**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D** . **C** . **20549**


___________________




**FORM
      10-KSB**


**ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**


**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2006**


**COMMISSION
      FILE NUMBER 000-51038**


___________________




**MEDASORB
      TECHNOLOGIES CORPORATION**


(Name
      of
      Small Business Issuer in Its Charter)


**Nevada**
              (State
                or Other Jurisdiction of Incorporation or Organization)
            **98-0373793**
              (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**





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15
      (d) of the Exchange Act.    ̈


___________________




Check
      whether the issuer: (1) 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.


þ Yes  ̈ No




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained herein, and no disclosure will 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-KSB. þ




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


 ̈ Yes   þ No




The
      issuer had no **** revenues
      for its fiscal year ended December 31, 2006.





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates of the registrant as of March 26, 2007 was approximately
      $14,115,315. The number of shares outstanding of the registrant’s Common Stock
      as of March 26, 2007 was 24,628,274.




Transitional
      Small Business Disclosure Format:  ̈ Yes  þ No










**MEDASORB
      TECHNOLOGIES CORP.**


**2006
      FORM 10-KSB ANNUAL REPORT**


**TABLE
      OF CONTENTS**




PagePART
                I
            3Item
                1. Description of Business.
            3Item
                2. Description of Property.
            28Item
                3. Legal Proceedings.
            29Item
                4. Submission of Matters to a Vote of Security Holders.
            29PART
                II
            29Item
                5. Market for Common Equity and Related Stockholder Matters and Small
                Business Issuer Purchases of Equity Securities.
            29Item
                6. Management’s Discussion and Analysis of Plan of
                Operation.
            30Item
                7. Financial Statements.
            33Item
                8. Changes in and Disagreements With Accountants on Accounting and
                Financial Disclosure.
            33Item
                8A. Controls and Procedures.
            33Item
                8B. Other Information.
            33PART
                III
            33Item
                9. Directors, Executive Officers, Promoters and Control Persons,
                Compliance with Section 16(a) of the Exchange Act.
            33Item
                10. Executive Compensation.
            33Item
                11. Security Ownership of Certain Beneficial Owners and Management
                and
                Related Stockholder Matters.
            33Item
                12. Certain Relationships and Related Transactions and Director
                Independence.
            34Item
                13. Exhibits.
            34Item
                14. Principal Accountant Fees and Services.
            35Financial
                Statements.
            F-1







**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.** **Description
      of 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. We will be required to obtain required approvals from the United States
      Food and Drug Administration before we can sell our products. 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. If we obtain FDA
      approval, we anticipate commencing clinical studies for CytoSorbTM by the third
      quarter of 2007. If these studies are successful and we obtain FDA approval
      to
      proceed with our follow-up pivotal study, we anticipate that we will be able
      to
      begin sales of CytoSorbTM by mid-to-late 2009, at the earliest, assuming a
      successful pivotal study. However, there can be no assurance we will ever obtain
      FDA approval for CytoSorbTM or any other device.




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.




The
      CytoSorbTM device consists of a cylinder containing the adsorbent polymer beads.
      The cylinder 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 cylinder, 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 toxins intended to be adsorbed by our
      devices.




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 situations such as
      patient overdoses.




3


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 FDA
      approval to sell CytoSorbTM. Even if we ultimately obtain FDA approval, because
      we can not control the timing of FDA responses to our submissions, there can
      be
      no assurance as to when such approval will be obtained.




Our
      BetaSorbTM device is intended to remove beta 2 -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
      absorbent polymer packed into an identically shaped and constructed cylinder
      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 dialyser. 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 FDA approval.




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 a
      more
      extensive sepsis study. In addition, CytoSorb’sTM ability to interact safely with
      blood (hemocompatibility) has been demonstrated through ISO 10993 testing.
      The
      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.




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**




We
      were
      incorporated in Nevada on April 25, 2002 as Gilder Enterprises, Inc. and were
      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. (“MedaSorb Delaware”)
      in a merger, and its business became our business. In connection with the
      merger, we also changed our principal executive offices to those of MedaSorb
      Delaware, which are located at 7 Deer Park Drive, Suite K, Monmouth Junction,
      New Jersey 08852. Following the merger, in July 2006 we changed our name to
      MedaSorb Technologies Corporation.




4


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




MedaSorb
      Delaware has been engaged in research and development since its inception,
      and
      prior to the merger, had raised approximately $53 million **** from
      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 Delaware had 292 stockholders that held an
      aggregate of 20,340,929 shares of common stock of MedaSorb Delaware. 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 our sole director
      and
      officer 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 Delaware 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 Delaware. 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 former stockholders of MedaSorb Delaware 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 Delaware 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 Delaware options and warrants that were cancelled. Certain
      providers of legal services to MedaSorb Delaware who previously had the right
      to
      be issued approximately 997,000 **** shares
      of
      MedaSorb Delaware 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.




Concurrently
      with the closing of the merger, Joseph G. Bowes, our sole director and officer
      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, James Winchester, MD was appointed our Chief
      Medical Officer, Vincent Capponi was appointed our Chief Operating Officer
      and
      David Lamadrid was appointed our Chief Financial Officer.




For
      accounting purposes, the merger is being accounted for as a reverse merger,
      since we were a shell company prior to the merger, the former stockholders
      of
      MedaSorb Delaware own a majority of the issued and outstanding shares of our
      Common Stock after the merger, and the directors and executive officers of
      MedaSorb Delaware became our directors and executive officers. Accordingly,
      MedaSorb Delaware is treated as the acquiror in the merger, which is treated
      as
      a recapitalization of MedaSorb Delaware, and the pre-merger financial statements
      of MedaSorb Delaware are now deemed to be our historical financial statements.




5


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
      have
      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 since February
      26, 2007 and will continue to accrue at such rate until the registration
      statement is effective, and are payable in cash for such period, and we are
      obligated to pay those purchasers an aggregate of $105,000 per 30-day period
      from February 26, 2007 through the date such registration statement is
      effective.




Both
      the
      conversion price of the Series A Preferred Stock and the exercise price of
      the
      warrants are 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.




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 consist 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.




6


In
      the
      event those investors have 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 may 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. No assurance can be given that the sale of the pledged securities
      will provide these investors with sufficient proceeds to cover the full extent
      of their loss, if any, on their investment. 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.




**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
      largely untouched by dialysis.




Our
      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, such as cytokines, circulating in the blood. We believe that our
      technology may have many applications in the treatment of common, chronic and
      acute healthcare complications including the 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.




Both
      the
      CytoSorbTM and BetaSorbTM devices consist of a cylinder containing adsorbent
      polymer beads, although the polymers used in the two devices are physically
      different. The cylinders 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 dialyser, 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; extrapolated to a global population, the worldwide incidence is
      several million cases per year. Severe trauma and community acquired pneumonia
      are often associated with sepsis.




7


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 95,000 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.




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
      approximately 300,000 patients in the United States currently receiving chronic
      dialysis and more than 1.4 million worldwide. Approximately 89% 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,
      circulating in the blood. All of the potential applications described below
      ( i.e. ,
      the
      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 only recently submitted a proposed pilot study for
      approval to the FDA with respect to CytoSorbTM, the first device we intend to
      bring to market. If we obtain FDA approval, we anticipate commencing clinical
      studies for CytoSorbTM by the third quarter of 2007. If these studies are
      successful and we obtain FDA approval to proceed with our follow-up pivotal
      study, we anticipate that we will be able to begin sales of CytoSorbTM by
      mid-to-late 2009, at the earliest, assuming a successful pivotal study. However,
      there can be no assurance we will ever obtain FDA approval for CytoSorbTM or any
      other device.




8


The
      CytoSorbTM Device (Critical Care)




*APPLICATION:
      Treatment and Prevention of Sepsis*




Sepsis
      is
      defined 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. Sepsis carries mortality rates of between 28%
      and 60%. 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; extrapolated to a global population, this equates to several million
      new
      cases annually. In the U.S. alone, treatment of sepsis costs nearly $18 billion
      annually. According to the Centers for Disease Control, sepsis is the tenth
      leading cause of death in the U.S., as reported by (CDC). More than 1,000 people
      die each day from sepsis.




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.




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 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 and Budget Requirements: 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 a more
      extensive sepsis study. Our plans for the development of CytoSorbTM to treat
      sepsis patients are summarized in the table below.




9




**Task**
            **Status/Estimated
                Time Required**
            **Estimated**
              ******Budget
                Requirements**1.
                Design pilot study
            Completed;
                Submitted for FDA approval in December 2006
            (nominal)2.
                Conduct pilot study
            six
                to nine months following design of pilot study and approval from
                FDA to
                commence the study
            $1.2
                million3.
                Design pivotal study
            Concurrent
                with item 2
            (nominal)4.
                Conduct pivotal study
            nine
                to 12 months following completion of a successful pilot study, submission
                of final report of pilot study to FDA and FDA approval of pivotal
                study
                design
            $1.8
                million5.
                Approval time following submission
            six
                to nine monthsTotal
            Mid
                to late 2009
            $3.0
                million




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 FDA approval, because
      we cannot control the timing of FDA responses to our submissions, 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.




There
      is
      a shortage of donated organs worldwide, with approximately 95,000 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 and Budget Requirements: Studies
      are currently being 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 completed the observational and dosing phases of the project
      in
      the third quarter of 2006. The observational and dosing phases of the study
      involved 30 viable donors and eight non-viable donors, respectively. 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. The
      treatment phase will be contingent upon further discussion with the FDA and
      HRSA
      regarding study design, as well as obtaining additional funding.




10


*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 absorbent 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
      CytoSorbTM 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.




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.




11


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, and most recently a clinical pilot of
      six
      patients in California for up to 24 weeks in which our BetaSorbTM device removed
      the targeted toxin, beta 2 -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 now
      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




Pursuant
      to a “SubAward Agreement” we entered into with the University of Pittsburgh in
      September 2005, we are working with researchers at the University of Pittsburgh
      - Critical Care Medicine Department in the development of the sepsis application
      for our technology. Consisting of more than twenty physicians, as well as
      numerous full-time scientists, educators and administrative assistants, the
      Critical Care Medicine Department at the University of Pittsburgh is one of
      the
      largest organizations of its type in the world and has established an
      international reputation for excellence in clinical care, education, and
      research.




The
      SubAward Agreement was entered into under a grant 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 commenced in September 2005 and is expected to continue for a total of
      five years. 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,
      during the first year of the study, which concluded in August 2006, we received
      $104,921 for our efforts in support of the study. Although we have not yet
      formally entered into an additional SubAward Agreement, 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 $142,000, $110,000, $133,000
      and
      $163,000, respectively, for years two, three, four and five of the study, but
      that our continued participation in the study is subject to our performance
      and
      an annual review by UPMC.




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 our principal investigator for
      CytoSorbTM. Dr. Kellum, together with several other researchers at UPMC, serve on
      our Critical Care 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 Center **** and **** has
      authored more than 70 publications and has received numerous research grants
      from foundations and industry.




12


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 and obtain 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 four scientists with expertise in the
      fields of fundamental chemical research, polymer research and development,
      and
      dialysis engineering technology.




Our
      Medical Advisory Board - Critical Care Medicine consists of seven medical
      doctors, four of whom are affiliated with UPMC, with expertise in critical
      care
      medicine, sepsis, multi-organ failure and related clinical study
      design.




Our
      Medical Advisory Board - 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
      $150 per hour, except with respect to one of our advisors, who we compensate
      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 Delaware, we granted Ms.
      Montiel a perpetual royalty equal to three percent of all gross revenues
      received by us from sales of CytoSorb TM in
      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 Delaware, 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.




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 twelve of our issued patents and five 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.




13


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 continue
      to exclusively own any confidential and proprietary know how.




***Product
      Payment & Reimbursement*** ******




Critical
      Care Applications




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.




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
      the
      U.S., over 80% of chronic dialysis patients are Medicare-eligible, regardless
      of
      age. Therefore, it is expected that 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 will 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 tested at the
      University of Pittsburg using a septic rat model based on lipopolysaccharide
      (a
      particular kind of toxin, known as a bacterial endotoxin) and the CytoSorbTM
polymer.




14


Both
      the
      CytoSorbTM and BetaSorbTM devices consist of a cylinder containing adsorbent
      polymer beads. The cylinder 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 cylinder, toxins are adsorbed from the blood, without
      filtering any fluids from the blood or the need for replacement fluid or
      dialysate.




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 dialyser. 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 extremely expensive when compared to the percentage of patients
      who benefit.




While
      studies of other potential sepsis drug therapies are in progress, we are not
      aware of any other broad-spectrum blood detoxification therapy under development
      for this application that could be considered directly competitive with our
      approach.




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.




15


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 beta 2 -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.




Efforts
      to improve removal of middle molecular weight toxins with enhanced dialyzer
      designs have achieved only marginal 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.




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.




We
      have
      not conducted any clinical studies of our products with respect to the treatment
      of any other indications, although data collected during the “emergency and
      compassionate use” treatment of a single sepsis patient has been encouraging to
      us. 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.




We
      only
      recently submitted a proposed pilot study for approval to the FDA with respect
      to CytoSorbTM , the first device we intend to bring to market. If we obtain FDA
      approval, we anticipate commencing clinical studies for CytoSorbTM by the third
      quarter of 2007. If these studies are successful and we obtain FDA approval
      to
      proceed with our follow-up pivotal study, we anticipate that we will be able
      to
      begin sales of CytoSorbTM by mid-to-late 2009, at the earliest, assuming a
      successful pivotal study. However, there can be no assurance we will ever obtain
      FDA approval for CytoSorbTM or any other device.




***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 $1 **** million
      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. The treatment phase will be contingent upon
      further discussion with the FDA and HRSA regarding study design, as well as
      obtaining additional funding.




16


In
      addition, in September 2005, the University of Pittsburgh Medical Center was
      awarded a grant 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, during the
      first year of the study, which concluded in August 2006, we received $104,921
      for our efforts in support of the grant. Although we have not yet formally
      entered into an additional SubAward Agreement, 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 $142,000, $110,000, $133,000 and $163,000,
      respectively, for years two, three, four and five of the study, but that 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.




***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
      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.




17


In
      the
      European Union, distributors of 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.




In
      the
      United States, our CytoSorbTM and BetaSorbTM devices are classified as Class III
      (CFR 876.5870—Sorbent Hemoperfusion System) and will require 501(k) Submissions
      to the FDA. However, because the BetaSorbTM device is intended for chronic use,
      the FDA may require pre-market approval (PMA), which we will submit if required.
      In the case of CytoSorbTM, because the application is for acute care (short term,
      less than 30 days), management believes that FDA approval for this product
      may
      be obtained based solely on the 510(k) Submission accompanied with clinical
      data. 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, and applicable approvals
      in Canada and Japan.




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.




Provided
      we have sufficient additional funding and FDA approval to proceed, we expect
      to
      begin the treatment phase of a pilot clinical study on the safety and efficacy
      of our products in the treatment of sepsis in the third or fourth quarter of
      2007. The pilot phase is expected to span six to nine months. If we successfully
      complete the pilot study and obtain approval from the FDA to proceed to the
      pivotal phase, we estimate that an additional one year period would be required
      for the pivotal study, to the extent we have sufficient funding, for the purpose
      of compiling sufficient data to support both the U.S. 510(k) Submission and
      the
      application to obtain CE Mark certification in Europe. In the U.S., another
      six
      to nine months is anticipated for FDA review and approval of the 510(k)
      submission. Concurrent with these activities, we plan to pursue CE Mark
      certification of our products. Upon successful completion of a “quality systems
      audit” in combination with clinical data and the assembly of a technical file,
      we anticipate that CytoSorbTM device will receive CE Mark certification,
      all owing
      it
      to be sold in Europe.




The
      FDA
      can ban certain medical devices, detain or seize adulterated or misbranded
      medical devices, order repair, replacement or refund of these devices and
      require notification of health professionals and others with regard to medical
      devices that present unreasonable risks of substantial harm to the public
      health. The FDA may also enjoin and restrain certain violations of the Food,
      Drug and Cosmetic Act and the Safe Medical Devices Act pertaining to medical
      devices, or initiate action for criminal prosecution of such violations.
      International sales of medical devices manufactured in the U.S. that are not
      approved by the FDA for use in the U.S., or are banned or deviate from lawful
      performance standards, are subject to FDA export requirements. 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 funding to support our
      planned activities and that our products perform as expected in clinical
      studies, that we will obtain FDA approval of our CytoSorbTM device in the
      treatment of sepsis in mid to late 2009, assuming a successful pivotal study.
      As
      we approach regulatory approval, we plan to initially build a sales organization
      of approximately 15 representatives in the U.S. In addition, we plan on pursuing
      localized distribution agreements in rural areas.




18


We
      also
      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 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 21 **** U.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 and patent applications include:




·
            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.





·
            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 on April 20, 2021. This patent
                concerns
                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 on January 4, 2023. This patent
                concerns
                a hemocompatible polymer and a one-step method of producing
                it.




19




·
            U.S.
                Pat. App. Nos. 10/980,510, 10/981,055, 11/105,140 and 11/255,132.
                These
                applications concern biocompatible devices, systems, and methods
                for
                reducing levels of pro-inflammatory or anti-inflammatory stimulators
                or
                mediators in the blood.





·
            U.S.
                Pat. App. No. 11/601,931. This application concerns size-selective
                polymeric adsorbents for use in
                hemoperfusion.





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, 2006, we had eight 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.




**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
      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.




20


***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,
      2006, we had an accumulated deficit of $67,426,583 which included losses from
      operations of $7,671,580 for the year ended December 31, 2006 and $3,665,596
      for
      the year ended December 31, 2005. 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
      may have difficulty raising needed capital in the future because of our limited
      operating history and business risks associated with
      us.***




We
      generate no revenues from our proposed products or otherwise, and have expended
      and will continue to expend substantial funds in the research, development
      and
      clinical and pre-clinical studies of our polymer products. Following the June
      30, 2006 merger, we completed a private placement of securities raising gross
      proceeds of $5.3 million. We anticipate that the net proceeds of the private
      placement will only be sufficient to fund our operations through the fourth
      quarter of 2007 ,
      following which we will need additional financing before we can complete the
      clinical studies and commercialization of our proposed products. However, there
      can be no assurance that financing will be available on acceptable terms or
      at
      all. Our future capital requirements will depend upon many factors, including,
      but not limited to, continued progress in our research and development
      activities, costs and timing of conducting clinical studies and seeking
      regulatory approvals and patent prosecutions, competing technological and market
      developments, and our ability to establish collaborative relationships with
      third parties. If adequate funds are unavailable, we may have to delay, reduce
      the scope of or eliminate one or more of our research or development programs
      or
      product launches or marketing efforts or cease operations.




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


·
            costs
                for training physicians and other health care
                personnel.




21


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 ourself.




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




We
      currently have only eight employees. Our success will depend to a significant
      degree upon the continued services of our key management and advisors,
      including, Al Kraus, our Chief Executive Officer; Dr. James Winchester, our
      Chief Medical Officer, who is employed by us on a part time basis; David
      Lamadrid, our Chief Financial Officer; and Vincent Capponi, our Chief Operating
      Officer. These individuals, other than Mr. Kraus, whose employment agreement
      terminates in July 2008, 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’s primary employment is with another employer***




Dr.
      James
      Winchester, our Chief Medical Officer, serves as the Chief of Beth Israel
      Medical Center’s Nephrology division. Although the time Dr. Winchester provides
      to us varies from time to time, it is generally in the range of one-half day
      to
      one full day per week. Because Dr. Winchester’s primary employment is with Beth
      Israel Medical Center, Dr. Winchester 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;


·
            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.




***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 which
      we’ve recently settled, 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.




22


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 FDA approval of our products.
      The
      approval process, if permitted to proceed by the FDA, will involve pilot and
      pivotal clinical studies and is lengthy and costly. The failure to obtain
      government approvals, including required FDA approvals, 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 United States, in various states and
      in
      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 FDA approval
      for any of our products, we will be subject to extensive ongoing regulation.




Our
      products will be subject to regulation as medical devices under the Federal
      Food, Drug, and Cosmetic Act. In the United States, the FDA enforces, 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 FDA under these laws. Current FDA regulations classify our
      CytoSorbTM device (the first product we intend to seek FDA approval for) as a
      Class III device (CFR 876.5870—Sorbent Hemoperfusion System). We intend to
      submit a 510(k) pre-market notification to the FDA for approval to market this
      product. There can be no assurance, however, that the FDA will grant clearance
      to market CytoSorbTM in a timely manner, if at all, or that the FDA will not
      require the submission of additional clinical data or a pre-market approval
      application ("PMA"), which is a lengthier process. 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 any additional FDA, state or foreign 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. FDA approvals are also required to commence the pilot and pivotal
      clinical studies we need to conduct to further study our devices. There can
      be
      no assurance that the FDA will allow the clinical studies to commence. We also
      are and will be subject to other Federal, state, and local laws, regulations
      and
      recommendations relating to laboratory and manufacturing practices as well
      as
      Medicare, Medicaid and anti-kickback laws. Non-compliance with applicable
      requirements can result in civil penalties, the recall, injunction or seizure
      of
      products, an inability to import products into the United States, the refusal
      by
      the government to approve or clear product approval applications, the withdrawal
      of previously approved product applications and criminal prosecution. The extent
      of potentially adverse government regulation that might arise from future
      legislation or administrative action cannot be predicted.




23


***We
      have conducted limited clinical studies of our
      BetaSorb*** ***TM*** ***device
      and no clinical studies of our CytoSorb*** ***TM*** ***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. 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 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
      do not
      currently have any product liability insurance or other liability insurance
      relating to clinical studies or any products. We cannot give assurances that
      we
      will be able 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.




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




Dr.
      John
      Kellum and Dr. David Powner, among others, are critical care advisors and
      consultants of ours and are associated with University of Pittsburgh Medical
      Center and University of Texas, respectively. 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.




24


***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 and pre-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 FDA and other 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.




***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.




25


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 75% 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, which we are
      currently obligated to pay .***




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 subsequently issued an additional 2,153,585 shares of Series
      A
      Preferred Stock through December 31, 2006 to additional investors as well as
      in
      respect of dividends issued on the shares of Series A Preferred Stock we
      initially issued, and we may 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” including, the failure to cause a
                registration statement registering the shares of Common Stock underlying
                the Series A Preferred Stock and Warrants issued in connection therewith
                to be effective by February 25, 2007 (240 days following the closing
                of
                the private placement);





·
            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.





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 since February
      26, 2007 and will continue to accrue at such date until the registration
      statement is effective, and are payable in cash for such period, and we are
      obligated to pay those purchasers an aggregate of $105,000 per 30-day period
      from February 26, 2007 through the date such registration statement is
      effective.





26


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





·
            require
                that we 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, we are obligated to pay those purchasers an aggregate
      of $105,000 per 30-day period from February 26, 2007 through the date such
      registration statement is effective.




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.





***Anti-Dilution
      Provisions Of The Series A Preferred Stock And Warrants, As Well As The Terms
      Of
      The Employment Agreement With Our Chief Executive Officer, Could Result In
      Dilution Of Stockholders***




Both
      the
      conversion price of the Series A Preferred Stock and the exercise price of
      the
      Warrants are 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, such conversion
      price and/or exercise price will be reduced to such lower price, further
      diluting holders of our Common Stock.




In
      addition, under our Employment Agreement with Al Kraus, our Chief Executive
      Officer, Mr. Kraus is entitled to be issued options to purchase Common Stock
      at
      a price of $6.64 per share so that the combined total of Common Stock owned
      by
      Mr. Kraus, including upon exercise of options, equals 5% of our outstanding
      Common Stock on a fully diluted basis. Mr. Kraus has such right until such
      time
      as an aggregate of $20 million of financing has been received by us following
      the commencement of his employment. Pursuant to his Employment Agreement, based
      on the number of currently outstanding shares of Common Stock, Series A
      Preferred Stock, warrants and options, Mr. Kraus is entitled to purchase 413,920
      shares of Common Stock at a price $6.64 per share.




***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.





27


***Future
      Sales of Common Stock Could Result in a Decline in Market
      Price.***





Following
      the completion of the merger, the holders of 3,750,000 shares of Common Stock
      are able to sell such shares without registering them under the Securities
      Act.
      In addition, we have filed a registration statement covers the resale of
      9,312,273 shares of Common Stock underlying the Series A Preferred Stock and
      Warrants sold in the offering or issuable in connection therewith. Sales of
      a
      significant number of shares of Common Stock in the public market could result
      in a decline in the market price of our Common Stock.




***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 as described above.
      Subject to the rights of the holders of the Series A Preferred Stock, our
      Board of Directors is empowered, without stockholder approval, to issue up
      to
      88,000,000 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 100,000,000 shares of common stock, of which
      approximately 75,000,000 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.** **Description
      of Properties.**




We
      currently operate a 6,575 sq. ft. facility near Princeton, New Jersey, housing
      research laboratories, clinical manufacturing operations and administrative
      offices, under a lease agreement which expired in February 2007. We expect
      to
      enter into a two-year renewal agreement for that lease shortly. 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.




28


**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.**




No
      matter
      was submitted to a vote of security holders during the fourth quarter of
      2006.




**PART
      II**




**Item
      5.** **Market
      for Common Equity, Related Stockholder Matters and Small Business 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.





**Price****High**
            **Low****2006**First
                quarter
            n/a
            n/aSecond
                quarter
            n/a
            n/aThird
                quarter (from August 9)
            $3.95
            $1.25Fourth
                quarter
            $1.73
            $0.57







The
      number of holders of record for our Common Stock as of December 31, 2006 was
      approximately 385. 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.





**EQUITY
      COMPENSATION PLAN INFORMATION**




The
      following table summarizes outstanding options as of December 31, 2006, after
      giving effect to the merger.  The Registrant had no options outstanding
      prior to the merger, and all of the options below were issued in connection
      with
      the merger to former option holders of MedaSorb.





**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
            
            
            1,185,001
            
            $
            15.66
            
            
            2,205,599
                (2
            )Total
            
            
            1,185,00
                (3
            )
            $
            15.66(3
            )
            
            2,605,59








29




(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) 133,858 shares of Common Stock at a price
                of
                $41.47 per share, (ii) 247,121 shares of Common Stock at a price
                of $31.52
                per share, (iii) 56,279 shares of Common Stock at a price of
                $21.57per
                share, (iv) 34,028 shares of Common Stock at a price of $19.91 per
                share,
                (v) 443,507 shares of Common Stock at a price of $6.64 per share,
                (vi) 452
                shares of Common Stock at a price of $3.32 per share, (vii) 103,000
                shares
                of Common Stock at a price of $1.65 per share, and (viii) 166,756
                shares
                of Common Stock at a price of $1.25 per
                share.




**Item
      6.** **M** **anagement’s
      Discussion and Analysis of Plan of Operation.**




**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 (“MedaSorb Delaware”) and MedaSorb Acquisition Inc., a newly formed
      wholly-owned Delaware subsidiary of ours, MedaSorb Delaware
      merged with MedaSorb Acquisition Inc. (now known as MedaSorb Technologies,
      Inc.), and the stockholders of MedaSorb Delaware became our stockholders.
      MedaSorb Technologies, Inc. is now a wholly owned subsidiary of ours, and its
      business (the business conducted by MedaSorb Delaware prior to the merger)
      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.





**Convertible
      Notes Payable**





In
      accordance with Emerging Issues Task Force Issue 98-5, Accounting for
      Convertible Securities with a Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios, the Company evaluates its convertible notes
      payable to determine if an imbedded beneficial conversion feature (BCF) exists.
      If a BCF is determined to exist, the Company allocates a portion of the proceeds
      equal to the intrinsic value of that feature to additional paid-in capital.
      The
      debt discount attributed to the beneficial conversion feature is amortized
      over
      the convertible debenture's maturity period as interest expense using the
      effective yield method.





30


In
      accordance with Emerging Issues Task Force Issue 00-27, Application of Issue
      No.
      98-5 to Certain Convertible Instruments, the Company recognizes the value
      attributable to warrants to additional paid-in capital and a discount against
      the convertible debentures. The Company values the warrants in accordance with
      EITF 00-27 using the Black-Scholes pricing model. The debt discount attributed
      to the value of the warrants issued is amortized over the convertible
      debenture’s maturity period as interest expense using the effective yield
      method.





**Research
      and Development**





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





**Stock-Based
      Compensation**




In
      December 2004, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards 123R, “Share-Based Payment”. This statement
      requires that the cost resulting from all share-based payment transactions
      be
      recognized in the financial statements. This statement establishes fair value
      as
      the measurement objective in accounting for share-based payment arrangements
      and
      requires all entities to apply a fair-value based measurement method in
      accounting for share-based payment transactions with employees except for equity
      instruments held by employee share ownership plans.




Prior
      to
      the January 1, 2006 adoption of SFAS 123R, the Company accounted for
      stock-based compensation using the intrinsic value method prescribed in
      Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
      Employees” and related interpretations. Accordingly, no compensation expense had
      been recognized for stock options since all options granted had an exercise
      price equal to the market price on the date of grant. As permitted by SFAS
      123,
“Accounting for Stock-Based Compensation,” stock-based compensation was included
      as a pro forma disclosure in the notes to the consolidated financial statements.




Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of SFAS 123R, using the modified prospective method. Under this method, the
      provisions of SFAS 123R apply to all awards granted or modified after the date
      of adoption and all previously granted awards not yet vested as of the date
      of
      adoption. Prior periods have not been restated.





**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 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.




We
      intend
      to initially focus 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 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 situations such as
      patient overdoses.




31


In
      December 2006, we submitted to the FDA a proposed pilot study utilizing the
      CytoSorbTM device in humans for the treatment of sepsis. If the proposed pilot
      study is approved by the FDA, we anticipate commencing clinical studies by
      the
      third quarter of 2007. If these studies are successful and we obtain FDA
      approval to proceed with our follow-up pivotal study, we anticipate that we
      will
      be able to begin sales of CytoSorbTM by mid-to-late 2009. There can be no
      assurance that the FDA will allow us to conduct the pivotal study following
      receipt of data from the pilot study. 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. No
      assurance can be given that our proposed CytoSorbTM product will work as intended
      or that we will be able to obtain FDA approval to sell CytoSorbTM. Even if we
      ultimately obtain FDA approval, because we can not control the timing of FDA
      responses to our submissions, there can be no assurance as to when such approval
      will be obtained.




Our
      research and development costs were $1,112,804 and $1,526,743 for the years
      ended December 31, 2006 and 2005, respectively. We have experienced substantial
      operating losses since inception. As of December 31, 2006, we had an accumulated
      deficit of $67,426,583 which included losses from operations of $7,671,580
      and
      $3,665,596 for the years ended December 31, 2006 and December 31, 2005
      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 $2,051,932 and $2,162,703
      respectively, for the years ended December 31, 2006 and December 31, 2005
      respectively. Legal,
      financial, and other professional consulting costs were $912,379 and $948,209
      for the years ended December 31, 2006 and 2005, respectively.




In
      addition, our loss for the year ended December 31, 2006 includes interest
      expense of $4,738,877 primarily consisting of the following, net of interest
      and
      dividend income of $106,392:




·
            debt
                discount charges of $3,351,961 as a result of the issuance of 3,058,141
                shares of common stock to the holders of MedaSorb Delaware convertible
                notes in the aggregate principal amount of $6,549,900 to induce those
                holders to convert those notes into common stock prior to the
                merger,




·
            $423,309
                of interest expense with respect to those convertible
                notes,




·
            $1,000,000
                of debt discount charges as a result of the issuance to Margie Chassman
                of
                10,000,000 shares of common stock in connection with the funding
                of a
                $1,000,000 bridge loan to MedaSorb Delaware prior to the merger,
                and




·
            $50,000
                of interest expense with respect to the $1,000,000 bridge loan from
                Ms.
                Chassman.




**Liquidity
      and Capital Resources**




Since
      inception, the operations of MedaSorb Delaware have been financed through the
      private placement of its debt and equity securities. At December 31, 2005 (prior
      to the reverse merger), MedaSorb Delaware had cash of $707,256, an amount
      sufficient to fund its operations for approximately four months. Due to its
      losses and available cash at that time, MedaSorb Delaware’s audited consolidated
      financial statements for its year ended December 31, 2005 (which are now our
      financial statements) have been prepared assuming MedaSorb Delaware will
      continue as a going concern, and the auditors’ report on those financial
      statements expresses substantial doubt about the ability of MedaSorb Delaware
      to
      continue as a going concern.




As
      of
      December 31, 2006 we had cash on hand of $2,873,138, and current liabilities
      of
      $1,082,044. **** We
      believe that we have sufficient cash to fund our operations through the fourth
      quarter of 2007 , 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.




32


In
      October 2005, MedaSorb Delaware entered into an Investment Agreement with Margie
      Chassman pursuant to which she advanced us $1,000,000. The advance bore interest
      at the rate of 6% per annum. Pursuant to the terms of the Investment Agreement,
      on October 28, 2006, the $1,000,000 advance was converted into
      1,000,000 **** shares
      of
      Series A Preferred Stock and warrants to purchase 400,000 **** shares
      of
      Common Stock at a price of $2.00 per share.





**Item
      7.** **Financial
      Statements.**




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-KSB.





**Item
      8.** **Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure.**




Not
      Applicable.




**Item
      8A. 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, 2006, 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.




There
      has
      not been any changes in our internal controls over financial reporting that
      occurred during our quarter ended December 31, 2006 that has materially
      affected, or is reasonably likely to materially affect, the Company’s internal
      control over financial reporting.




**Item
      8B. Other Information.**




Not
      Applicable.




**PART
      III**




**Item
      9.** **Directors
      and Executive Officers of the Registrant.**




The
      information required to be disclosed hereunder will be incorporated by reference
      to our proxy statement, if filed by April 30, 2007 or, if such proxy statement
      is not filed by such date, such information will be disclosed by amendment
      to
      this Form 10-KSB prior to April 30, 2007.




**Item
      10.** **Executive
      Compensation.** ****




The
      information required to be disclosed hereunder will be incorporated by reference
      to our proxy statement, if filed by April 30, 2007 or, if such proxy statement
      is not filed by such date, such information will be disclosed by amendment
      to
      this Form 10-KSB prior to April 30, 2007.




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




The
      information required to be disclosed hereunder will be incorporated by reference
      to our proxy statement, if filed by April 30, 2007 or, if such proxy statement
      is not filed by such date, such information will be disclosed by amendment
      to
      this Form 10-KSB prior to April 30, 2007.




33


**Item
      12.** **Certain
      Relationships and Related Transactions.**




The
      information required to be disclosed hereunder will be incorporated by reference
      to our proxy statement, if filed by April 30, 2007 or, if such proxy statement
      is not filed by such date, such information will be disclosed by amendment
      to
      this Form 10-KSB prior to April 30, 2007.




**Item
      13.** **Exhibits.**




(a)
            The
                following documents are filed as part of this report:Exhibit
                No.
            Description2.1
            Agreement
                and Plan of Merger, dated as of June 29, 2006, by and among Gilder
                    Enterprises, Inc., MedaSorb Corporation and MedaSorb Acquisition
                Inc.
                *3.1
            Articles
                of Incorporation of Gilder Enterprises, Inc. (filed as Exhibit 3.1
                to
                Registrant’s Registration Statement on Form SB-2 filed on March 29, 2004,
                and incorporated herein by reference).3.2
            Amendment
                to Registrant’s Articles of Incorporation effected August 1, 2006 (filed
                as Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed on August
                7, 2006, and incorporated herein by reference).3.3
            By-Laws
                of Gilder Enterprises, Inc. (filed as Exhibit 3.2 to Registrant’s
                Registration Statement on Form SB-2 filed on March 29, 2004, and
                incorporated herein by reference).4.1
            Certificate
                To Set Forth Designations, Voting Powers, Preferences, Limitations,
                Restrictions, And Relative Rights Of Series A 10% Cumulative Convertible
                Preferred Stock, $.001 Par Value Per Share**4.2
            Form
                of Warrant issued to purchasers of Series A Preferred Stock.
                **4.3
            Form
                of Subscription Agreement, dated as of June 29, 2006, by and among
                Gilder
                Enterprises, Inc. and the purchasers party thereto. **10.1‡
            Employment
                Agreement, dated as of July 18, 2003, between Al Kraus and MedaSorb
                Technologies, LLC. *10.2‡
            Employment
                Agreement, dated as of July 1, 2005, between Vincent Capponi and
                MedaSorb
                Technologies, LLC. *10.3‡
            Employment
                Agreement, dated as of July 1, 2005, between David Lamadrid and MedaSorb
                Technologies, LLC. *10.4‡
            Employment
                Agreement, dated as of July 1, 2004, between Dr. James Winchester
                and
                MedaSorb Technologies, LLC. *10.5‡
            Gilder
                Enterprises, Inc. 2006 Long Term Incentive Plan. **10.6
            Stipulated
                Order and Settlement Agreement by and Between Bro-Tech Corporation
                and
                Purolite International Ltd. and MedaSorb Corporation. *10.7
            Subaward
                Agreement, dated May 2006, between MedaSorb Technologies and University
                of
                Pittsburgh. *




34




10.8
            Letter
                Agreement, dated August 11, 2003, between RenalTech International
                and
                Guillermina Vega Montiel *10.9
            Term
                Sheet For An Investment In MedaSorb Technologies, LLC, dated October
                26,
                2005, between MedaSorb and Margie Chassman *10.10
            Form
                of Voting Agreement entered into by Margie Chassman and her transferees
                in
                connection with 10,000,000 shares of Common Stock. *21
            Subsidiaries
                of the Registrant *


31.1
                Certification
                    of Al Kraus, Chief Executive Officer of the Registrant, pursuant
                    to Rules
                    13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of
                    193431.2
                Certification
                    of David Lamadrid, Chief Financial Officer, pursuant to Rules
                    13a-14(a)
                    and 15(d)-14(a) of the Securities Exchange Act of 193432.1
                Certification
                    of Al Kraus, Chief Executive Officer of the Registrant, pursuant
                    to Rules
                    13a-14(b) and 15(d)-14(b) of the Securities Exchange Act of
                    193432.2
                Certification
                    of David Lamadrid, Chief Financial Officer of the Registrant,
                    pursuant to
                    Rules 13a-14(b) and 15(d)-14(b) of the Securities Exchange Act
                    of
                    1934


*
            Incorporated
              by
              reference to the similarly described exhibit previously filed as an
              exhibit toRegistrant’s
              Registration Statement on Form SB-2, Registration No.
              333-138247.**
            Incorporated
              by reference to the similarly described exhibit previously filed as
              an
              exhibit toRegistrant’s
              Current Report on Form 8-K, as filed with the SEC on July 6,
              2006.‡
            Indicates
              a management
              contract or compensatory plan or
              arrangement.




**Item
      14.** **Principal
      Accountant Fees and Services.**




The
      information required to be disclosed hereunder will be incorporated by reference
      to our proxy statement, if filed by April 30, 2007 or, if such proxy statement
      is not filed by such date, such information will be disclosed by amendment
      to
      this Form 10-KSB prior to April 30, 2007.




35


**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 29 th day of
      March, 2007.




MEDASORB
      TECHNOLOGIES CORPORATION








By: /s/
      Al
      Kraus


Al
      Kraus


Chief
      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/
                Al Kraus
            
            Chief
                Executive Officer (Principal
            March
                29, 2007Al
                Kraus
            
            Executive
                Officer) and Director/s/
                David Lamadrid
            
            Chief
                Financial Officer (Principal
            March
                29, 2007David
                Lamadrid
            
            Accounting
              and
              Financial Officer)/s/
                William R. Miller
            
            Chairman
                of the Board
            March
                29, 2007William
                R. Miller/s/
                  Joseph Rubin
            
            Director
            March
                29, 2007Joseph
                Rubin, Esq./s/
                Kurt Katz
            
            Director
            March
                29, 2007Kurt
                Katz





36


FINANCIAL
      STATEMENTS








PageReports
                of Independent Accounting Firms
            F-2Consolidated
                Balance Sheets at December 31, 2006 and
                December 31, 2005
            F-4Consolidated
                Statements of Operations for the years ended December 31, 2006 and
                2005,
                and from inception to December 31, 2006
            F-5Consolidated
                Statements of Changes in Stockholders’ Equity (Deficiency) period
                from inception to December 31, 2006
            F-6Consolidated
                Statements of Cash Flows for the for the years ended December 31,
                2006 and
                2005, and from inception to December 31, 2006
            F-8Notes
                to Financial Statements
            F-10







F-1




**Report
      of Independent Registered Public Accounting Firm**







To
      the
      Board of Directors and Stockholders,


Medasorb
      Technologies Corporation:





We
      have
      audited the accompanying balance sheets of Medasorb Technologies Corporation
      (f/k/a Gilder Enterprises, Inc.) (a development stage company), as of December
      31, 2006 and 2005 ,
      and the
      related 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, 2006 .
      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 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 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 Technologies Corporation
      as of December 31, 2006 and 2005 and the
      results of its operations and cash flows for the years then ended and the
      cumulative period from January 1, 2001 to December 31, 2006 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 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 financial statements do not include any
      adjustments that might result from the outcome of this uncertainty.




/s/
      WithumSmith+Brown, A Professional Corporation




New
      Brunswick, New Jersey


March
      26,
      2007


F-2


**Report
      of Independent Public Accountants**







To
      the
      Board of Directors and Stockholders,


Medasorb
      Technologies Corporation:





To
      the
      Board of Directors and Stockholders,


Medasorb
      Technologies Corporation:





We
      have
      audited the accompanying balance sheets of Medasorb Technologies 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 Technologies 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,**
            
            **2006**
            
            **2005****ASSETS**Current
                Assets:Cash
                and cash equivalents
            
            $
            2,873,138
            
            $
            707,256Prepaid
                expenses and other current assets
            
            
            24,880
            
            
            19,261**Total
                current assets**
            
            
            2,898,018
            
            
            726,517Property
                and equipment - net
            
            
            303,560
            
            
            553,657Other
                assets
            
            
            243,471
            
            
            181,307**Total
                long-term assets**
            
            
            547,031
            
            
            734,964**Total
                Assets**
            
            $
            3,445,049
            
            $
            1,461,481**LIABILITIES
                AND STOCKHOLDERS' EQUITY (DEFICIENCY)**Current
                Liabilities:Accounts
                payable
            
            $
            942,265
            
            $
            1,802,788Accrued
                expenses and other current liabilities
            
            
            69,779
            
            
            412,646Accrued
                interest
            
            
            70,000
            
            
            1,056,960Stock
                subscribed
            
            
            --
            
            
            399,395Convertible
                notes payable
            
            
            --
            
            
            3,429,899**Total
                current liabilities**
            
            
            1,082,044
            
            
            7,101,688Long-term
                liabilities:Convertible
                notes payable
            
            
            --
            
            
            4,120,000**Total
                liabilities**
            
            
            1,082,044
            
            
            11,221,688Stockholders'
                Equity (Deficiency):10%
                Series A Preferred Stock, Par Value $0.001, 100,000,000 and
                -0-shares
                authorized at December 31, 2006 and 2005, respectively,7,403,585
                and -0- shares issued and outstanding, respectively
            
            
            7,403
            
            
            --Common
                Stock, Par Value $0.001, 100,000,000 and 300,000,000
                sharesauthorized
                at December 31, 2006 and 2005, respectively, 24,628,274and
                4,829,120 shares issued and outstanding, respectively
            
            
            24,629
            
            
            4,829Additional
                paid-in capital
            
            
            69,757,556
            
            
            49,214,431Deficit
                accumulated during the development stage
            
            
            (67,426,583
            )
            
            (58,979,467
            )**Total
                stockholders' equity (deficiency)**
            
            
            2,363,005
            
            
            (9,760,207
            )**Total
                Liabilities and Stockholders' Equity (Deficiency)**
            
            $
            3,445,049
            
            $
            1,461,481




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
                  from****January
                  22,1997****(date
                  of inception) to**
              
              **Year
                  ended**
              
              **Year
                  ended****December
                  31,**
              
              **December
                  31,**
              
              **December
                  31,****2006**
              
              **2006**
              
              **2005**Revenue
              
              $
              --
              
              $
              --
              
              $
              --Expenses:Research
                  and development
              
              
              40,892,771
              
              
              1,112,804
              
              
              1,526,743Legal,
                  financial and other consulting
              
              
              6,259,513
              
              
              912,379
              
              
              948,209General
                  and administrative
              
              
              20,138,109
              
              
              939,128
              
              
              635,960Change
                  in fair value of management and incentive units
              
              
              (6,055,483
              )
              
              --
              
              
              (14,551
              )Total
                  expenses
              
              
              61,234,910
              
              
              2,964,311
              
              
              3,096,361Other
                  (income) expenses:Gain
                  on disposal of property and equipment
              
              
              (21,663
              )
              
              --
              
              
              (21,663
              )Gain
                  on extinguishment of debt
              
              
              (206,608
              )
              
              (31,608
              )
              
              (175,000
              )Interest
                  expense, net
              
              
              5,644,408
              
              
              4,738,877
              
              
              765,898Total
                  other (income) expense, net
              
              
              5,416,137
              
              
              4,707,269
              
              
              569,235Net
                  loss
              
              
              (66,651,047
              )
              
              (7,671,580
              )
              
              (3,665,596
              )Series
                  A preferred stock dividend
              
              
              775,536
              
              
              775,536
              
              
              --Net
                  loss available to common shareholders
              
              $
              (67,426,583
              )
              $
              (8,447,116
              )
              $
              (3,665,596
              )Basic
                  and diluted net loss per common share
              
              
              
              
              $
              (0.56
              )
              $
              (0.77
              )Weighted
                  average number of common stock outstanding
              
              
              
              
              
              14,956,072
              
              
              4,786,956


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,
                  2006**
  **Deficit****Common
                  Stock**
              
              **Preferred
                  Stock**
              
              
              
              **Accumlated**
              
              **Total****Members'**
              
              
              
              
              
              
              
              
              
              
              
              **Additional**
              
              **During
                    the**
              
              **Stockholders'****Equity
                    (Deficiency)**
              
              **Deferred
                    Compensation**
              
              **Shares**
              
              **Par**
                **Value**
              
              **Shares**
              
              **Par**
                **Value**
              
              **Paid-In
                    Capital**
              
              **Development
                    Stage**
              
              **Equity(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
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              161,073Options
                  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
              )
  The Notes to Consolidated Financial Statements are an
        integral
        part of these statements.
  F-6
  **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,
                    2006**
  **Deficit****Common
                      Stock**
                  
                  **Preferred
                      Stock**
                  
                  
                  
                  **Accumlated**
                  
                  **Total****Members'**
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  **Additional**
                  
                  **During
                        the**
                  
                  **Stockholders'****Equity(Deficiency)**
                  
                  **Deferred
                        Compensation**
                  
                  **Shares**
                  
                  **Par**
                    **Value**
                  
                  **Shares**
                  
                  **Par**
                    **Value**
                  
                  **Paid-In
                        Capital**
                  
                  **Development**
                      **Stage**
                  
                  **Equity(Deficit)**
 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 forequity
              
              
              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 an 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 ofpreferred
                  stock
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              (620,563
              )
              
              --
              
              
              (620,563
              )Shares
                  held by original stockholders of Parent immediately prior
                  tomerger
              
              
              --
              
              
              --
              
              
              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 $1,000,000convertible
                  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 andservices
                  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
              )
              $
              2,363,005


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 from****January
                  22, 1997****(date
                  of inception) to**
              
              **Year
                  ended**
              
              **Year
                  ended****December
                  31,**
              
              **December
                  31,**
              
              **December
                  31,****2006**
              
              **2006**
              
              **2005**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (66,651,047
              )
              $
              (7,671,580
              )
              $
              (3,665,596
              )Adjustments
                  to reconcile net loss to net cashused
                  by operating activities:Common
                  stock issued as inducement to convertconvertible
                  notes payable and accrued interest
              
              
              3,351,961
              
              
              3,351,961
              
              
              --Issuance
                  of common stock to consultants for services
              
              
              30,000
              
              
              30,000
              
              
              --Depreciation
                  and amortization
              
              
              2,046,625
              
              
              255,526
              
              
              265,264Amortization
                  of debt discount
              
              
              1,000,000
              
              
              1,000,000
              
              
              --Gain
                  on disposal of property and equipment
              
              
              (21,663
              )
              
              --
              
              
              (21,663
              )Gain
                  on extinguishment of debt
              
              
              (206,608
              )
              
              (31,608
              )
              
              (175,000
              )Abandoned
                  patents
              
              
              183,556
              
              
              --
              
              
              183,556Bad
                  debts - employee advances
              
              
              255,882
              
              
              --
              
              
              --Contributed
                  technology expense
              
              
              4,550,000
              
              
              --
              
              
              --Consulting
                  expense
              
              
              237,836
              
              
              --
              
              
              --Management
                  unit expense
              
              
              1,334,285
              
              
              --
              
              
              (14,551
              )Expense
                  for issuance of warrants
              
              
              478,409
              
              
              9,883
              
              
              --Expense
                  for issuance of options
              
              
              390,977
              
              
              143,352
              
              
              --Amortization
                  of deferred compensation
              
              
              74,938
              
              
              --
              
              
              --Changes
                  in operating assets and liabilities:Prepaid
                  expenses and other current assets
              
              
              (296,428
              )
              
              (5,619
              )
              
              41,898Other
                  assets
              
              
              (53,893
              )
              
              (2,730
              )
              
              --Accounts
                  payable and accrued expenses
              
              
              2,798,244
              
              
              (421,677
              )
              
              775,665Accrued
                  interest
              
              
              1,893,103
              
              
              493,310
              
              
              760,860**Net
                  cash used by operating activities**
              
              
              (48,603,823
              )
              
              (2,849,182
              )
              
              (1,849,567
              )Cash
                  flows from investing activities:Proceeds
                  from sale of property and equipment
              
              
              32,491
              
              
              --
              
              
              32,491Purchases
                  of property and equipment
              
              
              (2,199,094
              )
              
              --
              
              
              (4,000
              )Patent
                  costs
              
              
              (393,419
              )
              
              (64,863
              )
              
              (20,393
              )Loan
                  receivable
              
              
              (1,632,168
              )
              
              --
              
              
              --**Net
                  cash provided (used) by investing activities**
              
              
              (4,192,190
              )
              
              (64,863
              )
              
              8,098Cash
                  flows from financing activities:Proceeds
                  from issuance of common stock
              
              
              400,490
              
              
              400,490
              
              
              --Proceeds
                  from issuance of preferred stock, net of relatedissuance
                  costs
              
              
              4,679,437
              
              
              4,679,437
              
              
              --Equity
                  contributions - net of fees incurred
              
              
              41,711,198
              
              
              --
              
              
              --Proceeds
                  from borrowing
              
              
              8,378,631
              
              
              --
              
              
              2,132,581Proceeds
                  from subscription receivables
              
              
              499,395
              
              
              --
              
              
              399,395
  The Notes to Consolidated Financial Statements are an
        integral
        part of these statements.
  F-8
 **MEDASORB
                  TECHNOLOGIES CORPORATION****(a
                  development stage company)****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS**
 **Net
                  cash provided by financing activities**
              
              
              55,669,151
              
              
              5,079,927
              
              
              2,531,976Net
                  increase (decrease) in cash and cash equivalents
              
              
              2,873,138
              
              
              2,165,882
              
              
              690,507Cash
                  and cash equivalents at beginning of period
              
              
              --
              
              
              707,256
              
              
              16,749Cash
                  and cash equivalents at end of period
              
              $
              2,873,138
              
              $
              2,873,138
              
              $
              707,256**Supplemental
                  disclosure of cash flow information:**Cash
                  paid during the period for interest
              
              $
              511,780
              
              $
              --
              
              $
              7,871**Supplemental
                  schedule of noncash financing activities:**Note
                  payable principal and interest conversion to equity
              
              $
              10,201,714
              
              $
              9,030,149
              
              $
              51,656Issuance
                  of member units for leasehold improvements
              
              $
              141,635
              
              $
              --
              
              $
              --Issuance
                  of management units in settlement of cost ofraising
                  capital
              
              $
              437,206
              
              $
              --
              
              $
              92,287Change
                  in fair value of management units for cost of raisingcapital
              
              $
              278,087
              
              $
              --
              
              $
              --Exchange
                  of loan receivable for member units
              
              $
              1,632,168
              
              $
              --
              
              $
              --Issuance
                  of common stock in exchange for stocksubscribed
              
              $
              399,395
              
              $
              399,395
              
              $
              --Issuance
                  of equity in settlement of accounts payable
              
              $
              1,586,444
              
              $
              750,125
              
              $
              836,319Costs
                  paid from proceeds in conjunction with issuance ofpreferred
                  stock
              
              $
              620,563
              
              $
              620,563
              
              $
              --Preferred
                  stock dividends
              
              $
              775,536
              
              $
              775,536
              
              $
              --
  The Notes to
      Consolidated Financial Statements are an integral part of these
      statements.




F-9




**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 Medasorb Technologies, Inc., its wholly-owned subsidiary (the
“Subsidiary”), collectively referred to as “the Company.”





On
      June
      30, 2006, pursuant to an Agreement and Plan of Merger, by and among the Parent,
      MedaSorb Technologies, Inc., a Delaware corporation (formerly known as MedaSorb
      Corporation) (“MedaSorb Delaware”) and the Parent’s subsidiary (formerly known
      as MedaSorb Acquisition Inc.), MedaSorb Delaware merged (the “Merger”) with the
      Parent’s subsidiary, and the stockholders of MedaSorb Delaware became
      stockholders of the Parent. The business of the Subsidiary (the business
      conducted by MedaSorb Delaware prior to the Merger) is now the Company’s only
      business.





In
      connection with the Merger (i) the former stockholders of MedaSorb Delaware
      were
      issued an aggregate of 20,340,929 shares of Common Stock of the Parent in
      exchange for the same number of shares of common stock of MedaSorb Delaware
      previously held by such stockholders, (ii) outstanding warrants and options
      to
      purchase a total of 1,697,648 shares of the common stock of MedaSorb Delaware
      were cancelled in exchange for warrants and stock options to purchase the same
      number of shares of the Parent’s Common Stock at the same exercise prices and
      otherwise on the same general terms as the options and warrants that were
      cancelled, and (iii) certain providers of legal services to MedaSorb Delaware
      who previously had the right to be issued approximately 997,000 **** shares
      of
      MedaSorb Delaware common stock as payment toward accrued legal fees, became
      entitled to instead be issued the same number of shares of the Parent’s Common
      Stock as payment toward such services. Immediately prior to the Merger, after
      giving effect to a share cancellation transaction effected by the former
      principal stockholder of the Parent, the Parent had outstanding 3,750,000 shares
      of Common Stock and no warrants or options to purchase Common Stock. MedaSorb
      Delaware prior to the Merger had 300,000,000 authorized shares of common stock.
      Following the Merger, the Parent has authorized 100,000,000 shares of common
      stock and 100,000,000 shares of preferred stock.





For
      accounting purposes, the Merger is being accounted for as a reverse merger,
      since the Parent was a shell company prior to the Merger, the former
      stockholders of MedaSorb Delaware now own a majority of the issued and
      outstanding shares of the Parent’s Common Stock, and directors and executive
      officers of MedaSorb Delaware became the Parent’s directors and executive
      officers. Accordingly, MedaSorb Delaware is treated as the acquiror in the
      Merger, which is treated as a recapitalization of MedaSorb Delaware, and the
      pre-merger financial statements of MedaSorb Delaware are now deemed to be the
      historical financial statements of the Parent. Historical information described
      in this report refers to the operations of MedaSorb Delaware prior to the
      Merger.





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, 2006 of $67,426,583.
      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 additional financing, there can be no assurance that the amount will
      be
      sufficient to complete the Company's plans. These consolidated financial
      statements do not include any adjustments related to the outcome of this
      uncertainty.





The
      Company has developed an intellectual property portfolio, including 21 issued
      and 5 pending  patents,  covering
      materials, methods of production, systems incorporating the technology and
      multiple medical uses.





F-10


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





**Nature
      of Business**


The
      Company, through its subsidiary, 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, 2006, 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, 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.





**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.





**Convertible
      Notes Payable**


In
      accordance with Emerging Issues Task Force Issue 98-5, Accounting for
      Convertible Securities with a Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios ("EITF 98-5"), the Company evaluates its
      convertible notes payable to determine if an imbedded beneficial conversion
      feature (BCF) exists. If a BCF is determined to exist, the Company allocates
      a
      portion of the proceeds equal to the intrinsic value of that feature to
      additional paid-in capital. The debt discount attributed to the beneficial
      conversion feature is amortized over the convertible debenture's maturity period
      as interest expense using the effective yield method.





In
      accordance with Emerging Issues Task Force Issue 00-27, Application of Issue
      No.
      98-5 to Certain Convertible Instruments ("EITF 00-27"), the Company recognizes
      the value attributable to warrants to additional paid-in capital and a discount
      against the convertible debentures. The Company values the warrants in
      accordance with EITF 00-27 using the Black-Scholes pricing model. The debt
      discount attributed to the value of the warrants issued is amortized over the
      convertible debenture’s maturity period as interest expense using the effective
      yield method.


F-11


**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.





**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 and considers the Company’s risk
      negligible.





**Financial
      Instruments**


The
      carrying values of prepaid expenses and other current assets, accounts payable
      and accrued expenses approximate their fair values due to their short-term
      nature. Convertible notes payable approximate their fair value based upon the
      borrowing rates available for the nature of the underlying debt.





**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**


Through
      December 31, 2005, the Company has accounted for its stock compensation plans
      under the recognition and measurement principles of Accounting Principles
      Opinion (APB) No. 25, “Accounting for Stock Issued to Employees” and related
      interpretations. Under APB No. 25, no compensation cost was generally recognized
      for fixed stock options in which the exercise price was greater than or equal
      to
      the market price on the grant date. Through December 31, 2005, the Company
      had
      not adopted the recognition requirements of Statement of Financial Accounting
      Standards (“SFAS”) No. 123(R), “ *Accounting
      for Stock-Based Compensation* ”,
      for
      employees and directors and, accordingly, has made all pro forma disclosures
      required. The Company adopted the requirements of SFAS No. 123(R) and EITF
      Issue
      No. 96-18, “Accounting for Equity Instruments That are Issued to Other Than
      Employees for Acquiring or in Conjunction with Selling Goods and Services” with
      regard to non-employees. Each option granted is fair valued on the date of
      grant. Had compensation cost for options granted to employees and directors
      been
      determined consistent with SFAS No. 123(R), the Company's pro forma net loss
      would have been as follows:








Period
                fromJanuary
                22, 1997
            
            Year
                ended(date
                of inception) to
            
            December
                31,Net
                Loss
            
            December
                31, 2005
            
            2005As
                reported
            
            $
            58,979,467
            
            $
            3,665,596Pro
                forma
            
            $
            59,053,461
            
            $
            3,692,026




Under
      SFAS No. 123(R), the fair value of each option was estimated on the date of
      grant using the Black-Scholes option pricing model with the following
      weighted-average assumptions: (1) expected lives of five-ten years, (2) dividend
      yield of 0%, (3) risk-free interest rates ranging from 3.25% - 5.63%, and (4)
      volatility percentage of 0.01%.





F-12


Effective
      January 1, 2006, the Company has adopted the recognition requirements of
      Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “ *Accounting
      for Stock-Based Compensation* ”,
      for
      employees and directors. The adoption of SFAS No. 123(R) has not had a
      significant effect on these financial statements.




**Effects
      of Recent Accounting Pronouncements**


In
      December 2004, the FASB issued Statement of Financial Accounting Standards
      No.
      123(R), "Share-Based Payment" ("SFAS 123(R)"), which requires all companies
      to
      measure compensation cost for all share-based payments (including employee
      stock
      options) at fair value and to recognize cost over the vesting period. In March
      2005, the SEC released SEC Staff Accounting Bulletin No. 107, "Share-Based
      Payment" ("SAB 107"). SAB 107 provides the SEC staff position regarding the
      application of SFAS 123(R), including interpretive guidance related to the
      interaction between SFAS 123(R) and certain SEC rules and regulations, and
      provides the staff's views regarding the valuation of share-based payment
      arrangements for public companies. SAB 107 highlights the importance of
      disclosures made related to the accounting for share-based payment transactions.
      In April 2005, the SEC announced that companies may implement SFAS 123(R) at
      the
      beginning of their next fiscal year beginning after June 15, 2005, or December
      15, 2005 for small business issuers. The Company implemented the provisions
      of
      SFAS 123(R) and SAB 107 in the first quarter of calendar 2006 using the
      modified-prospective method, and it did not have a material impact on the
      Company’s consolidated financial position or cash flows. See Note 9 for further
      information and the required disclosures under SFAS 123(R) and SAB 107,
      including the impact of the implementation on our results of
      operations.





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.”
This statement replaces APB No. 20 and SFAS No. 3 and changes the requirements
      for the accounting and reporting of a change in accounting principle. APB No.
      20
      previously required that most voluntary changes in accounting principle be
      recognized by including in net income of the period of the change the cumulative
      effect of changing to the accounting principle. SFAS No. 154 requires
      retrospective application to prior periods’ financial statements of voluntary
      changes in accounting principle. SFAS No. 154 is effective for accounting
      changes and corrections of errors made in fiscal years beginning after December
      15, 2005. The Company does not expect that the adoption of SFAS No. 154 will
      have a significant impact on the consolidated results of operations or financial
      position of the Company.





In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments - an amendment of FASB Statements No. 133 and 140,” to
      simplify and make more consistent the accounting for certain financial
      instruments. Specifically, SFAS No. 155 amends SFAS No. 133, Accounting for
      Derivative Instruments and Hedging Activities, to permit fair value
      remeasurement for any hybrid financial instrument with an embedded derivative
      that otherwise would require bifurcation, provided that the whole instrument
      is
      accounted for on a fair value basis. SFAS No. 155 amends SFAS No. 140,
      Accounting for the Impairment or Disposal of Long-Lived Assets, to allow a
      qualifying special-purpose entity (SPE) to hold a derivative financial
      instrument that pertains to a beneficial interest other than another derivative
      financial instrument. SFAS No. 155 applies to all financial instruments acquired
      or issued after the beginning of an entity’s first fiscal year that begins after
      September 15, 2006, with earlier application allowed. The
      Company does not expect that the adoption of SFAS No. 155 will have a
      significant impact on the consolidated results of operations or financial
      position of the Company.





In
      March
      2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
      Assets”, to simplify accounting for separately recognized servicing assets and
      servicing liabilities. SFAS No. 156 amends SFAS No. 140, “Accounting for
      Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
      Additionally, SFAS No. 156 permits, but does not require, an entity to choose
      either the amortization method or the fair value measurement method for
      measuring each class of separately recognized servicing assets and servicing
      liabilities. SFAS No. 156 applies to all separately recognized servicing assets
      and servicing liabilities acquired of issued after the beginning of an entity’s
      fiscal year that begins after September 15, 2006, although early adoption is
      permitted. The
      Company does not expect that the adoption of SFAS No. 156 will have a
      significant impact on the consolidated results of operations or financial
      position of the Company.





In
      July
      2006, FASB has published FASB Interpretation No. 48 (FIN No. 48), “Accounting
      for Uncertainty in Income Taxes”, to address the noncomparability in reporting
      tax assets and liabilities resulting from a lack of specific guidance in SFAS
      No. 109, “Accounting for Income Taxes”, on the uncertainty in income taxes
      recognized in an enterprise’s financial statements.  FIN No. 48 will apply
      to fiscal years beginning after December 15, 2006, with earlier adoption
      permitted. The
      Company does not expect that the adoption of FIN No. 48 will have a significant
      impact on the consolidated results of operations or financial position of the
      Company.





F-13


In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” ** to
      eliminate the diversity in practice that exists due to the different definitions
      of fair value and the limited guidance for applying those definitions in GAAP
      that are dispersed among the many accounting pronouncements that require fair
      value measurements. SFAS No. 157 retains the exchange price notion in earlier
      definitions of fair value, but clarifies that the exchange price is the price
      in
      an orderly transaction between market participants to sell an asset or liability
      in the principal or most advantageous market for the asset or liability.
      Moreover, the SFAS states that the transaction is hypothetical at the
      measurement date, considered from the perspective of the market participant
      who
      holds the asset or liability. Consequently, fair value is defined as the price
      that would be received to sell an asset or paid to transfer a liability in
      an
      orderly transaction between market participants at the measurement date (an
      exit
      price), as opposed to the price that would be paid to acquire the asset or
      received to assume the liability at the measurement date (an entry
      price).





SFAS
      No.
      157 also stipulates that, as a market-based measurement, fair value measurement
      should be determined based on the assumptions that market participants would
      use
      in pricing the asset or liability, and establishes a fair value hierarchy that
      distinguishes between (a) market participant assumptions developed based on
      market data obtained from sources independent of the reporting entity
      (observable inputs) and (b) the reporting entity's own assumptions about market
      participant assumptions developed based on the best information available in
      the
      circumstances (unobservable inputs). Finally, SFAS No. 157 expands disclosures
      about the use of fair value to measure assets and liabilities in interim and
      annual periods subsequent to initial recognition. Entities are encouraged to
      combine the fair value information disclosed under SFAS No. 157 with the fair
      value information disclosed under other accounting pronouncements, including SFAS
      No.
      107 ,
      “Disclosures about Fair Value of Financial Instruments,” where practicable. The
      guidance in this Statement applies for derivatives and other financial
      instruments measured at fair valueunder SFAS
      No.
      133 ,
      “Accounting for Derivative Instruments and Hedging Activities,” at initial
      recognition and in all subsequent periods.





SFAS
      No.
      157 is effective for financial statements issued for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal years, although
      earlier application is encouraged. Additionally, prospective application of
      the
      provisions of SFAS No. 157 is required as of the beginning of the fiscal year
      in
      which it is initially applied, except when certain circumstances require
      retrospective application. The Company is currently evaluating the impact of
      this statement on its results of operations or financial position of the
      Company.





In
      September 2006, the FASB issued “Statement of Financial Accounting Standards No.
      158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement
      Plans (an amendment of FASB Statements No. 87, 88, 106, and 132R)”, which will
      require employers to fully recognize the obligations associated with
      single-employer defined benefit pension, retiree healthcare and other
      postretirement plans in their financial statements. Under past accounting
      standards, the funded status of an employer’s postretirement benefit plan (i.e.,
      the difference between the plan assets and obligations) was not always
      completely reported in the balance sheet. Past standards only required an
      employer to disclose the complete funded status of its plans in the notes to
      the
      financial statements. SFAS No. 158 applies to plan sponsors that are public
      and
      private companies and nongovernmental not-for-profit organizations. The
      requirement to recognize the funded status of a benefit plan and the disclosure
      requirements are effective as of the end of the fiscal year ending after
      December 15, 2006, for entities with publicly traded equity securities, and
      at
      the end of the fiscal year ending after June 15, 2007, for all other entities.
      The requirement to measure plan assets and benefit obligations as of the date
      of
      the employer’s fiscal year-end statement of financial position is effective for
      fiscal years ending after December 15, 2008. Since the Company does not have
      a
      defined benefit plan or post-retirement plan, the Company does not expect that
      the adoption of SFAS No. 158 will have a significant impact on the consolidated
      results of operations or financial position of the Company.




F-14


**3.
      PROPERTY AND EQUIPMENT, NET:**





Property
      and equipment - net, consists of the following:


December
                31,
            
            2006
            
            2005
            
            Depreciation/
              Amortization
              PeriodFurniture
                and fixtures
            
            $
            130,015
            
            $
            130,015
            
            
            7
                yearsEquipment
                and computers
            
            
            1,709,815
            
            
            1,709,815
            
            
            3
                to 7 yearsLeasehold
                improvements
            
            
            462,980
            
            
            462,980
            
            
            Term
                of lease2,302,810
            
            
            2,302,810Less
                accumulated depreciationand
                amortization
            
            
            1,999,250
            
            
            1,749,153**Property
                and Equipment, Net**
            
            $
            303,560
            
            $
            553,657





Depreciation
      expense for the years ended December 31, 2006 and 2005 amounted to $250,096
      and
      $259,836, respectively. Depreciation expense from inception to December 31,
      2006
      amounted to $2,026,338.





**4.
      OTHER ASSETS:**





Other
      assets consist of the following:





December
                31,
            
            2006
            
            2005Intangible
                assets, net
            
            $
            189,577
            
            $
            130,143Security
                deposits
            
            
            53,894
            
            
            51,164**Total**
            
            $
            243,471
            
            $
            181,307





Intangible
      assets consist of the following:





December
                31,
            
            2006
            
            2005Gross
            
            Accumulated
            
            Gross
            
            AccumulatedAmount
            
            Amortization
            
            Amount
            
            AmortizationPatents
            
            $
            209,863
            
            $
            20,286
            
            $
            145,000
            
            $
            14,857





The
      issued patents that are capitalized are being amortized over the patents
      remaining legal life. Pending patents are not being amortized. Amortization
      expense amounted to $5,428 and $5,428 for the years ended December 31, 2006
      and
      2005, respectively. Amortization expense from inception to December 31, 2006
      amounted to $20,286.





Amortization
      expense is anticipated to be approximately $8,800 for each of the next five
      years ended December 31, 2011. During the years ended December 31, 2006 and
      2005, the Company abandoned its pursuit of certain patents and recorded a loss
      on abandonment in the amount of $0 and $183,556,
      respectively.


F-15


**5.
      ACCOUNTS PAYABLE AND ACCRUED EXPENSES:**







Accounts
      Payable and accrued expenses consist of the following:




December
                31,2006
            
            2005Other
                payables
            
            
            148,390
            
            
            239,786Legal,
                financial and consulting
            
            
            290,168
            
            
            883,092Research
                and development
            
            
            451,414
            
            
            683,009Filing
                fees
            
            
            119,221
            
            
            162,071Employee
                compensation
            
            
            2,851
            
            
            247,4761,012,044
            
            
            2,215,434





**6.
      INCOME TAXES:**





From
      inception through December 31, 2005, the Company incurred losses which, as
      a
      limited liability company, were passed through to its members. The Company
      was a
      corporation in 2006, and its tax loss of approximately $3,400,000 for the year
      ended December 31, 2006 also represents the Company’s net operating loss
      carryforward, which expires in 2026. These loss carryforwards are subject to
      limitation in future years should certain ownership changes occur. A deferred
      tax asset has not been recorded due to the uncertainty that the Company will
      have the ability to utilize such asset.





For
      the
      years ended December 31, 2006, respectively, the Company’s effective tax rate
      differs from the federal statutory rate principally due to net operating losses
      and 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 year ended December 31, 2006 is as follows:





Federal
                statutory rate
            
            
            (34.0
            )%Decrease
                resulting from:Non-deductible
                expenses
            
            
            18.6Operating
                losses
            
            
            15.4Effective
                tax rate
            
            
            --
            %




**7.
      COMMITMENTS AND CONTINGENCIES:**





The
      Company is obligated under non-cancelable operating leases for office space
      and
      equipment expiring at various dates through September 2009. The aggregate
      minimum future payments under these leases are approximately as
      follows:





Year
      ending December 31,




2007
            
            $
            42,0002008
            
            
            5,0002009
            
            
            4,000**Total**
            
            $
            51,000





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, 2006 and 2005 amounted to approximately
      $226,000 and $259,000, respectively.





F-16


**Employment
      Agreements**





The
      Company has employment agreements with certain key executives through July
      2008. The
      agreements provide for annual base salaries of varying amounts. Future minimum
      annual salaries are approximately as follows:




Year
      ending December 31,




2007
            
            $
            200,0002008
            
            
            108,000**Total**
            
            $
            308,000





One
      of
      these agreements provides for an additional bonus payment based on achieving
      specific milestones as defined in the agreement, however, as of the date of
      this
      report, these milestones have not been met. Furthermore, this agreement includes
      an anti-dilution provision whereby the employee is granted options for the
      right
      to obtain 5% of the outstanding stock of the Company on a fully diluted basis.
      For the year ended December 31, 2006, the Company’s financial statements reflect
      the issuance of options to purchase 413,920 shares of common stock to this
      employee consistent with his employment agreement. The options were valued
      at
      approximately $69,600 and have been included as a charge to the consolidated
      statements of operations for the year ended December 31, 2006.





**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, but may have a
      material adverse impact on the consolidated financial position of the Company
      and/or the results of its operations. ****





On
      September 1, 2006, MedaSorb and Purolite International Ltd. and its affiliates
      (“Purolite”) agreed to the settlement of the action that had been commenced by
      Purolite in which Purolite claimed ownership rights in certain of the Company’s
      patents. The settlement agreement provides the Company with 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 settlement agreement,
      the Company has agreed to pay Purolite 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
      (see License Agreements). The Company has not generated any revenue from its
      products and has not incurred any royalty costs through December 31, 2006.
      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.





**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, 2006. 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 Settlement Agreement, MedaSorb has agreed to
      pay
      Purolite 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 (see Litigation). The Company
      has
      not generated any revenue from its products and has not incurred any royalty
      costs through December 31, 2006. 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.




F-17


**8.
      CONVERTIBLE NOTES PAYABLE**




From
      time
      to time beginning in 2003 through June 30, 2006, the Company issued convertible
      notes to various investors in the aggregate principal amount of $6,549,900.
      The
      notes bore interest at a rate of 12 percent per annum and were convertible
      into
      common stock at prices ranging from $3.32 per share to $6.64 per share (as
      adjusted for the Merger and conversion of MedaSorb Delaware from a limited
      liability company to a corporation). Some of the convertible notes were issued
      together with warrants. All of these convertible notes, in the aggregate
      principal amount of $6,549,900, together with $1,480,249 in accrued interest,
      were converted into equity on June 30, 2006 upon the closing of the Merger
      (see
      Note 1). In connection with this conversion, the Parent issued 5,170,880 shares
      of Common Stock and five-year warrants to purchase a total of 816,691 shares
      of
      Common Stock at a price of $4.98 per share. The 5,170,880 shares of Common
      Stock
      issued upon conversion includes 3,058,141 shares (“inducement shares”) issued to
      the note holders as an inducement for them to convert the convertible notes.
      The
      inducement shares were valued at $3,351,961, and such amount is included as
      a
      charge to interest expense in the consolidated statements of operations for
      the
      year ended December 31, 2006.





Separately,
      in 2005 the Company received a $1 million bridge loan in anticipation of the
      reverse merger transaction (see Note 1) which closed in June 2006. The loan
      bore
      interest at 6% per annum, repayable in cash or, at the option of the noteholder,
      converted into the Series A Preferred Stock and Warrants which were sold in
      connection with the Merger (see Note 1). The loan and accrued interest were
      due
      and payable on December 31, 2006, subject to earlier repayment in the event
      the
      Company were to complete an offering of securities generating gross proceeds
      of
      $5.5 million or more. In addition, in the event that less than $6.5 million
      of
      gross proceeds were raised in such an offering within 120 days from the date
      subscription materials were first circulated to potential investors, the balance
      of the bridge loan then outstanding, at the Company’s option, would be
      convertible into the securities sold in that offering. In consideration for
      both
      funding the loan and assisting in arranging the Merger transaction and
      concurrent offering, the noteholder was also issued 10 million shares of common
      stock in 2006. Due to the contingent nature of completing the reverse merger,
      the Company could not be reasonably assured that the reverse merger would take
      place until its consummation in 2006. Accordingly, the issuance of common stock
      associated with these contingencies resulted in the Company recording a debt
      discount charge in the amount of $1,000,000 at the date of the reverse merger
      closing in 2006. The terms of the agreement provided the note to be due
      currently. Therefore, the Company immediately amortized the debt discount
      entirely at the date of the reverse merger closing, resulting in a charge to
      the
      consolidated statements of operations for the year ended December 31, 2006
      in
      the amount of $1,000,000.





In
      October 2006, pursuant to the terms of the Investment Agreement with the bridge
      loan holder, the $1,000,000 bridge loan was converted into 1,000,000 shares
      of
      10% Series A Preferred Stock and warrants to purchase 400,000 shares of Common
      Stock at a price of $2.00 per share. In accordance with Emerging Issues Task
      Force (EITF) 00-27, the Company allocated the $1,000,000 of proceeds based
      on
      the relative fair value to the preferred stock as follows: $917,180 was
      allocated to the preferred stock and $82,820 to the warrants. Additionally,
      the
      Company evaluated if the embedded conversion option resulted in a beneficial
      conversion feature, however, the proceeds allocated to the preferred stock
      exceeded the market value of the common stock subject to conversion, resulting
      in a beneficial conversion feature in the amount of $122,820. 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
      totaling $205,640 has been recorded as a preferred stock dividend and is
      included in the consolidated statements of operations for year ended December
      31, 2006. As noted above, the Company has concluded that the conversion feature
      is not considered a derivative under EITF 00-19 and SFAS 133.





**9.**  **STOCKHOLDERS'
      EQUITY**





**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 will be reduced to such lower price.





F-18


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” including, the failure to cause a
                registration statement registering the shares of Common Stock underlying
                the Series A Preferred Stock and Warrants issued in connection therewith
                to be effective within 240 days following the closing of the private
                placement;


·
            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.





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)
      requires 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 (see Note 11).





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.





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 to the preferred stock 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.




F-19


**Stock
      Option Plans**


As
      of
      December 31, 2006, 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 2,500,000 shares of common stock are reserved for issuance under the 2006
      Plan. As of December 31, 2006 there were outstanding options to purchase 294,401
      shares of common stock under the 2006 Plan. Additionally, as of December 31,
      2006 there were options to purchase 890,600 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
      Compensation Committee of the Board (the Committee).  The Committee 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 Committee is also authorized to prescribe, amend and
      rescind terms relating to options granted under the 2006 Plan.  Generally,
      the interpretation and construction of any provision of the 2006 Plan or any
      options granted hereunder is within the discretion of the
      Committee.





The
      2006
      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 SAB 107 for all share-based compensation. Share-based
      employee compensation for the year ended December 31, 2006 in the amounts of
      approximately $31,300 and $112,000 (net of related tax), is included in the
      net
      loss of $7,671,580 under the captions research and development and general
      and
      administrative, respectively.





The
      summary of the stock option activity for the year ended December 31, 2006 is
      as
      follows:





WeightedWeighted
            
            AverageAverage
            
            RemainingExercise
            
            ContractualShares
            
            per
                Share
            
            Life
                (Years)Outstanding,
                January 1, 2006
            
            
            512,247
            
            $
            27.49
            
            
            5.2Granted
            
            
            673,105
            
            
            6.65
            
            
            9.2Cancelled
            
            
            (351
            )
            
            6.64
            
            
            8.0Exercised
            
            
            --
            
            
            --
            
            
            --Outstanding,
                December 31, 2006
            
            
            1,185,001
            
            $
            15.66
            
            
            7.5





The
      weighted-average grant date fair value for options granted during the years
      ended December 31, 2006 and 2005 amounted to approximately $0.30 and $0.44
      per
      share, respectively.





At
      December 31, 2006, the aggregate intrinsic value of options outstanding and
      options currently exercisable amounted to approximately $63,000.





F-20


The
      summary of the status of the Company’s non-vested options for the year ended
      December 31, 2006 is as follows:





Shares
            
            Weighted
                Average Grant Date Fair ValueNon-vested,
                January 1, 2006
            
            
            1,105
            
            $
            0.00Granted
            
            
            673,105
            
            $
            0.30Cancelled
            
            
            (351
            )
            $
            0.00Vested
            
            
            (594,194
            )
            $
            0.24Exercised
            
            
            --
            
            
            --Non-vested,
                December 31, 2006
            
            
            79,665
            
            $
            0.77




As
      of
      December 31, 2006, approximately $61,000 of total unrecognized compensation
      cost
      related to stock options is expected to be recognized over a weighted average
      period of 6.7 years.





As
      of
      December 31, 2006, the Company has the following warrants to purchase common
      stock outstanding:





Number
                of Shares
            
            Warrant
                Exercise
            
            WarrantTo
                be Purchased
            
            Price
                per Share
            
            Expiration
                Date1,206
            
            $
            41.47
            
            
            January
                9, 200725,995
            
            $
            19.91
            
            
            February
                8, 2007603
            
            $
            41.47
            
            
            February
                24, 20072,652
            
            $
            41.47
            
            
            May
                30, 200715,569
            
            $
            6.64
            
            
            March
                31, 2010816,691
            
            $
            4.98
            
            
            June
                30, 20112,100,000
            
            $
            2.00
            
            
            June
                30, 2011339,954
            
            $
            2.00
            
            
            September
                30, 201152,080
            
            $
            2.00
            
            
            July
                31, 2011400,000
            
            $
            2.00
            
            
            October
                31, 2011240,125
            
            $
            2.00
            
            
            October
                24, 2016





As
      of
      December 31, 2006, the Company has the following warrant to purchase 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 $2.00 per share.





**Equity
      Instruments Issued for Services Rendered**


During
      the years ended December 31, 2006 and 2005, 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 and expected life of the stock option or warrant, the current
      price of the underlying stock and its expected volatility, expected dividends
      on
      the stock and the risk free interest rate 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, 2006 and 2005 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 1,185,001 and 3,994,875 incremental shares ,
      respectively, as well as shares issuable upon conversion of Series A Convertible
      Preferred Stock and Preferred Stock Warrant representing approximately 6,342,868
      incremental shares have been excluded from the computation of diluted EPS as
      they are anti-dilutive.


F-21


**11.**  **SUBSEQUENT
      EVENTS**




Effective
      January 1, 2007, the Company appointed a new Chairman of the Board, agreed
      to
      compensate him at the rate of $20,000 per annum, and issued him an option to
      purchase 200,000 shares of Common Stock exercisable at $1.65 per
      share.





In
      January 2007, the Company issued options to purchase 176,000 shares of Common
      Stock to employees and a consultant exercisable at $1.90 per share.





In
      February 2007, the Company issued an option to purchase 400,000 shares of Common
      Stock to an employee exercisable at $1.26 per share.





The
      Company is required to file a registration statement under the terms of the
      subscription agreements for 5,250,000 shares of Series A Preferred Stock with
      an
      aggregate stated value of $5,250,000, sold to four institutional investors
      (See
      Note 9). The
      registration rights provided for in the subscription agreements entered into
      with these investors requires the Company to file a registration statement
      with
      the SEC and cause it to be declared effective by the SEC by February 25,
      2007.  The failure to have the registration statement timely declared
      effective by the SEC constitutes an event of default under the Certificate
      of
      Designation and entitles those
      investors to liquidated damages of two percent (2%) of the purchase price of
      the
      Series A Preferred Stock per 30-day period. The
      Company filed the registration statement, but it has not yet been declared
      effective by the SEC. Accordingly, the Company is obligated to pay those
      investors an aggregate of $105,000 per 30-day period from February 26, 2007
      through the date that the registration statement is declared effective by the
      SEC, and cash dividends on the shares of Series A Preferred Stock issued to
      those investors began to accrue at the rate of 20% per annum on February 26,
      2007 and will continue to accrue at that rate until the registration statement
      is declared effective.





F-22