clinical
studies and clinical studies do not necessarily predict the results that will be
obtained from later pre-clinical studies and clinical studies. Moreover,
pre-clinical and clinical data are susceptible to varying interpretations, which
could delay, limit or prevent regulatory approval. A number of companies in the
medical device and pharmaceutical industries have suffered significant setbacks
in advanced clinical studies, even after promising results in earlier studies.
The failure to adequately demonstrate the safety and effectiveness of an
intended product under development could delay or prevent regulatory clearance
of the device, resulting in delays to commercialization, and could materially
harm our business.




We
rely extensively on research and testing facilities at various universities and
institutions, which could be adversely affect us should we lose access to those
facilities.




Although
we have our own research laboratories and clinical facilities, we collaborate
with numerous institutions, universities and commercial entities to conduct
research and studies of our products. We currently maintain a good working
relationship with these parties. However, should the situation change, the cost
and time to establish or locate alternative research and development could be
substantial and delay gaining CE Mark and/or FDA approval and commercializing
our products.




We
are and will be exposed to product liability risks, and clinical and preclinical
liability risks, which could place a substantial financial burden upon us should
we be sued.




Our
business exposes us to potential product liability and other liability risks
that are inherent in the testing, manufacturing and marketing of medical
devices. We cannot be sure that claims will not be asserted against us. A
successful liability claim or series of claims brought against us could have a
material adverse effect on our business, financial condition and results of
operations.




We cannot
give assurances that we will be able to continue to obtain or maintain adequate
product liability insurance on acceptable terms, if at all, or that such
insurance will provide adequate coverage against potential liabilities. Claims
or losses in excess of any product liability insurance coverage that we may
obtain could have a material adverse effect on our business, financial condition
and results of operations.


24





Certain
university and other relationships are important to our business and may
potentially result in conflicts of interests.




Dr. John
Kellum and others, are critical care advisors and consultants of ours and are
associated with institutions such as the University of Pittsburgh Medical
Center. Their association with these institutions may currently or in the future
involve conflicting interests in the event they or these institutions enter into
consulting or other arrangements with competitors of ours.




We
have limited manufacturing experience, and once our products are approved, we
may not be able to manufacture sufficient quantities at an acceptable cost, or
without shut-downs or delays.




We remain
in the research and development and clinical study phase of product
commercialization. Accordingly, once our products are approved for commercial
sale, we will need to establish the capability to commercially manufacture our
products in accordance with international regulatory requirements. We have
limited experience in establishing, supervising and conducting commercial
manufacturing. If we or the third-party manufacturers of our products fail to
adequately establish, supervise and conduct all aspects of the manufacturing
processes, we may not be able to commercialize our products.




Due
to our limited marketing, sales and distribution experience, we may be
unsuccessful in our efforts to sell our products.




We expect
to enter into agreements with third parties for the commercial manufacture and
distribution of our products. There can be no assurance that parties we may
engage to market and distribute our products will:




·
            satisfy their financial or
      contractual obligations to
us;


·
            adequately market our products;
      or


·
            not offer, design, manufacture or
      promote competing products.





If for
any reason any party we engage is unable or chooses not to perform its
obligations under our marketing and distribution agreement, we would experience
delays in product sales and incur increased costs, which would harm our business
and financial results.




If
we are unable to convince physicians and other health care providers as to the
benefits of our products, we may incur delays or additional expense in our
attempt to establish market acceptance.




Broad use
of our products may require physicians and other health care providers to be
informed about our products and their intended benefits. The time and cost of
such an educational process may be substantial. Inability to successfully carry
out this education process may adversely affect market acceptance of our
products. We may be unable to educate physicians regarding our products in
sufficient numbers or in a timely manner to achieve our marketing plans or to
achieve product acceptance. Any delay in physician education may materially
delay or reduce demand for our products. In addition, we may expend significant
funds towards physician education before any acceptance or demand for our
products is created, if at all.




The
market for our products is rapidly changing and competitive, and new devices and
drugs which may be developed by others could impair our ability to maintain and
grow our business and remain competitive.




The
medical device and pharmaceutical industries are subject to rapid and
substantial technological change. Developments by others may render our
technologies and products noncompetitive or obsolete. We also may be unable to
keep pace with technological developments and other market factors.
Technological competition from medical device, pharmaceutical and biotechnology
companies, universities, governmental entities and others diversifying into the
field is intense and is expected to increase. Many of these entities have
significantly greater research and development capabilities and budgets than we
do, as well as substantially more marketing, manufacturing, financial and
managerial resources. These entities represent significant competition for
us.


25





If
users of our products are unable to obtain adequate reimbursement from
third-party payers, or if new restrictive legislation is adopted, market
acceptance of our products may be limited and we may not achieve anticipated
revenues.




The
continuing efforts of government and insurance companies, health maintenance
organizations and other payers of healthcare costs to contain or reduce costs of
health care may affect our future revenues and profitability, and the future
revenues and profitability of our potential customers, suppliers and
collaborative partners and the availability of capital. For example, in certain
foreign markets, pricing or profitability of medical devices is subject to
government control. In the United States, given recent federal and state
government initiatives directed at lowering the total cost of health care, the
U.S. Congress and state legislatures will likely continue to focus on health
care reform, the cost of medical devices and on the reform of the Medicare and
Medicaid systems. While we cannot predict whether any such legislative or
regulatory proposals will be adopted, the announcement or adoption of these
proposals could materially harm our business, financial condition and results of
operations.




Our
ability to commercialize our products will depend in part on the extent to which
appropriate reimbursement levels for the cost of our products and related
treatment are obtained by governmental authorities, private health insurers and
other organizations, such as health maintenance organizations (“HMOs”).
Third-party payers are increasingly challenging the prices charged for medical
care. Also, the trend toward managed health care in the United States and the
concurrent growth of organizations such as HMOs, which could control or
significantly influence the purchase of health care services and medical
devices, as well as legislative proposals to reform health care or reduce
government insurance programs, may all result in lower prices for our products.
The cost containment measures that health care payers and providers are
instituting and the effect of any health care reform could materially harm our
ability to operate profitably.




INVESTMENT
RISKS




Directors,
executive officers and principal stockholders own a significant percentage of
the shares of Common Stock, which will limit your ability to influence corporate
matters.




Our
directors, executive officers and principal stockholders together beneficially
own approximately 86% of our outstanding shares of Common Stock. Accordingly,
these stockholders could have a significant influence over the outcome of any
corporate transaction or other matter submitted to stockholders for approval,
including mergers, consolidations and the sale of all or substantially all of
our assets and also could prevent or cause a change in control. The interests of
these stockholders may differ from the interests of our other stockholders.
Third parties may be discouraged from making a tender offer or bid to acquire us
because of this concentration of ownership.




Our
Series A Preferred Stock provides for the payment of penalties.




Immediately
following our June 30, 2006 merger, we issued 5,250,000 shares of Series A 10%
Cumulative Convertible Preferred Stock with an aggregate stated value of
$5,250,000. We issued an additional 3,543,060 shares of Series A Preferred Stock
through December 31, 2008 to additional investors, as dividends and in
connection with the settlement of amounts owed to certain investors due to our
failure to timely register shares of Common Stock issuable upon conversion of
Series A Preferred Stock. We will likely issue additional shares of this series
of preferred stock in the future as dividends. The Certificate of Designation
designating the Series A Preferred Stock provides that upon the following
events, among others, the dividend rate with respect to the Series A Preferred
Stock increases to 20% per annum, which dividends would then be required to be
paid in cash:





·
            the occurrence of
      “Non-Registration Events”;





·
            an uncured breach by us of any
      material covenant, term or condition in the Certificate of Designation or
      any of the related transaction documents;
  and


26





·
            any money judgment or similar
      final process being filed against us for more than
      $100,000.





In
addition, the registration rights provided for in the subscription agreement we
entered into with the purchasers in this offering:





·
            required us to file a
      registration statement with the SEC on or before 120 days from the closing
      to register the shares of Common Stock issuable upon conversion of the
      Series A Preferred Stock and exercise of the Warrants, and cause such
      registration statement to be effective by February 25, 2007 (240 days
      following the closing); and





·
            entitles each of these investors
      to liquidated damages in an amount equal to two percent (2%) of the
      purchase price of the Series A Preferred Stock if we fail to timely file
      that registration statement with, or have it declared effective by, the
      SEC.





Because
the registration statement we agreed to file was not declared effective within
the time required under our agreements with the June 30, 2006 purchasers of the
Series A Preferred Stock, dividends on the shares of Series A Preferred Stock
issued to those purchasers accrued at the rate of 20% per annum from February
26, 2007 until May 7, 2007, the date the registration statement was declared
effective. Additionally during this time period, we were obligated to pay those
purchasers cash dividends and an aggregate of $105,000 per 30-day period from
February 26, 2007 through the date such registration statement was declared
effective. Pursuant to a settlement agreement with the June 30, 2006 purchasers
of Series A Preferred Stock, all cash dividends and damages were paid for in
full with additional shares of Series A Preferred Stock.





The
Certificate of Designation, Subscription Agreement and related transaction
documents also provide for various penalties and fees for breaches or failures
to comply with provisions of those documents, such as the timely payment of
dividends, delivery of stock certificates, and obtaining and maintaining an
effective registration statement with respect to the shares of Common Stock
underlying the Series A Preferred Stock and Warrants sold in the offering. We
may in the future default in our contractual obligations to the holders of our
Series A Preferred Stock, and in such event we may be required to pay liquidated
damages in cash or additional shares of Preferred Stock .





Our
Series B Preferred Stock provides for the payment of penalties.




Immediately
following our June 2008 and August 2008 private placement, we issued a total of
52,931.47 shares of Series B 10% Cumulative Convertible Preferred Stock with an
aggregate stated value of $5,293,147. We issued an additional 2,627.17 shares of
Series B Preferred Stock through December 31, 2008 to investors, as dividends.
We will likely issue additional shares of this series of preferred stock in the
future as dividends. The Certificate of Designation designating the Series B
Preferred Stock provides that upon the following events, among others, the
dividend rate with respect to the Series A Preferred Stock increases to 20% per
annum:





·
            the occurrence of
      “Non-Registration Events”;





·
            an uncured breach by us of any
      material covenant, term or condition in the Certificate of Designation or
      any of the related transaction documents;
  and


27




·
            any money judgment or similar
      final process being filed against us for more than
      $100,000.





In
addition, the registration rights provided for in the subscription agreement we
entered into with the purchasers in this offering:





·
            required us to file a
      registration statement with the SEC on or before 180 days from the Initial
      Closing to register the shares of Common Stock issuable upon conversion of
      the Series B Preferred Stock, and cause such registration statement to be
      effective by February 21, 2009 (240 days following the Initial Closing) or
      March 23, 2009 if the reasons for delay are solely due to SEC delay;
      and





·
            entitles each of these investors
      to liquidated damages in an amount equal to two percent (2%) of the
      purchase price of the Series A Preferred Stock if we fail to timely file
      that registration statement with, or have it declared effective by, the
      SEC.





The
Company has submitted an original S-1 registration statement to the SEC on
December 12, 2008.  The SEC has replied with questions and a request
to reduce the number of shares to be registered, which the Company is currently
working on addressing.  The Company has received a waiver from a
majority of the Series B holders for the non-registration event and the timing
of the Series B registration does not create a cross-default of the Series A
Preferred Series.  There can be no assurance that the Company will
receive such waiver from investors for any future items and no assurance the
Company will still not incur penalties or prevent an Event of Default from
occurring.





The
Certificate of Designation, Subscription Agreement and related transaction
documents also provide for various penalties and fees for breaches or failures
to comply with provisions of those documents, such as the timely payment of
dividends, delivery of stock certificates, and obtaining and maintaining an
effective registration statement with respect to the shares of Common Stock
underlying the Series B Preferred Stock sold in the offering. We may in the
future default in our contractual obligations to the holders of our Series B
Preferred Stock, and in such event we may be required to pay liquidated damages
in cash or additional shares of Preferred Stock .





Anti-Dilution
Provisions Of The Series B Preferred Stock




The
conversion price of the Series B Preferred Stock issued to the June and August
2008 purchasers of our Series B Preferred Stock are subject to anti-dilution
provisions, so that upon future non-excepted issuances of our Common Stock or
equivalents thereof, subject to specified customary exceptions, at a price below
the conversion price of the Series B Preferred Stock, such conversion price will
be reduced on a weighted average basis, further diluting holders of our Common
Stock.


Holders
of the Series B Preferred Stock have priority in the event of our dissolution,
liquidation or winding up.





In the
event of our dissolution, liquidation or winding up, the holders of the Series B
Preferred Stock will receive, in priority over the holders of the Series A
Preferred Stock and Common Stock, a liquidation preference. Therefore, it is
possible that holders of Series A Preferred Stock and Common Stock will not
obtain any upon our dissolution, liquidation or winding up.




Penny Stock Regulations May Affect
Your Ability To Sell Our Common Stock.





To the
extent the price of our Common Stock remains below $5.00 per share, our Common
Stock will be subject to Rule 15g-9 under the Exchange Act, which imposes
additional sales practice requirements on broker dealers which sell these
securities to persons other than established customers and accredited investors.
Under these rules, broker-dealers who recommend penny stocks to persons other
than established customers and "accredited investors" must make a special
written suitability determination for the purchaser and receive the purchaser's
written agreement to a transaction prior to sale. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the associated risks. The additional burdens imposed upon
broker-dealers by these requirements could discourage broker-dealers from
effecting transactions in our Common Stock and may make it more difficult for
holders of our Common Stock to sell shares to third parties or to otherwise
dispose of them.


28




Our
Board of Directors may, without stockholder approval, issue and fix the terms of
shares of preferred stock and issue additional shares of common stock adversely
affecting the rights of holders of our common stock.




Our
certificate of incorporation authorizes the issuance of up to 100,000,000 shares
of “blank check” preferred stock, with such designation rights and preferences
as may be determined from time to time by the Board of Directors. We have
designated 12,000,000 shares of Series A Preferred Stock and 200,000 shares of
Series B Preferred Stock as described above. Subject to the rights of the
holders of the Series A and Series B Preferred Stock, our Board of
Directors is empowered, without stockholder approval, to issue up to 87,800,000
additional shares of preferred stock with dividend, liquidation, conversion,
voting or other rights, which could adversely affect the rights of the holders
of our common stock. In addition, our certificate of incorporation authorizes
the issuance of up to 500,000,000 shares of common stock, of which approximately
469,500,000 shares remain available for issuance and may be issued by us without
stockholder approval. Issuances of additional shares of common stock and/or
preferred stock may be utilized as a method of discouraging, delaying or
preventing a change in control of our company.




Our
Charter Documents and Nevada Law May Inhibit A Takeover That Stockholders May
Consider Favorable.




Provisions
in our articles of incorporation and bylaws, and Nevada law, could delay or
prevent a change of control or change in management that would provide
stockholders with a premium to the market price of their Common Stock. The
authorization of undesignated preferred stock, for example, gives our board the
ability to issue preferred stock with voting or other rights or preferences that
could impede the success of any attempt to effect a change in control of us, or
otherwise adversely affect holders of Common Stock in relation to holders of
preferred stock.




Compliance
with changing corporate governance and public disclosure regulations may result
in additional expense.





Keeping
abreast of, and in compliance with, changing laws, regulations and standards
relating to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002, new SEC regulations will require an increased amount
of management attention and external resources. In addition, prior to the
merger, our current management team was not subject to these laws and
regulations, as MedaSorb was a private corporation. We intend to continue to
invest all reasonably necessary resources to comply with evolving standards,
which may result in increased general and administrative expense and a diversion
of management time and attention from revenue-generating activities to
compliance activities.





Our
Common Stock is thinly traded on the OTC Bulletin Board, and we may be unable to
obtain listing of our common stock on a more liquid market.





Our
Common Stock is quoted on the OTC Bulletin Board, which provides significantly
less liquidity than a securities exchange (such as the American or New York
Stock Exchange) or an automated quotation system (such as the Nasdaq Stock
Market). There is uncertainty that we will ever be accepted for a listing on an
automated quotation system or securities exchange.




Item
      2.
              Properties.




We
currently operate a facility near Princeton, New Jersey with approximately 7,375
sq. ft, housing research laboratories, clinical manufacturing operations and
administrative offices, under a lease agreement, which expires in February 2010.
In the opinion of management, the leased properties are adequately insured, are
in good condition and suitable for the conduct of our business. We also
collaborate with numerous institutions, universities and commercial entities who
conduct research and testing of our products at their
facilities.


29





Item
      3.
              Legal
      Proceedings.




We are
not party to any material pending legal proceedings.




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




On
October 29, 2008, the Company received written consents in lieu of a meeting of
Stockholders from holders of 100,161,988 shares, which include holders of Series
B Preferred Stock which vote on an as-converted basis, representing
approximately 57.2% of the 174,997,053 shares of the total shares of voting
stock of the Company to increase the number of authorized shares of our Common
Stock from 100,000,000 shares to 500,000,000 shares of Common
Stock.  For a more detailed disclosure of the shareholder vote to
increase the authorized number of shares, please refer to the Definitive 14C
Information Statement filed with the Securities and Exchange Commission dated as
of November 18, 2008.




PART
II




Item
      5.
              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity
Securities.




Market
Information





Our
Common Stock trades in the over-the-counter-market on the OTC Bulletin Board
under the symbol “MSBT.” Our Common Stock began trading on such market on August
9, 2006. The quotations listed below reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.





PriceHigh
                      
                      
                      Low2006Third
      quarter (from August 9)
                      
                      $
                      3.95
                      
                      
                      $
                      1.25Fourth
      quarter
                      
                      $
                      1.73
                      
                      
                      $
                      0.572007First
      quarter
                      
                      $
                      2.85
                      
                      
                      $
                      1.04Second
      quarter
                      
                      $
                      1.45
                      
                      
                      $
                      0.40Third
      quarter
                      
                      $
                      0.63
                      
                      
                      $
                      0.16Fourth
      quarter
                      
                      $
                      0.44
                      
                      
                      $
                      0.142008First
      quarter
                      
                      $
                      0.32
                      
                      
                      $
                      0.15Second
      quarter
                      
                      $
                      0.23
                      
                      
                      $
                      0.10Third
      quarter
                      
                      $
                      0.20
                      
                      
                      $
                      0.07Fourth
      quarter
                      
                      $
                      0.17
                      
                      
                      $
                      0.03





The
number of holders of record for our Common Stock as of December 31, 2008 was
approximately 340. This number excludes individual stockholders holding stock
under nominee security position listings.




Dividend
Policy




We have
not paid any cash dividends on our Common Stock and do not anticipate declaring
or paying any cash dividends in the foreseeable future. In addition, the terms
of our Series A Preferred Stock prohibit the payment of dividends on our Common
Stock. Nonetheless, the holders of our Common Stock are entitled to dividends
when and if declared by our board of directors from legally available
funds.


30





EQUITY
COMPENSATION PLAN INFORMATION




The
following table summarizes outstanding options as of December 31, 2008, after
giving effect to the merger and subsequent grants.  The Registrant had no
options outstanding prior to the merger, and all of the options below were
issued either in connection with the merger to former option holders of MedaSorb
or subsequently as new grants to employees, directors, and
consultants.





Number of securities to be
                                    issued upon exercise of
                                    outstanding options
                                  
                                  Weighted-average
                                    exercise price of
                                    outstanding options
                                  
                                  Number of securities remaining
                                    available for future issuance under
                                    equity compensation plans
                                    (excluding securities reflected in
                                    first column)Equity
      compensation plans approved by stockholders
                                  
                                  0
                                  
                                  
                                  n/a
                                  
                                  400,000
                                  (1)Equity
      compensation plans not approved by stockholders
                                  
                                  18,158,846
                                  
                                  $
                                  1.05
                                  
                                  21,841,154
                                  (2)Total
                                  
                                  18,158,846
                                  (3)
                                  $
                                  1.05
                                  (3)
                                  22,241,154




(1)
              Represents options that may be
      issued under our 2003 Stock Option
Plan.




(2)
              Represents options that may be
      issued under our 2006 Long-Term Incentive
  Plan.




(3)
              Represents options to purchase
      (i) 118,667 shares of Common Stock at a price of $41.47 per share, (ii)
      232,051 shares of Common Stock at a price of $31.52 per share, (iii)
      35,488 shares of Common Stock at a price of $21.57 per share, (iv)
      15,944 shares of Common Stock at a price of $19.91 per share, (v) 439,740
      shares of Common Stock at a price of $6.64 per share, (vi) 173,000 shares
      of Common Stock at a price of $1.90 per share, (vii) 306,000 shares of
      Common Stock at a price of $1.65 per share, (viii) 400,000 shares of
      Common Stock at a price of $1.26 per share, (ix) 166,756 shares of Common
      Stock at a price of $1.25 per share, (x) 3,014,000 shares of Common Stock
      at a price of $0.25, (xi) 137,622 shares of Common Stock at a price of
      $0.22, (xii) 115,000 shares of Common Stock at a price of $0.08, and
      (xiii) 13,004,578 shares of Common Stock at a price of
      $0.035.




Item
      6.
              Selected
      Financial Data.





Not
required by smaller reporting companies.





Item
      7.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.




Reverse
Merger





On June
30, 2006, pursuant to an Agreement and Plan of Merger, by and among us (formerly
known as Gilder Enterprises, Inc.), MedaSorb Technologies, Inc., a Delaware
corporation and MedaSorb Acquisition Inc., a newly formed wholly-owned Delaware
subsidiary of ours, MedaSorb Technologies, Inc. merged with MedaSorb Acquisition
Inc. (now known as CytoSorbents, Inc.), and the stockholders of MedaSorb
Technologies, Inc. became our stockholders. CytoSorbents, Inc. is now a wholly
owned subsidiary of ours, and its business is now our only
business.





CRITICAL
ACCOUNTING POLICIES





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates. We believe
the following critical accounting policies have significant effect in the
preparation of our consolidated financial statements.





Development
Stage Corporation





The
Company’s financial statements have been prepared in accordance with the
provisions of Statement of Financial Accounting Standard (SFAS) No. 7,
"Accounting and Reporting by Development Stage Enterprises."





Patents





Legal
costs incurred to establish patents are capitalized. When patents are issued,
capitalized costs are amortized on the straight-line method over the related
patent term. In the event a patent is abandoned, the net book value of the
patent is written off.





Research
and Development





All
research and development costs, payments to laboratories and research
consultants are expensed when incurred.


31





Stock
Based-Compensation





The
Company accounts for its stock-based compensation under the recognition
requirements of Statement of Financial Accounting Standards (“SFAS”) No. 123(R).
“Accounting for Stock-Based
Compensation”, for employees and directors whereby each option granted is
valued at fair market value on the date of grant. Under SFAS No. 123, the fair
value of each option is estimated on the date of grant using the Black-Scholes
option pricing model.




The
Company also follows the guidance in EITF 96-18 “Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services” for equity instruments issued
to consultants.





Effects
of Recent Accounting Pronouncements





Effective
January 1, 2008, the Company has adopted the provisions of SFAS No. 157, “Fair
Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a
framework for measuring fair value in accordance with accounting principles
generally accepted in the United States, and expands disclosures about fair
value measurements. Any amounts recognized upon adoption as a cumulative effect
adjustment will be recorded to the opening balance of retained earnings in the
year of adoption. The provisions of SFAS 157 did not have a significant impact
on the Company’s statements of operations or financial position.





Effective
January 1, 2008, the Company has adopted the provisions of SFAS No. 159,
“Establishing the Fair Value Option for Financial Assets and Liabilities” to
permit all entities to choose to elect to measure eligible financial instruments
and certain other items at fair value. The decision whether to elect the fair
value option may occur for each eligible items either on a specified election
date or according to a preexisting policy for specified types of eligible items.
However, that decision must also take place on a date on which criteria under
SFAS 159 occurs. Finally, the decision to elect the fair value option shall be
made on an instrument-by-instrument basis, except in certain circumstances. An
entity shall report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting date. The
provisions of SFAS 159 did not have a significant impact on the Company’s
statements of operations or financial position.





PLAN
OF OPERATIONS





We are a
development stage company and expect to remain so for at least the next twelve
months. We have not generated revenues to date and do not expect to do so until
we commercialize and receive the necessary regulatory approvals to sell our
proposed products. We will seek to commercialize a blood purification technology
that efficiently removes middle molecular weight toxins from circulating blood
and physiologic fluids.




We are
focusing our efforts on the commercialization of our CytoSorbTM product, which we
believe will provide a relatively faster regulatory pathway to market. The first
indication for CytoSorbTM will be in the adjunctive treatment of sepsis
(bacterial infection of the blood), which causes systematic inflammatory
response syndrome. CytoSorbTM has been designed to prevent or reduce the
accumulation of high concentrates of cytokines in the bloodstream associated
with sepsis. It is intended for short term use as an adjunctive device to the
standard treatment of sepsis. To date, we have manufactured the CytoSorbTM device
on a limited basis for testing purposes, including for use in clinical studies.
We believe that current state of the art blood purification technology (such as
dialysis) is incapable of effectively clearing the toxins intended to be
adsorbed by our CytoSorbTM device.




Following
the sepsis indication, we intend to continue our research in other acute
conditions where CytoSorbTM has indicated potential in preliminary studies to
prevent or reduce the accumulation of cytokines in the bloodstream. These
conditions include the prevention of post-operative complications of cardiac
surgery (cardiopulmonary bypass surgery) and damage to organs donated for
transplant prior to organ harvest. We are also exploring the potential benefits
the CytoSorbTM device may have in removing drugs from blood.




In
December 2006, we submitted a proposed pilot study for approval to the FDA with
respect to CytoSorbTM, the first device we intend to bring to market. In the
first quarter of 2007, we received approval from the FDA to conduct a limited
study of five patients in the adjunctive treatment of sepsis. Based on
management’s belief that proceeding with the approved limited study would add at
least one year to the approval process for the United States, we made a
determination to focus our efforts on obtaining regulatory approval in Europe
before proceeding with the FDA.




We
estimate that the market potential in Europe for our products is substantially
equivalent to that in the U.S. Given the opportunity to conduct a much larger
clinical study in Europe, and management’s belief that the path to a CE Mark
should be faster than FDA approval, we have targeted Europe for the initial
market introduction of our CytoSorbTM product. To accomplish the European
introduction, in July 2007 we prepared and filed a request for a clinical trial
with a German Central Ethics Committee. We received approval of the final study
design in October of 2007.




We
received approval from the German Ethics Committee in October of 2007 to conduct
a clinical study of up to 80 patients with acute respiratory distress syndrome
or acute lung injury in the setting of sepsis. At December 31, 2008 we had
initiated and opened for enrollment seven (7) hospital units to participate in
our clinical study and had identified an additional six (6) sites that may be
added to our study to accelerate enrollment. As of March 2009 we have increased
the number of hospital units participating in our study to ten
(10).
 
 In April
2009, we submitted a protocol revision to expand the options for
anti-coagulation that the clinical sites may use, and to increase the total
number of patients that may be enrolled from 80 to 100 patients.  This
revision has been approved by the German Ethics Committee. We believe that the
revised protocol will enable more potential sites to participate in the study,
and may help accelerate patient enrollment through greater access to potential
candidates.  Further, while we do not anticipate enrolling more than 80
patients, we now have the flexibility to enroll up to 100 patients if
needed.
 
 Additionally,
we have updated blood sampling and handling procedures to minimize non-device
related artifacts that may potentially arise if the samples are not processed
appropriately.
 
 To date
we have enrolled twenty two (22) patients in the clinical study, which have been
randomized yielding eleven (11) treated and eleven (11) control (non-treated)
patients. We hope to enroll approximately sixty (60) additional patients. 
While we do not anticipate enrolling the entire 100 patients that we are now
entitled to enroll, the approved increase allows us some flexibility in the
event any of the enrolled patients are not able to complete the study due to
withdrawal or inability to complete post treatment follow-up. In conducting the
German Clinical study we have utilized our CytoSorbTM device in over 75
treatments to date with no Serious Adverse Events attributable to the
device.
 
 We expect
to complete the patient enrollment by the end of 2009. Concurrent with the
clinical study, we expect to commence the CE Mark submission process. Assuming a
successful outcome of the study, management believes it will take an additional
6-9 months following its submission for CE Mark approval to receive the European
regulatory approval. Assuming availability of adequate and timely funding, and a
successful outcome to the study, management anticipates obtaining CE Mark
approval in the first half of 2010, at the earliest.




The
clinical protocol for our European clinical study has been designed to allow us
to gather information to support future U.S. studies. In the event we receive
the CE Mark and are able to successfully commercialize our products in the
European market, we will review our plans for the United States to determine
whether to conduct clinical trials in support of 510K or PMA registration. No
assurance can be given that our proposed CytoSorbTM product will work as intended
or that we will be able to obtain CE Mark (or FDA) approval to sell CytoSorbTM.
Even if we ultimately obtain CE Mark approval, because we cannot control the
timing of responses from regulators to our submissions, there can be no
assurance as to when such approval will be obtained.


32




Our
research and development costs were $1,983,483 and $1,415,509 for the years
ended December 31, 2008 and 2007, respectively. We have experienced substantial
operating losses since inception. As of December 31, 2008, we had an accumulated
deficit of $75,461,481which included net losses of $3,017,890 and $3,350,754 for
the years ended December 31, 2008 and December 31, 2007 respectively.
Historically, our losses have resulted principally from costs incurred in the
research and development of our polymer technology, and general and
administrative expenses, which together were $2,892,855 and $2,677,475, for the
years ended December 31, 2008 and December 31, 2007 respectively. Legal,
financial, and other consulting costs were $391,711 and $389,155 for the years
ended December 31, 2008 and 2007, respectively.





In
addition, our loss for the year ended December 31, 2008 includes net interest
and dividend income of $18,147.




Liquidity
and Capital Resources




Since
inception, our operations have been financed through the private placement of
our debt and equity securities. At December 31, 2008, we had cash on hand of
$2,749,208 and current liabilities of $977,704.  Our increase in cash
from December 31, 2007 is a result of the June and August 2008 $5.29 million
private placement of Series B Preferred Stock, which is further described in
Note 9 to the consolidated financial statements.  We believe that we
have sufficient cash to fund our operations through the third quarter of 2009,
following which we will need additional funding before we can complete our
clinical studies and commercialize our products.  We will continue to
seek funding for the long term needs of the Company. There can be no assurance
that financing will be available on acceptable terms or at all. If adequate
funds are unavailable, we may have to suspend, delay or eliminate one or more of
our research and development programs or product launches or marketing efforts
or cease operations.




This
Annual Report have been prepared assuming we will continue as a going concern,
and the auditors’ report on those financial statements expresses substantial
doubt about our ability to continue as a going concern.




Item
7A. Quantitative
and Qualitative Disclosures About Market Risk.
 
 Not
required by smaller reporting companies.




Item
      8.
              Financial
      Statements and Supplementary
Data.




The
Financial Statements and Notes thereto can be found beginning on page F-1,
"Index to Financial Statements," at the end of this Form 10-K.




Item
      9.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.




None.




Item
9A(T). Controls and Procedures.




An
evaluation was performed, under the supervision of, and with the participation
of, our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-(e) to the
Securities and Exchange Act of 1934). Based on that evaluation, our management,
including our Chief Executive Officer and Chief Financial Officer, concluded
that our disclosure controls and procedures were adequate and effective, as of
December 31, 2008, to ensure that information required to be disclosed by us in
the reports that we file or submits under the Securities Exchange Act of 1934,
is recorded, processed, summarized, and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.


33





There has
not been any changes in our internal controls over financial reporting that
occurred during our fiscal year ended December 31, 2008 that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.




In 2008,
management conducted tests of our internal controls over financial reporting in
accordance with the standards set forth by the U.S. Securities and Exchange
Commission (“SEC”).  In accordance with these standards, management
assessed and tested, on a sample basis, the Company’s internal control over
financial reporting according to a comprehensive risk analysis using the
Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). It is management’s opinion
that the testing methodology of the internal control framework is appropriate
and provides reasonable assurance as to the integrity and reliability of our
internal controls over financial reporting.





In
management’s opinion, based on the assessment completed as at December 31,
2008, our internal controls over financial reporting are operating
effectively.





This
annual report does not include an audit report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to audit by the
Company’s registered public accounting firm pursuant to temporary rules of the
SEC that permit the Company to provide only management’s report in this annual
report.




Item
9B. Other Information.




Not
Applicable.




PART
III




Item 10.
              Directors,
      Executive Officers and Control Persons; Compliance with Section 16(a) of
      the Exchange Act.




Directors
and Executive Officers





The
following table sets forth our directors and executive officers, their ages and
the positions they hold:





Name
                                
                                Age
                                
                                PositionPhillip Chan,
      MD
                                
                                38
                                
                                President and Chief Executive
      Officer, DirectorAl
    Kraus
                                
                                64
                                
                                Chairman of the
      BoardJoseph Rubin, Esq.
                                
                                70
                                
                                DirectorEdward R. Jones, MD,
      MBA
                                
                                60
                                
                                DirectorJames
      Gunton
                                
                                42
                                
                                DirectorVincent
      Capponi
                                
                                51
                                
                                Chief Operating OfficerDavid
      Lamadrid
                                
                                38
                                
                                Chief Financial
      OfficerRobert Bartlett,
      MD
                                
                                69
                                
                                Chief Medical
      Officer




Phillip Chan, MD, PhD.Dr.
Chan became a director of MedaSorb in 2008 and since January 2009 is also Chief
Executive Officer. Prior to MedaSorb, Dr. Chan led healthcare and life science
investments as Partner for the NJTC Venture Fund.  Dr. Chan co-founded
Andrew Technologies, a medical device company developing novel surgical
instruments for plastic surgery and continues as a Board Director. He is a
Board-certified Internal Medicine physician with a strong background in clinical
medicine and research. Dr. Chan received his MD and PhD from the Yale University
School of Medicine and completed his Internal Medicine residency at Beth Israel
Deaconess Medical Center at Harvard. He also holds a BS in cell and molecular
biology from Cornell University.
  34





Al Kraus.Mr. Kraus has been a director of MedaSorb since 2003 and up until the end
of 2008 was the Company’s President and CEO.  Mr. Kraus currently
serves as Chairman of the Board of Directors.  Mr. Kraus has more than
twenty-five years’ experience managing companies in the dialysis, medical device
products, personal computer and custom software industries. Prior to joining us,
from 2001 to 2003, Mr. Kraus was President and CEO of NovoVascular Inc., an
early stage company developing coated stent technology. From 1996 to 1998, Mr.
Kraus was President and CEO of Althin Healthcare and from 1998 to 2000, of
Althin Medical Inc., a manufacturer of products for the treatment of end stage
renal disease. While CEO of Althin, he provided strategic direction and
management for operations throughout the Americas. From 1979 to 1985, Mr. Kraus
was U.S. Subsidiary Manager and Chief Operating Officer of Gambro Inc., a
leading medical technology and healthcare company. Mr. Kraus was the Chief
Operating Officer of Gambro when it went public in the United States in an
offering led by Morgan Stanley.




Joseph Rubin,
Esq.Mr.
Rubin became a director of MedaSorb in 1997. Mr. Rubin is a founder and Senior
Partner of Rubin, Bailin, and Ortoli, LLP an international and domestic
corporate and commercial law firm in New York City, where he has practiced law
since 1986. Mr. Rubin also teaches at the Columbia University School of
International and Public Affairs, where he is also Executive Director of the
International Technical Assistance Program for Public Affairs (ITAP). Mr. Rubin
was Adjunct Professor at the Columbia University Graduate School of Business
from 1973 to 1994, and taught at Columbia Law School in 1996. Mr. Rubin received
his law degree from Harvard Law School, and his B.A., MIA, and M.Phil degrees in
political science and international relations from Columbia
University.





Edward R. Jones,
MD, MBA.Dr.
Jones has been a director of ours since April 2007. Dr. Jones is an attending
physician at the Albert Einstein Medical Center and Chestnut Hill Hospital as
well as Clinical Professor of Medicine at Temple University Hospital. Dr. Jones
has published or contributed to the publishing of 30 chapters, articles, and
abstracts on the subject of treating kidney-related illnesses. He is a
sixteen-year member of the Renal Physicians Association, the Philadelphia County
Medical Society and a past board member of the National Kidney Foundation of the
Delaware Valley. Dr. Jones has been elected to serve as the next President of
the Renal Physicians Association starting in 2009.




James Gunton.Mr. Gunton
became a director of MedaSorb in 2008. He is a cofounder of the NJTC Venture
Fund. Mr. Gunton has been investing in privately-held growth technology
companies for fifteen years. Before co-founding in 2001 the $80 million NJTC
Venture Fund, Jim was a manager at Oracle Corporation in the Silicon Valley. He
represents NJTC Venture Fund at nine portfolio companies and is a former
Governor of the National Association of Small Business Investment Companies. Jim
earned a BS from Stanford University and an MBA with distinction from Duke
University.




Vincent
Capponi. Mr. Capponi joined MedaSorb as Vice President of Operations in
2002 and became its Chief Operating Officer in July 2005. He has more than 20
years of management experience in medical device, pharmaceutical and imaging
equipment at companies including Upjohn, Sims Deltec and Sabratek. Prior to
joining MedaSorb in 2002, Mr. Capponi held several senior management positions
at Sabratek and its diagnostics division GDS, and was interim president of GDS
diagnostics in 2001. From 1998 to 2000, Mr. Capponi was Senior Vice President
and Chief Operating Officer for Sabratek and Vice President Operations from 1996
to 1998. He received his MS in Chemistry and his BS in Chemistry and
Microbiology from Bowling Green State University.





David
Lamadrid.  Mr. Lamadrid has been with MedaSorb since 2000 and has
served as its Chief Financial Officer since October 2002. He has over 15 years
of business experience in finance and operations. Prior to joining MedaSorb in
2000, Mr. Lamadrid was a financial analyst at Chase Manhattan Bank working in
the Middle Market Banking Group. Mr. Lamadrid received his MBA from New York
University, a BS in Finance from St. John’s University, and an AAS in Accounting
from S.U.N.Y. Rockland.


35




Robert Bartlett,
MD.  Dr. Bartlett became our Chief Medical Officer in January
2009.  He is Professor Emeritus of Surgery at the University of
Michigan Health System.  Prior to becoming Professor Emeritus in 2005,
Dr. Bartlett was Director of the Surgical Intensive Care Unit, Chief of the
Trauma/Clinical Care Division and Director of the Extracorporeal Life Support
Program at the University of Michigan Medical Center.  Dr. Bartlett
was the pioneer in the development of the extracorporeal membrane oxygenation
machine (ECMO), used to oxygenate blood in critically ill patients
worldwide.  He received his MD from the University of Michigan Medical
School, cum laude.  He completed his general surgery residency at
Peter Bent Brigham Hospital in Boston, and was Chief resident in thoracic
surgery.  Dr. Bartlett was also a NIH Trainee in Academic Surgery at
Harvard Medical School, and was previously faculty at the University of
California, Irvine.  Dr. Bartlett is the recipient of 26 separate
research grants, 14 from the National Institute of Health, including an RO1
grant for the development of a totally artificial lung.  He has also
received numerous national and international awards for his contributions to
critical care medicine.




Section
16(a) Beneficial Ownership Reporting Compliance




The
members of our Board of Directors, our executive officers and persons who hold
more than 10% of our outstanding Common Stock are subject to the reporting
requirements of Section 16(a) of the Exchange Act, which requires them to file
reports with respect to their ownership of our Common Stock and their
transactions in such Common Stock. Based solely upon a review of Forms 3 and 4
and amendments filed with the SEC by persons subject to the reporting
requirements of Section 16(a) of the Exchange Act, we believe that, all
reporting requirements under Section 16(a) for the 2008 fiscal year were met in
a timely manner by our directors, executive officers and beneficial owners of
more than 10% of our Common Stock.




Code
of Conduct




We
maintain a Code of Business Conduct and Ethics that is applicable to all of our
employees, including our Chief Executive Officer and Chief Financial Officer,
and our directors. The Code of Conduct, which satisfies the requirements of a
“code of ethics” under applicable SEC rules, contains written standards that are
designed to deter wrongdoing and to promote honest and ethical conduct,
including the ethical handling of actual or apparent conflicts of interest;
full, fair, accurate, timely and understandable public disclosures and
communications, including financial reporting; compliance with applicable laws,
rules and regulations; prompt internal reporting of violations of the code; and
accountability for adherence to the code.




Audit
Committee Financial Expert




The Board
of Directors does not have an Audit Committee, and therefore does not have an
“audit committee financial expert,” as such term is defined in Item 401(h)(2) of
Regulation S-K.




Item 11.
              Executive
      Compensation.




Summary
Compensation Table




The
following table shows for the fiscal year ended December 31, 2008, compensation
awarded to or paid to, or earned by, our Chief Executive Officer, our Chief
Operating Officer, our Chief Financial Officer, and our Chief Medical Officer
(the “Named Executive Officers”).


36




Name
      and Principal Position
                          
                          Year
                          
                          Salary
                            ($)
                          
                          Bonus
                            ($)
                          
                          Option
                            Awards (1)
                            ($)
                          
                          Total
      ($)Al
      KrausChief
      Executive Officer
                          
                          
                          2008
                          
                          216,351
                          
                          -0-
                          
                          
                          108,381
                          (2)
                          324,7322007
                          
                          216,351
                          
                          -0-
                          
                          
                          251,446
                          (3)
                          467,7972006
                          
                          201,257
                          
                          -0-
                          
                          
                          69,555
                          (4)
                          270,812Vincent
      Capponi,Chief
      Operating Officer
                          
                          
                          2008
                          
                          195,527
                          
                          150
                          
                          
                          155,795
                          (5)
                          351,4722007
                          
                          195,527
                          
                          -0-
                          
                          
                          -0-
                          
                          195,5272006
                          
                          178,441
                          
                          200
                          
                          
                          40,297
                          (6)
                          218,939David
      Lamadrid,Chief
      Financial Officer
                          
                          
                          2008
                          
                          157,630
                          (12)
                          150
                          
                          
                          196,555
                          (7)
                          354,3352007
                          
                          145,801
                          
                          -0-
                          
                          
                          137,781
                          (8)
                          283,5822006
                          
                          135,629
                          
                          200
                          
                          
                          -0-
                          
                          135,829Dr.
      James WinchesterChief
      Medical Officer
                          
                          
                          2008
                          
                          120,000
                          
                          -0-
                          
                          
                          24,760
                          (9)
                          144,7602007
                          
                          120,000
                          
                          -0-
                          
                          
                          2,431
                          (10)
                          122,4312006
                          
                          120,000
                          
                          -0-
                          
                          
                          40,297
                          (11)
                          160,297




(1)
            The value of option awards
      granted to the Named Executive Officers has been estimated pursuant to
      SFAS No. 123(R) for the options described in the footnotes below, except
      that for purposes of this table, we have assumed that none of the options
      will be forfeited. The Named Executive Officers will not realize the
      estimated value of these awards in cash until these awards are vested and
      exercised or sold. For information regarding our valuation of option
      awards, see “Stock-Based Compensation” in Note 2 of our financial
      statements for the period ended December 31, 2008.





(2)
            Reflects options to purchase
      7,119,328 shares of Common Stock at an exercise price of $0.035 per share,
      which were granted on June 25, 2008 and expire June 25,
      2018.





(3)
            Reflects options to purchase
      400,000 shares of Common Stock at an exercise price of $1.26 per share,
      which were granted on February 8, 2007 and expire February 8, 2017 and
      options to purchase 80,122 shares of Common Stock at an exercise price of
      $0.22 per share, which were granted on December 31, 2007 and expire
      December 31, 2017.




(4)
            Reflects options to purchase
      413,920 shares of Common Stock, all of which are currently exercisable at
      an exercise price of $6.64 per share. Options to purchase 332,094 of these
      shares were granted on September 30, 2006 and expire on September 30,
      2016, and options to purchase 81,826 of these shares were granted on
      December 31, 2006 and expire on December 31,
  2016.




(5)
            Reflects options to purchase
      1,100,000 shares of Common Stock at an exercise price of $0.25 per share,
      which were granted on January 16, 2008 and expire on January 16, 2018.
      This option vested and became exercisable as to 366,666 shares on the date
      of grant, vested and became exercisable as to 366,667 shares on January
      16, 2009; and vests and becomes exercisable as to 366,667 shares on
      January 16, 2010.  Reflects options to purchase 2,250,000 shares
      of Common Stock at an exercise price of $0.035 per share, which were
      granted on June 25, 2008 and expire on June 25, 2018. This option vested
      and became exercisable as to 562,500 shares on the date of grant, vests
      and becomes exercisable as to 562,500 shares on June 25,
      2009,  vests and becomes exercisable as to 562,500 shares on
      June 25, 2010, and vests and becomes exercisable as to 562,500 shares on
      June 25, 2011.





(6)
            Reflects options to purchase
      50,000 shares of Common Stock at an exercise price of $1.65 per share,
      which were granted on December 31, 2006 and expire on December 31, 2016.
      This option vested and became exercisable as to 16,667 shares on the date
      of grant, vested and became exercisable as to 16,667 shares on December
      31, 2007; and vested and became exercisable as to 16,666 shares on
      December 31, 2008.




(7)
            Reflects options to purchase
      1,400,000 shares of Common Stock at an exercise price of $0.25 per share,
      which were granted on January 16, 2008 and expire on January 16, 2018.
      This option vested and became exercisable as to 466,667 shares on the date
      of grant, vested and became exercisable as to 466,667 shares on January
      16, 2009; and vests and becomes exercisable as to 466,666 shares on
      January 16, 2010.  Reflects options to purchase 2,750,000 shares
      of Common Stock at an exercise price of $0.035 per share, which were
      granted on June 25, 2008 and expire on June 25, 2018. This option vested
      and became exercisable as to 687,500 shares on the date of grant, vests
      and becomes exercisable as to 687,500 shares on June 25, 2009, vests and
      becomes exercisable as to 687,500 shares on June 25, 2010, and vests and
      becomes exercisable as to 687,500 shares on June 25,
      2011.





(8)
            Reflects options to purchase
      150,000 shares of Common Stock at an exercise price of $1.90 per share
      which were granted on January 16, 2007 and expire on January 16, 2017.
      This option vested and became exercisable as to 50,000 shares on the date
      of grant, vested and became exercisable as to 50,000 shares on January 16,
      2008; and vested and became exercisable as to 50,000 shares on January 16,
      2009.




(9)
            Reflects options to purchase
      175,000 shares of Common Stock at an exercise price of $0.25 per share,
      which were granted on January 16, 2008 and expire on January 16, 2018.
      This option vested and became exercisable as to 58,333 shares on the date
      of grant, vested and became exercisable as to 58,333 shares on January 16,
      2009; and vests and becomes exercisable as to 58,334 shares on January 16,
      2010.  Reflects options to purchase 356,250 shares of Common
      Stock at an exercise price of $0.035 per share, which were granted on June
      25, 2008 and expire on June 25, 2018. This option vested and became
      exercisable as to 89,063 shares on the date of grant, vests and becomes
      exercisable as to 89,063 shares on June 25, 2009, vests and becomes
      exercisable as to 89,062 shares on June 25, 2010, and vests and becomes
      exercisable as to 89,062 shares on June 25,
  2011.





(10)
            Reflects options to purchase
      25,000 shares of Common Stock at an exercise price of $0.22 per share,
      which were granted on December 31, 2007 and expire on December 31, 2017.
      This option vested and became exercisable as to 8,334 shares on the date
      of grant, vested and became exercisable as to 8,333 shares on December 31,
      2008; and vest and become exercisable as to 8,333 shares on December 31,
      2009.




(11)
            Reflects options to purchase
      50,000 shares of Common Stock at an exercise price of $1.65 per share,
      which were granted on December 31, 2006 and expire on December 31, 2016.
      This option vested and became exercisable as to 16,667 shares on the date
      of grant, vested and become exercisable as to 16,667 shares on December
      31, 2007; and vested and become exercisable as to 16,666 shares on
      December 31, 2008.




(12)
            Amount includes payments in the
      approximate amount of $11,800 for certain other expenses pursuant to an
      employment agreement.





Outstanding
Equity Awards at Fiscal Year End




The
following table shows for the fiscal year ended December 31, 2008, certain
information regarding outstanding equity awards at fiscal year end for the Named
Executive Officers.




37




Outstanding
Equity Awards At December 31, 2008





Option
      AwardsName
                                            
                                            Number of
                                              Securities Underlying
                                              Unexercised Options
                                              (#)
                                              Exercisable
                                            
                                            Number of Securities
                                              Underlying Unexercised
                                              Options
                                              (#)
                                              Unexercisable
                                            
                                            Option
                                              Exercise
                                              Price
                                              ($)
                                            
                                            Option
                                              Expiration DateAl
      Kraus
                                            
                                            
                                            332,094
                                            
                                            
                                            
                                            
                                            6.64
                                            (1)
                                            9/30/1681,826
                                            
                                            
                                            
                                            
                                            6.64
                                            (1)
                                            12/31/16400,000
                                            
                                            
                                            
                                            
                                            1.26
                                            (1)
                                            02/08/1780,122
                                            
                                            
                                            
                                            
                                            0.22
                                            (1)
                                            12/31/177,119,329
                                            
                                            
                                            
                                            
                                            0.035
                                            (1)
                                            06/25/18Vincent
      Capponi
                                            
                                            
                                            50,000
                                            
                                            
                                            
                                            
                                            1.65
                                            (2)
                                            12/31/16366,666
                                            
                                            733,334
                                            
                                            
                                            0.25
                                            (3)
                                            01/16/18562,500
                                            
                                            1,687,500
                                            
                                            
                                            0.035
                                            (4)
                                            06/25/18David
      Lamadrid
                                            
                                            
                                            100,000
                                            
                                            50,000
                                            
                                            
                                            1.90
                                            (5)
                                            01/16/17466,666
                                            
                                            933,334
                                            
                                            
                                            0.25
                                            (6)
                                            01/16/18687,500
                                            
                                            2,062,500
                                            
                                            
                                            0.035
                                            (7)
                                            06/25/18Dr.
      James Winchester
                                            
                                            
                                            50,000
                                            
                                            
                                            
                                            
                                            1.65
                                            (8)
                                            12/31/1616,667
                                            
                                            8,333
                                            
                                            
                                            0.22
                                            (9)
                                            12/31/1758,333
                                            
                                            116,667
                                            
                                            
                                            0.25
                                            (10)
                                            01/16/1889,063
                                            
                                            267,187
                                            
                                            
                                            0.035
                                            (11)
                                            06/25/18




(1)
            Fully
      vested




(2)
            Vests
      and becomes exercisable as to (i) 16,667 shares on December 31, 2006; (ii)
      16,667 shares on December 31, 2007; and (iii) 16,666 shares on December
      31, 2008.




(3)
            Vests
      and becomes exercisable as to (i) 366,666 shares on January 16, 2008; (ii)
      366,667 shares on January 16, 2009; and (iii) 366,667 shares on January
      16, 2010.





(4)
            Vests
      and becomes exercisable as to (i) 562,500 shares on June 25, 2008; (ii)
      562,500 shares on June 25, 2009; (iii) 562,500 shares on June 25, 2010;
      and (iv) 562,500 shares on June 25,
2011.





(5)
            Vests
      and becomes exercisable as to (i) 50,000 shares on January 16, 2007; (ii)
      50,000 shares on January 16, 2008; and (iii) 50,000 shares on January 16,
      2009.





(6)
            Vests
      and becomes exercisable as to (i) 466,666 shares on January 16, 2008; (ii)
      466,667 shares on January 16, 2009; and (iii) 466,667 shares on January
      16, 2010.





(7)
            Vests
      and becomes exercisable as to (i) 562,500 shares on June 25, 2008; (ii)
      562,500 shares on June 25, 2009; (iii) 562,500 shares on June 25, 2010;
      and (iv) 562,500 shares on June 25,
2011.




(8)
            Vests
      and becomes exercisable as to (i) 16,667 shares on December 31, 2006; (ii)
      16,667 shares on December 31, 2007; and (iii) 16,666 shares on December
      31, 2008.




(9)
            Vests
      and becomes exercisable as to (i) 8,333 shares on December 31, 2007; (ii)
      8,333 shares on December 31, 2008; and (iii) 8,334 shares on December 31,
      2009.




(10)
            Vests
      and becomes exercisable as to (i) 58,333 shares on January 16, 2008; (ii)
      58,333 shares on January 16, 2009; and (iii) 58,334 shares on January 16,
      2010.





(11)
            Vests
      and becomes exercisable as to (i) 89,063 shares on June 25, 2008; (ii)
      89,063 shares on June 25, 2009; (iii) 89,062 shares on June 25, 2010; and
      (iv) 89,062 shares on June 25,
2011.





Director
Compensation




The
following table shows for the fiscal year ended December 31, 2008 certain
information with respect to the compensation of all non-employee directors of
the Company.




Director
Compensation for Fiscal 2008





Name
                                
                                
                                Fees Earned or
                                  Paid
      in
                                  Cash
                                  ($)
                                
                                Option
                                  Awards
                                  ($)
      (1)
                                
                                Total
                                  ($)William
      R. Miller
                                
                                (10)
                                20,000
                                
                                
                                11,430
                                (2)(3)
                                31,430Joseph
      Rubin
                                
                                
                                8,000
                                
                                
                                855
                                (2)(4)
                                8,855Kurt
      Katz
                                
                                (11)
                                4,000
                                
                                
                                770
                                (2)(5)
                                4,770Edward
      R. Jones
                                
                                
                                8,000
                                
                                
                                855
                                (2)(6)
                                8,855Martin
      F. Whalen
                                
                                (12)
                                3,000
                                
                                
                                285
                                (2)(7)
                                3,285Phillip
      Chan, MD
                                
                                (13)
                                4,000
                                
                                
                                85
                                (2)(8)
                                4,085James
      Gunton
                                
                                (14)
                                4,000
                                
                                
                                85
                                (2)(9)
                                4,085Al
      Kraus
                                
                                (15)




38




(1)
                  The
      value of option awards granted to directors has been estimated pursuant to
      SFAS No. 123(R) for the options described in the footnotes below, except
      that for purposes of this table, we have assumed that none of the options
      will be forfeited. The directors will not realize the estimated value of
      these awards in cash until these awards are vested and exercised or sold.
      For information regarding our valuation of option awards, see “Stock-Based
      Compensation” in Note 2 of our financial statements for the period ended
      December 31, 2008.
 
 (2)
                  Fully
      vested
 
 (3)
                  At
      December 31, 2008, in connection with his service as a director we had
      issued Mr. Miller the following: options to purchase 200,000 shares of our
      Common Stock at an exercise price of $1.65 per share, which were granted
      on January 1, 2007 and expire on January 1, 2007; options to purchase
      100,000 shares of our Common Stock at an exercise price of $0.25 per
      share, which were granted on January 16, 2008 and expire on January 16,
      2018, and options to purchase 25,000 shares of our Common Stock at an
      exercise price of $0.035 per share, which were granted on June 25, 2008
      and expire on June 25, 2018.
 
 (4)
                  At
      December 31, 2008, in connection with his service as a director we had
      issued Mr. Rubin the following: options to purchase 21,098 shares of our
      Common Stock at an exercise price of $31.52 per share, which were granted
      on June 30, 2006 and expire on December 13, 2010; options to purchase
      5,274 shares of our Common Stock at an exercise price of $21.57 per share,
      which were granted on June 30, 2006 and expire on January 26, 2012;
      options to purchase 3,014 shares of our Common Stock at an exercise price
      of $21.57 per share, which were granted on June 30, 2006 and expire on
      December 11, 2012; options to purchase 753 shares of our Common Stock at
      an exercise price of $21.57 per share, which were granted on June 30, 2006
      and expire on December 28, 2013; options to purchase 1,507 shares of our
      Common Stock at an exercise price of $6.64 per share, which were granted
      on June 30, 2006 and expire on December 29, 2014; options to purchase
      10,000 shares of our Common Stock at an exercise price of $1.25 per share,
      which were granted on June 30, 2006 and expire on January 30, 2016;
      options to purchase 15,069 shares of our Common Stock at an exercise price
      of $1.25 per share, which were granted on June 30, 2006 and expire on June
      12, 2016; options to purchase 5,000 shares of our Common Stock at an
      exercise price of $1.25 per share, which were granted on August 1, 2006
      and expire on August 1, 2016; options to purchase 10,000 shares of our
      Common Stock at an exercise price of $0.22 per share, which were granted
      on December 31, 2007 and expire on December 31, 2017; options to purchase
      45,000 shares of our Common Stock at an exercise price of $0.035 per
      share, which were granted on June 25, 2008 and expire on June 25, 2018;
      and options to purchase 30,000 shares of our Common Stock at an exercise
      price of $0.08 per share, which were granted on December 31, 2008 and
      expire on December 31, 2018.
 
 (5)
                  At
      December 31, 2008, in connection with his service as a director we had
      issued on behalf of Mr. Katz the following : options to purchase 16,200
      shares of our Common Stock at an exercise price of $31.52 per share, which
      were granted on June 30, 2006 and expire on December 13, 2010; options to
      purchase 5,274 shares of our Common Stock at an exercise price of $21.57
      per share, which were granted on June 30, 2006 and expire on January 26,
      2012; options to purchase 3,014 shares of our Common Stock at an exercise
      price of $21.57 per share, which were granted on June 30, 2006 and expire
      on December 11, 2012; options to purchase 753 shares of our Common Stock
      at an exercise price of $21.57 per share, which were granted on June 30,
      2006 and expire on December 28, 2013; options to purchase 1,507 shares of
      our Common Stock at an exercise price of $6.64 per share, which were
      granted on June 30, 2006 and expire on December 29, 2014; options to
      purchase 10,000 shares of our Common Stock at an exercise price of $1.25
      per share, which were granted on June 30, 2006 and expire on January 30,
      2016; options to purchase 15,069 shares of our Common Stock at an exercise
      price of $1.25 per share, which were granted on June 30, 2006 and expire
      on June 12, 2016; options to purchase 5,000 shares of our Common Stock at
      an exercise price of $1.25 per share, which were granted on August 1, 2006
      and expire on August 1, 2016; options to purchase 10,000 shares of our
      Common Stock at an exercise price of $0.22 per share, which were granted
      on December 31, 2007 and expire on December 31, 2017; options to purchase
      45,000 shares of our Common Stock at an exercise price of $0.035 per
      share, which were granted on June 25, 2008 and expire on June 25, 2018;
      and options to purchase 15,000 shares of our Common Stock at an exercise
      price of $0.08 per share, which were granted on December 31, 2008 and
      expire on December 31, 2018. All of these options have been issued to a
      trust established by Mr. Katz for the benefit of his
    children.
 
 (6)
                  At
      December 31, 2008, in connection with his service as a director we had
      issued Dr. Jones the following: options to purchase 7,500 shares of our
      Common Stock at an exercise price of $0.22 per share, which were granted
      on December 31, 2007 and expire on December 31, 2017; options to purchase
      45,000 shares of our Common Stock at an exercise price of $0.035 per
      share, which were granted on June 25, 2008 and expire on June 25, 2018;
      and options to purchase 30,000 shares of our Common Stock at an exercise
      price of $0.08 per share, which were granted on December 31, 2008 and
      expire on December 31, 2018.
 
 (7)
                  At
      December 31, 2008, in connection with his service as a director we had
      issued Mr. Whalen the following: options to purchase 5,000 shares of our
      Common Stock at an exercise price of $0.22 per share, which were granted
      on December 31, 2007 and expire on December 31, 2017; options to purchase
      15,000 shares of our Common Stock at an exercise price of $0.035 per
      share, which were granted on June 25, 2008 and expire on June 25, 2018;
      and options to purchase 10,000 shares of our Common Stock at an exercise
      price of $0.08 per share, which were granted on December 31, 2008 and
      expire on December 31, 2018.
 
 (8)
                  At
      December 31, 2008, in connection with his service as a director we had
      issued Dr. Chan the following: options to purchase 15,000 shares of our
      Common Stock at an exercise price of $0.08 per share, which were granted
      on December 31, 2008 and expire on December 31,
  2018.
 
 (9)
                  At
      December 31, 2008, in connection with his service as a director we had
      issued Mr. Gunton the following: options to purchase 15,000 shares of our
      Common Stock at an exercise price of $0.08 per share, which were granted
      on December 31, 2008 and expire on December 31,
  2018.
 
 (10)
                  Effective
      December, 31 2008, Mr. Miller resigned his position as a member of the
      Board of Directors.
 
 (11)
                  Effective
      July, 23 2008, Mr. Katz resigned his position as a member of the Board of
      Directors.
 
 (12)
                  Effective
      April, 25 2008, Mr. Whalen resigned his position as a member of the Board
      of Directors.
 
 (13)
                  Effective
      July 24, 2008, Dr. Chan was appointed to the Company’s Board of Directors
      and Compensation Committee.  Effective January 1, 2009, Dr. Chan
      entered into an employment agreement becoming interim Chief Executive
      Officer of the Company.  In January 2009, Dr. Chan resigned his
      position as a member on the Compensation
  Committee.
 
 (14)
                  Effective
      July, 24 2008, Mr. Gunton was appointed to the Company’s Board of
      Directors and Compensation
Committee.
 
 (15)
                  During
      2008 Mr. Kraus was an employee Director and was not eligible to receive
      compensation for Director services. Effective December 31, 2008, Mr. Kraus
      resigned his position as Chief Executive Officer of the Company, remaining
      as a member of the Board of Directors. In January 2009, Mr. Kraus agreed
      to serve as Chairman of the Board of
Directors.




In 2007,
we approved arrangements under which each non-employee director receives a fee
of $2,000 for each quarterly Board meeting attended in person and a fee of
$1,000 for each quarterly Board meeting participated in by telephone. In
addition, our Board approved a policy under which each non-employee director
will be eligible to be issued options to purchase up to 10,000 shares of our
Common Stock on December 31, 2007 based on attendance at quarterly Board
meetings held during 2007. Such options will be exercisable at the closing price
of our Common Stock on the date of grant. Our directors are also reimbursed for
actual out-of-pocket expenses incurred by them in connection with their
attendance at meetings of the Board of Directors.




In
connection with his appointment as Chairman of the Board, we agreed to
compensate Mr. Miller at the rate of $20,000 per annum, and on January 1, 2007
we issued Mr. Miller a ten year option to purchase 200,000 shares of our Common
Stock at a price of $1.65 per share (the last reported sales price on the OTC
Bulletin Board on December 29, 2006). In January 2008 we issued Mr. Miller an
additional option to purchase 100,000 shares of Common Stock at an exercise
price of $0.25 per share.  Effective December 31, 2008, Mr. Miller has
resigned from the Board of Directors.





In 2008,
the Board approved the issuance to each non-employee director, with the
exception of the Chairman, options to purchase up to 30,000 shares of Common
Stock on December 31, 2008 based on attendance at quarterly Board meetings held
during 2008.





In
connection with his appointment as Chairman of the Board in January 2009, we
agreed to compensate Mr. Kraus at the rate of $20,000 per annum, and on January
8, 2009 we issued Mr. Kraus a ten year option to purchase 200,000 shares of our
Common Stock at a price of $0.084 per share.  Additionally for
services performed as Chief Executive Office of the company through December 31,
2008, the Board approved a 10 year option to purchase 450,000 shares of our
Common Stock at a price of $0.168 per share on January 28, 2009.





In 2009,
the Board approved the issuance to each non-employee director, with the
exception of the Chairman, options to purchase up to 100,000 shares of Common
Stock on December 31, 2009 based on attendance at quarterly Board meetings held
during 2009.





Employment
Agreements with Named Executive Officers





Phillip
Chan





Effective
January 1, 2009, we entered into a new employment agreement with Dr. Phillip
Chan, pursuant to which his employment will terminate on December 31, 2009.
Pursuant to this employment agreement, we agree to pay Phillip Chan an initial
annual base compensation of $216,351 payable in equal semimonthly installments
in accordance with our usual practice. This base compensation shall be subject
to semiannual review by our Compensation Committee, but his compensation may not
be reduced from then current level. He is eligible for employee stock options
which will be adjusted on the same basis as all other shareholders to account
for any stock split, stock dividends, combination or
recapitalization.




39





Al Kraus





We
entered into an employment agreement with Al Kraus on June 18, 2008 as our Chief
Executive Officer.  Pursuant to the employment agreement, we agreed to
pay Al Kraus an annual base compensation of $216,351 payable in equal
semimonthly installments in accordance with our usual practice.





On
October 22, 2008, Al Kraus provided notice that he would resign from his
position as President and Chief Executive Officer effective as of December 31,
2008.





Effective
January 7, 2009, we entered into a new agreement with Al Kraus, pursuant to
which he became Chairman of the Board of Directors for a two year term
terminating on January 7, 2011. Pursuant to this agreement, we agree to pay Al
Kraus compensation at a rate of $20,000 per year, payable in equal payments at
the end of each fiscal quarter.  He is eligible for stock options
which will be adjusted on the same basis as all other shareholders to account
for any stock split, stock dividends, combination or
recapitalization.





Vincent
Capponi





We
entered into an employment agreement with Vincent Capponi on June 18, 2008,
pursuant to which his employment terminated on December 31, 2008. Pursuant to
this employment agreement, we agree to pay Vincent Capponi an initial annual
base compensation of $195,767 payable in equal semimonthly installments in
accordance with our usual practice. This base compensation shall be subject to
annual review by our Compensation Committee, but his compensation may not be
reduced from then current level. He is eligible for employee stock options which
will be adjusted on the same basis as all other shareholders to account for any
stock split, stock dividends, combination or recapitalization.





Effective
January 1, 2009, we entered into a new employment agreement with Vincent
Capponi, pursuant to which his employment will terminate on December 31, 2009.
Pursuant to this employment agreement, we agree to pay Vincent Capponi an
initial annual base compensation of $205,303 payable in equal semimonthly
installments in accordance with our usual practice. This base compensation shall
be subject to semiannual review by our Compensation Committee, but his
compensation may not be reduced from then current level. He is eligible for
employee stock options which will be adjusted on the same basis as all other
shareholders to account for any stock split, stock dividends, combination or
recapitalization.





David
Lamadrid





We
entered into an employment agreement with David Lamadrid on June 18, 2008,
pursuant to which his employment terminated on December 31, 2008. Pursuant to
this employment agreement, we agree to pay David Lamadrid an initial annual base
compensation of $145,801 payable in equal semimonthly installments in accordance
with our usual practice. This base compensation shall be subject to annual
review by our Compensation Committee, but his compensation may not be reduced
from then current level. He is eligible for employee stock options which will be
adjusted on the same basis as all other shareholders to account for any stock
split, stock dividends, combination or recapitalization.





Effective
January 1, 2009, we entered into a new employment agreement with David Lamadrid,
pursuant to which his employment will terminate on December 31, 2009. Pursuant
to this employment agreement, we agree to pay David Lamadrid an initial annual
base compensation of $175,000 payable in equal semimonthly installments in
accordance with our usual practice. This base compensation shall be subject to
semiannual review by our Compensation Committee. He is eligible for employee
stock options which will be adjusted on the same basis as all other shareholders
to account for any stock split, stock dividends, combination or
recapitalization.





Robert
Bartlett





Effective
January 1, 2009, we entered into a new consulting agreement with Dr. Robert
Bartlett, pursuant to which his consulting will terminate on December 31, 2009.
Pursuant to this consulting agreement, we agree to pay Dr. Robert Bartlett
consulting fees at an annualized rate of $50,000 payable in equal monthly
installments of $4,166.67 per month. He is eligible for stock options which will
be adjusted on the same basis as all other shareholders to account for any stock
split, stock dividends, combination or recapitalization.


40




Item 12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.




The
following table sets forth information known to us with respect to the
beneficial ownership of Common Stock held of record as of March 31, 2009, by (1)
all persons who are owners of 5% or more of our Common Stock, (2) each of our
named executive officers (see “Summary Compensation Table”), (3) each director,
and (4) all of our executive officers and directors as a group. Each of the
stockholders can be reached at our principal executive offices located at 7 Deer
Park Drive, Suite K, Monmouth Junction, New Jersey 08852.





SHARES
                      BENEFICIALLY
                      OWNED1Number
                    
                    Percent (%)Beneficial
      Owners of more than 5% of Common Stock (other than directors and executive
      officers)Margie
      Chassman(2)
                    
                    
                    58,237,575
                    (2)
                    69.4
                    %Guillermina
      Montiel(3)
                    
                    
                    5,052,456
                    
                    16.5
                    %Margery
      Germain(4)
                    
                    
                    2,000,000
                    
                    6.6
                    %Robert
      Shipley (5)
                    
                    
                    16,871,553
                    
                    36.0
                    %Directors
      and Executive OfficersAl
      Kraus(6)
                    
                    
                    10,057,001
                    
                    25.7
                    %Phillip
      Chan (7)
                    
                    
                    1,649,277
                    
                    5.1
                    %David
      Lamadrid (8)
                    
                    
                    2,379,567
                    
                    7.3
                    %Vince
      Capponi (9)
                    
                    
                    1,863,919
                    
                    5.8
                    %Joseph
      Rubin(10)
                    
                    
                    765,814
                    
                    2.5
                    %Robert
      Bartlett
                    
                    
                    —
                    
                    *James
      Gunton(11)
                    
                    
                    15,000
                    
                    *Edward
      R. Jones(12)
                    
                    
                    82,500
                    
                    *All directors and executive
      officers as a group (eight persons)(13)
                    
                    
                    16,813,078
                    
                    37.4
                    %




41




*
              Less than
    1%.
 
 1
              Gives effect to the shares of
      Common Stock issuable upon the exercise of all options exercisable within
      60 days of March 31, 2009 and other rights beneficially owned by the
      indicated stockholders on that date. Beneficial ownership is determined in
      accordance with the rules of the Securities and Exchange Commission and
      includes voting and investment power with respect to shares. Unless
      otherwise indicated, the persons named in the table have sole voting and
      sole investment control with respect to all shares beneficially owned.
      Percentage ownership is calculated based on 30,510,819 shares of Common
      Stock outstanding as of March 31,
2009.
  2
              Based on information reflected in
      a Schedule 13G filed by Ms. Chassman with the SEC on November 20, 2006,
      and includes 5,460,000 shares of Common Stock ultimately issuable upon
      exercise and conversion of the Series A Preferred Stock and warrants
      underlying the warrant we issued Ms. Chassman upon the closing of our
      Series A Preferred Stock private placement, 12,696,780 shares of Common
      Stock issuable upon conversion of Series A Preferred Stock, 27,959,035
      shares of Common Stock issuable upon conversion of Series B Preferred
      Stock, 2,940,331 shares of Common Stock ultimately issuable upon exercise
      and conversion of warrants for Series B Preferred Stock, and 4,386,429
      shares of Common Stock issuable upon exercise of warrants. Ms. Chassman
      has waived her registration rights with respect to the Series A Preferred
      Stock and warrants. Margie Chassman is married to David Blech. Mr. Blech
      disclaims beneficial ownership of these shares. Since 1980 Mr. Blech has
      been a founder of companies and venture capital investor in the
      biotechnology sector. His initial venture investment, Genetic Systems
      Corporation, which he helped found and served as treasurer and a member of
      the board of directors, was sold to Bristol Myers in 1986 for $294 million
      of Bristol Myers stock. Other companies he helped found include DNA Plant
      Technology, Celgene Corporation, Neurogen Corporation, Icos Corporation,
      Incyte Pharmaceuticals, Alexion Pharmaceuticals and Neurocrine
      Biosciences. He was also instrumental in the turnaround of Liposome
      Technology, Inc. and Biotech General Corporation. In 1990 Mr. Blech
      founded D. Blech & Company, which, until it ceased doing business in
      September 1994, was a registered broker-dealer involved in underwriting
      biotechnology issues. In May 1998, David Blech pled guilty to two counts
      of criminal securities fraud, and, in September 1999, he was sentenced by
      the U.S. District Court for the Southern District of New York to five
      years’ probation, which was completed in September 2004. Mr. Blech also
      settled administrative charges by the Commission in December 2000 arising
      out of the collapse in 1994 of D. Blech & Co., of which Mr. Blech was
      President and sole stockholder. The settlement prohibits Mr. Blech from
      engaging in future violations of the federal securities laws and from
      association with any broker-dealer. In addition, the District Business
      Conduct Committee for District No.10 of NASD Regulation, Inc. reached a
      decision, dated December 3, 1996, in a matter styled District Business
      Conduct Committee for District No. 10 v. David Blech, regarding the
      alleged failure of Mr. Blech to respond to requests by the staff of the
      National Association of Securities Dealers, Inc. (“NASD”) for documents
      and information in connection with seven customer complaints against
      various registered representatives of D. Blech & Co. The decision
      found that Mr. Blech failed to respond to such requests in violation of
      NASD rules and that Mr. Blech should, therefore, be censured, fined
      $20,000 and barred from associating with any member firm in any capacity.
      Furthermore, Mr. Blech was discharged in bankruptcy in the United States
      Bankruptcy Court for the Southern District of New York in March
      2000.




42





3
              Includes
      58,472 shares of Common Stock issuable upon exercise of stock
      options.4
              Includes
      1,700,000 shares of Common Stock held directly by Ms. Germain and 300,000
      shares of Common Stock held by her minor children.5
              Includes
      410,129 shares of Common Stock issuable upon conversion of Series A
      Preferred Stock, 11,915,884 shares of Common Stock issuable upon
      conversion of Series B Preferred Stock, 3,378,232 shares of Common Stock
      ultimately issuable upon exercise and conversion of warrants for Series B
      Preferred Stock, and 661,293 shares of Common Stock issuable upon exercise
      of warrants and options.6
              Includes
      8,663,370 shares of Common Stock issuable upon exercise of stock
      options.7
              Includes
      297,900 shares of Common Stock issuable upon conversion of Series B
      Preferred Stock, 84,448 shares of Common Stock ultimately issuable upon
      exercise and conversion of warrants for Series B Preferred Stock, and
      1,266,929 shares of Common Stock issuable upon exercise of stock
      options.8
              Includes
      1,870,833 shares of Common Stock issuable upon exercise of stock
      options.9
              Includes
      1,445,833 shares of Common Stock issuable upon exercise of stock
      options.10
              Includes
      2,561 shares of Common Stock issuable upon conversion of Series A
      Preferred Stock, 293,149 shares of Common Stock issuable upon conversion
      of Series B Preferred Stock, and 387,740 shares of Common Stock issuable
      upon exercise of warrants and stock options. Does not include shares of
      Common Stock beneficially owned by Mr. Rubin’s spouse, as to which he
      disclaims beneficial ownership.11
              These
      shares are issuable upon exercise of stock options.12
              These
      shares are issuable upon exercise of stock options.13
              Includes
      an aggregate of 2,561 shares of Common Stock issuable upon conversion of
      Series A Preferred Stock, 591,049 shares of Common Stock issuable upon
      conversion of Series B Preferred Stock, 84,448 shares of Common Stock
      ultimately issuable upon exercise and conversion of warrants for Series B
      Preferred Stock, and 13,732,305 shares of Common Stock issuable upon
      exercise of warrants and stock
options.





Item
13. Certain
Relationships and Related Transactions and Director
Independence.


Joseph
Rubin is a director of ours and performs legal services for us from time to
time. At December 31, 2008, we owed Mr. Rubin’s firm approximately $4,800 in
respect of legal services provided by his firm to us.





Director
Independence





All
members of our Board of Directors, other than Joseph Rubin, who performs legal
services for us as disclosed above, Al Kraus, formerly an employee, and Phillip
Chan, our Chief Executive Officer, are independent under the standards set forth
in Nasdaq Marketplace Rule 4200(a)(15).


43


Item
14. Principal Accountant Fees and Services.





The
following table presents fees for professional audit services rendered by
WithumSmith+Brown, A Professional Corporation, for the audit of our annual
financial statements for the years ended December 31, 2008 and 2007, and fees
billed for other services rendered by WithumSmith+Brown during those
years.




2008
                        
                        
                        2007Audit
      fees(1)
                        
                        $
                        105,010
                        
                        
                        $
                        80,347Audit
      related fees
                        
                        
                        —
                        
                        
                        
                        —Tax
      fees
                        
                        
                        10,700
                        
                        
                        
                        —All
      other fees
                        
                        $
                        —
                        
                        
                        $
                        —Total
      fees
                        
                        $
                        115,710
                        
                        
                        $
                        80,347








(1)
              Includes
      fees paid for professional services rendered in connection with the audit
      of annual financial statements and the review of quarterly financial
      statements, and the review of such financial statements in the Company’s
      Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Registration
      Statement on Form SB-2, S-1 and S-8, and Current Reports on Form
      8-K.





Pre-Approval
Policies And Procedures





We do not
have an audit committee or a formal pre-approval process for the performance for
us by our independent auditor of non-audit services. For the year ended December
31, 2008, our independent auditor performed non-attest tax services. We
anticipate that any non-audit services to be performed for us by our independent
auditor, subject to the de minimis exceptions for non-audit services described
in Section 10A(i)(1)(B) of the Securities Exchange Act of 1934, as amended, will
be approved prior to our auditor’s engagement for such services by our Board of
Directors, acting in the capacity of an audit committee.




PART IV




Item
15. Exhibits, Financial Statement Schedules.





(a) The
following documents are filed as part of this report:





Exhibit
                      No.
                    
                    Description31.1
                    
                    Certification
      of Philip Chan pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.31.2
                    
                    Certification
      of David Lamadrid pursuant to 18 U.S.C. Section 1350 as adopted pursuant
      to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
                    
                    Certification
      of Philip Chan pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.32.2
                    
                    Certification
      of David Lamadrid pursuant to 18 U.S.C. Section 1350 as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of
  2002.


44


SIGNATURES





In
accordance with Section 13 or 15(d) of the Exchange Act, MedaSorb Technologies
Corporation has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 10th day of April
2009.





MEDASORB
      TECHNOLOGIES CORPORATIONBy:
                  /s/
      Phillip ChanPhillip
      ChanChief
      Executive Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





Signature
              
              Title
              
              Date/s/
      Phillip Chan
              
              Chief
      Executive Officer (Principal
              
              April
      10, 2009Phillip
      Chan
              
              Executive
      Officer) and Director/s/
      David Lamadrid
              
              Chief
      Financial Officer (Principal
              
              April
      10, 2009David
      Lamadrid
              
              Accounting
      and Financial Officer)/s/
      Al Kraus
              
              Chairman
      of the Board
              
              April
      10, 2009Al
      Kraus/s/
      Joseph Rubin
              
              Director
              
              April
      10, 2009Joseph
      Rubin, Esq./s/
      Edward R. Jones
              
              Director
              
              April
      10, 2009Edward
      R. Jones/s/
      James Gunton
              
              Director
              
              April
      10, 2009James
      Gunton


45


FINANCIAL
STATEMENTS





PageReport
      of Independent Registered Public Accounting Firm
                
                F-2Consolidated
      Balance Sheets at December 31, 2008 and December 31, 2007
                
                F-4Consolidated
      Statements of Operations for the years ended December 31, 2008 and 2007,
      and from inception to December 31, 2008
                
                F-5Consolidated
      Statements of Changes in Stockholders’ Equity (Deficiency) period from
      inception to December 31, 2008
                
                F-6Consolidated
      Statements of Cash Flows for the for the years ended December 31, 2008 and
      2007, and from inception to December 31, 2008
                
                F-7Notes
      to Financial Statements
                
                F-9


F-1


Report
of Independent Registered Public Accounting Firm





To the
Board of Directors and Stockholders,


MedaSorb
Technologies Corporation:





We have
audited the accompanying consolidated balance sheets of Medasorb Technologies
Corporation (a development stage company), as of December 31, 2008 and 2007, and
the related consolidated statements of operations, stockholders’ equity
(deficiency) and cash flows for the years then ended and the cumulative period
from January 1, 2001 to December 31, 2008. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Medasorb Technologies
Corporation as of December 31, 2008 and 2007 and the consolidated results
of their operations and their cash flows for the years then ended and
the cumulative period from January 1, 2001 to December 31, 2008 in conformity
with accounting principles generally accepted in the United States of
America.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Company has suffered recurring net losses and negative
cash flows from operations. These matters raise substantial doubt about its
ability to continue as a going concern. Management’s plans in regard to these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.





/s/
WithumSmith+Brown, PC





New
Brunswick, New Jersey


April 8,
2009


F-2


Report
of Independent Public Accountants





To the
Board of Directors and Stockholders,


Medasorb
Corporation:





We have
audited the accompanying balance sheets of Medasorb Corporation (a development
stage company), as of December 31, 2000 and 1999, and the related statements of
operations, changes in members’ equity and cash flows for the period from
inception (January 22, 1997) through December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.





We
conducted our audits in accordance with auditing standards generally accepted in
the United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Medasorb Corporation as of December
31, 2000 and 1999, and the results of its operations and its cash flows for the
period from inception (January 22, 1997) to December 31, 2000, in conformity
with accounting principles generally accepted in the United States.





Arthur
Andersen, LLP





New York,
New York


December
27, 2001


F-3


MEDASORB
TECHNOLOGIES CORPORATION


(a
development stage company)





CONSOLIDATED
BALANCE SHEETS









December 31,
                                    
                                    2008
                                    
                                    
                                    2007ASSETSCurrent
      Assets:Cash
      and cash equivalents
                                    
                                    $
                                    2,749,208
                                    
                                    
                                    $
                                    211,613Short-term
      investments
                                    
                                    
                                    199,607
                                    
                                    
                                    
                                    0Prepaid
      expenses and other current assets
                                    
                                    
                                    117,003
                                    
                                    
                                    
                                    200,682Total
      current assets
                                    
                                    
                                    3,065,818
                                    
                                    
                                    
                                    412,295Property
      and equipment - net
                                    
                                    
                                    52,057
                                    
                                    
                                    
                                    144,457Other
      assets
                                    
                                    
                                    269,310
                                    
                                    
                                    
                                    245,820Total
      long-term assets
                                    
                                    
                                    321,367
                                    
                                    
                                    
                                    390,277Total
      Assets
                                    
                                    $
                                    3,387,185
                                    
                                    
                                    $
                                    802,572LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIENCY)Current
      Liabilities:Accounts
      payable
                                    
                                    $
                                    885,465
                                    
                                    
                                    $
                                    775,342Accrued
      expenses and other current liabilities
                                    
                                    
                                    92,239
                                    
                                    
                                    
                                    131,526Total
      current liabilities
                                    
                                    
                                    977,704
                                    
                                    
                                    
                                    906,868Notes
      Payable:Notes
      payable
                                    
                                    
                                    50,000
                                    
                                    
                                    
                                    —Total
      Long Term Liabilities
                                    
                                    
                                    50,000
                                    
                                    
                                    
                                    —Total
      liabilities
                                    
                                    
                                    1,027,704
                                    
                                    
                                    
                                    906,868Stockholders
      Equity/(Deficiency):10%
      Series B Preferred Stock, Par Value $0.001, 200,000 and -0- shares
      authorized at December 31, 2008 and 2007, respectively; 55,558.64 and -0-
      issued and outstanding , respectively
                                    
                                    
                                    55
                                    
                                    
                                    
                                    —10%
      Series A Preferred Stock, Par Value $0.001, 12,000,000 shares authorized
      at December 31, 2008 and 2007, 8,793,060 and 8,019,508 shares issued and
      outstanding, respectively
                                    
                                    
                                    8,793
                                    
                                    
                                    
                                    8,019Common
      Stock, Par Value $0.001, 500,000,000 and 100,000,000 shares authorized at
      December 31, 2008 and 2007, 25,263,517 and 25,044,932 shares issued and
      outstanding, respectively
                                    
                                    
                                    25,264
                                    
                                    
                                    
                                    25,045Additional
      paid-in capital
                                    
                                    
                                    77,786,850
                                    
                                    
                                    
                                    71,400,849Deficit
      accumulated during the development stage
                                    
                                    
                                    (75,461,481
                                    )
                                    
                                    
                                    (71,538,209
                                    )Total
      stockholders’ equity/(deficiency)
                                    
                                    
                                    2,359,481
                                    
                                    
                                    
                                    (104,296
                                    )Total
      Liabilities and Stockholders' Equity (Deficiency)
                                    
                                    $
                                    3,387,185
                                    
                                    
                                    $
                                    802,572





The Notes
to Consolidated Financial Statements are an integral part of these
statements.


F-4


MEDASORB
TECHNOLOGIES CORPORATION


(a
development stage company)





CONSOLIDATED
STATEMENTS OF OPERATIONS





Period fromJanuary 22,1997(date of inception) to
                    
                    
                    Year ended
                    
                    
                    Year endedDecember 31,
                    
                    
                    December 31,
                    
                    
                    December 31,2008
                    
                    
                    2008
                    
                    
                    2007Revenue
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —Expenses:Research
      and development
                    
                    
                    44,291,763
                    
                    
                    
                    1,983,483
                    
                    
                    
                    1,415,509Legal,
      financial and other consulting
                    
                    
                    7,000,025
                    
                    
                    
                    351,357
                    
                    
                    
                    389,155General
      and administrative
                    
                    
                    22,309,447
                    
                    
                    
                    909,372
                    
                    
                    
                    1,261,966Change
      in fair value of management and incentive units
                    
                    
                    (6,055,483
                    )
                    
                    
                    —
                    
                    
                    
                    —Total
      expenses
                    
                    
                    67,545,752
                    
                    
                    
                    3,244,212
                    
                    
                    
                    3,066,630Other
      (income) expenses:Gain
      on disposal of property and equipment
                    
                    
                    (21,663
                    )
                    
                    
                    —
                    
                    
                    
                    —Gain
      on extinguishment of debt
                    
                    
                    (216,617
                    )
                    
                    
                    —
                    
                    
                    
                    (10,009
                    )Interest
      (income) expense, net
                    
                    
                    5,599,253
                    
                    
                    
                    22,207
                    
                    
                    
                    (67,362
                    )Penalties
      associated with non-registration of Series A Preferred
    Stock
                    
                    
                    361,495
                    
                    
                    
                    —
                    
                    
                    
                    361,495Total
      other (income) expense, net
                    
                    
                    5,722,468
                    
                    
                    
                    22,207
                    
                    
                    
                    284,124Loss
      before benefit from income taxes
                    
                    
                    73,268,220
                    
                    
                    
                    3,266,419
                    
                    
                    
                    3,350,754Benefit
      from income taxes
                    
                    
                    (248,529
                    )
                    
                    
                    (248,529
                    )
                    
                    
                    —Net
      loss
                    
                    
                    (73,019,691
                    )
                    
                    
                    (3,017,890
                    )
                    
                    
                    (3,350,754
                    )Preferred
      stock dividend
                    
                    
                    2,441,790
                    
                    
                    
                    905,382
                    
                    
                    
                    760,872Net
      loss available to common shareholders
                    
                    $
                    (75,461,481
                    )
                    
                    $
                    (3,923,272
                    )
                    
                    $
                    (4,111,626
                    )Basic
      and diluted net loss per common share
                    
                    
                    
                    
                    
                    $
                    (0.16
                    )
                    
                    $
                    (0.17
                    )Weighted
      average number of common stock outstanding
                    
                    
                    
                    
                    
                    
                    25,121,377
                    
                    
                    
                    24,848,562





The Notes
to Consolidated Financial Statements are an integral part of these
statements.


F-5


MEDASORB
TECHNOLOGIES CORPORATION


(a
development stage company)





CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)





Period
from January 22, 1997 (date of inception) to December 31, 2008




Members
                                                                  Equity
                                                                
                                                                
                                                                Deferred
                                                                
                                                                
                                                                Common
      Stock
                                                                
                                                                
                                                                Preferred
      Stock B
                                                                
                                                                
                                                                Preferred
      Stock A
                                                                
                                                                
                                                                Additional
                                                                  Paid-In
                                                                
                                                                
                                                                Deficit
                                                                    Accumulated
                                                                    During
      theDevelopment
                                                                
                                                                
                                                                Total
                                                                  Stockholders'(De
      ficiency)
                                                                
                                                                
                                                                Com
      pensation
                                                                
                                                                
                                                                Sha
      res
                                                                
                                                                
                                                                Par
      value
                                                                
                                                                
                                                                Sha
      res
                                                                
                                                                
                                                                Par
      Value
                                                                
                                                                
                                                                Sha
      res
                                                                
                                                                
                                                                Par
      Value
                                                                
                                                                
                                                                Cap
      ital
                                                                
                                                                
                                                                Sta
      ge
                                                                
                                                                
                                                                Equ
      ity
      (Deficit)Balance
      at January 22, 1997 (date of inception)
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                $
                                                                —Equity
      contributions
                                                                
                                                                
                                                                1,143,487
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                1,143,487Subscriptions
      receivable
                                                                
                                                                
                                                                440,000
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                440,000Technology
      contribution
                                                                
                                                                
                                                                4,550,000
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                4,550,000Net
      loss
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (5,256,012
                                                                )
                                                                
                                                                
                                                                (5,256,012
                                                                )Balance
      at December 31, 1997
                                                                
                                                                
                                                                6,133,487
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (5,256,012
                                                                )
                                                                
                                                                
                                                                877,475Equity
      contributions
                                                                
                                                                
                                                                2,518,236
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                2,518,236Options
      issued to consultants
                                                                
                                                                
                                                                1,671
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                1,671Subscriptions
      receivable
                                                                
                                                                
                                                                50,000
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                50,000Net
      loss
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (1,867,348
                                                                )
                                                                
                                                                
                                                                (1,867,348
                                                                )Balance
      at December 31, 1998
                                                                
                                                                
                                                                8,703,394
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (7,123,360
                                                                )
                                                                
                                                                
                                                                1,580,034Equity
      contributions
                                                                
                                                                
                                                                1,382,872
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                1,382,872Equity
      issued to consultants
                                                                
                                                                
                                                                88,363
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                88,363Recognition
      of deferred compensation
                                                                
                                                                
                                                                47,001
                                                                
                                                                
                                                                
                                                                (47,001
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —Amortization
      of deferred compensation
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                15,667
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                15,667Subscriptions
      receivable
                                                                
                                                                
                                                                100,000
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                100,000Net
      loss
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (3,066,388
                                                                )
                                                                
                                                                
                                                                (3,066,388
                                                                )Balance
      at December 31, 1999
                                                                
                                                                
                                                                10,321,630
                                                                
                                                                
                                                                
                                                                (31,334
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (10,189,748
                                                                )
                                                                
                                                                
                                                                100,548Equity
      contributions
                                                                
                                                                
                                                                14,407,916
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                14,407,916Equity
      issued to consultants
                                                                
                                                                
                                                                1,070,740
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                1,070,740Warrants
      issued to consultants
                                                                
                                                                
                                                                468,526
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                468,526Recognition
      of deferred compensation
                                                                
                                                                
                                                                27,937
                                                                
                                                                
                                                                
                                                                (27,937
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —Amortization
      of deferred compensation
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                46,772
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                46,772Net
      loss
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (10,753,871
                                                                )
                                                                
                                                                
                                                                (10,753,871
                                                                )Balance
      at December 31, 2000
                                                                
                                                                
                                                                26,296,749
                                                                
                                                                
                                                                
                                                                (12,499
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (20,943,619
                                                                )
                                                                
                                                                
                                                                5,340,631Equity
      contributions
                                                                
                                                                
                                                                13,411,506
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                13,411,506Equity
      issued to consultants
                                                                
                                                                
                                                                161,073
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                161,073Stock
      options issued to employee
                                                                
                                                                
                                                                2,847
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                2,847Fees
      incurred in raising capital
                                                                
                                                                
                                                                (1,206,730
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (1,206,730
                                                                )Amortization
      of deferred compensation
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                12,499
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                12,499Net
      loss
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (15,392,618
                                                                )
                                                                
                                                                
                                                                (15,392,618
                                                                )Balance
      at December 31, 2001
                                                                
                                                                
                                                                38,665,445
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (36,336,237
                                                                )
                                                                
                                                                
                                                                2,329,208Equity
      contributions
                                                                
                                                                
                                                                6,739,189
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                6,739,189Equity
      issued to consultants
                                                                
                                                                
                                                                156,073
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                156,073Options
      issued to consultant
                                                                
                                                                
                                                                176,250
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                176,250Options
      issued to employee
                                                                
                                                                
                                                                2,847
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                2,847Fees
      incurred in raising capital
                                                                
                                                                
                                                                (556,047
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (556,047
                                                                )Forgiveness
      of loan receivable in exchange for equity
                                                                
                                                                
                                                                (1,350,828
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (1,350,828
                                                                )Net
      loss
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (11,871,668
                                                                )
                                                                
                                                                
                                                                (11,871,668
                                                                )Balance
      at December 31, 2002
                                                                
                                                                
                                                                43,832,929
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (48,207,905
                                                                )
                                                                
                                                                
                                                                (4,374,976
                                                                )Equity
      contributions
                                                                
                                                                
                                                                4,067,250
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                4,067,250Equity
      issued to consultants
                                                                
                                                                
                                                                16,624
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                16,624Change
      in fair value of management units
                                                                
                                                                
                                                                2,952,474
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                2,952,474Options
      issued to consultant
                                                                
                                                                
                                                                65,681
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                65,681Fees
      incurred in raising capital
                                                                
                                                                
                                                                (343,737
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (343,737
                                                                )Forgiveness
      of loan receivable in exchange for equity
                                                                
                                                                
                                                                (281,340
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (281,340
                                                                )Net
      loss
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (6,009,283
                                                                )
                                                                
                                                                
                                                                (6,009,283
                                                                )Balance
      at December 31, 2003
                                                                
                                                                
                                                                50,309,881
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (54,217,188
                                                                )
                                                                
                                                                
                                                                (3,907,307
                                                                )Equity
      contributions
                                                                
                                                                
                                                                512,555
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                512,555Change
      in fair value of management units
                                                                
                                                                
                                                                (2,396,291
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (2,396,291
                                                                )Fees
      incurred in raising capital
                                                                
                                                                
                                                                (80,218
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (80,218
                                                                )Net
      Loss
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (1,096,683
                                                                )
                                                                
                                                                
                                                                (1,096,683
                                                                )Balance
      at December 31, 2004
                                                                
                                                                
                                                                48,345,927
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (55,313,871
                                                                )
                                                                
                                                                
                                                                (6,967,944
                                                                )Equity
      contributions
                                                                
                                                                
                                                                92,287
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                92,287Settlement
      of accounts payable in exchange for equity
                                                                
                                                                
                                                                836,319
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                836,319Conversion
      of convertible notes payable and accrued interest for
      equity
                                                                
                                                                
                                                                51,565
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                51,565Change
      in fair value of management units
                                                                
                                                                
                                                                (14,551
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (14,551
                                                                )Fees
      incurred in raising capital
                                                                
                                                                
                                                                (92,287
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (92,287
                                                                )Reorganization
      from LLC to "C" Corporation
                                                                
                                                                
                                                                (49,219,260
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                4,829,120
                                                                
                                                                
                                                                
                                                                4,829
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                49,214,431
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —Net
      loss
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (3,665,596
                                                                )
                                                                
                                                                
                                                                (3,665,596
                                                                )Balance
      at December 31, 2005
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                4,829,120
                                                                
                                                                
                                                                
                                                                4,829
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                49,214,431
                                                                
                                                                
                                                                
                                                                (58,979,467
                                                                )
                                                                
                                                                
                                                                (9,760,207
                                                                )Issuance
      of common stock for stock subscribed
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                240,929
                                                                
                                                                
                                                                
                                                                241
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                799,644
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                799,885Issuance
      of common stock to investor group for price protection
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                100,000
                                                                
                                                                
                                                                
                                                                100
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (100
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —Issuance
      of stock options to employees, consultants and directors
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                143,352
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                143,352Issuance
      of 10% Series A Preferred Stock for cash
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                5,300,000
                                                                
                                                                
                                                                
                                                                5,300
                                                                
                                                                
                                                                
                                                                5,530,143
                                                                
                                                                
                                                                
                                                                (235,443
                                                                )
                                                                
                                                                
                                                                5,300,000Cost
      of raising capital associated with issuance of preferred
    stock
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (620,563
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (620,563
                                                                )Shares
      held by original stockholders of Parent immediately prior to
      merger
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                3,750,000
                                                                
                                                                
                                                                
                                                                3,750
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (3,750
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —Conversion
      of convertible debt, related accrued interest and sharesto induce
      conversion into common stock
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                5,170,880
                                                                
                                                                
                                                                
                                                                5,171
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                11,376,939
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                11,382,110Issuance
      of common stock in consideration for funding
      $1,000,000 convertible note payable per terms of merger
      transaction
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                10,000,000
                                                                
                                                                
                                                                
                                                                10,000
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                990,000
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                1,000,000Issuance
      of common stock in exchange for accounts payable and services
      rendered
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                778,274
                                                                
                                                                
                                                                
                                                                779
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                587,035
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                587,814Conversion
      of common stock issued prior to reverse merger for 10% Series
      A Preferred Stock
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (240,929
                                                                )
                                                                
                                                                
                                                                (241
                                                                )
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                799,885
                                                                
                                                                
                                                                
                                                                800
                                                                
                                                                
                                                                
                                                                30,194
                                                                
                                                                
                                                                
                                                                (30,753
                                                                )
                                                                
                                                                
                                                                —Non-cash
      stock dividends on 10% Series A Preferred Stock
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                303,700
                                                                
                                                                
                                                                
                                                                303
                                                                
                                                                
                                                                
                                                                303,397
                                                                
                                                                
                                                                
                                                                (303,700
                                                                )
                                                                
                                                                
                                                                —Issuance
      of preferred stock for redemption of convertible note
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                1,000,000
                                                                
                                                                
                                                                
                                                                1,000
                                                                
                                                                
                                                                
                                                                1,204,640
                                                                
                                                                
                                                                
                                                                (205,640
                                                                )
                                                                
                                                                
                                                                1,000,000Issuance
      of warrants to consultants for services
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                9,883
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                9,883Issuance
      of warrants in exchange for accounts payable
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                192,311
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                192,311Net
      loss
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (7,671,580
                                                                )
                                                                
                                                                
                                                                (7,671,580
                                                                )Balance
      at December 31, 2006
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                24,628,274
                                                                
                                                                
                                                                
                                                                24,629
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                7,403,585
                                                                
                                                                
                                                                
                                                                7,403
                                                                
                                                                
                                                                
                                                                69,757,556
                                                                
                                                                
                                                                
                                                                (67,426,583
                                                                )
                                                                
                                                                
                                                                2,363,005Issuance
      of stock options to employees, consultants and directors
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                498,955
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                498,955Issuance
      of common stock in settlement of accounts payable
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                11,501
                                                                
                                                                
                                                                
                                                                11
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                22,991
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                23,002Conversion
      of preferred stock into common stock
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                405,157
                                                                
                                                                
                                                                
                                                                405
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (506,446
                                                                )
                                                                
                                                                
                                                                (506
                                                                )
                                                                
                                                                
                                                                101
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —Issuance
      of Series A Preferred Stock as dividends and settlement of
      dividends/penalties payable in connection with non-registration
      event
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                1,122,369
                                                                
                                                                
                                                                
                                                                1,122
                                                                
                                                                
                                                                
                                                                1,121,246
                                                                
                                                                
                                                                
                                                                (760,872
                                                                )
                                                                
                                                                
                                                                361,496Net
      loss
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (3,350,754
                                                                )
                                                                
                                                                
                                                                (3,350,754
                                                                )Balance
      at December 31, 2007
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                25,044,932
                                                                
                                                                
                                                                
                                                                25,045
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                8,019,508
                                                                
                                                                
                                                                
                                                                8,019
                                                                
                                                                
                                                                
                                                                71,400,849
                                                                
                                                                
                                                                
                                                                (71,538,209
                                                                )
                                                                
                                                                
                                                                (104,296
                                                                )Stock
      based compensation - employees, consultants and directors
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                363,563
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                363,563Issuance
      of Series A Preferred Stock as dividends
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                830,384
                                                                
                                                                
                                                                
                                                                831
                                                                
                                                                
                                                                
                                                                277,087
                                                                
                                                                
                                                                
                                                                (277,918
                                                                )
                                                                
                                                                
                                                                —Issuance
      of Series B Preferred Stock for
                                                                  cash
      and conversion of $175,000 of
                                                                  convertible
      debt
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                52,931.47
                                                                
                                                                
                                                                
                                                                53
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                5,657,842
                                                                
                                                                
                                                                
                                                                (364,747
                                                                )
                                                                
                                                                
                                                                5,293,148Cost
      of raising capital associated with issuance of Series B Preferred
      Stock
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (215,398
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (215,398
                                                                )Issuance
      of Series B Preferred Stock as dividends
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                2,627.17
                                                                
                                                                
                                                                
                                                                2
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                262,715
                                                                
                                                                
                                                                
                                                                (262,717
                                                                )
                                                                
                                                                
                                                                —Issuance
      of warrants upon conversion of convertible notes payable into Series B
      Preferred Stock
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                40,354
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                40,354Conversion
      of Series A Preferred stock into common
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                218,585
                                                                
                                                                
                                                                
                                                                219
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (56,832
                                                                )
                                                                
                                                                
                                                                (57
                                                                )
                                                                
                                                                
                                                                (162
                                                                )
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —Net
      loss
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (3,017,890
                                                                )
                                                                
                                                                
                                                                (3,017,890
                                                                )Balance
      at December 31, 2008
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                
                                                                25,263,517
                                                                
                                                                
                                                                $
                                                                25,264
                                                                
                                                                
                                                                
                                                                55,558.64
                                                                
                                                                
                                                                $
                                                                55
                                                                
                                                                
                                                                
                                                                8,793,060
                                                                
                                                                
                                                                $
                                                                8,793
                                                                
                                                                
                                                                $
                                                                77,786,850
                                                                
                                                                
                                                                $
                                                                (75,461,481
                                                                )
                                                                
                                                                $
                                                                2,359,481





The Notes
to Consolidated Financial Statements are an integral part of these financial
statements.


F-6


MEDASORB
TECHNOLOGIES CORPORATION


(a
development stage company)





CONSOLIDATED
STATEMENTS OF CASH FLOWS







For the Period fromJanuary 22, 1997(date of inception) to
                              
                              
                              Year ended
                              
                              
                              Year endedDecember 31,
                              
                              
                              December 31,
                              
                              
                              December 31,2008
                              
                              
                              2008
                              
                              
                              2007Cash
      flows from operating activities:Net
      loss
                              
                              $
                              (73,019,691
                              )
                              
                              $
                              (3,017,890
                              )
                              
                              $
                              (3,350,754
                              )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Common
      stock issued as inducement to convert convertible notes payable and
      accrued interest
                              
                              
                              3,351,961
                              
                              
                              
                              —
                              
                              
                              
                              —Issuance
      of common stock to consultants for services
                              
                              
                              30,000
                              
                              
                              
                              —
                              
                              
                              
                              —Depreciation
      and amortization
                              
                              
                              2,340,766
                              
                              
                              
                              103,701
                              
                              
                              
                              190,440Amortization
      of debt discount
                              
                              
                              1,000,000
                              
                              
                              
                              —
                              
                              
                              
                              —Gain
      on disposal of property and equipment
                              
                              
                              (21,663
                              )
                              
                              
                              —
                              
                              
                              
                              —Gain
      on extinguishment of debt
                              
                              
                              (216,617
                              )
                              
                              
                              —
                              
                              
                              
                              (10,009
                              )Interest
      expense paid with Series B Preferred Stock in connection with conversion
      of notes payable
                              
                              
                              3,147
                              
                              
                              
                              3,147
                              
                              
                              
                              —Abandoned
      patents
                              
                              
                              183,556
                              
                              
                              
                              —
                              
                              
                              
                              —Bad
      debts - employee advances
                              
                              
                              255,882
                              
                              
                              
                              —
                              
                              
                              
                              —Contributed
      technology expense
                              
                              
                              4,550,000
                              
                              
                              
                              —
                              
                              
                              
                              —Consulting
      expense
                              
                              
                              237,836
                              
                              
                              
                              —
                              
                              
                              
                              —Management
      unit expense
                              
                              
                              1,334,285
                              
                              
                              
                              —
                              
                              
                              
                              —Expense
      for issuance of warrants
                              
                              
                              518,763
                              
                              
                              
                              40,354
                              
                              
                              
                              —Expense
      for issuance of options
                              
                              
                              1,253,495
                              
                              
                              
                              363,563
                              
                              
                              
                              498,955Amortization
      of deferred compensation
                              
                              
                              74,938
                              
                              
                              
                              —
                              
                              
                              
                              —Penalties
      in connection with non-registration event
                              
                              
                              361,496
                              
                              
                              
                              —
                              
                              
                              
                              361,496Changes
      in operating assets and liabilities:Prepaid
      expenses and other current assets
                              
                              
                              (388,551
                              )
                              
                              
                              83,679
                              
                              
                              
                              (175,802
                              )Other
      assets
                              
                              
                              (66,633
                              )
                              
                              
                              (12,740
                              )
                              
                              
                              —Accounts
      payable and accrued expenses
                              
                              
                              2,796,916
                              
                              
                              
                              70,837
                              
                              
                              
                              (72,165
                              )Accrued
      interest
                              
                              
                              1,823,103
                              
                              
                              
                              —
                              
                              
                              
                              (70,000
                              )Net
      cash used by operating activities
                              
                              
                              (53,597,011
                              )
                              
                              
                              (2,365,349
                              )
                              
                              
                              (2,627,839
                              )Cash
      flows from investing activities:Proceeds
      from sale of property and equipment
                              
                              
                              32,491
                              
                              
                              
                              —
                              
                              
                              
                              —Purchases
      of property and equipment
                              
                              
                              (2,220,521
                              )
                              
                              
                              —
                              
                              
                              
                              (21,427
                              )Patent
      costs
                              
                              
                              (427,730
                              )
                              
                              
                              (22,052
                              )
                              
                              
                              (12,259
                              )Purchases
      of short-term investments
                              
                              
                              (393,607
                              )
                              
                              
                              (393,607
                              )
                              
                              
                              —Proceeds
      from maturities of short-term investments
                              
                              
                              194,000
                              
                              
                              
                              194,000Loan
      receivable
                              
                              
                              (1,632,168
                              )
                              
                              
                              —
                              
                              
                              
                              —Net
      cash used by investing activities
                              
                              
                              (4,447,535
                              )
                              
                              
                              (221,659
                              )
                              
                              
                              (33,686
                              )Cash
      flows from financing activities:Proceeds
      from issuance of common stock
                              
                              
                              400,490
                              
                              
                              
                              —
                              
                              
                              
                              —Proceeds
      from issuance of preferred stock, net of related issuance
      costs
                              
                              
                              9,579,040
                              
                              
                              
                              4,899,603
                              
                              
                              
                              —Equity
      contributions - net of fees incurred
                              
                              
                              41,711,198
                              
                              
                              
                              —
                              
                              
                              
                              —Proceeds
      from borrowing
                              
                              
                              8,603,631
                              
                              
                              
                              225,000
                              
                              
                              
                              —Proceeds
      from subscription receivables
                              
                              
                              499,395
                              
                              
                              
                              —
                              
                              
                              
                              —Net
      cash provided by financing activities
                              
                              
                              60,793,754
                              
                              
                              
                              5,124,603
                              
                              
                              
                              —





The Notes
to Consolidated Financial Statements are an integral part of these
statements.


F-7


MEDASORB
TECHNOLOGIES CORPORATION


(a
development stage company)





CONSOLIDATED
STATEMENTS OF CASH FLOWS







For the Period fromJanuary 22, 1997(date of inception) to
                                                
                                                
                                                Year ended
                                                
                                                
                                                Year endedDecember 31,
                                                
                                                
                                                December 31,
                                                
                                                
                                                December 31,2008
                                                
                                                
                                                2008
                                                
                                                
                                                2007Net
      increase (decrease) in cash and cash equivalents
                                                
                                                
                                                2,749,208
                                                
                                                
                                                
                                                2,537,595
                                                
                                                
                                                
                                                (2,661,525
                                                )Cash
      and cash equivalents at beginning of period
                                                
                                                
                                                —
                                                
                                                
                                                
                                                211,613
                                                
                                                
                                                
                                                2,873,138Cash
      and cash equivalents at end of period
                                                
                                                $
                                                2,749,208
                                                
                                                
                                                $
                                                2,749,208
                                                
                                                
                                                $
                                                211,613Supplemental
      disclosure of cash flow information:Cash
      paid during the period for interest
                                                
                                                $
                                                590,189
                                                
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                78,409Supplemental
      schedule of noncash financing activities:Note
      payable principal and interest conversion to equity
                                                
                                                $
                                                10,376,714
                                                
                                                
                                                $
                                                175,000
                                                
                                                
                                                $
                                                —Issuance
      of member units for leasehold improvements
                                                
                                                $
                                                141,635
                                                
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                —Issuance
      of management units in settlement of cost of raising
    capital
                                                
                                                $
                                                437,206
                                                
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                —Change
      in fair value of management units for cost of raising
    capital
                                                
                                                $
                                                278,087
                                                
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                —Exchange
      of loan receivable for member units
                                                
                                                $
                                                1,632,168
                                                
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                —Issuance
      of equity in settlement of accounts payable
                                                
                                                $
                                                1,609,446
                                                
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                23,002Issuance
      of common stock in exchange for stock subscribed
                                                
                                                $
                                                399,395
                                                
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                —Costs
      paid from proceeds in conjunction with issuance of preferred
      stock
                                                
                                                $
                                                768,063
                                                
                                                
                                                $
                                                147,500
                                                
                                                
                                                $
                                                —Preferred
      stock dividends
                                                
                                                $
                                                2,441,790
                                                
                                                
                                                $
                                                905,382
                                                
                                                
                                                $
                                                760,872Net
      effect of conversion of common stock to preferred stock prior to
      merger
                                                
                                                $
                                                559
                                                
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                —





During
the years ended December 31, 2008 and 2007, 56,832 and 506,446 Series A
Preferred Shares were converted into 218,585 and 405,157 Common Shares,
respectively. For the period from January 22, 1997 (date of inception) to
December 31, 2008, 563,278 Series A Preferred Shares were converted into 623,742
Common Shares.





During
the years ended December 31, 2008 and 2007, -0- and 553,629 Series A Preferred
Shares were issued in connection with the non-registration event as settlement
of dividends/penalties payable, respectively, For the period from January 22,
1997 (date of inception) to December 31, 2008, 553,629 Series A Preferred Shares
were issued in connection with the non-registration event as settlement of
dividends/penalties payable.





The Notes
to Consolidated Financial Statements are an integral part of these
statements.


F-8





1.
              BASIS
      OF PRESENTATION





The
accompanying consolidated financial statements include the results of MedaSorb
Technologies Corporation (the “Parent”), formerly known as Gilder Enterprises,
Inc., and CytoSorbents, Inc. (f/k/a MedaSorb Technologies, Inc.) , its
wholly-owned operating subsidiary (the “Subsidiary”), collectively referred to
as “the Company.”





The
Company is a development stage company and has not yet generated any revenues.
Since inception, the Company's expenses relate primarily to research and
development, organizational activities, clinical manufacturing, regulatory
compliance and operational strategic planning. Although the Company has made
advances on these matters, there can be no assurance that the Company will
continue to be successful regarding these issues, nor can there be any assurance
that the Company will successfully implement its long-term strategic
plans.





The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has experienced
negative cash flows from operations since inception and has a deficit
accumulated during the development stage at December 31, 2008 of $75,461,481.
The Company is not currently generating revenue and is dependent on the proceeds
of present and future financings to fund its research, development and
commercialization program. The Company is continuing its fund-raising efforts.
Although the Company has historically been successful in raising additional
capital through equity and debt financings, there can be no assurance that the
Company will be successful in raising additional capital in the future or that
it will be on favorable terms. Furthermore, if the Company is successful in
raising the additional financing, there can be no assurance that the amount will
be sufficient to complete the Company's plans. These matters raise substantial
doubt about the Company’s ability to continue as a going concern. These
consolidated financial statements do not include any adjustments related to the
outcome of this uncertainty.


F-9


The
Company has developed an intellectual property portfolio, including 25 issued
and multiple pending patents, covering materials, methods of
production, systems incorporating the technology and multiple medical
uses.





2.
              PRINCIPAL
      BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES:





Nature
of Business





The
Company is engaged in the research, development and commercialization of medical
devices with its platform blood purification technology incorporating a
proprietary adsorbent polymer technology. The Company is focused on developing
this technology for multiple applications in the medical field, specifically to
provide improved blood purification for the treatment of acute and chronic
health complications associated with blood toxicity. As of December 31, 2008,
the Company has not commenced commercial operations and, accordingly, is in the
development stage. The Company has yet to generate any revenue and has no
assurance of future revenue.





Principles
of Consolidation





The
consolidated financial statements include the accounts of the Parent, MedaSorb
Technologies Corporation, and its wholly-owned subsidiary, CytoSorbents, Inc.
(f/k/a MedaSorb Technologies, Inc). All significant intercompany transactions
and balances have been eliminated in consolidation.





Development
Stage Corporation





The
accompanying consolidated financial statements have been prepared in accordance
with the provisions of Statement of Financial Accounting Standard (SFAS) No. 7,
"Accounting and Reporting by Development Stage Enterprises."





Cash
and Cash Equivalents





The
Company considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.





Short
Term Investments





Short-term
investments include short-term bank certificates of deposit with original
maturities of between three and twelve months.  These
short-term investments are classified as held to maturity and are valued at
cost which approximates fair value. These investments are considered Level 1
investments under SFAS No. 157.





Property
and Equipment





Property
and equipment are recorded at cost less accumulated depreciation. Depreciation
of property and equipment is provided for by the straight-line method over the
estimated useful lives of the related assets. Leasehold improvements are
amortized over the lesser of their economic useful lives or the term of the
related leases. Gains and losses on depreciable assets retired or sold are
recognized in the statements of operations in the year of disposal. Repairs and
maintenance expenditures are expensed as incurred.





Patents





Legal
costs incurred to establish patents are capitalized. When patents are issued,
capitalized costs are amortized on the straight-line method over the related
patent term. In the event a patent is abandoned, the net book value of the
patent is written off.





Impairment
or Disposal of Long-Lived Assets





The
Company assesses the impairment of patents and other long-lived assets under
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. For long-lived assets to be held and used, the Company
recognizes an impairment loss only if its carrying amount is not recoverable
through its undiscounted cash flows and measures the impairment loss based on
the difference between the carrying amount and fair value.


F-10


Research
and Development





All
research and development costs, payments to laboratories and research
consultants are expensed when incurred.





Income
Taxes





Income
taxes are accounted for under the asset and liability method prescribed by SFAS
No. 109, “Accounting for Income Taxes.” Deferred income taxes are recorded for
temporary differences between financial statement carrying amounts and the tax
basis of assets and liabilities. Deferred tax assets and liabilities reflect the
tax rates expected to be in effect for the years in which the differences are
expected to reverse. A valuation allowance is provided if it is more likely than
not that some or all of the deferred tax asset will not be realized. Under
Section 382 of the Internal Revenue Code the net operating losses generated
prior to the reverse merger may be limited due to the change in ownership.
Additionally, net operating losses generated subsequent to the reverse merger
may be limited in the event of changes in ownership.





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 that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities. Actual results
could differ from these estimates.





Concentration
of Credit Risk





The
Company maintains cash balances, at times, with financial institutions in excess
of amounts insured by the Federal Deposit Insurance Corporation. Management
monitors the soundness of these institutions in an effort to minimize its
collection risk of these balances.





Financial
Instruments





The
carrying values of cash and cash equivalents, short-term investments, accounts
payable and other debt obligations approximate their fair values due to their
short-term nature.





Net
Loss per Common Share





Basic EPS
is computed by dividing income (loss) available to common stockholders by the
weighted average number of common shares outstanding during the period. Diluted
EPS gives effect to all dilutive potential common shares outstanding during the
period. The computation of diluted EPS does not assume conversion, exercise or
contingent exercise of securities that would have an anti-dilutive effect on
earnings. Refer to Note 10 for methodology for determining net loss per
share.





Stock-Based
Compensation





The
Company accounts for its stock-based compensation under the recognition
requirements of Statement of Financial Accounting Standards (“SFAS”) No. 123(R).
“Accounting for Stock-Based
Compensation”, for employees and directors whereby each option granted is
valued at fair market value on the date of grant. Under SFAS No. 123 (R), the
fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model.





The
Company also follows the guidance in EITF 96-18 “Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services” for equity instruments issued
to consultants.


F-11


Effects
of Recent Accounting Pronouncements





Effective
January 1, 2008, the Company has adopted the provisions of SFAS No. 157, “Fair
Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a
framework for measuring fair value in accordance with accounting principles
generally accepted in the United States, and expands disclosures about fair
value measurements. Any amounts recognized upon adoption as a cumulative effect
adjustment will be recorded to the opening balance of retained earnings in the
year of adoption. The provisions of SFAS 157 did not have a significant impact
on the Company’s statements of operations or financial position.





Effective
January 1, 2008, the Company has adopted the provisions of SFAS No. 159,
“Establishing the Fair Value Option for Financial Assets and Liabilities” to
permit all entities to choose to elect to measure eligible financial instruments
and certain other items at fair value. The decision whether to elect the fair
value option may occur for each eligible items either on a specified election
date or according to a preexisting policy for specified types of eligible items.
However, that decision must also take place on a date on which criteria under
SFAS 159 occurs. Finally, the decision to elect the fair value option shall be
made on an instrument-by-instrument basis, except in certain circumstances. An
entity shall report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting date. The
provisions of SFAS 159 did not have a significant impact on the Company’s
statements of operations or financial position.





3.
              PROPERTY
      AND EQUIPMENT, NET:





Property
and equipment - net, consists of the following:





December
      31,
                                
                                2008
                                
                                
                                2007
                                
                                Depreciation/
                                  Amortization
                                  PeriodFurniture
      and fixtures
                                
                                $
                                130,015
                                
                                
                                $
                                130,015
                                
                                7
      yearsEquipment
      and computers
                                
                                
                                1,731,242
                                
                                
                                
                                1,731,242
                                
                                3
      to 7 yearsLeasehold
      improvements
                                
                                
                                462,980
                                
                                
                                
                                462,980
                                
                                Term
                                  of
      lease2,324,237
                                
                                
                                
                                2,324,237Less
      accumulated depreciation and amortization
                                
                                
                                2,272,180
                                
                                
                                
                                2,179,780Property
      and Equipment, Net
                                
                                $
                                52,057
                                
                                
                                $
                                144,457


F-12


Depreciation
expense for the years ended December 31, 2008 and 2007 amounted to $92,400 and
$180,530, respectively. Depreciation expense from inception to December 31, 2008
amounted to $2,299,268





4.
              OTHER
      ASSETS:





Other
assets consist of the following:





December
      31,
                      2008
                      
                      2007Intangible
      assets, net
                      
                      $
                      202,676
                      
                      
                      $
                      191,926Security
      deposits
                      
                      
                      66,634
                      
                      
                      
                      53,894Total
                      
                      $
                      269,310
                      
                      
                      $
                      245,820





Intangible
assets consist of the following:





December
      31,
                        
                        2008
                        
                        
                        2007Gross
                        
                        
                        Accumulated
                        
                        
                        Gross
                        
                        
                        AccumulatedAmount
                        
                        
                        Amortization
                        
                        
                        Amount
                        
                        
                        AmortizationPatents
                        
                        $
                        244,172
                        
                        
                        $
                        41,496
                        
                        
                        $
                        222,121
                        
                        
                        $
                        30,195





The
issued patents that are capitalized are being amortized over the patents
remaining legal life. Pending patents are not amortized. Amortization expense
amounted to $11,301 and $9,910 for the years ended December 31, 2008 and 2007,
respectively. Amortization expense from inception to December 31, 2008 amounted
to $41,496.





Amortization
expense is anticipated to be approximately $11,300 for the next five years ended
December 31, 2013.





5.
              ACCOUNTS
      PAYABLE AND ACCRUED EXPENSES:





Accounts
Payable and accrued expenses consist of the following:





December 31,2008
                        
                        2007Other
      payable
                        
                        $
                        316,556
                        
                        
                        $
                        334,800Legal,
      financial and consulting
                        
                        
                        367,379
                        
                        
                        
                        242,891Research
      and development
                        
                        
                        293,769
                        
                        
                        
                        329,177$
                        977,704
                        
                        
                        $
                        906,868





6.
              CONVERTIBLE
      NOTES:





The
Company has outstanding Promissory Notes in the aggregate principal amount of
$50,000, due in September 2009, which bear interest at the rate of 10% per
annum.  The holder of the Promissory note has the option to convert,
on an all-or-none basis, the entire principal and outstanding interest of their
Notes into the Series B Preferred Stock issued in June 2008.  In
addition, pursuant to the terms of such Promissory Notes, upon such conversion,
each Note holder will receive five-year warrants to purchase the number of
shares of Common Stock equal to the quotient obtained by dividing (x) 25% of the
principal amount of the Promissory Notes being converted, by (y) $0.0362, the
purchase price per share of Common Stock issuable upon conversion of the Series
B Preferred Stock.  In addition, Promissory Notes in the aggregate
principal amount of $175,000 plus accrued interest were converted into the
Series B Preferred Stock in June 2008 (See Note 9).





7.
              INCOME
      TAXES:





From
inception through December 31, 2005, the Company incurred losses which, as a
limited liability company, were passed through to its members. Tax losses
amounted to approximately $2,600,000 and $2,900,000 for the years ended December
31, 2008 and December 31, 2007, respectively. The Company’s net operating loss
carryforward amounts to approximately $8,100,000 and expires through 2028. These
loss carryforwards are subject to limitation in future years should certain
ownership changes occur. A full valuation allowance equal to the deferred tax
asset has been recorded due to the uncertainty that the Company will have the
ability to utilize such asset.





During
the year ended December 31, 2008, the Company sold a portion of its New Jersey
Net Operating Loss tax carryforward to an industrial company under provisions in
the New Jersey tax code.  The Company realized approximately $249,000
from the sale of a portion of its New Jersey Net Operating Loss
carryforwards.


F-13


For the
years ended December 31, 2008 and December 31, 2007, respectively, the Company’s
effective tax rate differs from the federal statutory rate principally due to
net operating losses offset by certain non-deductible expenses for which no
benefit has been recorded.





A
reconciliation of the Federal statutory rate to the Company’s effective tax rate
for the years ended December 31, 2008 and December 31, 2007 is as
follows:





2008
                          
                          
                          2007Federal
      statutory rate
                          
                          
                          (34.0
                          )%
                          
                          
                          (34.0
                          )%Decrease
      resulting from:Non-deductible
      expenses
                          
                          
                          4.6
                          
                          
                          
                          4.9Operating
      losses
                          
                          
                          29.4
                          
                          
                          
                          29.1Effective
      tax rate
                          
                          
                          —
                          %
                          
                          
                          —
                          %




8.
            COMMITMENTS
      AND CONTINGENCIES:





The
Company is obligated under non-cancelable operating leases for office space and
equipment expiring at various dates through February 2010. The aggregate minimum
future payments under these leases are approximately as follows:





Year
ending December 31,




2009
                                
                                $
                                161,0002010
                                
                                
                                26,000Total
                                
                                
                                $
                                187,000





The
preceding data reflects existing leases and does not include replacements upon
their expiration. In the normal course of business, operating leases are
normally renewed or replaced by other leases.





Rent
expense for the years ended December 31, 2008 and 2007 amounted to approximately
$251,000 and $253,000, respectively.





Employment
Agreements





The
Company has employment agreements with certain key executives through December
2009. The agreements provide for annual base salaries of varying
amounts.





Litigation





The
Company is involved in various claims and legal actions. Management is of the
opinion that these claims and legal actions have no merit, and their
ultimate outcome will not have a material adverse impact on the
consolidated financial position of the Company and/or the results of its
operations.


F-14


Royalty
Agreements





In an
agreement dated August 11, 2003 an existing investor agreed to make a $4 million
equity investment in the Company. These amounts were received by the Company in
2003. In connection with this agreement the Company granted the investor a
future royalty of 3% on all gross revenues received by the Company from the sale
of its CytoSorb device. The Company has not generated any revenue from this
product and has not incurred any royalty costs through December 31, 2008. The
amount of future revenue subject to the royalty agreement could not be
reasonably estimated nor has a liability been incurred, therefore, an accrual
for royalty payments has not been included in the consolidated financial
statements.





License
Agreements





In an
agreement dated September 1, 2006, the Company entered into a license agreement
which provides the Company the exclusive right to use its patented technology
and proprietary know how relating to adsorbent polymers for a period of 18
years. Under the terms of the agreement, MedaSorb has agreed to pay royalties of
2.5% to 5% on the sale of certain of its products if and when those products are
sold commercially for a term not greater than 18 years commencing with the first
sale of such product. The Company has not generated any revenue from its
products and has not incurred any royalty costs through December 31, 2008. The
amount of future revenue subject to the Settlement Agreement could not be
reasonably estimated nor has a liability been incurred, therefore, an accrual
for royalty payments has not been included in the consolidated financial
statements.





Warrant
Agreement





As
inducement to invest additional funds in the private placement of Series B
Preferred Stock, additional consideration was granted to the participants of the
Series B Preferred Stock offering in the event that litigation is commenced
against MedaSorb prior to June 30, 2018, claiming patent infringement on certain
of the Company’s issued patents.  In the event this litigation arises
the Company may be required to issue warrants to purchase in the aggregate up to
a maximum of ten million shares of Common Stock subject to certain
adjustments.  Through December 31, 2008 no such litigation has arisen
and due to the deemed low probability of this potential outcome, the Company has
not booked a contingent liability for this agreement.







9.
            STOCKHOLDERS'
      EQUITY




In June
2008, the Company completed an initial closing of a $4.45 million private
placement, which included the conversion of Promissory Notes in the aggregate
principal amount of $175,000 plus accrued interest. In connection with this
transaction, the Company issued 44,531.47 shares of Series B Preferred Stock.
The Company also issued a 5 year warrant to purchase 3,986,429 shares of Common
Stock at an exercise price of $0.035 per share to the holder of the Promissory
Notes in connection with their conversion into the private placement. In August
2008 the Company completed a closing of an $840,000 private placement. In
connection with this transaction, the Company issued 8,400 shares of Series B
Preferred Stock. The purchasers of the Series B Preferred Stock at the initial
closing in June 2008 are entitled to purchase an additional $1.5 million of
Series B Preferred Stock at the same price of $100 per share (their stated
value) for a period of 15 months following the initial closing date. The Series
B Preferred Shares are initially convertible into common stock at a rate of
$0.035 per share subject to certain adjustments. As part of this transaction,
the Company incurred approximately $215,000 in costs of raising capital during
the twelve months ended December 31, 2008. Pursuant to an agreement signed with
the private placement investors, the Company filed an amendment to increase the
conversion price of the Series B Preferred Stock from $0.035 to $0.0362 per
share of Common Stock. The Company has 100 million shares authorized of
preferred stock. Of this amount the Company has designated 12 million shares as
10% Series A Preferred Stock and 200,000 shares as 10% Series B Preferred
Stock. The balance of authorized preferred shares is currently
undesignated.


10%
Series A Preferred Stock





Each
share of Series A Preferred Stock has a stated value of $1.00, and is
convertible at the holder’s option into that number of shares of Common Stock
equal to the stated value of such share of Series A Preferred Stock divided by
an initial conversion price of $1.25. Upon the occurrence of a stock split,
stock dividend, combination of the Common Stock into a smaller number of shares,
issuance of any of shares of Common Stock or other securities by
reclassification of the Common Stock, merger or sale of substantially all of the
Company’s assets, the conversion rate will be adjusted so that the conversion
rights of the Series A Preferred Stock stockholders will be equivalent to the
conversion rights of the Series A Preferred Stock stockholders prior to such
event. In addition, in the event the Company sells shares of Common Stock (or
the equivalent thereof) at a price of less than $1.25 per share, the conversion
price of the shares of Series A Preferred Stock will be reduced to such lower
price. In addition, in the event the Company sells shares of Common Stock (or
the equivalent thereof) at a price of less than $2.00 per share, the exercise
price of the warrants issued to the holders of the Series A Preferred Stock will
be reduced to such lower price. As of the “Qualified Closing” of our Series B
Preferred Stock private placement in August of 2008, these investors’ agreed to
a modification of their rights and pricing and gave up their anti-dilution
protection – see Qualified Closing description in Series B Preferred Stock
section.





The
Series A Preferred Stock bears a dividend of 10% per annum payable quarterly, at
the Company’s election in cash or additional shares of Series A Preferred Stock
valued at the stated value thereof; provided, however, that the Company must pay
the dividend in cash if an “Event of Default” as defined in the Certificate of
Designation designating the Series A Preferred Stock has occurred and is then
continuing. In addition, upon an Event of Default, the dividend rate increases
to 20% per annum. An Event of Default includes, but is not limited to, the
following:





·
            the
      occurrence of “Non-Registration Events”;·
            an
      uncured breach by the Company of any material covenant, term or condition
      in the Certificate of Designation or any of the related transaction
      documents; and


·
            any
      money judgment or similar final process being filed against the Company
      for more than $100,000.





In the
event of the Company’s dissolution, liquidation or winding up, the holders of
the Series A Preferred Stock will receive, in priority over the holders of
Common Stock, a liquidation preference equal to the stated value of such shares
plus accrued dividends thereon.


F-15


The
Series A Preferred Stock is not redeemable at the option of the holder but may
be redeemed by the Company at its option following the third anniversary of the
issuance of the Series A Preferred Stock for 120% of the stated value thereof
plus any accrued but unpaid dividends upon 30 days' prior written notice, during
which time the Series A Preferred Stock may be converted, provided a
registration statement is effective under the Securities Act with respect to the
Common Stock into which such Preferred is convertible and an Event of Default is
not then continuing.





Holders
of Series A Preferred Stock do not have the right to vote on matters submitted
to the holders of Common Stock.





The
registration rights provided for in the subscription agreements entered into
with the purchasers of the Series A Preferred Stock: 1) required that the
Company file a registration statement with the SEC on or before 120 days from
the closing to register the shares of Common Stock issuable upon conversion of
the Series A Preferred Stock and exercise of the warrants, and cause such
registration statement to be effective within 240 days following the closing;
and 2) entitles each of these investors to liquidated damages in an amount equal
to two percent (2%) of the purchase price of the Series A Preferred Stock if the
Company fails to timely file that registration statement with, or have it
declared effective by, the SEC.





The
transaction documents entered into with the purchasers of the Series A Preferred
Stock also provide for various penalties and fees for breaches or failures to
comply with provisions of those documents, such as the timely payment of
dividends, delivery of stock certificates upon conversion of the Series A
Preferred Stock or exercise of the warrants, and obtaining and maintaining an
effective registration statement with respect to the shares of Common Stock
underlying the Series A Preferred Stock and warrants sold in the
offering.





The
Company has recorded non-cash stock dividends in connection with the issuance of
Series A Preferred Stock as a stock dividend to its preferred shareholders as of
December 31, 2008. Prior to February 26, 2007 and after May 7, 2007, the
dividend rate was 10% per annum. Effective February 26, 2007 due to the
Company’s failure to have the registration statement it filed declared effective
by the Commission within the time required under agreements with the June 30,
2006 purchasers of the Series A Preferred Stock (i) dividends on the shares of
Series A Preferred Stock issued to those purchasers were required to be paid in
cash, (ii) the dividend rate increased from 10% per annum to 20% per annum, and
(iii) such purchasers were entitled to liquidated damages of 2% of their
principal investment payable in cash per 30 day period until the registration
statement was declared effective. In connection with such cash dividend and
penalty obligations, as modified by the Settlement Agreement described below,
the Company’s financial statements for the year ending December 31, 2007 also
reflect an aggregate charge of $361,496. On May 7, 2007 the Company’s
registration statement filed in connection with the Company’s obligations to the
June 30, 2006 purchasers of its Series A Preferred Stock was declared effective
by the Commission.





Pursuant
to a settlement agreement entered into in August 2007 with the June 30, 2006
purchasers of the Series A Preferred Stock, cash dividends stopped accruing on
the Series A Preferred Stock effective on the date the Company’s registration
statement was declared effective (May 7, 2007) and all cash dividends and
penalties due through that date were paid with additional shares of Series A
Preferred Stock at its stated value of $1.00 per share in lieu of cash. The
settlement, did not result in a gain or loss on extinguishment of debt
for the year ended December 31, 2007. Additionally, as part of the settlement,
the dividend rate on the Series A Preferred Stock issued to these purchasers was
reset to 10% effective as of May 7, 2007.





During
the years ended December 31, 2008 and 2007, the Company issued 830,384 and
760,873 shares of Series A Preferred Stock respectively as payment of stock
dividends at the stated value of $1.00 per share. During the year ended December
31, 2007, the Company issued 361,496 shares of Series A Preferred Stock as
settlement of the cash dividends and penalties payable to the purchasers under
the agreement.  The shares were valued at $361,495 and included as a charge
to operations under other (income) expenses for the year ended December 31,
2007.


F-16


In
accordance with Emerging Issues Task Force (EITF) 00-27, the Company allocates
the proceeds associated with the issuance of preferred stock based on the
relative fair value of the preferred stock and warrants. Additionally, the
Company evaluates if the embedded conversion option results in a beneficial
conversion feature by comparing the relative fair value allocated to the
preferred stock to the market value of the underlying common stock subject to
conversion. In connection with the preferred stock issuances during the year
ended December 31, 2006, the Company received total proceeds of $7,099,885. The
Company allocated the total proceeds in accordance with EITF 00-27 based on the
related fair value as follows: $6,776,667 was allocated to the preferred stock
and $323,218 to the warrants. Additionally, the embedded conversion option
resulted in a beneficial conversion feature in the amount of $148,618. In
accordance with EITF 98-5, the value assigned to the warrants resulting from the
relative fair value calculation as well as the value of the beneficial
conversion feature is recorded as a preferred stock dividend and is presented in
the consolidated statements of operations. In addition, the Company considers
the guidance of EITF 00-19, “Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company’s Own Common Stock,” and SFAS
133, “Accounting for Derivative Instruments and Hedging Activities (as
amended),” and concluded that the conversion feature embedded in the preferred
stock only provides for physical settlement and there are no net settlement
features. Accordingly, the Company has concluded that the conversion feature is
not considered a derivative under EITF 00-19 and SFAS 133.





10
% Series B Cumulative Convertible Preferred Stock


Each
share of Series B Preferred Stock has a stated value of $100.00, and is
convertible at the holder’s option into that number of shares of Common Stock
equal to the stated value of such share of Series B Preferred Stock divided by
an initial conversion price of $0.035, subject to certain adjustments.
Additionally, upon the occurrence of a stock split, stock dividend, combination
of the Common Stock into a smaller number of shares, issuance of any of shares
of Common Stock or other securities by reclassification of the Common Stock,
merger or sale of substantially all of the Company’s assets, the conversion rate
will be adjusted so that the conversion rights of the Series B Preferred Stock
stockholders will be equivalent to the conversion rights of the Series B
Preferred Stock stockholders prior to such event.





The
Series B Preferred Stock bears a dividend of 10% per annum payable quarterly;
provided, that if an “Event of Default” as defined in the Certificate of
Designation designating the Series B Preferred Stock has occurred and is then
continuing, the dividend rate increases to 20% per annum. An Event of Default
includes, but is not limited to, the following:





·
            the
      occurrence of “Non-Registration Events”;·
            an
      uncured breach by the Company of any material covenant, term or condition
      in the Certificate of Designation or any of the related transaction
      documents; and·
            any
      money judgment or similar final process being filed against the Company
      for more than $100,000.





Dividends
on the Series B Preferred Stock will be made in additional shares of Series B
Preferred Stock, valued at the stated value thereof. Notwithstanding the
foregoing, during the first three-years following the initial closing, upon the
approval of the holders of a majority of the Series B Preferred Stock, including
the lead investor, NJTC, if it then owns 25% of the shares of Series B Preferred
Stock initially purchased by it (the “Required Amount”), the Company may pay
dividends in cash instead of additional shares of Series B Preferred Stock, and
after such three-year period, the holders of a majority of the Series B
Preferred Stock, including NJTC if it then owns the Required Amount, may require
that such payments be made in cash.





In the
event of the Company’s dissolution, liquidation or winding up, the holders of
the Series B Preferred Stock will receive, in priority over the holders of
Series A Preferred Stock and Common Stock, a liquidation preference equal to the
stated value of such shares plus accrued dividends thereon.





Holders
of Series B Preferred Stock have the right to vote on matters submitted to the
holders of Common Stock on an as converted basis.





The
Company has agreed to file a registration statement under the Securities Act
covering the Common Stock issuable upon conversion of the Series B Preferred
Stock within 180 days following the initial closing and to cause it to become
effective within 240 days of such closing. The Company also granted the
investors demand and piggyback registration rights with respect to such Common
Stock. The investors in the private placement are entitled to liquidated damages
in an amount equal to two percent (2%) of the purchase price of the Series B
Preferred Stock if the Company fails to timely file that registration statement
with, or have it declared effective by, the SEC.  The Company has
received a waiver from a majority of the Series B holders for the
non-registration event and the timing of the Series B registration does not
create a cross-default of the Series A Preferred Series.





Following
the fifth anniversary of the initial closing, the holders of a majority of the
Series B Preferred Stock, including NJTC (if it then holds 25% of the shares of
Series B Preferred Stock initially purchased by it) may elect to require the
Company to redeem all (but not less than all) of their shares of Series B
Preferred Stock at the original purchase price for such shares plus all accrued
and unpaid dividends whether or not declared, provided the market price of the
Company’s Common Stock is then below the conversion price of the Series B
Preferred Stock.





Pursuant
to the Certificate of Designation designating the Series B Preferred Stock, for
so long as NJTC holds the Required Amount, NJTC is entitled to elect (i) two
directors to the Company’s Board of Directors, which shall initially consist of
six members, and (ii) two members to the Company’s compensation committee, which
shall consist of at least three members. Within twelve months following the
initial closing, the Company agreed to reduce the number of Directors on the
Company’s Board of Directors to five members.  Following the initial
closing, two affiliates of NJTC joined the Company’s Board of Directors and
compensation committee pursuant to the foregoing provision.




The
transaction documents entered into with the purchasers of the Series B Preferred
Stock also provide for various penalties and fees for breaches or failures to
comply with provisions of those documents, such as the timely payment of
dividends, delivery of stock certificates upon conversion of the Series B
Preferred Stock or exercise of the warrants, and obtaining and maintaining an
effective registration statement with respect to the shares of Common Stock
underlying the Series B Preferred Stock and warrants sold in the
offering.





In
accordance with Emerging Issues Task Force (EITF) 00-27, the Company allocates
the proceeds associated with the issuance of preferred stock based on the
relative fair value of the preferred stock and warrants. Additionally, the
Company evaluates if the embedded conversion option results in a beneficial
conversion feature by comparing the relative fair value allocated to the
preferred stock to the market value of the underlying common stock subject to
conversion. In connection with the preferred stock issuances during the year
ended December 31, 2008, the Company received total proceeds of $5,293,147. The
Company allocated the total proceeds in accordance with EITF 00-27 based on the
related fair value as follows: $5,110,773 was allocated to the preferred stock
and $182,374 to the warrants. Additionally, the embedded conversion option
resulted in a beneficial conversion feature in the amount of $182,374. In
accordance with EITF 98-5, the value assigned to the warrants resulting from the
relative fair value calculation as well as the value of the beneficial
conversion feature is recorded as a preferred stock dividend and is presented in
the consolidated statements of operations. In addition, the Company considers
the guidance of EITF 00-19, “Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company’s Own Common Stock,” and SFAS
133, “Accounting for Derivative Instruments and Hedging Activities (as
amended),” and concluded that the conversion feature embedded in the preferred
stock only provides for physical settlement and there are no net settlement
features. Accordingly, the Company has concluded that the conversion feature is
not considered a derivative under EITF 00-19 and SFAS 133.





During
the twelve months ended December 31, 2008 the Company recorded non-cash stock
dividends totaling $277,919 in connection with the issuance of 830,384 shares of
Series A Preferred Stock and stock dividends totaling $262,717 in connection
with the issuance of 2,627.17 shares of Series B Preferred Stock as a stock
dividend to its preferred shareholders as of December 31, 2008. The Company has
estimated the fair value of the shares issued as stock dividends based upon the
last completed financing transaction involving the underlying common shares,
which occurred in June 2008.





Pursuant
to agreements with the June 30, 2006 purchasers of Series A Preferred Stock that
waived rights to anti-dilution price protection upon the completion of the
Series B offering, the Company reduced the conversion price for these holders of
Series A Preferred Stock from $1.25 per share of Common to prices ranging from
$0.10 to $0.45 per share of Common. The June 30, 2006 purchasers of Series A
Preferred Stock also received reductions in their corresponding warrant exercise
prices from $2.00 per share of Common Stock to exercise prices ranging from
$0.40 to $0.90 per share of Common Stock.





Stock
Option Plans





As of
December 31, 2008, the Company had a Long Term Incentive Plan (“2006 Plan”) to
attract, retain, and provide incentives to employees, officers, directors, and
consultants. The Plan generally provides for the granting of stock, stock
options, stock appreciation rights, restricted shares, or any combination of the
foregoing to eligible participants.





A total
of 40,000,000 shares of common stock are reserved for issuance under the 2006
Plan. As of December 31, 2008 there were outstanding options to purchase
17,268,367 shares of common stock reserved under the plan. Additionally, as of
December 31, 2008 there were options to purchase 890,479 shares of Common Stock
that were issued outside of the 2006 Plan.





The 2006
Plan as well as grants issued outside of the Plan are administered by the Board
of Directors.  The Board is authorized to select from among eligible
employees, directors, advisors and consultants those individuals to whom
incentives are to be granted and to determine the number of shares to be subject
to, and the terms and conditions of the options.  The Board is also
authorized to prescribe, amend and rescind terms relating to options granted
under the Plans.  Generally, the interpretation and construction of any
provision of the Plans or any options granted hereunder is within the discretion
of the Board.





The Plan
provides that options may or may not be Incentive Stock Options (ISOs) within
the meaning of Section 422 of the Internal Revenue Code.  Only employees of
the Company are eligible to receive ISOs, while employees and non-employee
directors, advisors and consultants are eligible to receive options which are
not ISOs, i.e. “Non-Qualified Options.”  Because the Company has not yet
obtained shareholder approval of the 2006 Plan, all options granted thereunder
to date are “Non-Qualified Options” and until such shareholder approval is
obtained, all future options issued under the 2006 Plan will also be
“Non-Qualified Options.”





Stock-based
Compensation





Effective
January 1, 2006, the Company implemented the fair value recognition provisions
of SFAS 123(R) and guidance of SAB 107 for all share-based compensation.
Share-based employee, director, and consultant compensation in the amounts of
approximately $109,000 and $37,000 for the year ended December 31, 2008 and
2007 and $254,000 and $31,300 for the year ended December 31, 2008 and
2007, are included in the net loss of $3,017,890 and $3,350,754, respectively
under the captions research and development and general and
administrative.


F-17


The
summary of the stock option activity for the year ended December 31, 2008 is as
follows:





WeightedWeighted
                        
                        AverageAverage
                        
                        RemainingExercise
                        
                        ContractualShares
                        
                        per Share
                        
                        Life (Years)Outstanding,
      January 1, 2008
                        
                        
                        2,098,502
                        
                        
                        $
                        9.41
                        
                        
                        
                        7.7Granted
                        
                        
                        16,133,578
                        
                        
                        
                        0.075
                        
                        
                        
                        9.4Cancelled
                        
                        
                        (73,234
                        )
                        
                        
                        26.42
                        
                        
                        
                        0.0Exercised
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Outstanding,
      December 31, 2008
                        
                        
                        18,158,846
                        
                        
                        $
                        1.05
                        
                        
                        
                        9.1





The
weighted-average grant date fair value for options granted during the years
ended December 31, 2008 and 2007 amounted to approximately $0.03 and $0.63 per
share, respectively.





At
December 31, 2008, the aggregate intrinsic value of options outstanding and
options currently exercisable amounted to $10,474.





The
summary of the status of the Company’s non-vested options for the year ended
December 31, 2008 is as follows:





WeightedAverageGrant DateShares
                        
                        
                        Fair ValueNon-vested,
      January 1, 2008
                        
                        
                        173,330
                        
                        
                        $
                        0.80Granted
                        
                        
                        16,133,578
                        
                        
                        $
                        0.033Cancelled
                        
                        
                        —
                        
                        
                        $
                        —Vested
                        
                        
                        (10,026,304
                        )
                        
                        $
                        0.034Exercised
                        
                        
                        —
                        
                        
                        
                        —Non-vested,
      December 31, 2008
                        
                        
                        6,280,604
                        
                        
                        $
                        0.05





As of
December 31, 2008, approximately $306,709 of total unrecognized compensation
cost related to stock options is expected to be recognized over a weighted
average period of 1.18 years.





As of
December 31, 2008, the Company has the following warrants to purchase common
stock outstanding:




Number of Shares
                            
                            Warrant Exercise
                            
                            WarrantTo be Purchased
                            
                            Price per Share
                            
                            Expiration Date15,569
                            
                            $
                            6.64
                            
                            March
      31, 2010816,691
                            
                            $
                            4.98
                            
                            June
      30, 20111,200,000
                            
                            $
                            0.90
                            
                            June
      30, 2011900,000
                            
                            $
                            0.40
                            
                            June
      30, 2011339,954
                            
                            $
                            2.00
                            
                            September 30, 201152,080
                            
                            $
                            2.00
                            
                            July
      31, 2011400,000
                            
                            $
                            0.40
                            
                            October
      31, 2011240,125
                            
                            $
                            1.25
                            
                            October
      24, 20163,986,429
                            
                            $
                            0.035
                            
                            June
      25,
2013


F-18


As of
December 31, 2008, the Company has the following warrant to purchase Series A
Preferred Stock outstanding:





Number of
                          
                          Warrant Exercise
                          
                          WarrantShares to be
                          
                          Price per
                          
                          ExpirationPurchased
                          
                          Preferred Share
                          
                          Date525,000
                          
                          $
                          1.00
                          
                          June 30, 2011





If the
holder of warrants for preferred stock exercises in full, the holder will
receive additional 5 year warrants to purchase a total of 210,000 shares of
common stock at $0.40 per share.





As of
December 31, 2008, the Company has the following warrant to purchase Series B
Preferred Stock outstanding:





Number of
                          
                          Warrant Exercise
                          
                          WarrantShares to be
                          
                          Price per
                          
                          ExpirationPurchased
                          
                          Preferred Share
                          
                          Date15,000
                          
                          $
                          100.00
                          
                          September
      25, 2009





Equity
Instruments Issued for Services Rendered





During
the years ended December 31, 2008 and 2007 the Company issued stock options,
warrants and shares of common stock in exchange for services rendered to the
Company. The fair value of each stock option and warrant was valued using the
Black Scholes pricing model which takes into account as of the grant date the
exercise price (ranging from $0.035 to $1.90 per share) and expected life of the
stock option or warrant (5-10 years), the current price of the underlying stock
and its expected volatility (approximately 26 percent), expected dividends (-0-
percent) on the stock and the risk free interest rate (ranging from 2.25 to 4.5
percent) for the term of the stock option or warrant. Shares of common stock are
valued at the quoted market price on the date of grant. The fair value of each
grant was charged to the related expense in the statement of operations for the
services received.




10.
            NET
      LOSS PER SHARE





Basic
earnings per share and diluted earnings per share for the years ended December
31, 2008 and 2007 have been computed by dividing the net loss for each
respective period by the weighted average number of shares outstanding during
that period. All outstanding warrants and options representing approximately
26,109,694 and 3,964,419 incremental shares, respectively, as well as shares
issuable upon conversion of Series A & B Convertible Preferred Stock and
Preferred Stock Warrants representing approximately 239,767,931 incremental
shares, as well as shares issuable upon potential long-term Note conversion into
Series B Preferred Stock and Common warrants representing approximately
1,726,519 shares  have been excluded from the computation of diluted
EPS as they are anti-dilutive.





11.
            SUBSEQUENT
      EVENTS





In
January 2009, the Company issued options to purchase 2,753,858 shares of Common
Stock to an eligible employee, a director, and a consultant exercisable at
$0.084 per share and options to purchase 2,365,000 shares of Common Stock to
eligible employees and a consultant exercisable at $0.168 per
share.





During
January and February 2009 a total of 441,666 shares of Series A Preferred Stock
were converted into 4,416,666 shares of Common Stock, and a total of 300.69
shares of Series B Preferred Stock were converted into 830,636 shares of Common
Stock.


F-19