U.S.
      SECURITIES AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





**FORM
      10-KSB**





(Mark
      One)


x
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934


For
      the
      fiscal year ended December 31, 2007




o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934





For
      the
      transition period from   to





Commission
      file number 0-27046





**FORTICELL
      BIOSCIENCE, INC.**


(Name
      of
      small business issuer in its charter)


**Delaware**
              (State or other jurisdiction of
              incorporation or organization)
            **11-3068704**
              (I.R.S. Employer
              Identification No.)**3960 Broadway**
              **New York, New York**
              (Address of principal
              executive offices)
            **10032**
              (Zip Code)





Issuer's
      telephone number **(212)
      740-6999**




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




Securities
      registered pursuant to Section 12(g) of the Act:




**Common
      Stock, $.001 par value**




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





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. Yes x No o





Check
      if
      disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not
      contained in this form, 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 or any amendment
      to
      this Form 10-KSB. o





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





State
      issuer’s revenues for its most recent fiscal year - $0 –




State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked price of such common equity, as of a
      specified date within the past 60 days: $4,015,687 as of March 18, 2008.





State
      the
      number of shares outstanding of each of the issuer’s class of common equity, as
      of the latest practicable date: 13,678,015 as of March 21, 2008. (giving effect
      to issuance of 10,198 shares as a result of conversion of 38.2395 shares of
      Series B preferred stock for which the Series B preferred stock certificates
      have not been surrendered.)





**DOCUMENTS
      INCORPORATED BY REFERENCE**





None







**FORTICELL
      BIOSCIENCE, INC.**


**INDEX
      TO ANNUAL REPORT ON FORM 10-KSB**


**FILED
      WITH THE SECURITIES AND EXCHANGE COMMISSION**


**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2007**





ITEMS
      IN FORM 10-KSB





PageFacing
                pagePart
                IItem
                1.     Description of Business
            1Item
                2.     Description of Property
            18Item
                3.     Legal Proceedings
            18Item
                4.     Submission of Matters to a Vote of Security
                Holders
            19Part
                IIItem
                5.     Market for Common Equity and Related
                Stockholder Matters
            20Item
                6.     Management's Plan of Operation
            21Item
                7.     Financial Statements
            24Item
                8.     Changes in and Disagreements with Accountants
                on Accounting and Financial Disclosure
            24Item
                8.A.(T) Controls and Procedures
            24Item
                8.B.Other Information
            24Part
                IIIItem
                9. Directors and Executive Officers of the Registrant
            25Item
                10. Executive Compensation
            28Item
                11. Security Ownership of Certain Beneficial Ownersand
                Management
            31Item
                12. Certain Relationships and Related Transactions
            34Item
                13. Exhibits
            36Item
                14. Principal Accountant Fees and Services
            37Signatures
            38










**CAUTIONARY
      NOTE REGARDING** **** **FORWARD-LOOKING
      STATEMENTS**




This
      Annual Report on Form 10-KSB includes forward-looking statements within the
      meaning of Section 21E of the Securities Exchange Act of 1934. These
      forward-looking statements involve a number of risks and uncertainties. Such
      forward-looking statements include statements about our strategies, intentions,
      expectations, goals, objectives, discoveries, collaborations, preclinical and
      clinical programs, and our future achievements. These forward-looking statements
      can generally be identified as such because the context of the statement will
      include words such as “may,” “will,” “intends,” “plans,” “believes,”
“anticipates,” “expects,” “estimates,” “predicts,” “potential,” “continue,” or
“opportunity,” the negative of these words or words of similar import. For such
      statements, we claim the protection of the Private Securities Litigation Reform
      Act of 1995. Readers of this Annual Report on Form 10-KSB are cautioned not
      to
      place undue reliance on these forward-looking statements, which speak only
      as of
      the date on which they are made. These forward-looking statements are based
      largely on our expectations and projections about future events and future
      trends affecting our business, and are subject to risks and uncertainties that
      could cause actual results to differ materially from those anticipated in the
      forward-looking statements. Important factors that could cause actual results
      to
      differ materially from those in these forward-looking statements are disclosed
      in this Annual Report on Form 10-KSB, including, without limitation, those
      discussions under “RISK FACTORS” in “Item 1. Business”. In addition, past
      financial and/or operating performance is not necessarily a reliable indicator
      of future performance and you should not use our historical performance to
      anticipate results or future period trends. We can give no assurances that
      any
      of the events anticipated by the forward-looking statements will occur or,
      if
      any of them do, what impact they will have on our results of operations and
      financial condition. Except as required by law, we undertake no obligation
      to
      publicly revise our forward-looking statements to reflect events or
      circumstances that arise after the filing of this Form 10-KSB or documents
      incorporated by reference herein that include forward-looking
      statements.





In
      this
      Annual Report on Form 10-KSB, “Forticell,” “we,” “us” and “our” refer to
      Forticell Bioscience, Inc. and its wholly owned subsidiary, Hapto (Israel)
      Ltd.,
      unless the context otherwise provides.





**PART
      I**





**Item
      1.** **DESCRIPTION
      OF BUSINESS**





**Overview**





We
      are a
      biotechnology company which was organized in 1991 under the laws of the State
      of
      Delaware and under the name Ortec International, Inc. We are currently in the
      development stage, and accordingly, have no revenues. Our offices are located
      at
      3960 Broadway, New York, New York 10032. Our telephone number is 212-740-6999.
      Our website address is www.forticellbioscience.com .
      Our
      stock symbol is FORB.OB.





We
      are a
      development stage tissue engineering company with core competencies in cell
      culturing, biology and biomaterials. We have developed a proprietary and
      patented product that we call OrCel ® (ORCEL), which is used to stimulate the
      repair and regeneration of human skin. ORCEL is a two-layered tissue engineered
      dressing that consists of human derived skin cells, both dermal and epidermal,
      supported within a porous collagen matrix. The composite matrix is seeded with
      keratinocytes (epidermal cells) and fibroblasts (dermal cells). When ORCEL
      is
      applied to the wound site, it produces a mix of growth factors that stimulates
      wound closure.





Our
      primary target patient populations for the use of ORCEL are persons with venous
      stasis and diabetic foot ulcers, which we believe are large potential markets
      for the use of ORCEL. We also believe that ORCEL may have applications for
      cosmetic surgery, as well as other types of chronic and acute
      wounds.





We
      have
      developed the technology for the cryopreservation of ORCEL without diminishing
      its effectiveness. Cryopreservation is the freezing of our product to give
      it an
      extended shelf life. Currently, ORCEL has a shelf life of no less than seven
      months, as opposed to only a few days with the non-cryopreserved product. We
      believe that the longer shelf life will reduce the cost per unit of producing
      ORCEL as well as provide us with a marketing advantage over non-frozen
      competitive products.


1





We
      completed a pivotal clinical trial for the use of ORCEL in its cryopreserved
      form for the treatment of venous stasis ulcers. Venous stasis ulcers are open
      lesions on the legs which result from the poor circulation of the blood
      returning from the legs to the heart. In February 2004, we filed with the Food
      and Drug Administration (FDA) our application for pre market approval (PMA)
      to
      market ORCEL for the treatment of venous stasis ulcers. In the process of
      reviewing our application the FDA requested clarification of the various
      information provided by us. After a number of meetings we had with the FDA’s
      staff and additional submissions we made to the FDA, on April 25, 2005 the
      FDA
      advised us that although our cryopreserved ORCEL showed promise for the
      effective treatment of venous stasis ulcers, additional clinical data would
      be
      required to demonstrate reasonable assurance of the safety and effectiveness
      of
      cryopreserved ORCEL in treating patients with venous stasis ulcers before the
      FDA would clear ORCEL for commercial sales for such treatments. The clinical
      data from the pivotal trial of 136 patients submitted to the FDA showed that
      in
      60 patients who had typical venous ulcers (defined as those ulcers with partial
      or full-thickness skin tissue damage, in which the wound base is visible and
      the
      ulcer extends through the dermis but not into the subcutaneous tissue to fascia,
      muscle or bone), 59% of the ORCEL treated patients achieved wound closure versus
      36% of the patients who received the standard of care treatment. The FDA agreed
      that data of these 60 patients would be combined with that of the 60 patients
      to
      be enrolled in a confirmatory clinical trial and the combined results would
      be
      analyzed using Bayesian statistics. We obtained FDA approval for our
      confirmatory trial protocol in mid July 2005 and began the confirmatory trial
      in
      mid August 2005. In November 2006, we completed the confirmatory trial designed
      to confirm the superiority of cryopreserved ORCEL over the standard of care
      in
      the treatment of difficult-to-heal venous leg ulcers. On February 26, 2007,
      we
      announced that we had initiated the filing of the supplement to our PMA
      application with the FDA requesting clearance from the FDA to market our tissue
      engineered product, ORCEL, for the treatment of venous leg ulcers by submitting
      to the FDA the Chemistry, Manufacturing and Controls (CMC) section of the
      application. We filed the clinical section of the application, reporting the
      combined results of our two clinical trials, in October 2007. Such clinical
      section reported the results showing the effectiveness of our ORCEL product
      treating venous stasis ulcers as compared with the effectiveness of the current
      standard of care, the safety of using our product and the labeling we propose
      to
      use for our ORCEL product. The filings of these two sections are amendments
      to
      our PMA application filed in February 2004. Our October 2007 filing is currently
      being reviewed by the FDA.





We
      have
      deferred conducting a pivotal clinical trial for the use of ORCEL in the
      treatment of diabetic foot ulcers until after FDA determination of whether
      we
      may make commercial sales of cryopreserved ORCEL to treat venous stasis ulcers.
      We completed a pilot clinical trial for the use of ORCEL, in its fresh, not
      cryopreserved, form in the treatment of diabetic foot ulcers in the latter
      part
      of 2001. The results of that clinical trial showed a 75% improvement over the
      standard of care as well as a daily healing rate that was twice as fast as
      the
      standard of care, for those patients treated with ORCEL. On January 6, 2005,
      we
      submitted a modified protocol to the FDA for the conduct of a clinical trial
      of
      cryopreserved ORCEL to treat diabetic foot ulcers. In February 2005, the FDA
      completed a review of our modified protocol and gave us permission to initiate
      a
      pivotal trial evaluating cryopreserved ORCEL in the treatment of diabetic foot
      ulcers. If we have sufficient funds, we expect to initiate patient enrollment
      for the diabetic foot ulcers pivotal clinical trial shortly after receiving
      FDA
      clearance for commercial sales of ORCEL in the treatment of venous stasis
      ulcers. We expect that the diabetic foot ulcers clinical trial will be conducted
      at up to 25 clinical centers and involve up to approximately 200
      patients.





In
      2001,
      the FDA granted our application for the commercial sale of the fresh form of
      ORCEL for the treatment of donor site wounds. A donor site wound is created
      in
      an area of the patient's body from which the patient's skin was taken to cover
      a
      wound at another part of such patient's body. In 2001, the FDA also granted
      our
      application for the commercial sale of the fresh form of ORCEL for use on
      patients with recessive dystrophic epidermolysis bullosa undergoing hand
      reconstruction, as well as to treat the donor site wounds created during the
      surgery. Recessive dystrophic epidermolysis bullosa is a condition in which
      a
      newborn infant's skin instantly blisters and can peel off at the slightest
      touch
      and leave painful ulcerations and permanent scarring resulting in deformity
      of
      the hands and feet.





From
      December 2001 through December 2002, our gross revenues from the sale of ORCEL,
      using a small contracted sales force, were $265,665. We discontinued our sales
      efforts and the manufacture of fresh ORCEL for commercial sale preferring to
      use
      our limited financial resources for the completion of our clinical trial for
      the
      use of cryopreserved ORCEL in the treatment of venous stasis ulcers. Based
      on
      published information we believe that the use of ORCEL for the treatment of
      patients suffering from venous stasis ulcers, and of patients suffering from
      diabetic foot ulcers, each represents a significantly larger potential market
      than the use of ORCEL for the treatment of donor site wounds or epidermolysis
      bullosa.





In
      July
      2006, we submitted a Humanitarian Device Exemption (HDE) supplement to the
      FDA
      to obtain marketing approval for use of cryopreserved ORCEL in the treatment
      of
      Recessive Dystrophic Epidermolysis Bullosa (RDEB), the most severe type of
      Epidermolysis Bullosa (EB). RDEB is a devastating congenital skin disorder
      characterized by painful ulcers and widespread, permanent scarring resulting
      in
      the deformity of hands and feet. As a result, many RDEB patients require
      surgeries to allow greater use of their extremities resulting in need for
      replacement skin. In October 2006, we received a letter from the FDA informing
      us that the HDE has been approved pending an FDA audit of the manufacturing
      facility and quality systems at the facility where our ORCEL product will be
      manufactured. Since we have now submitted our PMA for venous stasis ulcers
      we
      expect the FDA to inspect the Lonza manufacturing facility we expect to use
      to
      produce ORCEL as part of the PMA approval process.


2





We
      have a
      Cell Therapy Manufacturing Agreement with Lonza Walkersville, Inc (successor
      by
      acquisition of Cambrex Bio Science **** Walkersville,
      Inc.), a subsidiary of Lonza Corporation (Lonza), for Lonza to produce ORCEL for
      us in Lonza’s production facilities in Walkersville, Maryland. Lonza is
      experienced in producing cell based medical products such as ORCEL. Having
      Lonza
      produce ORCEL for us alleviated the need for us to build and equip our own
      production and distribution facility, thus avoiding a large capital outlay,
      and
      we believe is otherwise more cost effective for us. We had also entered into
      a
      Sales Agency Agreement with Lonza for Lonza to be the exclusive distributor
      of
      ORCEL in the United States, Canada and Mexico. Such Sales Agency Agreement
      was
      terminated on September 26, 2007. We are meeting with various marketing
      partners. There are at least two companies interested in selling ORCEL with
      whom
      we have held discussions. See “Sales and Marketing” subheading which follows. We
      believe that our production agreement will enable us to begin commercial sales
      of ORCEL in the United States shortly after, and if, we get clearance from
      the
      FDA to begin commercial sales of cryopreserved ORCEL for the treatment of venous
      stasis ulcers.





**Fibrin
      Micro Beads and Haptides**





In
      October 2004 we entered into a collaboration agreement with Hapto Biotech Inc.
      (Hapto). Hapto was a privately-held company involved in the field of tissue
      engineering focused on the development of two proprietary fibrin derived
      platform technologies: Fibrin Micro Beads (FMBs) and Fibrin based peptides
      (Haptides TM ),
      which
      have demonstrated the ability to optimize the recovery, potential delivery
      and
      therapeutic value of adult stem cells. Hapto’s research indicates that FMBs have
      the ability to efficiently recover adult stem cells from mixed cell populations,
      as well as allow for their growth, proliferation and potential reimplantation
      into the patient. Hapto’s research also indicates that Haptides TM have the
      ability to enhance cell attraction and attachment, as well as effect cellular
      internalization of macromolecules and nanoparticles, allowing for the potential
      development of products for the stem cell, tissue regeneration and tissue
      augmentation, gene therapy and drug delivery markets. The objective of the
      collaboration entered into in October 2004 was to combine our proprietary
      collagen biomaterial and know how with Haptides TM to
      develop a noncellular peptide based collagen biomaterial which could promote
      the
      attraction and attachment of healthy cells within the patient’s body in
      regenerating new tissue or repairing wounds. The collaboration’s pre-clinical
      animal studies with this biomaterial showed promising results. Based on these
      promising results and the potential of the FMB’s technology, on April 14, 2006,
      we acquired Hapto with all its fibrin based technology and intellectual property
      after we received commitments for over $6,000,000 from a private placement
      sale
      of our equity securities. The receipt of such gross proceeds was a condition
      for
      the closing of our acquisition of Hapto. For such acquisition we issued to
      the
      Hapto shareholders a total of 2,031,119 shares of our common stock and warrants
      to purchase an additional 200,000 shares at $4.50 per share. The investment
      banking firm of Rodman & Renshaw, LLC served as our advisor for this
      acquisition. On April 17, 2006, we completed that private placement sale of
      our
      equity securities for aggregate proceeds of $6,176,000.





Research
      for Hapto’s FMBs and Haptide technologies was conducted at Hadassah Hospital
      facilities in Jerusalem, Israel, pursuant to an agreement between our Hapto
      subsidiary and Hadasit Medical Research Services & Development Limited, an
      Israeli company. Under that agreement Hadasit provided the facilities where
      the
      research is conducted as well as the services of one of the two senior
      scientists who have developed the two Hapto technologies. Hadasit charged us
      a
      monthly fee and other charges for the use of such facilities and the services
      of
      that one scientist.





Hapto
      has
      not conducted any human clinical trials to determine the safety and
      effectiveness in using FMBs or Haptides to treat human medical conditions.
      Hapto
      has performed research on the potential use of FMBs and Haptides in animal
      tests
      and in vitro testing and this data has been published. Hapto’s research is
      conducted in Israel.





We
      believe that our experience and knowledge in the areas of cell biology,
      biomaterials and tissue regeneration provide a platform from which we can
      effectively expand our focus to include the development of stem cell and
      regenerative medicine products. In anticipation of receiving FDA approval during
      the next six months to begin marketing our ORCEL product for the treatment
      of
      venous leg ulcers, we believe we should identify our future growth
      opportunities. Having added Hapto’s technologies to our ORCEL product and
      technology puts us in the growing field of stem cells and regenerative medicine.
      We hope to pursue the development of these technologies through licensing or
      other strategic business opportunities. We have to date entered into only one
      such licensing arrangement.




3


**Licensing
      and Sale of our Technology**





*Material
      Transfer and Technology Evaluation Agreement:* **** On
      December 21, 2007, we entered into a Material Transfer and Technology Evaluation
      Agreement with CJ CheilJedang Corp (CJ), a South Korean Corporation, for which
      we received $150,000 in January 2008 and we then provided CJ with 10 grams
      of
      research grade fibrin microbeads (FMB). We granted CJ the exclusive right for
      one year to use Ortec’s FMB technology for extraction of mesenchymal stem cells
      (MSCs) from umbilical cord blood. We will also provide technical support and
      consultation as needed and draft protocols on the use of our FMB technology.
      The
      FMB’s will be used only for research and development in the use of MSCs
      extracted from umbilical cord blood for the in vivo treatment of damaged and/or
      diseased tissues. If the research performed during the one-year evaluation
      period is successful, we may thereafter negotiate a definitive patent licensing
      and product development agreement. ****





*Cell
      supply agreement:* In April
      2004, we entered into a Material Supply Agreement with ES Cell International
      Pte
      Ltd. (ESI). Under the terms of the agreement, we provided ESI with human skin
      cells generated from cell lines developed and manufactured by us for use in
      our
      ORCEL product. We received a $50,000 up-front fee upon the signing of the
      agreement and we received an additional $150,000 upon first delivery of certain
      specified cell lines.





*License
      Agreement:* In
      October 2003, we entered into an exclusive License Agreement with Teva Medical
      Limited, a subsidiary of Teva Pharmaceutical Industries Ltd. (Teva) for the
      sales and marketing of our ORCEL product in Israel. This ten-year agreement,
      beginning on the date the product is launched for marketing in Israel, requires
      Teva to seek regulatory and reimbursement approval for ORCEL in Israel. We
      received an upfront payment of $50,000 in 2003. We will receive an additional
      $50,000 within thirty days of grant of reimbursement approval in Israel, and
      another $100,000 within 30 days of attainment of aggregate net sales of
      $3,000,000 in Israel within any period of twelve consecutive calendar months.
      The agreement also provides for pricing ORCEL and terms of payment. Additionally
      Teva will pay us royalties of 10% of net sales in Israel up to $5,000,000 per
      annum. If sales are in excess of $5,000,000 annually Teva will pay us 10% on
      the
      first $5,000,000 of sales in Israel and a 20% royalty on sales above $5,000,000
      in Israel. Regulatory and reimbursement approval has not yet been received
      in
      Israel.





**ORCEL**





ORCEL
      is
      produced from cells derived from infant foreskins obtained during routine
      circumcisions. The immature, neonatal cells are highly reproductive and provide
      enhanced proliferation and rapid remodeling of the human skin. We separate
      the
      epidermis from the dermis and treat each of these layers to release individual
      keratinocyte (epidermal) and fibroblast (dermal) cells, which are the primary
      cellular components of human skin. We grow the fibroblast and keratinocyte
      cells
      in cultures in large quantities, then freeze and store them as a cell bank,
      ready for use. Prior to the use of each cell line, we conduct extensive testing
      and screening in accordance with current FDA guidelines to ensure that the
      cells
      are free of presence of bacterial contaminants, viruses, pathogens,
      tumorigenicity or other transmittable diseases. We then apply the dermal
      fibroblast cells to a proprietary, cross-linked bovine collagen sponge to form
      the dermal layer matrix and we grow the epidermal keratinocyte cells on a
      separate non-porous layer of collagen. We then incubate and supply this
      composite matrix with the proper nutrients to allow the cells to multiply and
      for the fibroblasts to permeate inside and anchor to the porous collagen sponge.
      The top layers of keratinocyte cells and bottom layers of fibroblast cells
      in
      the collagen matrix, together constitute our proprietary ORCEL.





**Government
      Regulation**





We
      are
      subject to extensive government regulation. Products for human treatment are
      subject to rigorous pre-clinical and clinical testing procedures as a condition
      for clearance by the FDA and by similar authorities in foreign countries prior
      to commercial sale. As previously mentioned, we have completed the confirmatory
      clinical trial to evaluate ORCEL for treatment of venous stasis ulcers. The
      results from that human clinical trial are currently under review by the FDA
      as
      result of our PMA application for clearance for commercial sale of our ORCEL
      product to treat venous stasis ulcers.





**The
      FDA Clearance Process**





Pursuant
      to the Federal Food Drug and Cosmetic Act and regulations promulgated
      thereunder, the FDA regulates the manufacture, distribution and promotion of
      medical devices in the United States. ORCEL is considered by the FDA to be
      a
      medical device and is therefore regulated by the Center for Device and
      Radiological Health. We must receive pre-market clearance from the FDA for
      any
      commercial sale of our product. Before receiving such clearance we must provide
      proof in human clinical trials of the safety and efficacy of ORCEL. Pre-market
      clearance is a lengthy and expensive process.


4


The
      steps
      in the FDA clearance process may be summarized as follows:





·
            The
                sponsor (such as Forticell) prepares a protocol which sets forth
                in detail
                all aspects of the proposed clinical trial. The information includes
                the
                number of patients to be treated, the number of sites (hospitals
                and
                clinics) at which the patients in the clinical trial are to be treated,
                the then current standard of care with which the patients in the
                control
                group (in comparable medical condition as the patients to be treated
                with
                the medical device which is the subject of the clinical trial) are
                to be
                treated, the treatment frequency and the statistical plan that will
                be
                utilized to analyze the data derived from the clinical
                trial.





·
            The
                protocol also has to establish the safety of the use of the medical
                device
                to be studied in the trial. Safety can be established in a number
                of ways.
                One is by showing the results of use of the medical device in treatments
                in other clinical trials, in hospital approved treatments elsewhere
                in the
                world or by use in animal clinical trials and/or in an FDA cleared
                "pilot"
                clinical trial in which far fewer patients are treated than in the
                definitive "pivotal" clinical
                trial.





·
            The
                sponsor submits the protocol to the
                FDA.





·
            The
                FDA staff gives their comments, objections and requirements on the
                submitted protocol.





·
            The
                sponsor redrafts the protocol and otherwise responds to the FDA's
                comments.





·
            The
                sponsor recruits hospitals and clinics as sites at which the patients
                in
                the study are to be treated. Such recruitment begins with or prior
                to the
                preparation of the protocol.





·
            After
                the FDA clears the protocol the trial sites and the sponsor recruit
                the
                patients to be treated in the
                study.





·
            The
                patients are treated at not more than the number of trial sites specified
                in the protocol. One half of the patients are treated with the medical
                device being studied and the other half, the control group, with
                the then
                current standard of care for treatment of the same medical
                condition.





·
            The
                sites follow up each treated patient (for the period and the number
                of
                times provided in the FDA cleared protocol) to determine the efficacy
                of
                the medical device being studied in the treatment of the medical
                condition
                identified in the protocol, as against the efficacy of the standard
                of
                care used in the study.





·
            The
                sponsor assists and monitors compliance with the protocol's requirements
                in each site's conduct of the
                study.





·
            The
                sponsor collects the clinical data of each patient's treatment and
                progress from the sites.





·
            The
                data is analyzed by or for the sponsor. The sponsor prepares a report
                of
                the results of the study and submits the report and the supporting
                clinical data to the FDA staff reviewers for their comments and
                questions.





·
            After
                staff review of the submitted data, the sponsor responds to the FDA's
                comments and questions.





·
            After
                completion of its review, the FDA staff may submit a report of the
                results
                of the trial to an advisory medical panel consisting of experts in
                the
                treatment of the medical condition which the studied medical device
                is
                intended to treat.





·
            The
                panel submits its advice as to the efficacy and safety of the device
                to
                the FDA official who is the Director of the FDA Division to which
                the
                protocol and the results of the pivotal trial were originally submitted.
                If no advisory panel is required, the FDA staff reviewers submit
                their
                recommendation directly to the Division
                Director.





·
            The
                FDA Division Director is the FDA official who determines whether
                or not to
                clear the medical device for commercial sale for treatment of that
                medical
                condition. The sponsor may appeal a Division Director's negative
                determination through appeal levels within the FDA, up to the Commissioner
                of the FDA.





·
            The
                FDA may require an audit of the manufacturing facility.


5


·
            After
                FDA clearance the sponsor must submit all labeling information for
                the
                medical device to the FDA to make certain that the claims on the
                label
                accurately state the uses for which the medical device has been
                cleared.





**Regulatory
      Strategies**





We
      employ
      consultants with extensive knowledge in strategic regulatory and clinical trial
      planning to support our product development efforts through every stage of
      the
      development and FDA clearance process. We also employ consultants with extensive
      knowledge of medical devices including securing approval of insurance companies
      to reimburse their insured patients for the cost of the use of new medical
      products used in medical treatments. We have secured approval for Medicare
      payments for the use of ORCEL under Medicare's Outpatient Prospective Payment
      System (OPPS) for approximately $1,100 per unit of ORCEL. This approval covers
      the use of ORCEL in hospitals, other hospital-owned facilities and for hospital
      outpatient treatment. However, we will still need to secure the approval of
      Medicare designated contractors in different parts of the country for approval
      of the different medical conditions for which Medicare reimbursement of the
      use
      of ORCEL will be made. We can only secure that further approval after we have
      received FDA clearance for use of ORCEL for the treatment of that medical
      condition. We will also seek to secure approval for private health insurance
      providers' reimbursement for the cost of ORCEL. We believe that securing
      Medicare reimbursement approval for ORCEL will be of significant assistance
      to
      us in securing reimbursement approval by private health insurance
      companies.





**Sales
      and Marketing**





As
      noted
      above, our business strategy is to combine our efforts with Lonza for the
      production of ORCEL. We had previously entered into a sales agency agreement
      with Lonza, providing for Lonza to be the exclusive sales agent in the United
      States for our ORCEL product or any other future bi-layered cellular matrix
      product of ours for the treatment of venous stasis ulcers, diabetic foot ulcers
      or any other therapeutic indication for dermatological chronic or acute wound
      healing. Changes in ownership in 2007 at Lonza have resulted in a mutual
      reconsideration of our sales agency agreement. In connection with negotiating
      with Lonza revisions to our manufacturing agreement in September 2007, we agreed
      to the cancellation of our sales agency agreement. We have spoken with two
      potential marketing partners to secure a new agreement for the marketing and
      distribution of ORCEL after, and if, we receive FDA clearance for the commercial
      sales of ORCEL to treat venous stasis ulcers. We are also making contingency
      plans to have our own sales staff to market ORCEL.





**Production
      and Supply**





On
      October 29, 2003, we entered into an agreement commencing November 1, 2003,
      with
      Lonza for Lonza to manufacture ORCEL in its Walkersville, Maryland facilities.
      The Lonza manufacturing facility is required to meet FDA's good manufacturing
      processes standards. Lonza is experienced in the manufacture of cell-based
      medical products such as our ORCEL. On October 18, 2004, in connection with
      our
      now cancelled Sales Agency Agreement with Lonza, we amended certain terms of
      this manufacturing agreement.





Our
      manufacturing agreement with Lonza requires us to currently pay Lonza $136,591
      per month (although, in agreement with Lonza, such payments have been
      temporarily suspended since January 2007), or approximately $1,639,091 per
      year,
      for the use of a Lonza production facility in Walkersville, Maryland.





On
      September 26, 2007, we entered into an agreement with Lonza, whereby Lonza
      agreed:





·
            to
                perform certain defined work in a timely manner necessary to support
                our
                application for FDA Pre-Market Approval of our ORCEL product;


·
            to
                modify the terms of our October 29, 2003 Manufacturing Agreement,
                as
                previously amended, prescribing rates for labor and lower production
                suite
                fees than we previously agreed to and which we have to pay to Lonza,
                and


·
            to
                apply $100,000 held as a security deposit against outstanding amounts
                we
                owe Lonza.





We
      paid
      Lonza $750,000 to be applied against amounts we owe it. We agreed that we would
      pay Lonza on March 31, 2008, on account of its labor charges and production
      suite fees hereafter incurred after September 26, 2007, as well as for the
      remainder of our currently outstanding obligations, an amount which will be
      the
      lesser of the amount we then owe, or 25% of the net proceeds we receive from
      the
      sale of our equity securities in the first quarter of 2008. Any remaining
      outstanding balance we owe will be due on July 1, 2008. Pursuant to such
      September 26, 2007 agreement, until December 1, 2007 we will pay Lonza only
      for
      work Lonza’s employees perform for us at the rate of $400 per hour, but Lonza
      will not charge us for use of its production suite. Beginning December 1,
      2007 and until, and if, we receive FDA clearance for the commercial sale of
      our
      cryo-preserved ORCEL product for the treatment of venous stasis ulcers, we
      will
      pay Lonza a $50,000 per month suite fee plus $175 per hour for time spent
      by Lonza’s personnel in Lonza’s clean room, and $125 per hour for time spent by
      Lonza’s personnel other than in Lonza’s clean room, on work performed by Lonza’s
      employees for us. Beginning January 1, 2008, we may elect, but not more than
      once in a three-month period, to change the charges we have to pay to Lonza
      and
      select either the $400 per hour labor but no suite fee arrangement or the
      $50,000 per month suite fee but lower hourly labor charges. We and Lonza have
      agreed that we will try to negotiate an ORCEL per unit manufacturing charge
      before, and if, we get FDA clearance to sell cryo-preserved ORCEL to treat
      venous stasis ulcers. If Lonza and we do not reach such agreement then Lonza
      and
      we will still be bound by our October 29, 2003 agreement.


6





Under
      the
      2003 agreement the payments we will make to Lonza will increase to $175,000
      monthly, or $2,100,000 per year, if we require Lonza to build us a larger
      production facility to meet our requirements for the production of ORCEL. We
      believe that further refinements in our manufacturing process may not only
      reduce the cost of our ORCEL product but may alleviate the need for building
      a
      larger production facility in the future. Such annual payments include some
      services and overhead expenses provided and paid for by Lonza. These annual
      payments we are required to make increase 3% per annum on the anniversary of
      the
      commencement date. We are required to pay 50% of the cost of the construction
      of
      that larger production facility up to a maximum payment by us of $1,000,000.
      However, the amount we contribute to the construction of that larger facility
      will be repaid to us by credits against a portion of the future annual payments
      and of certain other payments we are required to make to Lonza after the larger
      facility is in use. We are also required to pay specified hourly charges for
      the
      Lonza employees engaged in the production of ORCEL as well as certain other
      charges. After construction of the larger production facility we are required
      to
      acquire from Lonza virtually all of our requirements for ORCEL that Lonza can
      produce. Prior to our election to have Lonza construct the larger production
      facility for us, either we or Lonza may terminate the agreement on six months
      notice by us and twelve months notice by Lonza. If we elect to have Lonza
      construct the larger production facility for us the agreement will continue
      for
      six years after the larger production facility is constructed. However, even
      after such construction we and Lonza may elect to scale down over the following
      three years the portion of our requirements for ORCEL that Lonza will produce
      for us. We may elect the scale down period at any time after one year after
      the
      larger production facility is constructed and in operation in which event there
      are additional payments we must make to Lonza. If we elect the scale down period
      after one year we must pay Lonza $2,625,000 and if we elect the scale down
      period after two years we must pay Lonza $1,050,000. If we elect the scale
      down
      periods in either of those two years, we forfeit our right to receive any
      further credits (up to the amount of our contribution to the cost of the larger
      production facility) against payments we are thereafter required to make to
      Lonza. Either Lonza or we may elect the scale down period later than three
      years
      after that facility is in operation and neither of us will be required to make
      any additional payments to the other because of that election.





If
      after
      the construction of the larger production facility, we breach a material term
      of
      our agreement with Lonza, or elect to terminate the agreement, we will have
      to
      pay Lonza the following amounts:





If termination occurs after the following
              anniversary of the construction of the
              larger production facility
            
            Amount
              of
              Payment6
                years
            
            $
            1,050,0005
                years, but less than 6 years
            
            
            1,575,0004
                years, but less than 5 years
            
            
            2,625,0003
                years, but less than 4 years
            
            
            3,675,0002
                years, but less than 3 years
            
            
            5,250,0001
                year, but less than 2 years
            
            
            6,300,000





In
      addition, upon such termination we will forfeit our right to receive any further
      credits (up to the amount of our contribution to the cost of the larger
      production facility) against future payments we may have to make to
      Lonza.





The
      raw
      materials that we use to manufacture ORCEL come from a limited number of
      suppliers. We currently purchase collagen corium, a component of the collagen
      matrix in ORCEL, from a single supplier but we have identified a secondary
      source of supply for that item. The collagen matrix used in ORCEL is
      manufactured for us to our specifications by another supplier. We have
      identified two potential secondary sources of collagen and we are in the process
      of testing the collagen they produce. We have agreed with the manufacturer
      of
      the collagen matrix we use to produce ORCEL that subsequent to a written
      notification from the FDA allowing us to sell ORCEL commercially for treatment
      of venous stasis ulcers we will provide such supplier projections for one or
      more subsequent quarters and the parties will be obligated to purchase and
      sell
      those projected amounts. While there may be other sources from where we could
      purchase such materials, a disruption in the supply of any of these materials
      would have a significant negative impact on our ability to manufacture and
      sell
      ORCEL and in any event would likely cause us delays and additional expenses
      in
      the manufacturing of ORCEL.


7





**Competition**





We
      are
      aware of several companies that are actively engaged in the research and
      development of products for the repair and regeneration of skin. There are
      currently three primary and distinct approaches to the repair and regeneration
      of skin: the acellular (no cell) approach, including the use of cadaver based
      products; the cell-based unilayered (epidermal or dermal cell) approach, and
      the
      cell-based bi-layered (epidermal and dermal cell) approach. A cell-based
      approach makes use of human donor cells. The approach we believe to be the
      most
      advanced and effective is the cell-based bi-layered approach. The production
      of
      ORCEL consists of a top layer of epidermal cells and a bottom layer of dermal
      cells in a collagen matrix that is a bi-layered approach utilizing donor
      cells.





There
      are
      many products available for treating skin wounds. However, as already noted,
      we
      believe that the use of donor cells delivered to the wound on a matrix is the
      most effective process for healing skin wounds and in particular hard to heal
      skin wounds. Therefore, we believe that only products using donor cells placed
      on a matrix will directly compete with ORCEL.





We
      consider the Apligraf product manufactured by Organogenesis, Inc. and Dermagraft
      product manufactured by Advanced BioHealing, Inc. (ABH) to be our principal
      competitors. Apligraf is an FDA cleared product using human dermal and epidermal
      cells (bi-layered) placed on a collagen matrix, for the treatment of both venous
      stasis and diabetic foot ulcers. The Apligraf product is not cryopreserved
      and
      has a reported shelf life of 10 days. The Dermagraft product which is
      cryopreserved uses human derived dermal cells only (unilayered) placed on a
      polyglactin matrix and is FDA cleared to treat diabetic foot ulcers. Dermagraft
      is not approved for use in treatment of venous leg ulcers. The Dermagraft
      product was purchased from Smith & Nephew by ABH in June 2006 and is back on
      the U.S. market. Both Organogenesis, Inc. and ABH are private companies that
      market and sell their own products. Due to their private company status, limited
      financial information is available regarding these companies. However we believe
      based on the information that is available, that both companies have greater
      resources than we do.





The
      biomedical field is continually undergoing rapid and significant technological
      changes. Other companies may succeed in developing other products that are
      more
      effective than ORCEL. If such new products are accepted by the medical
      community, or if those products receive FDA approval for treatment of venous
      stasis and diabetic foot ulcers before ORCEL does, or if other companies develop
      products that are more effective than ORCEL, any such developments could impede
      our ability to continue our operations.





**Patents
      and Proprietary Rights**





In
      connection with ORCEL, we have four United States patents, one European patent
      covering thirteen countries, and ten patents in ten other countries, issued.
      We
      also have one United States and eight international patent applications (filed
      under the Patent Cooperation Treaty) pending for our technology and
      processes:





·
            The
                first of these patents covers the structure of ORCEL. It is an epidermal
                layer of cultured epidermal cells and a bilayered collagen sponge
                structure that includes a layer of highly purified, non-porous collagen
                on
                top of a porous cross-linked collagen sponge containing cultured
                dermal
                cells. This patent expires on February 1, 2011. This is also the
                technology covered by the European and other foreign patents which
                have
                been issued to us. These foreign patents also expire in
                2011.





·
            Another
                United States patent provides for the extension of the use of the
                collagen
                sponge structure described above which may contain cells other than
                epidermal and/or dermal cells, such as cells for regenerating such
                organs
                and tissues as heart muscle, blood vessels, ligaments, cartilage
                and
                nerves. This patent also expires on February 1, 2011. We have not
                performed, nor are we planning to perform in the near future, any
                clinical
                trial using our platform technology for use of donor cells other
                than
                epidermal and dermal cells.





·
            Another
                United States patent covers a manufacturing process which, when
                implemented, can reduce the cost of producing ORCEL. This new
                manufacturing process creates an improvement over our collagen structures
                described above in that a third layer of collagen which is hospitable
                to
                cell growth is deposited on the non-porous collagen layer. This patent
                expires on December 28, 2020.





·
            Our
                fourth United States patent covers a process for the cryopreservation
                of
                ORCEL. This patent expires on December 26, 2021.




8


In
      connection with our acquisition of Hapto the FMBs and Haptides TM are
      covered under various patent applications.





FMB’s
      are
      derived from fibrinogen through a specific chemical process and provide a matrix
      for cell growth and transfer. The FMB technology is covered by five US patents
      and one Australian patent. There are also corresponding European, Japanese
      and
      Canadian applications in the prosecution phase.





·
            The
                first USA patent, entitled “FMBs Prepared from Fibrinogen, Thrombin and
                Factor VIII,” covers a method for producing FMBs. This patent expires on
                September 19, 2017.





·
            The
                second USA patent, entitled “FMBs Prepared from Fibrinogen, Thrombin and
                Factor VIII for Binding Cells”, covers FMBs prepared by a certain method,
                a composition including cells that are bound to such FMBs and a method
                for
                culturing cells on such FMBs. This patent expires on September 15,
                2018.





·
            The
                third USA patent, entitled “FMBs and Uses thereof”, covers a method for
                separating cells that bind to FMBs from cell culture, a method for
                transplanting such cells into a patient and a method for engineering
                human
                tissues. This patent expires on October 25, 2022. A corresponding
                patent
                has been granted in Australia and in 2006 we were notified by the
                European
                patent office that they intended to grant the patent. In January
                2007, we
                began the process for this patent to issue in England, Germany and
                France.
                Corresponding applications are also pending in Canada and
                Japan.





·
            The
                fourth USA patent, entitled “Fibrin Nanoparticles and Uses thereof”,
                covers isolated fibrin nanoparticles having a mean diameter of 200-2000
                nm
                and a method for preparing the fibrin nanoparticles. This patent
                expires
                on August 30, 2021. Corresponding applications are pending in Canada,
                Europe, Japan and Australia. There is also a USA pending application
                directed to a composition comprising fibrin nanoparticles and an
                agent.





·
            The
                fifth USA patent, entitled “Fibrin Applicator Pistols”, covers an
                applicator that can simultaneously deliver two component solutions,
                fibrinogen and thrombin at precise ratios and provides a method for
                delivering either as a spray or endoscopically FMB suspended within
                one of
                the solutions. This patent expires on March 27, 2022.





Haptides TM are
      synthetic peptides that mimic the mechanism of cell attachment to fibrinogen.
      These haptotactic (cell binding) peptides can be coated to scaffolds and devices
      and could also be used for drug delivery and for gene therapy. In Australia,
      one
      patent has been granted and another patent has been allowed. In the USA, during
      2006 two USA patents were granted covering the Haptide technology and two patent
      applications are in the prosecution phase in the USA, Europe and PCT countries.





·
            The
                first family of applications, entitled “Novel peptides”, covers a group of
                novel peptides homologous to a portion of Fibrinogen, which retains
                certain desired properties of the entire fibrinogen molecule including
                cell adhesive effects. One patent has been granted in Australia and
                in
                November 2006 we were notified by the European patent office that
                they
                intended to grant the patent. Corresponding applications are pending
                in
                Canada, Israel and Japan. On February 18, 2008 we received a European
                patent.




·
            In
                October 2006 a patent entitled “Haptotactic Peptides” was granted and is
                set to expire on January 2020. It covers a novel peptide homologous
                to a
                specific portion of Fibrinogen and such peptide retains certain properties
                of the fibrinogen molecule including cell adhesive effects.





·
            There
                is another family of patent applications, entitled “Novel Haptotactic
                Peptides”, that discloses novel peptide sequences homologous to the known
                fibrinogen derived haptotactic peptides Cβ and CαE. The novel peptides are
                derived from proteins related to fibrinogen and which possess cell
                attraction activity. One patent has been allowed in Australia and
                in
                December 2006 a USA patent entitled “Haptotactic Peptides” was granted and
                is set to expire in January 2021. We filed a continuation application
                in
                the USA to broaden the claims. Patent applications covering these
                peptides
                are also pending in Canada, Europe, Israel and
                Japan.





·
            Another
                family of patents, entitled “Liposomal Compositions Comprising Haptotactic
                Peptides and uses thereof” has been filed. These patents relate to
                liposomal compositions comprising peptides that elicit cell attachment
                responses and are internalized by cells and that are capable of enhancing
                the uptake of liposomes by cells. This invention can be used in
                pharmaceutical and cosmetic compositions. These patent applications
                are
                pending in the USA, Europe, Israel and
                Japan.




9


Despite
      such patents our success will depend, in part, on our ability to maintain trade
      secret protection for our technology.





We
      successfully defended challenges by Organogenesis to our United States patent,
      and by Advanced Bio Healing to our European patent for our ORCEL technology,
      in
      the respective patent offices where those patents were issued. However, those
      successful defenses do not preclude future challenges in court. We do not know
      if any of the other patents issued to us will be challenged, invalidated or
      circumvented. Patents and patent applications in the United States may be
      subject to interference proceedings brought by the U.S. Patent and Trademark
      Office, or to opposition proceedings initiated in a foreign patent office by
      third parties or to re-examination proceedings in the United States. We might
      incur significant costs defending such proceedings and we might not be
      successful. Several of our competitors have been granted patents, including
      those granted to Organogenesis and Advanced Bio Healing, Inc., relating to
      their
      particular skin technologies which also utilize donor cells on a collagen sponge
      matrix. To that extent they may be considered similar to our ORCEL
      technology.





The
      validity and breadth of claims in medical technology patents involves complex
      legal and factual questions and, therefore, are highly uncertain. We do not
      know
      if any pending patent applications or any future patent application will issue
      as patents, that the scope of any patent protection obtained will be enough
      to
      exclude competitors or that any of our patents will be held valid if
      subsequently challenged in court proceedings. We do not know if others have
      or
      will develop similar products, duplicate any of our products or design around
      any of our patents issued or that may be issued in the future. In addition,
      whether or not patents are issued to us, others may hold or receive patents
      which contain claims having a scope that covers aspects of our products or
      processes.




**Research
      and Development Expenses**





Research
      and development expenses consist primarily of salaries, clinical trial costs,
      amounts paid to Lonza for our production suite and other costs under our cell
      therapy manufacturing agreement, facility costs and laboratory supplies.
      Research and development expenses were $4,226,051 for the year ended December
      31, 2007, compared to $8,179,780 for the year ended December 31, 2006.





**Compliance
      with Environmental Regulations**




We
      are
      subject to regulation under the Occupational Safety and Health Act, the
      Environmental Protection Act, the Toxic Substances Control Act, the Resource
      Conservation and Recovery Act, the Controlled Substances Act and other present
      and potential future federal, state or local regulations. Our research and
      development programs involve the controlled use of hazardous materials,
      chemicals, biological materials and various radioactive compounds.




Although
      we believe that our operations comply in all material respects with applicable
      environmental laws and regulations, the risk of accidental contamination or
      injury from these materials cannot be completely eliminated. In the event of
      such an accident, we could be held liable for any damages that result, and
      the
      extent of that liability could exceed our resources. Our compliance with these
      laws and regulations did not, and is not expected to, have a material effect
      upon our capital expenditures, earnings or competitive position.





**Employees**





We
      presently employ 20 people on a full-time basis, including two executive
      officers in our offices and facilities in New York City. We presently employ
      one
      research assistant on a full time basis in Israel.





**Available
      Information**




Our
      reports filed or furnished pursuant to Section 13(a) or 15(d) of the
      Securities Exchange Act of 1934 are available free of charge on our website
      (www.forticellbioscience.com) as soon as reasonably practicable after they
      are
      filed with, or furnished to, the Securities and Exchange Commission. Our filed
      reports are also available on the SEC’s web site (www.sec.gov).


10





**RISK
      FACTORS**




*You
      should carefully consider the risks described below before making an investment
      decision. The risks and uncertainties described below are not the only ones
      facing us. Additional risks and uncertainties not presently known to us or
      that
      we currently deem immaterial also may impair our business operations. If any
      of
      the following risks actually occur, our business could be harmed. In such case,
      the trading price of our common stock could decline, and you may lose all or
      part of your investment.* **




**Risks
      Related to Our Business**





***Unless
      we secure FDA clearance for the sale of ORCEL to treat venous stasis ulcers
      it
      will be difficult to impossible for us to continue to operate our
      business.***





We
      submitted our PMA application for FDA clearance for the sale of ORCEL for the
      treatment of venous stasis ulcers in October 2007. We expect to receive a final
      determination for that application sometime in the third quarter of 2008. We
      may
      not obtain FDA clearance for the commercial sale of the cryopreserved form
      of
      ORCEL for the treatment of venous stasis ulcers and later for diabetic foot
      ulcers. Among the factors which may contribute to those findings are a negative
      assessment of our manufacturing processes, raw materials used in manufacturing
      our product, our freezing technique, and ORCEL’s clinical results. If we do not
      obtain FDA clearance for the sale of ORCEL in its cryopreserved form for the
      treatment of venous stasis ulcers, it may be difficult to impossible for us
      to
      raise capital to continue our business operations.





***We
      do not have sufficient funds to bring our product to market for use by large
      patient populations. Unless we secure additional financing we will not be able
      to continue to operate our business.***





We
      will
      need to secure additional financing for the approximately $600,000 of cash
      we
      are currently consuming per month, for our operations thereafter. The amount
      of
      cash we consume each month fluctuates, depending, among other things, on whether
      we are incurring expenses from services provided by third party suppliers in
      connection with a clinical trial and what payments we have to make on our
      outstanding debt. We have
      determined that, if necessary, there are certain measures that we can take
      to
      reduce our monthly costs by approximately fifty percent if we think it is
      required to continue our operations.





We
      will
      have to obtain additional funds through the sale of our securities to the public
      and through private placements, debt financing or other, including short-term,
      loans. We may not be able to secure any additional financing nor may we be
      able
      to reach the larger patient population markets of persons with venous stasis
      ulcers and diabetic foot ulcers, with funds that we may be able to raise. We
      are
      also likely to continue to encounter difficulties which are common to
      development stage companies, including unanticipated costs relating to
      development, delays in the testing of products, regulatory approval and
      compliance and competition.





Our
      capital funding requirements depend on numerous factors, including:





·
            the
                progress and magnitude of our research and development programs;


·
            the
                time involved in obtaining regulatory approvals for the commercial
                sale of
                our ORCEL product in its cryopreserved form to treat venous stasis
                ulcers
                and, later, diabetic foot ulcers;


·
            the
                costs involved in filing and maintaining patent claims;


·
            technological
                advances;


·
            competitive
                and market conditions;


·
            the
                successful implementation of the agreements we have entered into
                with
                Lonza for manufacturing our ORCEL product;


·
            our
                ability to establish and maintain other collaborative arrangements
                and


·
            the
                cost and effectiveness of commercialization activities and arrangements.





Our
      cash
      on hand at December 31, 2007 of $1.3 million was sufficient to fund our
      operations through mid March 2008.  On
      March
      25, 2008 we received a loan of $150,000 and we will need additional loans for
      the weeks ahead to continue our operations until the 100 Day FDA letter (“FDA
      Letter”) commenting on our PMA application is received.  We
      are
      currently having discussions with current shareholders and potential investors
      about possible financing alternatives, similar to the loan received on March
      25,
      to continue our operations until the receipt of the FDA Letter (which we
      reported in a Form 8K report dated February 29, 2008 was expected sometime
      in
      early 2008 but has not yet been received).  Depending
      on the contents of the FDA Letter, we hope to raise at least an additional
      $3,000,000, and up to $4,000,000, after the FDA Letter is received  to
      continue operations until a final determination from the FDA is made. Assuming
      an approval, we will then need to secure additional financing for our operations
      thereafter. If we do not obtain FDA clearance for the sale of ORCEL in its
      cryopreserved form for the treatment of venous stasis ulcers, it may be
      difficult to impossible for us to raise capital to continue our business
      operations. See Note 17 to the accompanying financial statements.


11





***Delays
      by the FDA in response to our Pre Market Approval Filings can have adverse
      consequences on our ability to maintain the integrity of our operations due
      to
      associated funding delays.***





We
      submitted our PMA request for ORCEL for the treatment of venous stasis ulcers
      in
      October 2007 and we had expected an initial reply by January 2008. This delay
      in
      receiving the initial response to our PMA from the FDA has created financial
      problems for us because we believe that a favorable initial response from the
      FDA will enable us to secure sufficient funds from investors and / or lenders
      to
      continue our operations. The delay, of almost 60 days as of March 31, 2008,
      in
      the time the FDA usually sends the 100 Day Letter, has forced us to delay some
      expenditures we should be making to secure (if secured) FDA clearance for
      commercial sales of ORCEL for the treatment of venous stasis ulcers. This will
      also delay our commercial launch of our ORCEL product and create a situation
      which has caused us to adjust our business plans to stretch those funds over
      a
      longer period of time. We now have to secure additional capital or loans without
      the benefit of an indication of the FDA’s view of our PMA submission and at a
      time when investors are dealing with economic stresses unrelated to us. ******





***Because
      of our history of ongoing losses and because we may never generate a profit
      and
      our lack of cash or other current assets, we have received an opinion from
      our
      independent registered public accountants that there is substantial doubt about
      our ability to continue as a going concern.***





Since
      our
      organization in 1991 we have sustained losses each year because, among other
      reasons, we have had very limited sales of our product. For the year ended
      December 31, 2007, we have a deficit accumulated in our development stage of
      $166 million. Our independent registered public accountants ****** advised
      us that these factors, among others, raise substantial doubt about our ability
      to continue as a going concern. Unless we obtain additional financing we will
      not be able to continue as a going concern.





***We
      have accumulated obligations that we are required, but are unable, to pay
      currently. This also raises doubt as to our ability to continue as a going
      concern.***





As
      of
      December 31, 2007, payment of approximately $1.5 million of the approximately
      $1.75 million we owed to our trade creditors was past due.





While
      we
      have arranged for payment of some of our obligations over a period of time,
      and
      have to make other payments of past due obligations to our current and ongoing
      suppliers, our ability to make payments we have agreed to pay and to insure
      continued receipt of needed supplies, and to continue reducing our past due
      obligations, will depend on our ability to secure needed financing or our
      ability to issue equity in satisfaction of certain obligations.





***Unless
      we later secure FDA clearance for the sale of ORCEL in its cryopreserved form
      to
      treat diabetic foot ulcers our sales of ORCEL will be more limited and thereby
      limit our ability to earn profits.***





Although
      we have completed an FDA cleared pilot clinical trial for the use of the fresh
      form of ORCEL for the treatment of diabetic foot ulcers, we do not have the
      funds available to conduct a pivotal clinical trial for the use of ORCEL in
      its
      cryopreserved form for the treatment of diabetic foot ulcers. The cryopreserved
      form of ORCEL has a shelf life of approximately seven months as opposed to
      only
      approximately three to five days for the fresh form of ORCEL. We do not expect
      to begin the FDA clearance process for a pivotal trial for cryopreserved ORCEL
      for the treatment of diabetic foot ulcers until after, and if, we receive
      clearance for the sale of cryopreserved ORCEL in the treatment of venous stasis
      ulcers, and only if we believe that we can secure financing for the conduct
      of
      that trial. If we are unable to later obtain FDA clearance for the sale of
      cryopreserved ORCEL for the treatment of diabetic foot ulcers, our sales of
      ORCEL will be more limited and thereby limit our ability to earn
      profits.


12





***Business
      changes at the corporation with which we have a manufacturing agreement could
      adversely affect the operations of our business.***





In
      the
      first quarter of 2007, Cambrex Bio Science of Walkersville, Inc. was acquired
      by
      Lonza, Inc. We are aware that Lonza, Inc. is a substantially larger public
      company with far greater resources than Cambrex. Unknown to us is whether
      Lonza’s management will perform Cambrex’s commitments to manufacture our ORCEL
      product. The loss of this contractual commitment, if we receive FDA clearance
      for commercial sales of ORCEL to treat venous stasis ulcers in the second half
      of 2008, would leave us in the difficult position of negotiating a new
      arrangement at or near the time we should be working on preparing for future
      commercial sales and building inventory of our product.





***Clinical
      trials for ORCEL are expensive, time consuming and their outcome is
      uncertain.***




Clinical
      trials are very expensive and difficult to design and implement. The clinical
      trial process is also time consuming. Before we can obtain regulatory clearance
      for the commercial sale of any product that we wish to develop, we are required
      to complete extensive human clinical trials to demonstrate its safety and
      efficacy. The timing of the commencement, continuation and completion of
      clinical trials may be subject to significant delays relating to various causes,
      including:




·
            delays
                or inability to manufacture or obtain sufficient quantities of materials
                for use in clinical trials;


·
            delays
                in obtaining regulatory approvals to commence a
                study;


·
            delays
                in identifying and reaching agreement on acceptable terms with prospective
                clinical trial sites;


·
            slower
                than expected rates of patient recruitment and
                enrollment;


·
            uncertain
                dosing issues;


·
            inability
                or unwillingness of medical investigators to follow our clinical
                protocols;


·
            variability
                in the number and types of subjects available for each study and
                resulting
                difficulties in identifying and enrolling subjects who meet trial
                eligibility criteria;


·
            scheduling
                conflicts with participating clinicians and clinical
                institutions;


·
            difficulty
                in maintaining contact with subjects after treatment, resulting in
                incomplete data;


·
            unforeseen
                safety issues or side effects;


·
            lack
                of effectiveness during the clinical trials,
                or


·
            other
                regulatory delays.





***Even
      if our ORCEL receives regulatory clearance, ORCEL will still be subject to
      extensive post-market regulation which will result in significant expense to
      us.***




If
      we
      receive regulatory clearance for commercial sale of ORCEL, we will also be
      subject to ongoing FDA obligations and continued regulatory review, such as
      continued safety reporting requirements, and we may also be subject to
      additional FDA post-marketing obligations, all of which may result in
      significant expense and limit our ability to commercialize our
      product.




If
      we
      receive FDA clearance, the FDA may still impose significant restrictions on
      the
      indicated uses for which the product may be marketed or impose ongoing
      requirements for potentially costly post-approval studies. In addition,
      regulatory agencies subject a product, its manufacturer and the manufacturer’s
      facilities to continual review and periodic inspections. The subsequent
      discovery of previously unknown problems with a product, including adverse
      medical effects, or problems with the facility where the product is
      manufactured, may result in restrictions on the marketing of that product,
      and
      could include withdrawal of the product from the market. Failure to comply
      with
      applicable regulatory requirements may result in:


·
            issuance
                of warning letters by the FDA;


·
            fines
                and other civil penalties;


·
            criminal
                prosecutions;


·
            injunctions,
                suspensions or revocations of marketing
                licenses;


·
            suspension
                of any ongoing clinical trials;


·
            suspension
                of manufacturing;


·
            delays
                in commercialization;


·
            refusal
                by the FDA to approve pending applications or supplements to approved
                applications filed by us or our
                collaborators;


·
            refusals
                to permit products to be imported or exported to or from the United
                States;


·
            restrictions
                on operations, including costly new manufacturing requirements,
                and


13


·
            product
                recalls or seizures.




The
      FDA’s
      policies may change and additional government regulations may be enacted that
      could prevent or delay regulatory clearance of our ORCEL or further restrict
      or
      regulate post-clearance activities. We cannot predict the likelihood, nature
      or
      extent of adverse government regulation that may arise from future legislation
      or administrative action, either in the United States or abroad. If we are
      not
      able to maintain regulatory compliance, we might not be permitted to market
      ORCEL and we may therefore have to discontinue the operations of our business.




In
      order
      to market any products outside of the United States, we and our collaborators
      must establish and comply with numerous and varying regulatory requirements
      of
      other countries regarding safety and efficacy. Approval procedures vary among
      countries and can involve additional product testing and additional
      administrative review periods. The time required to obtain clearance in other
      countries might differ from that required to obtain FDA clearance. The
      regulatory clearance process in other countries may include all of the risks
      associated with FDA clearance as well as additional presently unanticipated
      risks. Regulatory clearance in one country does not ensure regulatory clearance
      in another, but a failure or delay in obtaining regulatory clearance in one
      country may negatively impact the regulatory process in others. Failure to
      obtain regulatory clearance in other countries or any delay or setback in
      obtaining such clearance could have the same adverse effects associated with
      regulatory clearance in the United States, including the risk that our product
      may not be cleared for all indications requested and that such clearance may
      be
      subject to limitations on the indicated uses for which ORCEL may be
      marketed.





***Our
      failure to sell ORCEL on a profitable basis will limit our ability to continue
      our operations.***





To
      date
      ORCEL is the only product that we have developed and for which we have conducted
      human clinical trials. In the event we fail to develop additional products,
      or
      if the FDA does not grant us clearance to use ORCEL for the treatment of venous
      stasis ulcers and later diabetic foot ulcers, or if ORCEL is not favorably
      received by the medical community or it becomes obsolete, we will be unable
      to
      become profitable and we may be required to discontinue our
      operations.





***We
      are subject to extensive governmental regulation which increases the costs
      of
      manufacturing our product and will thereby negatively impact our ability to
      earn
      profits.***





Our
      business is subject to extensive regulation principally by the FDA in the United
      States and corresponding foreign regulatory agencies in each country in which
      we
      intend to sell ORCEL. These regulations affect:





·
            Product
                marketing clearances or approvals;


·
            Product
                standards;


·
            Packaging
                requirements;


·
            Design
                requirements;


·
            Manufacturing
                and quality assurance, including compliance by the manufacturing
                facility
                with good manufacturing process requirements, record keeping, reporting
                and product testing standards;


·
            Labeling;


·
            Periodic
                FDA inspections of the facility in which ORCEL will be
                manufactured;


·
            Import
                and export restrictions, and


·
            Tariffs
                and other tax requirements.





Our
      need
      to comply with these regulatory requirements will increase the cost of
      manufacturing our ORCEL product and negatively impact our ability to earn
      profits.





***The
      medical community may not accept ORCEL which will prevent us from selling ORCEL
      and prevent us from continuing our business.***





Market
      acceptance for ORCEL will depend upon a number of factors,
      including:





·
            The
                receipt and timing of FDA regulatory approvals for use of ORCEL,
                in its
                cryopreserved form, for the treatment of venous stasis ulcers and
                later
                for diabetic foot ulcers;


·
            Acceptance
                by the medical community of ORCEL for the treatment of the medical
                conditions that it is intended to treat, the demonstration of its
                safety
                and its cost effectiveness, and


·
            Securing
                approval of third parties, such as Medicare and insurance companies,
                for
                reimbursement for the cost of ORCEL.


14





Unless
      we
      secure market acceptance for ORCEL we will be unable to sell ORCEL and as a
      result we will be unable to conduct our business.





***Our
      potential competitors have greater financial, sales and marketing resources
      than
      we do so that we may have difficulty in competing against
      them.***





See
      “Description of Business - Competition”. As there noted, sales of Apligraf for
      the treatment of venous leg ulcers are now being made directly by Organogenesis
      and sales of Dermagraft for the treatment of diabetic foot ulcers are now being
      made by Advanced BioHealing. We believe that both Organogenesis and Advanced
      BioHealing are each larger than we are and have significantly greater resources
      than we have. The biomedical field is continually undergoing rapid and
      significant technological changes. Other companies may succeed in developing
      other products that are more effective than ORCEL. If such new products are
      accepted by the medical community, or if those products receive FDA clearance
      for treatment of venous stasis and diabetic foot ulcers before ORCEL does,
      or if
      other companies develop products that are more effective than ORCEL, any such
      developments could impede our ability to continue our operations.





***We
      rely on a limited number of key suppliers to manufacture ORCEL and therefore
      run
      the risk of delay in securing needed materials from other suppliers. We also
      rely on only one company to manufacture ORCEL. We run the risk that such company
      may not successfully manufacture ORCEL.***





See
      the
      discussion of “Description of Business-Production and Supply” where we describe
      our production agreement with Lonza and our agreements with other suppliers.
      If
      (i) Lonza does not produce ORCEL, or (ii) Lonza does not produce it at a per
      unit price well below the price at which we can sell ORCEL in North America,
      we
      may not be able to continue, or at least would be seriously hampered in
      continuing, our business operations. Also, any disruption in the supply of
      corium or collagen matrix or other materials from our current suppliers of
      such
      materials would have a significant negative impact on our ability to manufacture
      and sell ORCEL or at least would cause us delays and additional expenses in
      the
      manufacturing of ORCEL.





***We
      depend on our patents and proprietary technology which may not provide us with
      sufficient protection against technologies used, or which may be used by our
      competitors. We cannot protect our intellectual property rights throughout
      the
      world.***





The
      validity and breadth of claims in medical technology patents involves complex
      legal and factual questions and, therefore, are highly uncertain. Although
      we
      successfully defended challenges to our United States and European patents
      in
      the respective patent offices where those patents were issued, those successful
      defenses do not preclude future challenges in court. We do not know if any
      of
      the patents issued to us will be challenged, invalidated or circumvented.
      Patents and patent applications in the United States may be subject to an
      interference proceeding brought by the U.S. Patent and Trademark Office, or
      to
      opposition proceedings initiated in a foreign patent office by third parties.
      We
      might incur significant costs defending such proceedings and we might not be
      successful. We do not know if any of our patents or any of our pending patent
      applications or any future patent application of ours that will issue as
      patents, will provide us with the scope of patent protection that will be enough
      to exclude competitors. We also do not know that any of our patents will be
      held
      valid if subsequently challenged or that others will not claim rights in or
      ownership of the patents and other proprietary rights held by us. We do not
      know
      if others have or will develop similar products, duplicate any of our products
      or design around any of our patents issued or that may be issued in the future.
      In addition, whether or not patents are issued to us, others may hold or receive
      patents which contain claims having a scope that covers aspects of our products
      or processes.





Filing
      patents on our ORCEL technology throughout the world would be prohibitively
      expensive. Competitors may use our technology in jurisdictions where we have
      not
      obtained patent protection to develop their own products. These products may
      compete with ORCEL and may not be covered by any of our patent claims or other
      intellectual property rights.





Patent
      law outside the United States is also uncertain and many countries are currently
      reviewing and revising patent laws, particularly with respect to biotechnology
      and pharmaceutical inventions. The laws of some countries do not protect our
      intellectual property rights to the same extent as U.S. laws. It may be
      necessary or useful for us to participate in proceedings to determine the
      validity of our, or our competitors’, foreign patents, which could result in
      substantial cost and divert our efforts and attention from other aspects of
      our
      business.


15





***We
      may be subject to product liability claims which we might not be able to pay
      thereby causing us to discontinue our business.***





ORCEL
      is
      designed to be used in the treatment of medical conditions and diseases where
      there is a high risk of serious medical complications, amputation of the leg
      or
      death. Although we have obtained product liability insurance coverage in the
      amount of $3,000,000, such insurance coverage may not be adequate to protect
      us
      against future product liability claims. In addition, the cost of obtaining
      product liability insurance in the future may prevent us from securing such
      insurance on terms acceptable to us, if at all. Furthermore there can be no
      assurance that we will avoid significant product liability claims and the
      attendant adverse publicity. Large product liability claims or other claims
      with
      respect to uninsured or underinsured liabilities could make it impossible for
      us
      to continue our business operations.




***If
      we lose our key employee we may not be able to continue our business
      operations.***





The
      development and production of our product is managed by a wide array of
      scientific personnel, one of whom we consider to be a key employee. Dr. Melvin
      Silberklang is our vice president for research and development and our chief
      scientific officer. The loss of the services of Dr. Silberklang could cause
      delays in our ongoing business operations, and could have a material adverse
      effect on our business, results of operations and financial condition. We do
      not
      have an employment contract with Dr. Silberklang nor do we carry a key man
      insurance policy on his life.





***The
      market price of our common stock has been and may continue to be highly volatile
      creating greater financial risk for the owners of our common
      stock.***





The
      market price of our common stock has ranged from $0.30 to $13.20 during the
      past
      three years. As of March 21, 2008, we had 13,678,015 shares outstanding. Other
      factors that may affect the price of our common stock include:





·
            our
                ability to successfully produce and market and sell our ORCEL product;


·
            our
                ability to develop other products for sale;


·
            our
                competitors' announcements concerning technological innovations;


·
            new
                commercial products or procedures;


·
            proposed
                government regulations;


·
            developments
                or disputes relating to patents, trade secrets or proprietary rights,
                and


·
            the
                following substantial number of additional shares of our common stock
                we
                would have to issue:





§
            an
                aggregate of 35,512,137 shares upon conversion of our outstanding
                Series
                A, A-1, A-2, and D-1 convertible preferred
                stock;


§
            an
                aggregate of 43,846,012 shares upon the exercise of warrants to purchase
                the shares of our common stock we granted primarily in connection
                with
                financings during the past four
                years;


§
            potentially
                an aggregate of 7,833,340 shares upon the exercise of Series M-1
                warrants
                whose exercise is contingent upon exercise of the holder’s Series M
                warrant;


§
            an
                aggregate of 3,516,897 shares upon exercise of options we have granted
                to
                our employees, our executive officers, our directors, and to consultants
                and vendors..


§
            an
                aggregate of 600,000 shares of restricted stock given to our executive
                officers and certain key employees whose vesting is contingent on
                continued employment by us.





***Our
      largest stockholders may take actions that are contrary to your interests,
      including selling their stock.***




A
      small
      number of our stockholders hold a significant amount of our outstanding stock.
      These stockholders may have interests that are different from those of our
      other
      shareholders. In addition, the average number of shares of our stock that trade
      each day is generally low. As a result, sales of a large number of shares of
      our
      stock by these large stockholders or other stockholders within a short period
      of
      time could adversely affect our stock price.


16





***We
      may have to sell additional equity securities in the future which will dilute
      the portion of Forticell’s equity owned by our current
      stockholders.***





In
      addition to a number of private placements of our equity securities in the
      past
      5 years, in the future we will probably have to sell more shares of our common
      stock, or other securities convertible into or otherwise entitling the holder
      to
      purchase our common stock. In the future we will also issue additional options
      to purchase our common stock to our employees, our executive officers, our
      directors and to consultants and vendors. All such sales and issuances of our
      common stock, other equity securities and warrants and options to purchase
      our
      common stock, will dilute the portion of our equity owned by our current
      stockholders.





***The
      price protection provisions of most of our outstanding warrants and in our
      outstanding Series A and A-1 convertible preferred stock might prevent increases
      in the market price of our common stock.***





During
      the past five years we have sold a large amount of our common stock and our
      convertible preferred stock in numerous private placements we have completed.
      We
      have also entered into other private transactions including our acquisition
      of
      Hapto Biotech, Inc. in 2006 in which we issued shares of our common stock.
      In
      those private placement sales and in those other private transactions, we also
      issued warrants to purchase shares of our common stock. At the present time
      all
      of our outstanding warrants (not including stock options we have granted to
      our
      employees and former directors) entitle the holders of those warrants to
      purchase a total of 51,679,352 shares of our common stock at the following
      exercise prices:





Range of
              Exercise Price
            
            Number of
              Shares
              Purchasable$0.01-0.015
            
            
            978,0000.50
            
            
            15,666,6800.55
            
            
            9,866,6931.00
            
            
            23,349,6261.79-2.15
            
            
            626,9613.08-4.50
            
            
            787,7866.00
                and above
            
            
            403,606Total
            
            
            51,679,352





In
      addition we have Series A, A-1, A-2, and D-1 convertible preferred stock
      outstanding which are convertible into an aggregate of 35,512,137 shares of
      our
      common stock. We sold such Series A Preferred with warrants (included in the
      above table) attached in a private placement in June and July 2007. At the
      same
      time in related transactions, we issued our Series A-1 and A-2 Preferred as
      consideration for cancellation by the holder of its right to share in our future
      revenues.





The
      Series A and Series A-1 Preferred and almost all of the warrants have price
      protection and other anti-dilution provisions which could reduce the exercise
      price of these warrants below the amounts set forth in the above table and
      also
      reduce the conversion prices of the Series A and A-1 Preferred. Such price
      protection and other anti-dilution provisions would be triggered if in the
      future we sell shares of our common stock below the exercise price of the
      warrants in question (or the conversion price of the A and A-1 Preferred),
      or
      sell or otherwise issue securities convertible into, or which entitle the holder
      to purchase shares of our common stock at a price which in effect (taking into
      consideration the price paid for the convertible security or warrant or option)
      is less than the exercise price of the warrant in question or less than the
      conversion price of the Series A and A-1 preferred. In the event that the
      conversion price of the Series A and the Series A-1 price are reduced as a
      result of such anti-dilution provisions, the number of shares of our common
      stock into which the Series A and A-1 preferred could be converted would be
      proportionately increased.





The
      closing price for our common stock on March 26, 2008 was $0.25.


17





***Because
      we do not intend to pay any dividends on our common stock, an investor in our
      common stock may only realize an economic gain from an increase, if any, in
      the
      market price of our common stock.***





We
      have
      never paid, and have no intentions in the foreseeable future to pay, any
      dividends on our common stock. Therefore, an investor who purchases our common
      stock, in all likelihood, will only realize a profit on his investment if the
      market price of our common stock increases in value.





***The
      certificate of designations of our Series A, A-1 and A-2 convertible preferred
      stock requires significant payments upon a change of
      control.***





Should
      we
      wish to enter into a merger transaction, or other transaction in which more
      than
      50% of our voting shares are transferred, or other acquisition type transaction,
      such transaction would trigger payment of the liquidation preference amount
      of
      such preferred stock. Such payments could cause a suitor to pass on the
      transaction, an opportunity that could potentially increase shareholder
      value.





***Our
      operations might be interrupted by the occurrence of a natural disaster or
      other
      catastrophic event.***




We
      depend
      on our contractors and vendors and on our laboratories and other facilities
      for
      the continued operation of our business. Natural disasters or other catastrophic
      events, including terrorist attacks, power interruptions, wildfires and other
      fires, earthquakes and wars could disrupt our operations or those of our
      contractors and vendors. Even though we believe we carry reasonably adequate
      business interruption and liability insurance, and Lonza and our suppliers
      may
      carry liability insurance that protects us in certain events, we might suffer
      losses as a result of business interruptions that exceed the coverage available
      under our and such other entities’ insurance policies or for which we or such
      other entities do not have coverage. For example, we are not insured against
      a
      terrorist attack. Any natural disaster or catastrophic event could have a
      significant negative impact on our operations and financial
      results.





***If
      our operations expand we may not be able to maintain an effective system of
      internal controls over financial reporting.***





Pursuant
      to Section 404 of the Sarbanes−Oxley Act of 2002 and the related rules of the
      Securities and Exchange Commission, beginning for our year ended December 31,
      2007, we have included in our annual report an assessment of the effectiveness
      of our internal control over financial reporting. Furthermore, beginning with
      year end December 31, 2009, our registered independent public accounting firm
      will be required to report on the effectiveness of our internal control over
      financial reporting. If we fail to maintain effective internal controls, qnd
      /
      or if our independent registered public accounting firm cannot attest to our
      assessment, we could report a material weakness which could possibly result
      in a
      loss of public confidence. Also, the lack of effective internal control over
      financial reporting may adversely impact our ability to prepare timely and
      accurate financial statements. We satisfactorily completed our assessment for
      the year ended December 31, 2007. Depending on the outcome of the FDA’s review
      of our PMA application for the use of ORCEL in the treatment of venous stasis
      ulcers, future internal control assessments may be more rigorous as a result
      of
      possible expanded operations as well as coordination of our reviews with Lonza,
      the third party manufacturer of our ORCEL product.





**Item
      2.**   **DESCRIPTION
      OF PROPERTY**





We
      occupy
      11,005 square feet of space in Columbia University's Audubon Biomedical Science
      and Technology Park in New York City, for laboratory and office space. We use
      our laboratories for assay development, wound healing research, biomaterial
      development, bioprocess development, histology, quality assurance testing and
      for two clean rooms where we produce ORCEL. Rent for the entire 11,005 square
      feet is $49,064 per month. We are currently leasing the space on a month to
      month basis.





**Item
      3.**   **LEGAL
      PROCEEDINGS**





None


18





**Item
      4.**   **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**





The
      following matters were submitted to a vote during the three months ended
      December 31, 2007.





Our
      annual meeting of our stockholders was held on December 20, 2007 at the Russ
      Berrie Medical and Science Pavilion, 1150 St. Nicholas Avenue, New York, New
      York. At the meeting our stockholders voted (cast both in person and by proxy)
      on six matters and all of such matters were approved.





The
      first
      matter voted on was the election of the members of our Board of Directors.
      All
      six of management’s nominees were elected and the tabulation of the votes was as
      follows:





Nominees
                for Director
            
            FOR
            
            WITHHELDCosta
                Papastephanou
            
            
            7,226,184
            
            
            11,610John
                Leone
            
            
            7,200,242
            
            
            37,552Mark
                Bagnall
            
            
            7,200,242
            
            
            37,552Shepard
                Goldberg
            
            
            7,197,944
            
            
            39,850Raphael
                Hofstein
            
            
            7,207,142
            
            
            30,652Andreas
                Vogler
            
            
            7,209,507
            
            
            28,287





There
      was
      no other director whose term of office as a director continued after the
      meeting.





The
      second matter upon which our stockholders voted was the proposal to ratify
      the
      appointment by the Board of Directors of BDO Seidman, LLP as our independent
      registered public accountants for 2007, such vote was as follows:





FOR
            
            AGAINST
            
            ABSTAIN7,229,568
            
            
            8,223
            
            
            3





The
      third
      matter upon which our stockholders voted was the proposal to amend our
      certificate of incorporation to increase the number of shares that we are
      authorized to issue from 200,000,000 to 300,000,000 shares. Such vote was as
      follows:





FOR
            
            AGAINST
            
            ABSTAIN7,156,439
            
            
            58,810
            
            
            22,545





The
      fourth matter upon which our stockholders voted was on the proposal to approve
      our 2006 Stock Award and Incentive Plan as amended. Such vote was as
      follows:





FOR
            
            AGAINST
            
            ABSTAIN
            
            BROKER
              NON-
              VOTES4,206,430
            
            
            128,486
            
            
            20,699
            
            
            2,882,179





The
      fifth
      matter upon which our stockholders voted was on the proposal to amend our
      Certificates of Designation of the relative rights and preferences of our Series
      A, A-1, and Series A-2 Convertible Preferred Stock. Such vote was as
      follows:





FOR
            
            AGAINST
            
            ABSTAIN
            
            BROKER
              NON-
              VOTES4,319,413
            
            
            25,035
            
            
            11,167
            
            
            2,882,179





The
      sixth
      matter upon which our stockholders voted was on the proposal to amend our
      Certificates of Incorporation to change our name to Forticell Bioscience, Inc.
      Such vote was as follows:





FOR
            
            AGAINST
            
            ABSTAIN7,222,775
            
            
            8,922
            
            
            6,097


19





**PART
      II**





**Item
                5.**
            
            **MARKET
                FOR COMMON EQUITY AND RELATED STOCKHOLDER
                MATTERS**





**Market
      Information**





Our
      common stock commenced trading on January 19, 1996, under the symbol “ORTC.” The
      common stock traded on the NASDAQ Small Cap market until August 2002, when
      it
      was delisted from the Small Cap market and commenced trading on the National
      Association of Securities Dealers' Bulletin Board, where it currently trades
      under the symbol “FORB.OB.” The following table sets forth the high and low
      sales prices of our common stock as reported by the Bulletin Board and the
      Pink
      Sheets for each full quarterly period within the two most recent fiscal
      years.





**HIGH**
            
            **LOW***2007
                Quarter*First
            
            $
            0.79
            
            $
            0.41Second
            
            
            0.80
            
            
            0.55Third
            
            
            0.76
            
            
            0.31Fourth
            
            
            0.60
            
            
            0.33*2006
                Quarter*First
            
            $
            5.70
            
            $
            2.10Second
            
            
            5.25
            
            
            3.15Third
            
            
            3.50
            
            
            0.77Fourth
            
            
            1.23
            
            
            0.40





**Security
      Holders**





At
      February 26, 2008, there were 388 record holders of our common stock. There
      are
      1,450 beneficial owners of our common stock whose shares are held in "street
      name."





**Dividends**





We
      have
      not paid and have no current plans to pay dividends on our common
      stock.





**Recent
      Sales of Unregistered Securities**





On
      October 22, 2007 we granted employee stock options to purchase 1,500,000 shares
      of our common stock at $0.52 per share under our 2006 Stock Award and Incentive
      Plan (2006 Plan). Options to purchase of 1,050,000 of these shares were granted
      to our executive officers. Additionally we granted 300,000 restricted shares
      under the same 2006 Plan to our chief executive officer. The grants of such
      options and shares were exempt from the registration requirements of the Act
      because such grants did not constitute sales of securities and pursuant to
      Section 4(2) of the Act as transactions by an issuer not involving a public
      offering.





On
      December 17, 2007 and December 26, 2007 we issued 5.25 and 4.663 shares of
      our
      Series A Convertible Preferred Stock, convertible into 105,000 and 93,260 shares
      of our commons stock, respectively, to two different vendors in settlement
      of
      past due obligations in the aggregate amount of $71,840. Such issuances were
      exempt from the registration requirements of the Act pursuant to Section 4
      (2)
      of the Act as transactions by an issuer not involving any public offering.
      There
      were no underwriting discounts or commissions involved in such
      issuances.


20


**Item
      6.** **MANAGEMENT’S
      PLAN OF OPERATION**





*The
      following discussion should be read in conjunction with our financial statements
      and notes thereto. This discussion may be deemed to include forward-looking
      statements.*





**Plan
      of Operation**





We
      are a
      development stage enterprise which had no operating revenue after December
      2001.





The
      following is a list of the projected development activities on which we expect
      to focus during the next twelve months:





·
            Completion
                of all FDA required test method development and
                validation;


·
            Completion
                of development of the cell factory process to increase cell line
                expansion
                capacity and reduce costs;


·
            Completion
                of prelaminated sponge project;


·
            Validation
                at Lonza of a process which doubles our ORCEL manufacturing
                capacity;


·
            Transfer
                of the cell factory process to Lonza,
                and


·
            Production
                and expansion of cell inventory for use in the commercialization
                of
                ORCEL.





Additionally
      we may:





·
            Examine
                potential licensing opportunities for use of our collagen and fibrin-based
                biomaterials in other tissue engineering applications,


·
            Submit
                proposals to the appropriate agencies for the purpose of securing
                available research grants, and


·
            Invest
                approximately $125,000 for equipment which will allow us to expand
                our
                collagen sponge manufacturing
                capacity.





We
      expect
      that the above projects will require our current level of staffing. We
      periodically review and adjust our staffing levels and operational expenses
      for
      maximum efficiency. Assuming a favorable outcome from the FDA in 2008 we believe
      our workforce should remain fairly constant





Our
      cash
      on hand at December 31, 2007 of $1.3 million was sufficient to fund our
      operations through mid March 2008. On March 25, 2008 we received a loan of
      $150,000 and we will need additional loans for the weeks ahead to continue
      our
      operations until the 100 Day FDA letter (“FDA Letter”) commenting on our PMA
      application is received. We are currently having discussions with current
      shareholders and potential investors about possible financing alternatives,
      similar to the loan received on March 25, to continue our operations until
      the
      receipt of the FDA Letter (which we reported in a Form 8K report dated February
      29. 2008 was expected sometime in early 2008 but has not yet been received).
      Depending on the contents of the FDA Letter, we hope to raise at least an
      additional $3,000,000, and up to $4,000,000, after the FDA Letter is received
      to
      continue operations until a final determination about our ORCEL product is
      made
      by the FDA. Assuming an approval, we will then need to secure additional
      financing for our operations thereafter. We anticipate that at least a portion
      of the approximately 15,500,000 Series M Warrants with a $0.50 exercise price,
      issued in June and July 2007 and expiring thirty days after an announcement
      from
      us that FDA approval has been received, will be exercised in those thirty days
      and that the proceeds will allow us to continue operations until the completion
      of a new larger private placement or debt financing as soon as possible
      thereafter.





If
      we are
      not able to secure financing through the end of the FDA process and/or if we
      do
      not obtain FDA clearance for the sale of ORCEL in its cryopreserved form for
      the
      treatment of venous stasis ulcers, it may be difficult to impossible for us
      to
      raise capital to continue our business operations.





We
      currently incur costs of approximately $600,000 on a monthly basis. However,
      the
      amount of cash we consume each month fluctuates, depending, among other things,
      on whether we are incurring expenses for services provided by third party
      suppliers in connection with either clinical trial or contract manufacturing
      activities and what payments we have to make on our outstanding debt. We have
      determined that, if necessary, there are certain measures that we can take
      to
      reduce our monthly costs by approximately fifty percent if we think it is
      required to continue our operations.





As
      of
      December 31, 2007, we owed $1.75 million to trade creditors of which
      approximately $.4 million or 24% was owed to our contract manufacturer, Lonza
      Walkersville, Inc. Of the remaining $1.35 million, payment of approximately
      $1.1
      million was past due.


21


While
      we
      have arranged for payment of some of our obligations over a period of time,
      and
      have to make other payments of past due obligations to our current and ongoing
      suppliers, our ability to make payments we have agreed to pay and to ensure
      continued receipt of needed supplies, and to continue reducing our past due
      obligations, will depend on our ability to secure needed financing.





We
      hope
      to obtain additional funds through the sale of our securities to the public
      and
      through private placements, debt financing or other short-term loans. We may
      not
      be able to secure any future financing nor may we be able to reach the larger
      patient population markets of persons with venous stasis ulcers and diabetic
      foot ulcers, with funds that we may be able to raise. We are also likely to
      continue to encounter difficulties which are common to development stage
      companies, including unanticipated costs relating to development, delays in
      the
      testing of products, regulatory approval and compliance and
      competition.





Our
      capital funding requirements depend on numerous factors, including:





·
            the
                progress and magnitude of our research and development programs;


·
            the
                time involved in obtaining regulatory approvals for the commercial
                sale of
                our ORCEL product in its cryopreserved form to treat venous stasis
                ulcers
                and, later, diabetic foot ulcers;


·
            the
                costs involved in filing and maintaining patent claims;


·
            technological
                advances;


·
            competitive
                and market conditions;


·
            the
                successful implementation of the agreements we have entered into
                with
                Lonza for manufacturing of our ORCEL product;


·
            our
                ability to establish and maintain other collaborative arrangements,
                and


·
            the
                cost and effectiveness of commercialization activities and
                arrangements.





Unless
      we
      obtain additional financing we will not be able to continue our
      business.





**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**





The
      discussion and analysis of our financial condition and results of operations
      is
      based upon our financial statements, which have been prepared in accordance
      with
      accounting principles generally accepted in the U.S. The preparation of these
      financial statements requires us to make estimates and judgments that affect
      the
      reported amounts of assets, liabilities, expenses, and related disclosure of
      contingent assets and liabilities. Actual results may vary from these estimates
      under different assumptions or conditions. On an on-going basis, we evaluate
      our
      estimates, including those related to the estimated useful lives of intangible
      assets and stock based compensation. We base our estimates on historical
      experience, business practices and corporate policies, contractual provisions
      and various other assumptions that we believe are reasonable under the
      circumstances.





Our
      significant accounting policies are described in Note 2 to our consolidated
      financial statements. We believe the following critical accounting policies
      reflect our more significant estimates and assumptions used in the preparation
      of our financial statements.





*Valuation
      of Intangible Assets*





Several
      of our accounting policies involve significant judgments and uncertainties.
      The
      policies with the greatest potential effect on our results of operations and
      financial position include the estimated useful lives and fair values of
      intangible assets. Our intangible assets consist of patent application costs.
      We
      establish the estimated useful lives of our patent application costs based
      on a
      number of factors, which is in part based on our assessments of the technology
      and the life of the patent. If these estimates change, the estimated useful
      lives of our intangibles may require adjustment. We test for impairment annually
      and between annual tests if events occur or circumstances change that would
      more
      likely than not reduce the fair value below its carrying amount. Subsequent
      reviews may result in future periodic impairments that could have a material
      adverse effect on the results of operations in the period recognized.


22


*Stock-Based
      Compensation*





We
      follow
      Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
      Payment,” (SFAS 123(R)) and related interpretations in accounting for
      equity-based awards issued to employees and directors. The fair value of each
      of
      our stock option awards is expensed on a straight-line basis over the vesting
      period of the options, which is generally four years. Expected volatility is
      based on the historical volatility of our stock with reasonable assumptions
      regarding projected future events. The risk-free rate of interest for periods
      within the contractual life of the stock option award is based on the yield
      curve of a zero-coupon U.S. Treasury bond on the date the award is granted
      with
      a maturity equal to the expected term of the award. We use historical data
      to
      estimate forfeitures within our valuation model. The expected life of our stock
      option awards is derived from historical experience and represents the period
      of
      time that awards are expected to be outstanding. For warrants or options granted
      to non-employees, we measure fair value of the equity instruments utilizing
      the
      Black-Scholes method if that value is more reliably measurable than the fair
      value of the consideration or service received. We amortize such cost over
      the
      related period of service.





**Recent
      Accounting Pronouncements**





In
      December 2007, the Financial Accounting Standard Board (“FASB”) issued Statement
      of Financial Accounting Standard (“SFAS”) No. 141(R). SFAS 141(R) expands the
      definition of a business combination and requires acquisitions to be accounted
      for at fair value. These fair value provisions will be applied to contingent
      consideration, in-process research and development and acquisition
      contingencies. Purchase accounting adjustments will be reflected during the
      period in which an acquisition was originally recorded. Additionally, the new
      standard requires transaction costs and restructuring charges to be expensed.
      SFAS 141(R) is effective for us for acquisitions closing during and subsequent
      to the first quarter of fiscal 2009. We are currently assessing the impact
      of
      SFAS 141(R) on our results of operations, financial condition and cash
      flows.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 permits
      companies the option, at specified election dates, to measure financial assets
      and liabilities at their current fair value, with the corresponding changes
      in
      fair value from period to period recognized in the income statement.
      Additionally, SFAS 159 establishes presentation and disclosure requirements
      designed to facilitate comparisons between companies that choose different
      measurement attributes for similar assets and liabilities. SFAS 159 is effective
      starting on January 1, 2008, with an early adoption date of January 1, 2007.
      We
      are currently assessing the impact of SFAS 159 on our results of operations,
      financial condition and cash flows.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
      157). SFAS 157 establishes a framework for measuring fair value that is based
      on
      the assumptions market participants would use when pricing an asset or liability
      and establishes a fair value hierarchy that prioritizes the information to
      develop those assumptions. Additionally, the standard expands the disclosures
      about fair value measurements to include disclosing the fair value measurements
      of assets or liabilities within each level of the fair value hierarchy. SFAS
      157
      is effective starting on January 1, 2008, with an early adoption date of January
      1, 2007. We are currently assessing the impact of SFAS 157 on our results of
      operations, financial condition and cash flows.





**Off-Balance
      Sheet Arrangements**





We
      had no
      off-balance sheet arrangements as of December 31, 2007.


23


**Item
      7.**   **FINANCIAL
      STATEMENTS**





See
      Financial Statements and Financial Statement Index commencing on page
      F-1.




**Item
                    8.**
                  **CHANGES
                      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                      DISCLOSURE**




None





**Item
              8A.**
            **(T)
                CONTROLS AND PROCEDURES**





(a)  Evaluation
      of disclosure controls and procedures.





Our
      Principal Executive Officer and Principal Financial Officer, after evaluating
      the effectiveness of our disclosure controls and procedures (as defined in
      Rules
      13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended)
      required by paragraph (b) of Rule 13a-15 or Rule 15d-15, as of December 31,
      2007
      (“Evaluation Date”) have concluded that our disclosure controls and procedures
      were effective in timely alerting us to material information relating to us,
      required to be included in our periodic filings with the Securities and Exchange
      Commission.





(b)  Management’s
      Report on Internal Control over Financial Reporting.





Our
      management assessed the effectiveness of our internal control over financial
      reporting based on criteria for effective internal control over financial
      reporting established in “Internal Control — Integrated Framework,” issued by
      the Committee of Sponsoring Organization of the Treadway Commission (“COSO”).
      Based on this assessment, management determined that our internal controls
      over
      financial reporting were operating effectively as of December 31, 2007,




Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting. Our management, including such certifying
      officers, does not expect that our disclosure controls and procedures will
      prevent all errors and all improper conduct. A control system, no matter how
      well conceived and operated, can provide only reasonable, not absolute,
      assurance that the objectives of the control system are met. Further, a design
      of a control system must reflect the fact that there are resource constraints,
      and the benefits of controls must be considered relative to their costs. Because
      of the inherent limitations in all control systems, no evaluation of controls
      can provide absolute assurance that all control issues and instances of improper
      conduct, if any, have been detected. These inherent limitations include the
      realities that judgments and decision-making can be faulty, and that breakdowns
      can occur because of simple error or mistake. Additionally, controls can be
      circumvented by the individual acts of some persons, by collusion of two or
      more
      persons, or by management override of the control. Further, the design of any
      system of controls is also based in part upon assumptions about the likelihood
      of future events, and there can be no assurance that any design will succeed
      in
      achieving its stated goals under all potential future conditions. Over time,
      controls may become inadequate because of changes in conditions, or the degree
      of compliance with the policies or procedures may deteriorate. Because of the
      inherent limitations and a cost-effective control system, misstatements due
      to
      error or fraud may occur and may not be detected.





This
      report does not include an attestation report of our registered independent
      public accounting firm regarding internal control over financial reporting.
      Our
      report was not subject to attestation by our registered independent public
      accounting firm pursuant to temporary rules of the Securities and Exchange
      Commission that permit us to provide only management’s report in this
      report.





(c)  Changes
      in internal controls over financial reporting.





There
      were no changes in our internal controls or in other factors that could
      materially affect, or are likely to materially affect, our internal controls
      over financial reporting in the fourth quarter of 2007.





**Item
              8B.**
            **OTHER
                INFORMATION**





None.


24





**PART
      III**





**Item
      9.** ****   **DIRECTORS
      AND EXECUTIVE OFFICERS OF THE REGISTRANT**




Set
      forth
      below are our directors and executive officers, their respective names and
      ages,
      positions with us, principal occupations and business experiences during at
      least the past five years and the dates of the commencement of each individual's
      term as a director and/or officer.


**Name**
              
              **Age**
              
              **Position**Costa
                  Papastephanou, Ph.D.
              
              62
              
              Director,
                  Chief Executive OfficerAlan
                  W. Schoenbart
              
              49
              
              Chief
                  Financial Officer & SecretaryJohn
                  Leone
              
              60
              
              DirectorMark
                  Bagnall
              
              51
              
              DirectorShepard
                  Goldberg
              
              52
              
              DirectorRaphael
                  Hofstein, Ph.D.
              
              58
              
              DirectorAndreas
                  Vogler
              
              45
              
              Director




**Directors**




*Costa
      Papastephanou* was
      named chief executive officer and elected a director on June 21, 2007. He has
      been employed by us since February 2001 as our president and chief operating
      officer. Prior to joining us he was employed by Bristol Myers-Squibb for 30
      years, the last 14 of which he was with Bristol Myers’ Convatec, a multinational
      ostomy and wound care management division. His last position at Convatec was
      as
      president of the global chronic care division, where he was responsible for
      that
      division’s sales and marketing, clinical trials, research and development,
      manufacturing, quality assurance and regulatory affairs. He holds a Ph.D. in
      Biochemistry from the University of Miami as well as a Master of Science in
      Microbial Biochemistry from the University of London.




*John
      Leone* was
      elected a director on June 29, 2007. The Board of Directors has appointed him
      our lead director. He is currently a partner at Paul Capital Partners with
      over
      30 years of pharmaceutical industry experience. Most recently, he was president
      and chief executive officer of Cambrex Corporation, a leading life sciences
      company. Previously, he was at Aventis, where he served as senior vice president
      and chief operating officer of U.S. Commercial Operations. Among other
      initiatives, he spearheaded the successful integration of its predecessor
      companies, Rhone-Poulenc Rorer and Hoechst Marion Russell, to form Aventis.
      His
      industry experience also includes both domestic and international management
      roles with Pfizer and Wyeth. He received his BS degree in Engineering from
      the
      U.S. Military Academy at West Point and his MBA from the University of
      Colorado.




*Mark
      Bagnall* was
      elected a director on June 29, 2007. From May 2000 to June 2007, he served
      as
      senior vice president and chief finance and operations officer at Metabolex,
      Inc. Metabolex, Inc. is a privately held pharmaceutical company focused on
      the
      development of drugs to treat diabetes and related metabolic disorders. In
      the
      12 years prior to joining Metabolex, he held the top financial position at
      four
      life science companies: Metrika, Inc., a privately held diagnostics company,
      and
      three public biotechnology companies, Progenitor, Inc., Somatix Therapy
      Corporation, and Hana Biologics, Inc. During his career in biotechnology, he
      has
      managed several private and public financings, merger and acquisition
      transactions, and corporate licensing agreements. He is currently consulting
      and
      serving on the board of directors of two other public companies: Adventrx,
      a
      position he has held since February 2004, and VIA Pharmaceuticals, a
      position he has held since June 2007. He received his Bachelor of Science
      degree in Business Administration from the U.C. Berkeley Business School and
      is
      a certified public accountant. **




*Shepard
      Goldberg* was
      elected a director on June 29, 2007. He was recently senior vice president,
      operations and office of the president, at Emisphere Technologies, Inc. from
      1998 to 2007. Emisphere is a publicly traded biopharmaceutical company charting
      new frontiers in drug delivery. From 1977 to 1998, he was president of
      Hydrovalve Co. Inc., a privately held manufacturing/distribution business with
      national and Canadian catalog sales. Since September 2007, he is serving on
      the
      board of Duska Therapeutics, a public company. He has a Bachelor of Science
      degree in Electrical Engineering and Computer Sciences from the Polytechnic
      Institute in New York City and an MBA in Marketing and Business Administration
      from Adelphi University.


25




*Raphael
      Hofstein* was
      elected a director on June 5, 2006. Since 1999, he has served as the managing
      director of Hadasit, Ltd., a technology holding company originally for Hadassah
      Medical Organization in Jerusalem, Israel. Hadasit is now a publicly owned
      company in Israel. Hadasit holds interests in a number of companies engaged
      in
      developing and marketing medical devices, biomedicines and medical diagnostic
      products. Pursuant to the April 14, 2006 agreement whereby we acquired Hapto
      Biotech, Inc., the former shareholders of Hapto Biotech have appointed him
      as
      one of their two designees to serve as directors of Forticell. From 1997 to
      1999
      he was the president of Mindsense Biosystems Ltd., an Israeli company engaged
      in
      the development of immune assays for different diagnosis in neuropsychiatry.
      From 1988 to 1997 he was employed by Ecogen, Inc. of Langhorne, Pennsylvania,
      first in Israel as scientific director of Ecogen Israel Partnership evaluating,
      funding and developing products, and from 1997 in Langhorne, Pennsylvania for
      the commercial development of novel microbial fungicides. He received master
      and
      doctoral degrees in life sciences and chemistry from the Weizman Institute
      of
      Science in Rehovot, Israel in 1976 and 1980, respectively, and post doctoral
      re **s** earch
      fellowships from Harvard Medical School from 1980 to 1983.




*Andreas
      Vogler* was
      elected a director on June 5, 2006. Since 2002 he has been the managing general
      partner of BioMedical Innovations Ltd., a private equity fund that invests
      primarily in medical technology and healthcare companies. Pursuant to the April
      14, 2006 agreement whereby we acquired Hapto Biotech, Inc., the former
      shareholders of Hapto Biotech have appointed him as one of their two designees
      to serve as directors of Forticell. Since receiving his masters degree in
      economics at the University of Basle in Switzerland in 1988, he was employed
      until 2002 by UBS Warburg (formerly Swiss Bank Corporation) as a securities
      analyst and in investment banking, primarily in the medical technology and
      healthcare fields. He serves as a chairman of our Israeli subsidiary, Hapto
      (Israel) Ltd. He is also a director of Raphael Medical Technologies Inc. and
      Bioscan Ltd., both private Israel technology companies in the development stage,
      and of Piexon AG, a Swiss industrial company. From 2002 to 2004 he served as
      a
      director of Hirslanden Group, the largest private hospital chain in Switzerland.




All
      directors hold office until the next annual meeting of stockholders and the
      election and qualification of their successors. With the exception of Dr.
      Papastephanou, all are non-employee directors.





*Independence
      of Directors*





All
      of
      our current directors except Dr. Papastephanou are independent as independence
      of directors is defined in the rules of the NASDAQ stock market.





*Executive
      Officers*





Officers
      are elected annually by the Board of Directors and serve at the discretion
      of
      the Board of Directors. One of our executive officers, Dr. Papastephanou, is
      also a member of our Board of Directors. Information with regard to Dr.
      Papastephanou is set forth above under the heading "Directors." The other
      executive officer is Alan W. Schoenbart.





*Alan
      W. Schoenbart* is our
      chief financial officer. He joined
      us in March 2004. From April 1999 to December 2003, he was CFO of Vizacom Inc.,
      a publicly traded provider of consumer software and information technology
      services and products, and a designer of WiFi networks. From 1997 to 1999,
      he
      was CFO of Windswept Environmental and from 1995 to 1997, he was CFO of Advanced
      Media, Inc., both publicly held entities. From 1993 to 1995 he was controller
      of
      Goodtimes Entertainment, a privately held distributor of videos and software
      to
      mass merchant chains. From May 1981 to August 1993, he worked at KMPG as a
      manager and at other public accounting firms. He has a BS in Accounting from
      Fairleigh Dickinson University and is a certified public
      accountant.





We
      do not
      have an employment agreement with either Dr. Papastephanou or Mr.
      Schoenbart.





*Significant
      Employee*





*Melvin
      Silberklang* is our
      vice president for research and development and our Chief Scientific Officer.
      He
      has held those positions for all of the 11 years that he has been employed
      by
      us.





We
      do not
      have an employment agreement with Dr. Silberklang.


26





*The
      Committees*





Messrs.
      Goldberg and Bagnall are the members of our audit committee and are audit
      committee financial experts in that each has:




·
            an
                understanding of generally accepted accounting principles and financial
                statements;


·
            the
                ability to assess the general application of such principles in connection
                with the accounting for estimates, accruals and
                reserves;


·
            experience
                preparing, auditing, analyzing or evaluating financial statements
                that
                present a breadth and level of complexity of accounting issues that
                are
                generally comparable to the breadth and complexity of issues that
                can
                reasonably be expected to be raised by our financial statements,
                or
                experience actively supervising one or more persons engaged in such
                activities;


·
            an
                understanding of internal controls and procedures for financial reporting,
                and


·
            an
                understanding of audit committee
                functions.




Messrs.
      Goldberg and Leone are the members of our compensation committee.





**Attendance
      at Meetings**




During
      2007, the Board of Directors, Audit Committee, and Compensation Committee each
      met or acted without a meeting pursuant to unanimous written consent fourteen
      times, three times, and one time, respectively.




**Section
      16(a) Beneficial Ownership Reporting Compliance**




Section
      16(a) of the Securities Exchange Act of 1934 as amended (the "Exchange Act")
      requires our officers and directors, and persons who own more than ten percent
      of our common stock to file reports of ownership and changes of ownership with
      the Securities and Exchange Commission. These persons are also required to
      furnish us with copies of all forms filed under Section 16(a). Based solely
      on
      our review of the copies of those forms received by us, or written
      representations from such persons, all of our directors and our two executive
      officers, failed to file on a timely basis their September 26, 2007 option
      grants on Form 4, which were subsequently filed on a late Form 4.




**Code
      of Ethics**




The
      Board
      of Directors has adopted a code of ethics requiring our employees, including
      our
      executive officers and our directors, to act honestly and with integrity with
      respect to us and our business dealings and to provide full and fair disclosure
      about us that is required to, or will be reported to the public. The code of
      ethics requires our employees to disclose to our Board of Directors any material
      transaction or relationship on the part of any Ortec employee or director that
      could reasonably be deemed dishonest or that reasonably could be expected to
      give rise to an actual or apparent conflict of interest. We have filed a copy
      of
      our code of ethics with the Securities and Exchange Commission as Exhibit 14
      to
      our annual report on Form 10-KSB for the year ended December 31, 2003. A copy
      of
      our code of ethics can be found on our website www.ortecinternational.com.
      We
      will provide any person without charge, upon written request, a copy of our
      code
      of ethics. Such request should be addressed to our offices at 3960 Broadway,
      New
      York, New York 10032, Attention: Corporate Secretary


27


**Item
      10.**   **EXECUTIVE
      COMPENSATION**





The
      following table sets forth the compensation paid by us for our fiscal years
      ended December 31, 2007 and 2006 to (i) our principal executive officer (PEO)
      (ii) our other executive officer, and our Chief Scientific Officer (the "Named
      Executive Officers"). Additionally, it includes our former PEO and former
      chairman, Mr. Lipstein and Mr. Katz, respectively, who resigned in June
      2007.





**SUMMARY
      COMPENSATION TABLE**


**Name and**
                **Principal Position**
              
              **Year**
              
              **Salary**
                **($)**
              
              **Bonus**
                **($)**
              
              **Option**
                **Awards**
                **($)**
              
              **All**
                **Other Comp**
                **($)**
              
              **Total**
                **($)**Costa
                  Papastephanou, PEO
              
              
              2007
              
              
              240,000
              
              
              —
              
              
              93,988
              (2)
              
              10,897
              
              
              344,885Chief
                  Executive Officer
              
              
              2006
              
              
              240,000
              
              
              —
              
              
              —
              
              
              11,104
              
              
              251,104Alan
                  Schoenbart
              
              
              2007
              
              
              210,000
              
              
              —
              
              
              48,859
              (2)
              
              —
              
              
              258,859Chief
                  Financial Officer
              
              
              2006
              
              
              180,000
              
              
              —
              
              
              6,161
              (3)
              
              —
              
              
              186,161Mel
                  Silberklang
              
              
              2007
              
              
              216,646
              
              
              —
              
              
              22,005
              (2)
              
              —
              
              
              238,651Chief
                  Scientific Officer
              
              
              2006
              
              
              197,385
              
              
              —
              
              
              —
              
              
              —
              
              
              197,385Steven
                  Katz #
              
              
              2007
              
              
              75,000
              
              
              —
              
              
              —
              
              
              750,868
              (4)
              
              825,8682006
              
              
              150,000
              
              
              79,281
              (1)
              
              
              
              
              11,949
              
              
              241,230Ron
                  Lipstein #
              
              
              2007
              
              
              130,000
              
              
              —
              
              
              —
              
              
              1,298,201
              (4)
              
              1,428,2012006
              
              
              260,000
              
              
              79,281
              (1)
              
              —
              
              
              19,753
              
              
              359,034





#
      - Mr.
      Katz served as our chairman until June 21, 2007. Mr Lipstein served as PEO
      until
      June 21, 2007 when Costa Papastephanou succeeded him as PEO.





(1)  Mr.
      Katz
      and  Mr.
      Lipstein’s bonus was equal to 1% of the funds raised on our behalf (whether such
      funds are raised in equity or debt financings or as a result of licensing
      transactions) as well as options to purchase a number of shares equal to up
      to
      10% of the number of shares issued in any such financing transaction. Amount
      has
      been accrued but not paid. Amounts due for bonuses to former executives were
      forfeited in connection with our Cancellation Agreements. See “Certain
      Relationships and Related Transactions - Cancellation Agreements” for a fuller
      description of the terms of these Cancellation Agreements.




(2)  Represents
      the 2007 vested portion of the aggregate fair value calculated utilizing a
      Black-Scholes model with the following assumptions: no dividend yield, 90%
      volatility, risk free rates ranging from 4.08% to 4.27%, and a 5 year expected
      life. The exercise prices equaled the stock prices on the dates of grant -
      $0.38
      on 9/26/07 and $0.52 on 10/22/07. Option issuances were as follows on the
      respective 9/26/07 and 10/22/07 dates: Dr. Papastephanou: 1,000,000 and 500,000;
      Mr. Schoenbart: 250,000 and 550,000; and Dr. Silberklang: 250,000 and 100,000.
      All option awards were made pursuant to our 2006 Stock Award and Incentive
      Plan
      which was approved by our shareholders on December 20, 2007. The market value
      on
      that date of $0.38 was used to determine the award values for Black- Schole
      model purposes




(3) **** Represents
      Black-Scholes value of options to purchase 3,333 shares of common stock at
      $3.15
      per share.




(4) See
      Certain Relationships and Related Transactions – Cancellation Agreements.
      Such termination payment included warrants to purchase 2,382,022 shares at
      $0.55
      we issued to Mr. Lipstein and warrants to purchase 2,328,001 shares at $0.55
      we
      issued to Mr. Katz, whose values were calculated using a Black-Scholes model
      with the following assumptions: five year expected life, risk free rates of
      4.60% to 5.07%, 90% volatility, and no dividend yield. Such calculations were
      made at the various dates of our three closings when our stock price was $0.55
      on June 18, 2007, $0.51 on July 25, 2007, and $0.50 on July 31, 2007.




**Special
      Compensation to Executive Officers**





Pursuant
      to a resolution adopted by our Board of Directors in 2001, we were required
      to
      pay to Mr. Ron Lipstein, our former chief executive officer, and to Dr. Steven
      Katz, the former chairman of our Board of Directors, one percent each of all
      moneys received by us from investors in the sale of our equity securities or
      from certain lenders. We were also required to issue to each of them options
      to
      purchase such number of shares of our common stock equal to ten percent of
      the
      shares issued by us in an equity financing, which options are exercisable at
      the
      prices paid by the investors for the shares we sell in the equity financing.
      With their consent we did not grant to either Dr. Katz or Mr. Lipstein options
      to purchase ten percent of the number of shares of our common stock that the
      purchasers of our Series E convertible preferred stock received upon
      conversion of their Series E preferred stock. A total of 254,454 options,
      to each of these former executives, were forfeited pursuant to our Cancellation
      Agreements. See
      “Certain Relationships and Related Transactions - Cancellation Agreements” for a
      fuller description of the terms of these Cancellation
      Agreements.


28





**OUTSTANDING
      EQUITY AWARDS AT DECEMBER 31, 2007**


**Stock awards****Number of****shares or**
              
              **Market value****Option awards**
              
              **units of**
              
              **of shares or****Number of Securities**
              
              **Option**
              
              
              
              **stock that**
              
              **units of stock****Underlying**
              
              **Exercise**
              
              **Option**
              
              **have not**
              
              **that have not****Unexercised Options  (#)**
              
              **Price**
              
              **expiration**
              
              **vested**
              
              **vested****Name**
              
              **Exercisable**
              
              **Unexercisable**
              
              **($)**
              
              **date**
              
              **(#)**
              
              **($)**Costa
                  Papastephanou, PEO
              
              
              68
              
              
              -
              
              
              1,059.00
              
              
              2/05/08200
              
              
              -
              
              
              94.50
              
              
              6/12/08132
              
              
              -
              
              
              712.50
              
              
              11/01/08268
              
              
              -
              
              
              907.50
              
              
              1/03/09166
              
              
              -
              
              
              45.00
              
              
              11/07/09500
              
              
              -
              
              
              61.50
              
              
              2//06/103,332
              
              
              -
              
              
              27.00
              
              
              5/23/10250,000
              
              
              750,000
              (1)
              
              0.38
              
              
              09/26/14125,000
              
              
              375,000
              (2)
              
              0.52
              
              
              10/22/14300,000
              (3)
              
              156,000Alan
                  W. Schoenbart
              
              
              501
              
              
              167
              (4)
              
              27.75
              
              
              11/22/11833
              
              
              2,499
              (5)
              
              3.15
              
              
              2/13/1362,500
              
              
              187,500
              (1)
              
              0.38
              
              
              9/26/14137,500
              
              
              412,500
              (2)
              
              0.52
              
              
              10/22/14200,000
              (6)
              
              104,000Melvin
                  Silberklang
              
              
              68
              
              
              -
              
              
              930.00
              
              
              5/24/0868
              
              
              -
              
              
              45.00
              
              
              11/07/09166
              
              
              -
              
              
              61.50
              
              
              2/06/10166
              
              
              -
              
              
              45.00
              
              
              2/28/10166
              
              
              -
              
              
              27.00
              
              
              5/23/0762,500
              
              
              187,500
              (1)
              
              0.38
              
              
              9/26/1425,000
              
              
              75,000
              (2)
              
              0.52
              
              
              10/22/14200,000
              (6)
              
              104,000





(1)  
      Vests in three equal annual amounts beginning September 26, 2008.


(2)  
      Vests in three equal annual amounts beginning October 22, 2008.


(3)  
      Vests in three equal annual amounts beginning October 25, 2008.


(4)  
      Vests on November 22, 2008.


(5)  
      Vests in 3 equal amounts on February 13, 2008, 2009, and 2010.


(6)  
      Awards vest in five equal monthly installments beginning January 1, 2008 and
      ending May 31, 2008.





There
      were no option exercises in the last fiscal year by any of the Named Executive
      Officers.





**Retirement
      Plans**





We
      maintain a defined contribution 401(k) savings plan (401(k) plan) for the
      benefit of eligible employees. Under the 401(k) plan, a participant may elect
      to
      defer a portion of annual compensation. Contributions to the 401(k) plan are
      immediately vested in plan participants' accounts.


29




**Compensation
      of Directors**





Drs.
      Mark
      Eisenberg, Steven Lilien, Allen I. Schiff, Raphael Hofstein, John Leone, Shepard
      Goldberg, Mark Bagnall, and Andreas Vogler were all non-employee Directors
      in
      2007. Drs. Eisenberg, Lilien, and Schiff resigned from the board in June, 2007
      at which time Messrs. Leone, Goldberg, and Bagnall were elected. In September
      2007, for their services as directors, we granted 7 year options to Messrs.
      Leone, Bagnall, Goldberg, Hofstein, and Vogler for each of them to purchase
      50,000 shares of our common stock at an exercise price of $0.38 per share.
      These
      options vest in 4 equal annual installments with 25% having vested in
      2007.





**DIRECTOR
      COMPENSATION**


**Name**
            
            **Fees**
              **earned or**
              **paid in**
              **cash**
              **($)**
            
            **Stock**
              **Awards**
              **($)****(1)**
            
            **Option**
              **Awards**
              **($)****(2)**
            
            **Total**
              **($)**Dr.
                Steve Lilien
            
            
            12,000
            
            
            22,800
            
            
            -
            
            
            34,800Dr.
                Allen Schiff
            
            
            12,000
            
            
            19,000
            
            
            -
            
            
            31,000John
                R. Leone
            
            
            -
            
            
            -
            
            
            3,208
            
            
            3,208Mark
                Bagnall
            
            
            -
            
            
            -
            
            
            3,208
            
            
            3,208Shepard
                Goldberg
            
            
            -
            
            
            -
            
            
            3,208
            
            
            3,208Raphael
                Hofstein
            
            
            -
            
            
            -
            
            
            3,208
            
            
            3,208Andreas
                Vogler
            
            
            -
            
            
            -
            
            
            3,208
            
            
            3,208





(1) Dr.
      Lilien and Dr. Schiff were awarded 60,000 and 50,000 shares, respectively.
      Such
      shares were issued for long outstanding directors and audit committee members
      fees due them and to ensure their continued service on our audit committee.
      The
      shares were priced based on the February 19, 2007 $0.53 closing price of our
      common stock. These share awards were made pursuant to our 2006 Stock Award
      and
      Incentive Plan which was approved by our shareholders on December 20, 2007.
      The
      market value on that date of $0.38 was used to determine the award
      values.





(2)  In
      September 2007, for their services as directors, we granted 7 year options
      to
      Messrs. Leone, Bagnall, Goldberg, Hofstein and Vogler to purchase 50,000 shares
      each of our common stock each at an exercise price of $0.38 per share. These
      options vest in 4 equal annual amounts with 25% having vested in 2007. The
      amount of $3,212 represents the 2007 vested portion of the aggregate fair value
      calculated utilizing a Black-Scholes Model with the following assumptions:
      90%
      volatility, a risk free rate of 4.08%, an expected life of 5 years, and no
      dividend yield.





**Cancellation
      Agreements**




On
      June
      18, 2007 we entered into Cancellation Agreements with our former CEO and our
      former Chairman, Ron Lipstein and Steven Katz, respectively. Such agreements
      terminated their employment with us and require us to make certain payments
      to
      them. See “Certain Relationships and Related Transactions - Cancellation
      Agreements” for a fuller description of the terms of these Cancellation
      Agreements.




30


**Item
      11.**  **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**





The
      following table sets forth certain information regarding the ownership of our
      common stock as of March 21, 2008 by: (i) each director, (ii) the Named
      Executive Officers; (iii) all executive officers and directors of the
      Company as a group; and (iv) all those known by us to be beneficial owners
      of
      more than five percent of our common stock. All shares of our common stock
      subject to options currently exercisable or exercisable within 60 days of
      March 21, 2008, are deemed to be outstanding for the purpose of computing the
      percentage of ownership of the person holding such options, but are not deemed
      to be outstanding for computing the percentage of ownership of any other person.
      This table is based upon information supplied by officers, directors and
      principal stockholders and Schedules 13D and 13G filed with the SEC. Unless
      otherwise indicated in the footnotes to this table and subject to community
      property laws where applicable, we believe that each of the stockholders named
      in this table has sole voting and investment power with respect to the shares
      indicated as beneficially owned. Applicable percentages are based on 13,678,015
      shares outstanding on March 21, 2008, adjusted as required by rules promulgated
      by the SEC. Unless otherwise indicated in the table, the address of each party
      listed in the table is 3960 Broadway, New York, New York 10032.


**Beneficial Ownership****Name and Address of Beneficial Owner**
                
                **Number of**
                  **Shares**
                
                **Percentage**
                  **Ownership**Costa
                    Papastephanou
                
                
                391,809
                **(1)**
                
                2.8
                %Alan
                    W. Schoenbart
                
                
                364,464
                **(2)**
                
                2.6
                %Melvin
                    Silberklang
                
                
                88,133
                **(3)**
                
                *John
                    Leone
                
                
                12,500
                **(3)**
                
                *Mark
                    Bagnall
                
                
                12,500
                **(3)**
                
                *Shepard
                    Goldberg
                
                
                12.500
                **(3)**
                
                *Raphael
                    Hofstein
                  Hadassah
                  P.O.
                    Box 12000
                  Jerusalem
                    91120 Israel
                
                
                12,500
                **(3)**
                
                *Andreas
                    Vogler
                  BioMedical
                    Innovations, Ltd.
                  Bleicherweg
                    45
                  8002
                    Zurich, Switzerland
                
                
                1,489,000
                **(4)**
                
                9.9
                %Paul
                    Royalty Fund, L.P.
                  c/o
                    Paul Capital Advisors, L.L.C.
                  Two
                    Grand Central Tower
                  140
                    East 45thStreet, 44thFloor
                  New
                    York, New York 10017
                
                
                1,500,000
                **(5)**
                
                9.9
                %Platinum-Montaur
                    Life Sciences, LLC
                  152
                    West 57thStreet, 4thFloor
                  New
                    York, New York 10019
                
                
                1,500,000
                **(6)**
                
                9.9
                %Vicis
                    Capital Master Fund
                  126
                    E. 56th Street, 7th Floor
                  New
                    York, NY 10022
                
                
                1,500,000
                **(6)**
                
                9.9
                %Patrick
                    J. O’Donnell
                  c/o
                    Starboard Specialty Funds
                  200
                    W. Adams Street, Suite 1015
                  Chicago,
                    Illinois 60606
                
                
                1,500,000
                **(6)**
                
                9.9
                %SXJE
                    LLC
                  2800
                    Brion Circle
                  Lancing,
                    MI 48912
                
                
                1,500,000
                **(6)**
                
                9.9
                %Firebird
                    Global Master Fund, Ltd.
                  Firebird
                    Management LLC
                  Attention:
                    Jamie Kanterman
                  152
                    West 57th Street
                  New
                    York, New York
                
                
                1,500,000
                **(6)**
                
                9.9
                %Firebird
                    Global Master Fund II, Ltd.
                  Firebird
                    Management LLC
                  Attention:
                    Jamie Kanterman
                  152
                    West 57th Street
                  New
                    York, New York 10019
                
                
                1,500,000
                **(6)**
                
                9.9
                %Jason
                    Adelman
                  590
                    Madison Avenue
                  New
                    York, NY 10022
                
                
                1,500,000
                **(6)**
                
                9.9
                %Ron
                    Lipstein
                  585
                    Green Place
                  Woodmere,
                    New York 11598
                
                
                1,500,000
                **(6)**
                
                9.9
                %Steven
                    Katz
                  655
                    Rutland Avenue
                  Teaneck,
                    New Jersey 07666
                
                
                1,500,000
                **(6)**
                
                9.9
                %Jacob
                    Gottlieb
                  950
                    Third Avenue
                  New
                    York, NY 10022
                
                
                1,151,701
                **(7)**
                
                8.4
                %SDS
                    Capital Group SPC, Ltd.
                  53
                    Forest Avenue, Suite 201
                  Old
                    Greenwich, CT 06870
                
                
                1,465,000
                **(8)**
                
                9.9
                %BIP
                    Ventures Partners SICAR SA
                  I,
                    Rue des Coquelicots
                  1356
                    Luxembourg
                  Luxembourg
                
                
                1,053,513
                **(9)**
                
                7.2
                %Denkaria
                    B.V.
                  Startbaan
                    5 A suite 6b
                  1185
                    XP AMSTELVEEN
                  NETHERLAND
                
                
                904,090
                **(10)**
                
                6.6
                %Steven
                    Putzi
                  587
                    Cliff Road
                  Honesdale,
                    Pennsylvania 18431
                
                
                900,000
                **(11)**
                
                6.2
                %Valley
                    Forge Investments Limited
                  Attention:
                    Melanie Pallot
                  c/o
                    Stonehage Ltd.
                  Sir
                    Walter Raleigh House
                  48/50
                    Esplanade
                  St.
                    Helier, JE1 4HH
                
                
                787,578
                **(12)**
                
                5.4
                %All
                    executive officers and directors as a group (7 persons)
                
                
                2,295,273
                **(13)**
                
                14.7
                %  31




**Series
      A Convertible Preferred Stock – 1,146.292 shares outstanding**


**Beneficial Ownership****Name and Address of Beneficial Owner**
                
                **Number of**
                  **Shares**
                
                **Percentage**
                  **Ownership**Platinum-Montaur
                    Life Sciences, LLC
                  152
                    West 57thStreet, 4thFloor
                  New
                    York, New York 10019
                
                
                355.00
                
                
                31.0
                %Vicis
                    Capital Master Fund
                  126
                    E. 56th Street, 7th Floor
                  New
                    York, NY 10022
                
                
                152.50
                
                
                13.3
                %Firebird
                    Global Master Fund, Ltd.
                  Firebird
                    Management LLC
                  Attention:
                    Jamie Kanterman
                  152
                    West 57th Street
                  New
                    York, NY 10019
                
                
                100.00
                **(14)**
                
                8.7
                %SXJE
                    LLC
                  2800
                    Brion Circle
                  Lancing,
                    MI 48912
                
                
                64.09
                
                
                5.6
                %


32


**Series
        A-1 Convertible Preferred Stock – 500 shares outstanding**
  **Beneficial Ownership****Name and Address of Beneficial Owner**
              
              **Number of**
                **Shares**
              
              **Percentage**
                **Ownership**Paul
                  Royalty Fund, L.P.
                c/o
                  Paul Capital Advisors, L.L.C.
                Two
                  Grand Central Tower
                140
                  East 45thStreet, 44thFloor
                New
                  York, New York 10017
              
              
              500.00
              
              
              100
              %
  **Series
        A-2 Convertible Preferred Stock – 500 shares outstanding**
  **Beneficial Ownership****Name and Address of Beneficial Owner**
              
              **Number of**
                **Shares**
              
              **Percentage**
                **Ownership**Paul
                  Royalty Fund, L.P.
                c/o
                  Paul Capital Advisors, L.L.C.
                Two
                  Grand Central Tower
                140
                  East 45thStreet, 44thFloor
                New
                  York, New York 10017
              
              
              500.00
              
              
              100
              %
  **Series
        D-1 Convertible Preferred Stock – 5,948.6148 shares outstanding**
  **Beneficial Ownership****Name and Address of Beneficial Owner**
              
              **Number of**
                **Shares**
              
              **Percentage**
                **Ownership**SDS
                  Capital Group SPC, Ltd.
                53
                  Forest Avenue, 2nd Floor
                Old
                  Greenwich, CT 06870
              
              
              948.5121
              
              
              15.9
              %Cipher
                  06 LLC
                590
                  Madison Avenue
                New
                  York, NY 10022
              
              
              5,000.1027
              
              
              84.1
              %


*
      Less
      than one percent.




**(1)** Includes
      379,667 shares of common stock underlying stock options.





**(2)** Includes
      202,167 shares of common stock underlying stock options.





**(3)** Consists
      of shares of common stock underlying stock options. With respect to Dr.
      Hofstein, does not include 431,186 shares and warrants to purchase 10,206 shares
      owned by HBL Hadasit BioHoldings Limited, of which company Dr. Hofstein is
      the
      managing director. Dr. Hofstein disclaims any beneficial ownership of such
      shares or warrants.





**(4)** Includes
      770,588 shares of common stock underlying warrants and stock options and 507,960
      shares upon conversion of Series A Convertible Preferred stock.





**(5)** Includes
      1,500,000 shares issuable upon exercise of outstanding Series A-1 Convertible
      Preferred Stock.





**(6)** Includes
      1,500,000 shares issuable upon exercise of outstanding warrants and/ or the
      conversion of Series A Convertible Preferred Stock.





**(7)** Includes
      1,039,701 shares and warrants to purchase an additional 112,000 shares, owned
      by
      the four Visium Funds of which Visium Asset Management, LLC (VAM) is the
      Investment Advisor.  Visium Capital Management, LLC (VCM) is the general
      partner or two of the four funds. Jacob Gottlieb is the principal of VAM and
      the
      sole managing member of VCM.  Mr. Gottlieb has voting and dispositive power
      over these shares.





**(8)** Includes
      1,050,282 shares issuable upon exercise of outstanding warrants. According
      to a
      Schedule 13G/A filed jointly on February 14, 2008, by SDS Capital Group SPC,
      Ltd., SDS Management LLC, its investment advisor, and Steve Derby, the sole
      manager of the investment advisor, all three persons share voting and
      dispositive power over these shares.





**(9)** Includes
      651,953 shares issuable upon exercise of outstanding warrants and 401,560 shares
      issuable upon conversion of Series A Convertible preferred stock.





**(10)** Includes
      114,513 shares issuable upon the exercise of outstanding warrants.


33





**(11)** Includes
      500,000 shares issuable upon exercise of outstanding warrants and 400,000 shares
      issuable upon conversion of Series A Convertible preferred stock.





**(12)** Includes
      526,432 shares issuable upon exercise of outstanding warrants and 261,146 shares
      issuable upon conversion of Series A Convertible preferred stock.





**(13)** Includes
      644,334 shares of common stock underlying stock options and 770,588 shares
      underlying warrants. Also includes 507,960 shares upon conversion of Series
      A
      Convertible Preferred stock. With respect to Dr. Hofstein, does not include
      431,186 shares and warrants to purchase 10,206 shares owned by HBL Hadasit
      BioHoldings Limited, of which company Dr. Hofstein is the managing director.
      Dr.
      Hofstein disclaims any beneficial ownership of such shares or
      warrants.





**(14)** Includes
      50 shares each of Series A Convertible Preferred Stock held by Firebird Global
      Fund, Ltd. and Firebird Global Fund II, Ltd.





**Securities
      authorized for issuance under equity compensation plans**





**Equity Compensation Plan Information**Plan Category
            
            Number of
              securities
              to be issued upon
              exercise of
              outstanding
              options, warrants
              and rights
            
            Weighted
              average exercise
              price of
              outstanding
              options,
              warrants and
              rights
            
            Number of securities
              remaining available for
              future issuance under
              equity compensation
              plans (excluding
              securities reflected in
              column (a))(a)
            
            (b)
            
            (c)Equity
                compensation plans approved by security holders
            
            
            3,516,897
            
            $
            0.77
            
            
            1,749,770Equity
                compensation plans not approved by security holders
            
            
            11,476,259
            (1)
            $
            37.33
            
            
            -Total
            
            
            14,993,156
            
            
            
            
            
            1,749,770





(1)
            This
                includes warrants issued in 2007 to purchase 9,866,693 common shares
                as
                follows:





·
            As
                described below in Item 12, under Cancellation Agreements, in June
                2007 we
                entered into agreements with Ron Lipstein, our former chief executive
                officer, and Steven Katz, our former chairman, in which we and they
                agreed
                to terminate agreements we had with them to pay them 2.99 times their
                average annual salaries for the last 5 years if we terminated their
                employment with us. In connection therewith we issued 5 year warrants
                to
                Messrs. Lipstein and Katz entitling Mr. Lipstein to purchase 2,382,022
                shares, and Dr. Katz to purchase 2,328,001 shares of our common stock
                at
                an exercise price of $0.55 per share.





·
            Our
                placement agent received five-year warrants to purchase an aggregate
                of
                3,156,670 shares of our common stock at $0.55 per share in connection
                with
                our June- July 2007 Series A Preferred Financing.





·
            Under
                an advisory agreement with our placement agent, primarily as compensation
                for negotiating our recent restructuring transactions (the exchange
                transaction with PRF and the cancellation of termination of employment
                agreements with our chief executive officer and chairman, and in
                connection with the exchange of our outstanding Series H warrants
                for
                shares of our common stock and our new Series A warrants, each described
                elsewhere in this report) we agreed to issue warrants, identical
                to those
                issued in the Series A Preferred financing, to purchase 2,000,000
                shares
                of our common stock exercisable at $0.55 per share.




**Item
      12.**   **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**





***Obligation
      to Elect Directors***





The
      April
      14, 2006 agreement whereby we acquired Hapto provides that if our shareholders
      do not elect two designees of the former shareholders of Hapto as directors
      of
      Forticell for the earlier of (i) the two years ending in April 2008, or
      (ii) until such time as the number of shares of our common stock acquired
      by the former shareholders of Hapto in our acquisition of Hapto amount to less
      than 5% of our common stock then outstanding, we will be required to issue
      an
      additional 116,667 shares of our common stock to the former shareholders of
      Hapto for each such Hapto designee that is not elected as a director of
      Forticell. The former shareholders of Hapto have selected Raphael Hofstein
      and
      Andreas Vogler as their designees to serve as directors of
      Forticell.


34





***Cancellation
      Agreements***





In
      June
      2007 we entered into agreements with Ron Lipstein, our former chief executive
      officer, and Steven Katz, our former chairman, in which we and they agreed
      to
      terminate agreements we had with them to pay them 2.99 times their average
      annual salaries for the last 5 years if we terminated their employment with
      us.
      Under the terms of those June 2007 agreements, we paid Mr. Lipstein $215,000
      plus $20,000 for consulting services we would ask him to provide for six months
      ending in December 2007, and we paid Dr. Katz $65,000. We also agreed to pay
      to
      Mr. Lipstein $90,000 thirty days after, and a final payment of $190,000 ninety
      days after, and to pay Dr. Katz $45,000 thirty days after, and a final payment
      of $75,000 ninety days after we receive a letter in response to our Pre Market
      Approval (PMA) application to be filed with the FDA for commercial sales of
      our
      ORCEL to treat venous stasis ulcers, which are normally sent by the FDA to
      a
      sponsor of a clinical trial within 100 days after such sponsor files a PMA
      application for commercial sales of a drug or device. We also granted 5 year
      warrants to Messrs. Lipstein and Katz entitling Mr. Lipstein to purchase
      2,382,022 shares, and Dr. Katz to purchase 2,328,001 shares of our common stock
      at an exercise price of $0.55 per share. We are required to issue additional
      warrants on like terms to Messrs. Lipstein and Katz to purchase such number
      of
      shares of our common stock equal to 31⁄2% of the shares of common stock (a) we
      sell, or are required to issue upon conversion or exercise of convertible
      securities or warrants we sell, to raise not more than $6,300,000 within the
      period ending 30 days after (and if) we publicly announce our receipt of written
      notice from the FDA granting us the right to make commercial sales of ORCEL
      for
      the treatment of venous stasis ulcer (“the FDA clearance letter”), and (b) we
      issue also within 30 days after (and if) we publicly announce our receipt of
      the
      FDA clearance letter to our trade and other creditors in satisfaction of the
      obligations we owe them, over and above the number of shares of our common
      stock, we issue to such creditors in that period in satisfaction of $3,000,000
      of our obligations to them. Messrs. Lipstein and Katz surrendered all options
      previously received by them to purchase our common stock.





In
      such
      agreements with Messrs. Lipstein and Katz, they agreed to cancel deferred
      compensation we owed them of $233,300 and $366,221, respectively, and an
      additional $23,981 we owed them. In exchange we paid each of them $25,000 and
      granted Mr. Lipstein an option to purchase 12 A Preferred shares and Dr Katz
      an
      option to purchase 8 A Preferred shares at an exercise price of $100 per A
      Preferred share, plus the number of Series A, M, and M-1 warrants they would
      have been entitled to receive if they had purchased such A Preferred shares
      in
      the private placement sale we made of such A Preferred shares in June 2007.
      Such
      options are exercisable in the same 30 days period after (and if) we publicly
      announce our receipt of the FDA clearance letter by our filing of a current
      report to that effect on form 8-K with the SEC. In March 2008, Messrs. Lipstein
      and Katz exercised their options to buy, respectively, 12 and 8 shares of our
      A
      Preferred. As a result they are entitled to acquire the following additional
      number of shares of our common stock upon:





**Lipstein**
            
            **Katz**Conversion
                of the A Preferred shares
            
            
            240,000
            
            
            160,000Exercise
                of warrants:Series
                A @ $1.00 per common share
            
            
            120,000
            
            
            80,000Series
                M @ $0.50 per common share
            
            
            120,000
            
            
            80,000Series
                M-1 @ $1.00 per common share
            
            
            60,000
            
            
            40,000Total
                shares
            
            
            540,000
            
            
            360,000





***Agreement
      with respect to termination of employment***





On
      March
      28, 2008, we entered into agreements with Alan W. Schoenbart, our chief
      financial officer, providing that in the event we terminated Mr. Schoenbart’s
      employment without cause we would pay him nine months salary and provide him
      and
      his family with health insurance coverage, at our expense, until the earlier
      of
      one year after the termination of his employment or until he becomes eligible
      to
      participate in the health insurance plan of a new employer. The agreement also
      provides for acceleration of the vesting date of portions of his options to
      purchase shares of our common stock and that the vested portions of his options
      will not expire because of the termination of his employment. The definition
      of
“cause” which would entitle us to terminate his employment without requiring us
      to make the payments or observe the other provisions of our agreement with
      Mr.
      Schoenbart, is set forth in the agreement which is filed as Exhibit 10.2 to
      this
      report.


35





**Item
      13.**   **EXHIBITS**





No.
            
            Description3.1*
            
            Amended
                and Restated Articles of Incorporation and amendments thereto.3.2
            
            ByLaws.
                (Incorporated by Reference to Exhibit 3.2 to Form 10-QSB for the
                quarter
                ended March 31, 2007, filed with the Commission on July 3, 2007,
                Commission File No. 0-27368).10.1*
            
            2006
                Stock Award and Incentive Plan as amended.10.2*
            
            Agreement
                with respect to termination of employment of Alan W. Schoenbart dated
                March 28, 2008.10.3
            
            Agreement
                with Cambrex Bio Science Walkersville, Inc.; redacted - certain portions
                marked by asterisks were omitted pursuant to a confidential treatment
                request and filed separately with the Securities and Exchange Commission
                (Incorporated by reference to Exhibit 10.1 of our annual report on
                Form
                10-K for the period ended December 31, 2003, filed with the Commission
                on
                March 30, 2004, Commission File No. 0-27368)10.4
            
            Amendment
                No. 1 dated October 18, 2004 to the Cell Therapy Manufacturing Agreement
                dated October 29, 2003 between Ortec International, Inc. and Cambrex
                Bio
                Science Walkersville, Inc. (Incorporated by reference to Exhibit
                10.8 of
                our annual report on Form 10-KSB for the period ended December 31,
                2004,
                filed with the Commission on March 31, 2005, Commission File No.
                0-27368)10.5
            
            Form
                of Restricted Stock Award (Incorporated by reference to Exhibit 4.1
                of
                Form 8-K dated June 27, 2005, filed with the Commission on July 1,
                2005,
                Commission File No. 0-27368)10.6
            
            Series
                A Convertible Preferred Stock Purchase Agreement including Series
                A, M,
                and M-1 warrants, dated June 18, 2007. (Incorporated by Reference
                to
                Exhibit 10.3 to From 8-K/A dated June 18, 2007, filed with the Commission
                on June 25, 2007, Commission File No. 0-27368).10.7
            
            Placement
                Agent Agreement between Ortec International, Inc. and Burnham Hill
                Partners, a division of Pali Capital Inc., dated June 15, 2007.
                (Incorporated by Reference to Exhibit 10.4 to Form 8-K/A dated June
                18,
                2007, filed with the Commission on June 25, 2007, Commission File
                No.
                0-27368).10.8
            
            Financial
                Advisory Agreement between Ortec International, Inc, and Burnham
                Hill
                Partners, a division of Pali Capital Inc., dated June 15, 2007.
                (Incorporated by Reference to Exhibit 10.5 to Form 8-K/A dated June
                18,
                2007, filed with the Commission on June 25, 2007, Commission File
                No.
                0-27368).10.9
            
            Cancellation
                Agreement between Ortec International, Inc and Ron Lipstein dated
                June 18,
                2007. (Incorporated by Reference to Exhibit 10.6 to Form 8-K/A dated
                June
                18, 2007, filed with the Commission on June 25, 2007, Commission
                File No.
                0-27368).10.10
            
            Cancellation
                Agreement between Ortec International, Inc and Steven Katz dated
                June 18,
                2007. (Incorporated by Reference to Exhibit 10.7 to Form 8-K/A dated
                June
                18, 2007, filed with the Commission on June 25, 2007, Commission
                File No.
                0-27368).10.11
            
            Warrant
                issued to Ron Lipstein pursuant to Cancellation Agreement dated June
                18,
                2007. (Incorporated by Reference to Exhibit 10.8 to Form 8-K/A dated
                June
                18, 2007, filed with the Commission on June 25, 2007, Commission
                File No.
                0-27368).10.12
            
            Warrant
                issued to Steven Katz pursuant to Cancellation Agreement dated June
                18,
                2007. (Incorporated by Reference to Exhibit 10.9 of Form 8-K/A dated
                June
                18, 2007, filed with the Commission on June 25, 2007, Commission
                File No.
                0-27368).10.13
            
            Agreement
                dated September 26, 2007 between Ortec and Lonza (Incorporated by
                Reference to Exhibit 10.1 to From 8-K dated September 26, 2007, filed
                with
                the Commission on October 1, 2007, Commission File No.
                0-27368).10.14
            
            Material
                Transfer and Technology Evaluation Agreement between CJ CheilJedang
                Corp.
                and Ortec International, Inc. dated December 14, 2007. (Incorporated
                by
                Reference to Exhibit 10.1 to From 8-K dated December 21, 2007, filed
                with
                the Commission on December 21, 2007, Commission File No.
                0-27368).14
            
            Code
                of Ethics (Incorporated by reference to Exhibit 14 of our annual
                report on
                Form 10-K for the period ended December 31, 2003, filed with the
                Commission on March 30, 2004, Commission File No. 0-27368)23
                *
            
            Consent
                of BDO Seidman, LLP31.1*
            
            Rule
                13a-14(a) / 15d- 14 (a) Certification of Principal Executive Officer31.2
                *
            
            Rule
                13a-14(a) / 15d –14 (a) Certification of Principal Financial Officer32.1
                *
            
            Section
                1350 Certification of Principal Executive Officer32.2
                *
            
            Section
                1350 Certification of Principal Financial Officer





*
      filed
      herewith.


36


**Item
      14.** **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**




The
      following are the fees billed by BDO Seidman, LLP our independent registered
      public accounting firm, for services rendered by such firm during the fiscal
      year ended December 31, 2007.





**Audit
      Fees**





BDO
      Seidman, LLP billed $165,000 and $185,000 in the aggregate for professional
      services rendered for the audit of our annual financial statements and review
      of
      our quarterly financial statements for the fiscal years ended December 31,
      2007
      and 2006, respectively.





BDO
      Seidman, LLP did not perform any other services for us in 2007 and
      2006.





The
      functions of the Audit Committee include recommendations to the Board of
      Directors with respect to the engagement of our independent registered public
      accounting firm and the review of the scope, cost and effect of the audit
      engagement.





Under
      the
      Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by BDO
      Seidman, LLP must be approved in advance by our Audit Committee to assure that
      such services do not impair the auditors’ independence from the Company. Our
      Audit Committee specifically approved all audit services prior to them being
      performed by BDO Seidman, LLP.


37


**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
      duly
      caused this report to be signed on its behalf by the undersigned, thereunto
      duly
      authorized.





Dated:
                March 31, 2008
            Forticell
                Bioscience, Inc.By:
            /s/
                Costa Papastephanou
              Costa
                PapastephanouChief
                Executive Officer








In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant on March 31, 2008 in the
      capacities indicated below.








**Signature**
            
            **Title**/s/
                Costa Papastephanou
              Costa
                Papastephanou
            
            Chief
                Executive Officer and Director (Principal Executive
                Officer)/s/
                Alan W. Schoenbart
              Alan
                W. Schoenbart
            
            Chief
                Financial Officer (Principal Financial and Accounting
                Officer)/s/
                John Leone
              John
                Leone
            
            Director/s/
                Mark Bagnall
              Mark
                Bagnall
            
            Director/s/
                Andreas Vogler
              Andreas
                Vogler
            
            Director/s/
                Shepard Goldberg
              Shepard
                Goldberg
            
            Director/s/
                Raphael Hofstein
              Raphael
                Hofstein
            
            Director




38




FORTICELL
      BIOSCIENCE, INC.


(A
      DEVELOPMENT STAGE ENTERPRISE)


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**




PageReport
                of Independent Registered Public Accounting Firm
            
            F-2Consolidated
                Balance Sheet as of December 31, 2007
            
            F-3Consolidated
                Statements of Operations for the years ended December 31, 2007and
                2006and
                for the cumulative period from March 12, 1991 (inception) to December
                31,
                2007
            
            F-4Consolidated
                Statements of Shareholders’ Equity (Deficit) for the cumulative period
                fromMarch
                12, 1991 (inception) to December 31, 2007
            
            F-5Consolidated
                Statements of Cash Flows for the years ended December 31, 2007 and
                2006,and
                for the cumulative period from March 12, 1991 (inception) to December
                31,
                2007
            
            F-11Notes
                to Consolidated Financial Statements
            
            F-13


F1




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




Board
      of
      Directors and Stockholders


Forticell
      Bioscience, Inc.


New
      York,
      New York





We
      have
      audited the accompanying consolidated balance sheet of Forticell Bioscience,
      Inc. (a development stage enterprise) as of December 31, 2007 and the related
      consolidated statements of operations, shareholders’ deficit, and cash flows for
      the years ended December 31, 2007 and 2006 and for the period from March 12,
      1991 (inception) to December 31, 2007. These consolidated financial statements
      are the responsibility of the Company’s management. Our responsibility is to
      express an opinion on these consolidated financial statements based on our
      audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audits included consideration of internal control
      over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, 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, based on our audits, the consolidated financial statements referred
      to
      above present fairly, in all material respects, the financial position of
      Forticell Bioscience, Inc. at December 31, 2007, and the results of the
      Company’s operations and cash flows for the years ended December 31, 2007 and
      2006 **** and
      for
      the period from March 12, 1991 (inception) to December 31, 2007 **,** in
      conformity with accounting principles generally accepted in the United
      States.




The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As
      discussed in Note 1, the
      Company has a deficit accumulated in the development stage of $166 million. This
      factor, among others, as discussed in Note 1 to the consolidated
      financial statements, raises substantial doubt about the Company’s ability to
      continue as a going concern. Management’s plans in regard to these matters are
      also described in Note 1. The consolidated financial statements do not include
      any adjustments that might result from the outcome of this
      uncertainty.




/s/
      BDO
      Seidman, LLP





New
      York,
      New York


March
      31,
      2008




F2


FORTICELL
      BIOSCIENCE, INC.


(A
      DEVELOPMENT STAGE ENTERPRISE)





**CONSOLIDATED
      BALANCE SHEET**


December 31,2007**ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              1,301,795New
                  York state tax credits receivable
              
              
              500,000Prepaid
                  and other current assets
              
              
              149,997Total
                  current assets
              
              
              1,951,792Property
                  and equipment, net
              
              
              200,272Patent
                  application costs, net
              
              
              409,080Deposits
                  and other assets
              
              
              223,927Total
                  assets
              
              $
              2,785,071**LIABILITIES
                  AND SHAREHOLDERS’ DEFICIT**Current
                  liabilities:Accounts
                  payable and accrued expenses
              
              $
              2,768,232Capital
                  lease obligation - current
              
              
              2,113Current
                  maturities of promissory notes
              
              
              67,632Total
                  current liabilities
              
              
              2,837,977**COMMITMENTS
                  AND CONTINGENCIES**Shareholders’
                  deficit:Preferred
                  stock, $.001 par value; authorized, 1,000,000 shares:ConvertibleSeries
                  A, stated value $10,000 per share; authorized 20,000
                  shares;1,201.581
                  shares issued and outstanding; liquidation preference
                  $12,015,810
              
              
              6,735,940Less:
                  subscription receivable to purchase 4 shares
              
              
              (40,000
              )Series
                  A-1, stated value $10,000 per share; authorized 500
                  shares;500
                  shares issued and outstanding; liquidation preference
                  $5,000,000
              
              
              5,493,700Series
                  A-2, stated value $10,000 per share; authorized 500
                  shares;500
                  shares issued and outstanding; liquidation preference
                  $5,000,000
              
              
              2,050,000Series
                  D-1, stated value $10 per share; authorized 20,000 shares;5,948.6148
                  sharesissued and outstanding; liquidation preference of $59,486
              
              
              15,090,903Series
                  D-2, stated value $10 per share; authorized 20,000 shares;no
                  shares issued and outstanding; liquidation preference $0
              
              
              -Common
                  stock, $.001 par value; authorized, 300,000,000 shares; 11,972,235
                  shares
                  issued and outstanding
              
              
              11,972Additional
                  paid-in capital
              
              
              136,327,084Deficit
                  accumulated during the development stage
              
              
              (165,632,347
              )Deferred
                  compensation
              
              
              (80,329
              )Accumulated
                  other comprehensive loss
              
              
              (9,829
              )Total
                  shareholders’ deficit
              
              
              (52,906
              )Total
                  liabilities and shareholders’ deficit
              
              $
              2,785,071





The
      accompanying notes are an integral part of these statements.


F3


FORTICELL
          BIOSCIENCE, INC.
 (A
          DEVELOPMENT STAGE ENTERPRISE)
  **CONSOLIDATED
          STATEMENTS OF OPERATIONS**
 
 CumulativeFromMarch 12, 1991(inception) toYear ended December 31,
              
              December 31,2007
              
              2006
              
              2007Product
                  Revenue
              
              $
              -
              
              $
              -
              
              $
              265,665ExpensesProduct
                  and laboratory costs
              
              
              1,138,608
              
              
              4,341,932
              
              
              36,267,688Personnel
              
              
              5,330,723
              
              
              4,106,303
              
              
              50,807,720General
                  and administrative
              
              
              2,197,500
              
              
              1,353,414
              
              
              24,166,232Rent
              
              
              705,370
              
              
              730,320
              
              
              5,881,997Consulting
              
              
              -
              
              
              -
              
              
              5,702,651Interest
                  expense
              
              
              6,767,381
              
              
              9,027,748
              
              
              45,106,174Other
                  (income) expense
              
              
              (317,369
              )
              
              (101,804
              )
              
              (2,973,391
              )Gain
                  on extinguishment of revenue interest assignment
                  obligation
              
              
              (35,527,695
              )
              
              -
              
              
              (35,527,695
              )Purchased
                  in-process research and development costs
              
              
              -
              
              
              11,073,743
              
              
              11,073,743Change
                  in value of warrants
              
              
              -
              
              
              (12,042,565
              )
              
              (12,042,565
              )Loss
                  on settlement of promissory notes
              
              
              -
              
              
              -
              
              
              13,081,453Lease
                  termination costs
              
              
              -
              
              
              -
              
              
              1,119,166Loss
                  on extinguishments of debt and series A preferred shares
              
              
              -
              
              
              -
              
              
              1,004,027(19,705,482
              )
              
              18,489,091
              
              
              143,667,200Income
                  (loss) before income tax benefit
              
              
              19,705,482
              
              
              (18,489,091
              )
              
              (143,401,535
              )Income
                  tax benefit
              
              
              (250,000
              )
              
              (489,000
              )
              
              (739,000
              )Net
                  income (loss)
              
              
              19,955,482
              
              
              (18,000,091
              )
              
              (142,662,535
              )Preferred
                  stock dividends
              
              
              -
              
              
              151,035
              
              
              3,162,609Preferred
                  stock and warrants deemed dividends and discounts
              
              
              6,519,536
              
              
              277,972
              
              
              19,807,203Net
                  income (loss) applicable to common shareholders
              
              $
              13,435,946
              
              $
              (18,429,098
              )
              $
              (165,632,347
              )Net
                  income (loss) per shareBasic
              
              $
              1.18
              
              $
              (2.60
              )Diluted
              
              $
              0.59
              
              $
              (2.60
              )Weighted
                  average shares outstandingBasic
              
              
              11,426,005
              
              
              7,074,724Diluted
              
              
              31,670,788
              
              
              7,074,724
 
 The
        accompanying notes are an integral part of these statements .
  F4
 
 FORTICELL
        BIOSCIENCE, INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)**
  Deficitaccumulated
              
              
              
              
              
              
              TotalAdditional
              
              during the
              
              
              
              
              
              
              shareholders’Common stock
              
              Preferred stock series
              
              paid-in
              
              development
              
              
              Treasury
              
              Deferred
              
              equityShares
              
              Amount
              
              B
              
              C
              
              D
              
              D-1
              
              E
              
              capital
              
              stage
              
              
              stock
              
              compensation
              
              (deficit)March
                  12, 1991 (inception) to December 31, 1991Founders
              
              
              10,358
              
              $
              10
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              $
              860
              
              -
              
              
              -
              
              
              -
              
              $
              870First
                  private placement ($45 per share)
              
              
              1,450
              
              
              2
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              64,998
              
              -
              
              
              -
              
              
              -
              
              
              65,000The
                  Director ($172.50 and $795 per share)
              
              
              994
              
              
              1
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              249,999
              
              -
              
              
              -
              
              
              -
              
              
              250,000Second
                  private placement ($1413.75 per share)
              
              
              354
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              500,000
              
              -
              
              
              -
              
              
              -
              
              
              500,000Share
                  issuance expense
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (21,118
              )
              -
              
              
              -
              
              
              -
              
              
              (21,118
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              (281,644
              )
              
              -
              
              
              -
              
              
              (281,644
              )Balance
                  at December 31, 1991
              
              
              13,156
              
              
              13
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              794,739
              
              (281,644
              )
              
              -
              
              
              -
              
              
              513,108Second
                  private placement ($1,413.75 per share)
              
              
              176
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              250,006
              
              -
              
              
              -
              
              
              -
              
              
              250,006Second
                  private placement ($1,413.75 per share)
              
              
              152
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              215,467
              
              -
              
              
              -
              
              
              -
              
              
              215,467Stock
                    purchase agreement with the Director ($1,413.75 per
                    share)
              
              
              212
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              299,998
              
              -
              
              
              -
              
              
              -
              
              
              299,998Share
                  issuance expense
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (35,477
              )
              -
              
              
              -
              
              
              -
              
              
              (35,477
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              (785,941
              )
              
              -
              
              
              -
              
              
              (785,941
              )Balance
                  at December 31, 1992
              
              
              13,696
              
              
              13
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,524,733
              
              (1,067,585
              )
              
              -
              
              
              -
              
              
              457,161Third
                  private placement ($1,500 per share)
              
              
              731
              
              
              1
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,096,499
              
              -
              
              
              -
              
              
              -
              
              
              1,096,500Third
                  private placement ($1,500 per share)
              
              
              150
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              225,000
              
              -
              
              
              -
              
              
              -
              
              
              225,000Stock
                  purchase agreement with HomeInsurance
                  ($1,350 per share)
              
              
              741
              
              
              1
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              999,998
              
              -
              
              
              -
              
              
              -
              
              
              999,999Stock
                    purchase agreement with the Director ($1,413.75 per
                    share)
              
              
              142
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              200,000
              
              -
              
              
              -
              
              
              -
              
              
              200,000Shares
                  issued in exchange for commission
              
              
              4
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              6,000
              
              -
              
              
              -
              
              
              -
              
              
              6,000Share
                  issuance expenses
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (230,207
              )
              -
              
              
              -
              
              
              -
              
              
              (230,207
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              (1,445,624
              )
              
              -
              
              
              -
              
              
              (1,445,624
              )Balance
                  at December 31, 1993
              
              
              15,464
              
              
              15
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,822,023
              
              (2,513,209
              )
              
              -
              
              
              -
              
              
              1,308,829Fourth
                  private placement ($1,500 per share)
              
              
              263
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              397,712
              
              -
              
              
              -
              
              
              -
              
              
              397,712Stock
                  purchase agreement with HomeInsurance
                  ($1,500 per share)
              
              
              333
              
              
              1
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              499,999
              
              -
              
              
              -
              
              
              -
              
              
              500,000Share
                  issuance expense
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (8,697
              )
              -
              
              
              -
              
              
              -
              
              
              (8,697
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              (1,675,087
              )
              
              -
              
              
              -
              
              
              (1,675,087
              )Balance
                  at December 31, 1994
              
              
              16,060
              
              
              16
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,711,037
              
              (4,188,296
              )
              
              -
              
              
              -
              
              
              522,757Rent
                  forgiveness by Director
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              40,740
              
              -
              
              
              -
              
              
              -
              
              
              40,740Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              (1,022,723
              )
              
              -
              
              
              -
              
              
              (1,022,723
              )Balance
                  at December 31, 1995
              
              
              16,060
              
              
              16
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              4,751,777
              
              (5,211,019
              )
              
              -
              
              
              -
              
              
              (459,226
              )Initial
                  public offering
              
              
              8,000
              
              
              8
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              5,999,992
              
              -
              
              
              -
              
              
              -
              
              
              6,000,000Exercise
                  of warrants
              
              
              226
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              33,885
              
              -
              
              
              -
              
              
              -
              
              
              33,885Fifth
                  private placement ($973.50 per share)
              
              
              6,394
              
              
              6
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              6,220,791
              
              -
              
              
              -
              
              
              -
              
              
              6,220,797Share
                  issuance expenses
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,580,690
              )
              -
              
              
              -
              
              
              -
              
              
              (1,580,690
              )Stock
                  options issued for services
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              152,000
              
              -
              
              
              -
              
              
              -
              
              
              152,000Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              (2,649,768
              )
              
              -
              
              
              -
              
              
              (2,649,768
              )Balance
                  at December 31, 1996
              
              
              30,680
              
              
              30
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              15,577,755
              
              (7,860,787
              )
              
              -
              
              
              -
              
              
              7,716,998Exercise
                  of warrants
              
              
              7,726
              
              
              8
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              10,822,783
              
              -
              
              
              -
              
              
              -
              
              
              10,822,791Share
                  issuance expenses
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (657,508
              )
              -
              
              
              -
              
              
              -
              
              
              (657,508
              )Stock
                  options and warrants issued for services
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              660,000
              
              -
              
              
              -
              
              
              -
              
              
              660,000Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              (4,825,663
              )
              
              -
              
              
              -
              
              
              (4,825,663
              )Balance
                  at December 31, 1997 (carried forward)
              
              
              38,406
              
              
              38
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              26,403,030
              
              (12,686,450
              )
              
              -
              
              
              -
              
              
              13,716,618
  F5
  FORTICELL
        BIOSCIENCE, INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)**
 
 Deficitaccumulated
              
              
              
              
              
              TotalAdditional
              
              during the
              
              
              
              
              
              shareholders’Common Stock
              
              Preferred stock series
              
              paid-in
              
              development
              
              Treasury
              
              Deferred
              
              equityShares
              
              Amount
              
              B
              
              C
              
              D
              
              D-1
              
              E
              
              capital
              
              stage
              
              stock
              
              compensation
              
              (deficit)Balance
                  at December 31, 1997 (brought forward)
              
              
              38,406
              
              
              38
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              26,403,030
              
              
              (12,686,450
              )
              
              -
              
              
              -
              
              
              13,716,618Exercise
                  of warrants
              
              
              1,477
              
              
              2
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,281,955
              
              
              -
              
              
              -
              
              
              -
              
              
              1,281,957Stock
                  options and warrants issued for services
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,920,111
              
              
              -
              
              
              -
              
              
              -
              
              
              1,920,111Sixth
                private placementCommon
                  shares issued ($1500.38 per share)
              
              
              1,333
              
              
              1
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,788,697
              
              
              -
              
              
              -
              
              
              -
              
              
              1,788,698Warrants
                  to purchase 334 shares at $1,800 per share
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              211,302
              
              
              -
              
              
              -
              
              
              -
              
              
              211,302Share
                  issuance expenses
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (48,000
              )
              
              -
              
              
              -
              
              
              -
              
              
              (48,000
              )Purchase
                  of 44 shares of treasury stock (at cost)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (67,272
              )
              
              -
              
              
              (67,272
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (8,412,655
              )
              
              -
              
              
              -
              
              
              (8,412,655
              )Balance
                  at December 31, 1998
              
              
              41,216
              
              
              41
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              31,557,095
              
              
              (21,099,105
              )
              
              (67,272
              )
              
              -
              
              
              10,390,759Exercise
                  of warrants
              
              
              94
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              14,103
              
              
              -
              
              
              -
              
              
              -
              
              
              14,103Stock
                  options and warrants issued for services
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              64,715
              
              
              -
              
              
              -
              
              
              -
              
              
              64,715Seventh
                  private placementCommon
                  shares issued ($1,312.50 per share)
              
              
              2,594
              
              
              3
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,168,782
              
              
              -
              
              
              -
              
              
              -
              
              
              3,168,785Warrants
                  to purchase 519 shares – 210 at $1,875 per share an d 209 at $2,175
                  per share
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              236,291
              
              
              -
              
              
              -
              
              
              -
              
              
              236,291Placement
                  agent warrants to purchase 260 shares at $1,575 per share
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              232,000
              
              
              -
              
              
              -
              
              
              -
              
              
              232,000Eighth
                  private placement ($825 per share)
              
              
              10,909
              
              
              11
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              8,999,991
              
              
              -
              
              
              -
              
              
              -
              
              
              9,000,002Share
                  issuance expenses
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (619,908
              )
              
              -
              
              
              -
              
              
              -
              
              
              (619,908
              )Purchase
                  of 61 shares of treasury stock (at cost)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (75,518
              )
              
              -
              
              
              (75,518
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (10,040,509
              )
              
              -
              
              
              -
              
              
              (10,040,509
              )Balance
                  at December 31, 1999
              
              
              54,813
              
              
              55
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              43,653,069
              
              
              (31,139,614
              )
              
              (142,790
              )
              
              -
              
              
              12,370,720Exercise
                  of options and warrants
              
              
              1,170
              
              
              1
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              327,281
              
              
              -
              
              
              -
              
              
              -
              
              
              327,282Stock
                  options and warrants issued for services
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              56,265
              
              
              -
              
              
              -
              
              
              -
              
              
              56,265Ninth
                  private placementCommon
                  stock issued ($2,250 per share)
              
              
              444
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,000,005
              
              
              -
              
              
              -
              
              
              -
              
              
              1,000,005Placement
                  agent warrants (18 at $2,250 per share)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              23,000
              
              
              -
              
              
              -
              
              
              -
              
              
              23,000Tenth
                  private placement ($1,012.50 per share)
              
              
              8,318
              
              
              8
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              8,421,063
              
              
              -
              
              
              -
              
              
              -
              
              
              8,421,071Share
                  issuance expenses
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (641,500
              )
              
              -
              
              
              -
              
              
              -
              
              
              (641,500
              )Purchase
                  of 29 shares of treasury stock (at cost)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (34,855
              )
              
              -
              
              
              (34,855
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (12,129,663
              )
              
              -
              
              
              -
              
              
              (12,129,663
              )Balance
                  at December 31, 2000
              
              
              64,745
              
              
              64
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              52,839,183
              
              
              (43,269,277
              )
              
              (177,645
              )
              
              -
              
              
              9,392,325Stock
                  options to purchase 400 shares for services
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              188,080
              
              
              -
              
              
              -
              
              
              -
              
              
              188,080Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (15,885,377
              )
              
              -
              
              
              -
              
              
              (15,885,377
              )Balance
                  at December 31, 2001
              
              
              64,745
              
              
              64
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              53,027,263
              
              
              (59,154,654
              )
              
              (177,645
              )
              
              -
              
              
              (6,304,972
              )Exercise
                  of options and warrants
              
              
              2,381
              
              
              2
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              355
              
              
              -
              
              
              -
              
              
              -
              
              
              357Stock
                  options and warrants issued for services
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              113,060
              
              
              -
              
              
              -
              
              
              -
              
              
              113,060Warrants
                  issued with convertible debentures
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              440,523
              
              
              -
              
              
              -
              
              
              -
              
              
              440,523Warrants
                  issued with redeemable preferred stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              559,289
              
              
              -
              
              
              -
              
              
              -
              
              
              559,289Convertible
                  debenture conversion benefit
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,042,663
              
              
              -
              
              
              -
              
              
              -
              
              
              1,042,663Redeemable
                  convertible preferred conversion benefit
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,097,886
              
              
              -
              
              
              -
              
              
              -
              
              
              1,097,886Issuance
                  of series B preferred stock (938 shares at $10,000 per
                  share)
              
              
              -
              
              
              -
              
              
              9,382,742
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              9,382,742Warrants
                  issued and exercised with preferred stock
              
              
              62,552
              
              
              63
              
              
              (3,479,043
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,486,318
              
              
              -
              
              
              -
              
              
              -
              
              
              7,338Shares
                  issuance costs – preferred stock
              
              
              -
              
              
              -
              
              
              (866,612
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              304,615
              
              
              -
              
              
              -
              
              
              -
              
              
              (561,997
              )Preferred
                  stock dividends
              
              
              25,021
              
              
              25
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,125,909
              
              
              (1,125,934
              )
              
              -
              
              
              -
              
              
              -Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (21,578,021
              )
              
              -
              
              
              -
              
              
              (21,578,021
              )Balance
                  at December 31, 2002 (carried forward)
              
              
              154,699
              
              
              154
              
              
              5,037,087
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              61,197,881
              
              
              (81,858,609
              )
              
              (177,645
              )
              
              -
              
              
              (15,801,132
              )
  F6
 
 FORTICELL
        BIOSCIENCE, INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)**
 
 Deficitaccumulated
              
              
              
              
              
              TotalAdditional
              
              during the
              
              
              
              
              
              shareholders’Common stock
              
              Preferred stock series
              
              paid-in
              
              development
              
              Treasury
              
              Deferred
              
              equityShares
              
              Amount
              
              B
              
              C
              
              D
              
              D-1
              
              E
              
              capital
              
              stage
              
              stock
              
              compensation
              
              (deficit)Balance
                  at December 31, 2002 (brought forward)
              
              
              154,699
              
              
              154
              
              
              5,037,087
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              61,197,881
              
              
              (81,858,609
              )
              
              (177,645
              )
              
              -
              
              
              (15,801,132
              )Exercise
                  of options and warrants
              
              
              26,583
              
              
              27
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              12,939
              
              
              -
              
              
              -
              
              
              -
              
              
              12,966Issuance
                  of preferred stock:series
                  B (200 shares), series C (948 shares)
              
              
              -
              
              
              -
              
              
              2,000,000
              
              
              5,690,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              7,690,000Warrants
                  issued with preferred stock
              
              
              -
              
              
              -
              
              
              (490,567
              )
              
              (1,225,632
              )
              
              -
              
              
              -
              
              
              -
              
              
              1,716,199
              
              
              -
              
              
              -
              
              
              -
              
              
              -Warrant
                  to purchase 5,000 shares at $30 per share issued for
                  services
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              87,000
              
              
              -
              
              
              -
              
              
              -
              
              
              87,000Share
                  issuance costs – preferred stock
              
              
              -
              
              
              -
              
              
              (393,488
              )
              
              (797,327
              )
              
              -
              
              
              -
              
              
              -
              
              
              359,078
              
              
              -
              
              
              -
              
              
              -
              
              
              (831,737
              )Conversion
                  of series B preferred stock (605 shares) into common stock
              
              
              161,437
              
              
              162
              
              
              (3,253,571
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,253,409
              
              
              -
              
              
              -
              
              
              -
              
              
              -Conversion
                  of series B preferred stock into series D preferred stock (483
                  shares)
              
              
              -
              
              
              -
              
              
              (2,628,602
              )
              
              -
              
              
              2,628,602
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Preferred
                  stock deemed dividends and discounts
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              4,269,000
              
              
              (4,269,000
              )
              
              -
              
              
              -
              
              
              -Preferred
                  stock dividends
              
              
              6,154
              
              
              6
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              923,071
              
              
              (923,077
              )
              
              -
              
              
              -
              
              
              -Common
                  stock dividend to be distributed on series C preferred
                  stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              336,550
              
              
              (336,550
              )
              
              -
              
              
              -
              
              
              -Common
                  stock to be issued in connection with promissory notes (10,467
                  shares)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              287,000
              
              
              -
              
              
              -
              
              
              -
              
              
              287,000Adjustment
                  for one for ten reverse stock split
              
              
              5
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (15,920,504
              )
              
              -
              
              
              -
              
              
              (15,920,504
              )Balance
                  at December 31, 2003
              
              
              348,878
              
              
              349
              
              
              270,859
              
              
              3,667,041
              
              
              2,628,602
              
              
              -
              
              
              -
              
              
              72,442,127
              
              
              (103,307,740
              )
              
              (177,645
              )
              
              -
              
              
              (24,476,407
              )Issued
                  in connection with promissory notesPreviously
                  issued notes (FY 2002 above)
              
              
              10,467
              
              
              11
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (11
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Issued
                  in current fiscal year
              
              
              22,122
              
              
              22
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              746,180
              
              
              -
              
              
              -
              
              
              -
              
              
              746,202Common
                  stock (18,468) and 34.31 shares of series D preferred to be issued
                  in
                  connection with agreements which extended due date of promissory
                  notes
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              828,540
              
              
              -
              
              
              -
              
              
              -
              
              
              828,540Issued
                  in connection with exercise of warrants
              
              
              2,164
              
              
              2
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              323
              
              
              -
              
              
              -
              
              
              -
              
              
              325Conversion
                  of 35.62 shares of series C preferred stock into common
                  stock
              
              
              7,125
              
              
              7
              
              
              -
              
              
              (137,752
              )
              
              -
              
              
              -
              
              
              -
              
              
              137,745
              
              
              -
              
              
              -
              
              
              -
              
              
              -Payment
                  of dividends on 35.62 shares of series C preferred stock in common
                  stock
              
              
              916
              
              
              1
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              30,098
              
              
              (30,099
              )
              
              -
              
              
              -
              
              
              -Common
                  stock and series D preferred (233.83 shares) issued in connection
                  with
                  special warrant offer ($15.06 per share)
              
              
              33,132
              
              
              33
              
              
              -
              
              
              -
              
              
              939,050
              
              
              -
              
              
              -
              
              
              498,936
              
              
              -
              
              
              -
              
              
              -
              
              
              1,438,019Common
                  stock dividend to be distributed on series B and series C preferred
                  stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              613,805
              
              
              (613,805
              )
              
              -
              
              
              -
              
              
              -Option
                  to purchase 6,667 shares at $30 per share issued to director for
                  services
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              398,574
              
              
              -
              
              
              -
              
              
              -
              
              
              398,574Warrant
                  to purchase 5,000 shares at $30 issued for services
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              94,393
              
              
              -
              
              
              -
              
              
              -
              
              
              94,393Warrant
                  to purchase 937 shares at $48.75 issued in connection with
                  lease
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              18,500
              
              
              -
              
              
              -
              
              
              -
              
              
              18,500Share
                  issuance expenses
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (26,600
              )
              
              -
              
              
              -
              
              
              -
              
              
              (26,600
              )Special
                  warrant offer deemed dividends
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,123,000
              
              
              (1,123,000
              )
              
              -
              
              
              -
              
              
              -Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (15,377,900
              )
              
              -
              
              
              -
              
              
              (15,377,900
              )Balance
                  at December 31, 2004 (carried forward)
              
              
              424,804
              
              
              425
              
              
              270,859
              
              
              3,529,289
              
              
              3,567,652
              
              
              -
              
              
              -
              
              
              76,905,610
              
              
              (120,452,544
              )
              
              (177,645
              )
              
              -
              
              
              (36,356,354
              )
  F7
  FORTICELL
        BIOSCIENCE, INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)**
 
 Deficitaccumulated
              
              
              
              
              
              TotalAdditional
              
              during
                  the
              
              
              
              
              
              shareholders’Common
                  stock
              
              Preferred
                  stock series
              
              paid-in
              
              development
              
              Treasury
              
              Deferred
              
              equityShares
              
              Amount
              
              B
              
              C
              
              D
              
              D-1
              
              E
              
              capital
              
              stage
              
              stock
              
              compensation
              
              (deficit)Balance
                  at December 31, 2004 (brought forward)
              
              
              424,804
              
              
              425
              
              
              270,859
              
              
              3,529,289
              
              
              3,567,652
              
              
              -
              
              
              -
              
              
              76,905,610
              
              
              (120,452,544
              )
              
              (177,645
              )
              
              -
              
              
              (36,356,354
              )Common
                  stock and series D preferred (34.31 shares) issued in connection
                  with
                  agreements which extended due date of promissory notes
              
              
              18,468
              
              
              18
              
              
              -
              
              
              -
              
              
              274,500
              
              
              -
              
              
              -
              
              
              (274,518
              )
              
              -
              
              
              -
              
              
              -
              
              
              -January
                  2005 Private Placement:Common
                  stock issued
              
              
              432,264
              
              
              432
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              4,775,668
              
              
              -
              
              
              -
              
              
              -
              
              
              4,776,100Common
                  stock and series D preferred (1,720.16 shares) issued for promissory
                  note
                  conversion
              
              
              530,208
              
              
              530
              
              
              -
              
              
              -
              
              
              5,733,853
              
              
              -
              
              
              -
              
              
              14,895,029
              
              
              -
              
              
              -
              
              
              -
              
              
              20,629,412Common
                  stock and series D preferred (1,086.21 shares) issued in connection
                  with
                  Series C preferred exchange
              
              
              218,912
              
              
              219
              
              
              -
              
              
              (3,529,289
              )
              
              3,620,702
              
              
              -
              
              
              -
              
              
              6,261,816
              
              
              (6,353,448
              )
              
              -
              
              
              -
              
              
              -Common
                  stock issued for exercise of additional investment right from private
                  placement
              
              
              10,217
              
              
              10
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              114,937
              
              
              -
              
              
              -
              
              
              -
              
              
              114,947Common
                  stock issued in connection withFebruary
                  2005 private placement
              
              
              8,000
              
              
              8
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              86,265
              
              
              -
              
              
              -
              
              
              -
              
              
              86,273Common
                  stock issued in connection with exchange for series B preferred
                  stock
              
              
              14,710
              
              
              15
              
              
              (270,859
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              270,844
              
              
              -
              
              
              -
              
              
              -
              
              
              -Common
                  stock issued to officers
              
              
              109,667
              
              
              110
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              751,474
              
              
              -
              
              
              -
              
              
              (462,445
              )
              
              289,139Common
                  stock issued upon exercise of warrants
              
              
              243,901
              
              
              244
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,415
              
              
              -
              
              
              -
              
              
              -
              
              
              3,659October
                  2005 Private Placement:Common
                  stock issued
              
              
              972,718
              
              
              973
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,172,643
              
              
              -
              
              
              -
              
              
              -
              
              
              3,173,616Common
                  stock and Series D preferred (2,714.62 shares) and warrants issued
                  for
                  promissory notes
              
              
              423,128
              
              
              423
              
              
              -
              
              
              -
              
              
              2,714,624
              
              
              -
              
              
              -
              
              
              3,622,670
              
              
              -
              
              
              -
              
              
              -
              
              
              6,337,717Return
                  of excess preferred stock dividend
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (17,891
              )
              
              17,891
              
              
              -
              
              
              -
              
              
              -Modifications
                  of Series E warrant prices
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,490,140
              
              
              (1,264,247
              )
              
              -
              
              
              -
              
              
              2,225,893Warrants
                  to purchase 5,000 shares issued for services
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              7,189
              
              
              -
              
              
              -
              
              
              -
              
              
              7,189Share
                  issuance expenses
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (14,234
              )
              
              -
              
              
              -
              
              
              -
              
              
              (14,234
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (32,586,847
              )
              
              -
              
              
              -
              
              
              (32,586,847
              )Balance
                  at December 31, 2005 (carried forward)
              
              
              3,406,997
              
              
              3,407
              
              
              -
              
              
              -
              
              
              15,911,331
              
              
              -
              
              
              -
              
              
              114,051,057
              
              
              (160,639,195
              )
              
              (177,645
              )
              
              (462,445
              )
              
              (31,313,490
              )
 
 F8
 
 FORTICELL
        BIOSCIENCE, INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)**
 
 Deficitaccumulated
              
              
              
              
              
              TotalAdditional
              
              during
                  the
              
              
              
              
              
              shareholders’Common
                  stock
              
              Preferred
                  stock series
              
              paid-in
              
              development
              
              Treasury
              
              Deferred
              
              equityShares
              
              Amount
              
              B
              
              C
              
              D
              
              D-1
              
              E
              
              Capital
              
              stage
              
              stock
              
              compensation
              
              (deficit)Balance
                  at December 31, 2005 (brought forward)
              
              
              3,406,997
              
              
              3,407
              
              
              -
              
              
              -
              
              
              15,911,331
              
              
              -
              
              
              -
              
              
              114,051,057
              
              
              (160,639,195
              )
              
              (177,645
              )
              
              (462,445
              )
              
              (31,313,490
              )Exercise
                  of Series E warrants
              
              
              139,207
              
              
              139
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              58
              
              
              -
              
              
              -
              
              
              -
              
              
              197Warrant
                  issued for vendor settlement
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              54,982
              
              
              -
              
              
              -
              
              
              -
              
              
              54,982Warrant
                  issued with promissory notes
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              7,262
              
              
              -
              
              
              -
              
              
              -
              
              
              7,262Common
                stock and warrants issued forProduction
                  suite charges (includes warrants to purchase 73,674 shares at $11.25
                  per
                  share)
              
              
              363,360
              
              
              364
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,422,475
              
              
              -
              
              
              -
              
              
              -
              
              
              1,422,839Placement
                  agent fees
              
              
              113,147
              
              
              113
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              424,187
              
              
              -
              
              
              -
              
              
              -
              
              
              424,300Hapto
                  acquisition (includes warrants to purchase 200,000 shares at $4.50
                  per
                  share)
              
              
              2,031,119
              
              
              2,031
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              10,692,540
              
              
              -
              
              
              -
              
              
              -
              
              
              10,694,571Common
                  stock issued upon conversion of 323.4008 shares of Series D preferred
                  stock
              
              
              86,240
              
              
              86
              
              
              -
              
              
              -
              
              
              (820,428
              )
              
              -
              
              
              -
              
              
              820,342
              
              
              -
              
              
              -
              
              
              -
              
              
              -April
                  2006 private placementIssuance
                  of 6,176 shares of Series E preferred stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              6
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              6Bridge
                  loan converted into 301.333 shares of Series E preferred
                  stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Dividends
                  on Series E preferred stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              151,035
              
              
              -
              
              
              (151,035
              )
              
              -
              
              
              -
              
              
              -Conversion
                  of 6,176 Series E preferred
              
              
              2,822,078
              
              
              2,822
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (151,041
              )
              
              148,219
              
              
              -
              
              
              -
              
              
              -
              
              
              -Fair
                  value of warrants reclassified as liabilities
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (11,951,000
              )
              
              -
              
              
              -
              
              
              -
              
              
              (11,951,000
              )Reduction
                  of warrant liability
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              5,736,591
              
              
              -
              
              
              -
              
              
              -
              
              
              5,736,591Modifications
                  of Series E and F warrant prices
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              277,972
              
              
              (277,972
              )
              
              -
              
              
              -
              
              
              -Transfer
                  of Preferred stock series: D to D-1
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (15,090,903
              )
              
              15,090,903
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Retirement
                  of treasury shares
              
              
              (134
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (177,645
              )
              
              -
              
              
              177,645Share-based
                  compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              41,200
              
              
              -
              
              
              -
              
              
              -
              
              
              41,200Share
                  issuance expenses
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (57,118
              )
              
              -
              
              
              -
              
              
              -
              
              
              (57,118
              )Shares
                  issued pursuant to deferred compensation plan
              
              
              1,333
              
              
              1
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              415
              
              
              -
              
              
              -
              
              
              (416
              )
              
              -Restricted
                  share awards
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              165,000
              
              
              -
              
              
              -
              
              
              (165,000
              )
              
              -Amortization
                  of deferred compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              334,678
              
              
              334,678Adjustment
                  for one for fifteen reverse stock split
              
              
              523
              
              
              1
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (18,000,091
              )
              
              -
              
              
              -
              
              
              (18,000,091
              )Balance
                  at December 31, 2006
              
              
              8,963,870
              
              $
              8,964
              
              
              -
              
              
              -
              
              
              -
              
              $
              15,090,903
              
              
              -
              
              $
              121,656,536
              
              $
              (179,068,293
              )
              
              -
              
              $
              (293,183
              )
              $
              (42,605,073
              )
 
 F9
  FORTICELL
          BIOSCIENCE, INC.
 (A
          DEVELOPMENT STAGE ENTERPRISE)
 
 **CONSOLIDATED
          STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)**
 Deficitaccumulated
              
              Accumulated
              
              
              
              TotalAdditional
              
              during
                  the
              
              other
              
              
              
              shareholders’Common
                  stock
              
              Preferred
                  stock series
              
              paid-in
              
              development
              
              comprehensive
              
              Deferred
              
              equityShares
              
              Amount
              
              A
              
              A-1
              
              A-2
              
              D-1
              
              capital
              
              stage
              
              income
                  (loss)
              
              compensation
              
              (deficit)Balance
                  at December 31, 2006 (brought forward)
              
              
              8,963,870
              
              
              8,964
              
              
              -
              
              
              -
              
              
              -
              
              
              15,090,903
              
              
              121,656,536
              
              
              (179,068,293
              )
              
              -
              
              
              (293,183
              )
              
              (42,605,073
              )Comprehensive
                  income:Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              19,955,482
              
              
              -
              
              
              -
              
              
              19,955,482Foreign
                  currency translation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (9,829
              )
              
              -
              
              
              (9,829
              )Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              19,945,653Share-based
                  compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              271,407
              
              
              -
              
              
              -
              
              
              -
              
              
              271,407Common
                  stock and 250,000 stock options paid to directors
              
              
              110,000
              
              
              110
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              61,915
              
              
              -
              
              
              -
              
              
              -
              
              
              62,025Series
                  A Financing - gross proceeds-
                  A:1,191.668 shares , A-1 & A-2: 500 shares each @ $10,000, $11,000,
                  and $4,100, ,respectively per share
              
              
              -
              
              
              -
              
              
              11,916,680
              
              
              5,500,000
              
              
              2,050,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              19,466,680-
                  Value of attached series A: 11,916,680, M: 15,466,680 , and M-1:
                  7,733,340
                  warrants
              
              
              -
              
              
              -
              
              
              (3,789,566
              )
              
              -
              
              
              -
              
              
              -
              
              
              3,789,566
              
              
              -
              
              
              -
              
              
              -
              
              
              --
                  Placement, professional, and other fees
              
              
              -
              
              
              -
              
              
              (1,463,014
              )
              
              (6,300
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,469,314
              )-
                  Subscriber note receivable for 4 shares
              
              
              -
              
              
              -
              
              
              (40,000
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (40,000
              )-
                  Accretion of discount related to Series A and A-1 preferred
                  stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              5,231,744
              
              
              (5,231,744
              )
              
              -
              
              
              -
              
              
              --
                  Series A warrants issued in connection with bridge financing to
                  purchase
                  2,899,000 shares
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,003,747
              
              
              -
              
              
              -
              
              
              -
              
              
              1,003,747-
                  Series A: 9.913 shares to settle prior liabilities
              
              
              -
              
              
              -
              
              
              71,840
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              71,840Warrants
                  and options issued in connection with cancellation Agreement for
                  former
                  officers:-
                  Five-year warrants to purchase 4,157,617 shares
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,855,515
              
              
              -
              
              
              -
              
              
              -
              
              
              1,855,515-Issuance
                  of option to purchase 20 shares of series A preferred stock with
                  attached
                  warrants
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              198,000
              
              
              -
              
              
              -
              
              
              -
              
              
              198,000-Surrender
                  of options to purchase 508,909 shares
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (92,498
              )
              
              -
              
              
              -
              
              
              -
              
              
              (92,498
              )Equity
                  issued pursuant to advisory agreement:-
                  Warrants to purchase 2,000,000 shares
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              796,706
              
              
              -
              
              
              -
              
              
              -
              
              
              796,706-
                  Warrants to be exchanged for common stock
              
              
              931,032
              
              
              931
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              280,712
              
              
              -
              
              
              -
              
              
              -
              
              
              281,643Effect
                  of price reductions made to series H warrants
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,043,305
              
              
              (1,043,305
              )
              
              -
              
              
              -
              
              
              -Series
                  H warrants converted to common andseries
                  A warrants to purchase 365,192 shares
              
              
              2,002,444
              
              
              2002
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              242,485
              
              
              (244,487
              )
              
              -
              
              
              -
              
              
              -Share
                  vested pursuant to 2003 restricted share grant
              
              
              (35,127
              )
              
              (35
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (35
              )Legal
                  expenses incurred
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (12,056
              )
              
              -
              
              
              -
              
              
              -
              
              
              (12,056
              )Adjustment
                  for one for fifteen reverse stock split
              
              
              16
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Amortization
                  of deferred compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              212,854
              
              
              212,854Balance
                  at December 31, 2007
              
              
              11,972,235
              
              $
              11,972
              
              $
              6,695,940
              
              $
              5,493,700
              
              $
              2,050,000
              
              $
              15,090,903
              
              $
              136,327,084
              
              $
              (165,632,347
              )
              $
              (9,829
              )
              $
              (80,329
              )
              $
              (52,906
              )
 
 The
        accompanying notes are an integral part of these statements.
  F10
 
 FORTICELL
        BIOSCIENCE, INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
  Cumulative fromMarch 12, 1991(inception) toYear
                  ended December 31,
              
              December 31,2007
              
              2006
              
              2007Cash
                  flows from operating activitiesNet
                  loss
              
              $
              19,955,482
              
              $
              (18,000,091
              )
              $
              (142,662,535
              )Adjustments
                    to reconcile net loss to net cash used in operating
                    activitiesDepreciation
                  and amortization
              
              
              176,258
              
              
              202,600
              
              
              5,945,704Gain
                  on extinguishment of debt
              
              
              (35,527,695
              )
              
              -
              
              
              (35,527,695
              )Loss
                  on settlement of promissory notes
              
              
              -
              
              
              -
              
              
              13,081,453Cost
                  to terminate lease on New Jersey facility
              
              
              -
              
              
              -
              
              
              836,032Net
                  equity issuance pursuant to cancellation agreements
              
              
              1,961,017
              
              
              -
              
              
              1,961,017Amortization
                  of deferred compensation
              
              
              212,854
              
              
              334,678
              
              
              836,671Non-cash
                  equity compensation
              
              
              1,078,349
              
              
              -
              
              
              4,413,580Non-cash
                  interest
              
              
              1,799,745
              
              
              70,711
              
              
              3,853,679Non-cash
                  imputed interest
              
              
              4,951,000
              
              
              8,881,000
              
              
              38,966,586Non-cash
                  production suite charges
              
              
              -
              
              
              1,187,339
              
              
              1,422,839Share-based
                  compensation
              
              
              333,397
              
              
              41,200
              
              
              374,597Gain
                  on loan adjustment
              
              
              -
              
              
              -
              
              
              (236,000
              )Loss
                  on extinguishments of debt & series A preferred stock
              
              
              -
              
              
              -
              
              
              1,004,027Purchased
                  in-process research and development
              
              
              -
              
              
              11,073,743
              
              
              11,073,743Change
                  in fair value of warrants
              
              
              -
              
              
              (12,042,565
              )
              
              (12,042,565
              )Other
              
              
              -
              
              
              (6,710
              )
              
              33,121Change
                  in operating assets and liabilitiesOther
                  current assets and other assets
              
              
              (12,800
              )
              
              (480,547
              )
              
              (554,438
              )Accounts
                  payable and accrued liabilities
              
              
              (2,050,872
              )
              
              1,745,534
              
              
              4,742,023Net
                  cash used in operating activities
              
              
              (7,123,265
              )
              
              (6,993,108
              )
              
              (102,478,161
              )Cash
                  flow from investing activitiesPurchases
                  of property and equipment
              
              
              (97,880
              )
              
              (56,469
              )
              
              (4,768,226
              )Proceeds
                  from sale of property and equipment
              
              
              -
              
              
              -
              
              
              145,926Payments
                  for patent applications
              
              
              (38,550
              )
              
              (20,239
              )
              
              (1,128,662
              )Organization
                  costs
              
              
              -
              
              
              -
              
              
              (10,238
              )(Security
                  deposit) Security deposits refunded
              
              
              3,806
              
              
              (98,562
              )
              
              (885,029
              )Cash
                  paid for Hapto acquisition, net of $19,422 cash received
              
              
              -
              
              
              (204,402
              )
              
              (204,402
              )Purchases
                  of marketable securities
              
              
              -
              
              
              -
              
              
              (594,986
              )Sale
                  of marketable securities
              
              
              -
              
              
              -
              
              
              522,532Net
                  cash used in investing activities
              
              
              (132,624
              )
              
              (379,672
              )
              
              (6,923,085
              )Cash
                  flows from financing activitiesProceeds
                  from issuance of notes payable
              
              
              1,949,000
              
              
              1,750,000
              
              
              17,347,126Proceeds
                  from issuance of common stock
              
              
              -
              
              
              -
              
              
              61,701,458Proceeds
                  from exercise of warrants
              
              
              -
              
              
              197
              
              
              1,362,860Proceeds
                  from insurance premium financing
              
              
              138,000
              
              
              176,400
              
              
              814,400Share
                  issuance expenses and other financing costs
              
              
              (1,481,370
              )
              
              (57,119
              )
              
              (6,922,735
              )Purchase
                  of treasury stock
              
              
              -
              
              
              -
              
              
              (177,645
              )Proceeds
                  from issuance of loan payable
              
              
              -
              
              
              -
              
              
              1,446,229Proceeds
                  from obligation under revenue interest assignment
              
              
              -
              
              
              -
              
              
              10,000,000Proceeds
                  from issuance of convertible debentures
              
              
              -
              
              
              -
              
              
              5,908,000Proceeds
                  from issuance of preferred stock -Series
                  A
              
              
              8,381,975
              
              
              -
              
              
              9,581,975Series
                  B
              
              
              -
              
              
              -
              
              
              3,070,000Series
                  C
              
              
              -
              
              
              -
              
              
              5,690,000Series
                  E
              
              
              -
              
              
              5,526,829
              
              
              5,526,829Advances
                  received
              
              
              -
              
              
              -
              
              
              130,000Repayment
                  of insurance premium financing
              
              
              (138,000
              )
              
              (176,400
              )
              
              (814,400
              )Repayment
                  of capital lease obligations
              
              
              (7,020
              )
              
              (20,387
              )
              
              (612,201
              )Repayment
                  of loan payable
              
              
              (6,751
              )
              
              (41,635
              )
              
              (1,287,547
              )Repayment
                  of obligation under revenue interest assignment
              
              
              -
              
              
              -
              
              
              (11,414
              )Repayment
                  of notes payable
              
              
              -
              
              
              -
              
              
              (515,500
              )Repayment
                  of promissory notes
              
              
              (307,500
              )
              
              (440,000
              )
              
              (1,543,251
              )Net
                  cash provided by financing activities
              
              
              8,528,334
              
              
              6,717,885
              
              
              110,694,184*Effect
                  of exchange rate changes on cash and cash equivalents*
              
              
              16,311
              
              
              (7,455
              )
              
              8,857Net
                  Increase / (Decrease) in Cash And Cash Equivalents
              
              
              1,288,756
              
              
              (662,350
              )
              
              1,301,795CASH
                  AND CASH EQUIVALENTS:Beginning
                  of year
              
              
              13,039
              
              
              675,389
              
              
              -End
                  of year
              
              $
              1,301,795
              
              $
              13,039
              
              $
              1,301,795
  F11
 
 FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS (continued)**
  Cumulative
                FromMarch 12, 1991(inception)
                  toYear
                  ended December 31,
              
              December
                  31,2007
              
              2006
              
              2007Supplemental
                  disclosures of cash flow information:Non-cash
                  financing and investing activitiesAccounts
                  payable converted to preferred stock
              
              $
              71,840
              
              $
              -
              
              $
              71,840Accounts
                  payable converted to promissory notes
              
              
              -
              
              
              -
              
              
              837,468Advances
                  converted to promissory notes
              
              
              -
              
              
              -
              
              
              130,000Capital
                  lease obligations
              
              
              -
              
              
              -
              
              
              628,523Deferred
                  compensation
              
              
              -
              
              
              165,416
              
              
              917,000Deferred
                  offering costs included in accrued professional fees
              
              
              -
              
              
              -
              
              
              314,697Financings
                  costs - other long-term obligations
              
              
              -
              
              
              -
              
              
              59,500Forgiveness
                  of rent payable
              
              
              -
              
              
              -
              
              
              40,740Share
                  issuance expenses – warrants
              
              
              -
              
              
              -
              
              
              255,000Series
                  B dividends on preferred stock paid in common shares
              
              
              -
              
              
              -
              
              
              2,099,011Series
                  C dividends on preferred stock paid in common shares
              
              
              -
              
              
              -
              
              
              576,013Series
                  E dividends on preferred stock paid in common shares
              
              
              -
              
              
              151,035
              
              
              151,035Accretion
                  of discount on preferred stock and warrants
              
              
              5,231,744
              
              
              277,972
              
              
              18,519,411Series
                  B preferred stock converted to common stock
              
              
              -
              
              
              -
              
              
              270,859Series
                  C preferred stock exchanged for common stock
              
              
              -
              
              
              -
              
              
              3,529,289Series
                  D preferred stock issued in lieu of common stock
              
              
              -
              
              
              -
              
              
              12,343,679Series
                  D preferred stock converted to common stock
              
              
              -
              
              
              820,428
              
              
              820,428Series
                  D preferred stock exchanged for series D-1 preferred stock
              
              
              -
              
              
              15,090,903
              
              
              15,090,903Series
                  E preferred stock converted to common stock
              
              
              -
              
              
              151,041
              
              
              151,041Share
                  issuance expenses for preferred stock incurred through issuance
                  of
                  warrants - Series B
              
              
              -
              
              
              -
              
              
              391,307-
                  Series C
              
              
              -
              
              
              -
              
              
              272,386Share
                  issuance of series D preferred stock in exchange from series B
                  preferred
                  stock
              
              
              -
              
              
              -
              
              
              2,628,602Promissory
                  notes -Repaid
                  with common stock
              
              
              -
              
              
              -
              
              
              13,112,626Interest
                  payable thereon paid in common stock
              
              
              -
              
              
              -
              
              
              658,776Forgiven
                  for warrant participation
              
              
              -
              
              
              -
              
              
              100,000Repaid
                  with preferred stock
              
              
              2,701,500
              
              
              250,000
              
              
              2,951,500Revenue
                  interest assignment obligation paid with preferred shares
              
              
              7,550,000
              
              
              -
              
              
              7,550,000Warrant
                  issued in connection with lease
              
              
              -
              
              
              -
              
              
              18,500Warrant
                  issued in connection with liability settlement
              
              
              -
              
              
              54,982
              
              
              54,982Warrants
                  exchanged for common stock and warrants
              
              
              1,287,792
              
              
              -
              
              
              1,287,792Common
                  stock and warrants issued to settle liability
              
              
              -
              
              
              659,800
              
              
              659,800Treasury
                  shares retired
              
              
              -
              
              
              177,645
              
              
              177,645Conversion
                  of series C preferred stock into common stock
              
              
              -
              
              
              -
              
              
              137,645Contribution
                  of capital of amount due to founder
              
              
              -
              
              
              -
              
              
              398,967Equipment
                  transferred in satisfaction of deposit
              
              
              -
              
              
              -
              
              
              100,000Discount
                  on promissory notes
              
              
              -
              
              
              -
              
              
              1,033,202Cash
                  paid for interest
              
              $
              45,472
              
              $
              71,982
              
              $
              978,080Cash
                  paid for income taxes
              
              $
              -
              
              $
              -
              
              $
              203,411
  The
        accompanying notes are an integral part of these statements.
  F12




FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




**1
      - FORMATION OF THE COMPANY & BASIS OF PRESENTATION**





***Formation
      of the Company***





Forticell
      Bioscience, Inc. ("Forticell" or the "Company") was incorporated in March 1991
      as a Delaware corporation to secure and provide funds for the further
      development of the technology developed by Dr. Mark Eisenberg of Sydney,
      Australia, to replicate in the laboratory, a tissue engineered skin substitute
      for use in skin regeneration procedures (the "Technology"). Pursuant to a
      license agreement dated September 7, 1991, Dr. Eisenberg had granted us a
      license for a term of ten years, with automatic renewals by us for two
      additional ten-year periods, to commercially use and exploit the Technology
      for
      the development of products. In April 1998, Dr. Eisenberg assigned his patent
      for the Technology to us.





The
      Skin
      Group, Ltd. (the “Skin Group”) also was formed as a Delaware corporation in
      March 1991, to raise funds for the development of the Technology. On July 27,
      1992, the Skin Group was merged with and into Forticell. Owners of Skin Group
      shares were given .83672 of a Forticell share for each Skin Group share. The
      merger was accounted for as if it were a pooling of interests and, accordingly,
      the accompanying financial statements include the accounts of the Skin Group
      for
      all periods presented.





***Basis
      of Presentation***




We
      are a
      development stage enterprise which had no operating revenue prior to December
      2001. During 2001, we received Food and Drug Administration (FDA) approval
      for
      the use of the fresh form of our ORCEL product for the treatment of patients
      with recessive dystrophic epidermolysis bullosa and for donor sites in burn
      patients. We began marketing and selling our product for use on patients with
      one of these indications using a contract sales organization. Our sales and
      marketing efforts were active only for a brief period and accordingly our
      revenues were not significant. We terminated our sales efforts and elected
      to
      focus our attention on completing development of a cryopreserved form of our
      product for treatment of chronic wounds affecting larger patient populations.
      As
      a result, we completed a clinical trial during 2003 for the use of the
      cryopreserved form of ORCEL to treat venous stasis ulcers and filed an
      application for Pre-Market Approval (PMA) with the FDA in February 2004. In
      a
      letter dated April 25, 2005, the FDA determined that additional data would
      be
      necessary to confirm cryopreserved ORCEL’s effectiveness and safety treating
      venous stasis ulcers, although the FDA concluded that cryopreserved ORCEL showed
      promise for the effective treatment of venous stasis ulcers. The clinical data
      from the pivotal trial of 136 patients submitted to the FDA showed that in
      60
      patients who had typical venous ulcers (defined as those ulcers with partial
      or
      full-thickness skin tissue damage, in which the wound base is visible and the
      ulcer extends through the dermis but not into the subcutaneous tissue to fascia,
      muscle or bone), 59% of the ORCEL treated patients achieved wound closure versus
      36% of the patients who received the standard of care treatment. The FDA agreed
      that data of these 60 patients would be combined with that of the 60 patients
      to
      be enrolled in a confirmatory clinical trial and the combined results would
      be
      analyzed using Bayesian statistics. We obtained FDA approval for our
      confirmatory trial protocol in mid July 2005 and began the confirmatory trial
      in
      mid August 2005. In November 2006, we completed the confirmatory trial designed
      to confirm the superiority of cryopreserved ORCEL over the standard of care
      in
      the treatment of difficult-to-heal venous leg ulcers in comparison to the
      standard of care therapy. On February 26, 2007, we announced that we had
      initiated the filing of the supplement to our PMA application with the FDA
      requesting clearance to market our tissue engineered product, ORCEL, for the
      treatment of venous stasis ulcers, by submitting to the FDA the Chemistry,
      Manufacturing and Controls (CMC) section of the application. We filed the
      clinical section of the application, reporting the combined results of our
      two
      clinical trials, in October 2007. Such clinical section reported the results
      showing the effectiveness of our ORCEL product treating venous stasis ulcers
      as
      compared with the effectiveness of the current standard of care, the safety
      of
      using our product and the labeling we propose to use for our ORCEL product.
      The
      filings of these two sections are amendments to our PMA application filed in
      February 2004.  Our
      October 2007 filing is currently being reviewed by the FDA.





The
      accompanying financial statements have been prepared assuming that we will
      continue as a going concern. We recorded net income applicable to common
      shareholders of $13.4 million during the year ended December 31, 2007 because
      of
      our gain of $35.5 million on the early extinguishment of our revenue interest
      assignment obligation. Without such gain we would have incurred a net loss
      applicable to common shareholders of $22.1 million during this year. We have
      a
      deficit accumulated in the development stage of $166 million. These factors,
      among others, raise substantial doubt about our ability to continue as a going
      concern.


F13


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


Our
      cash
      on hand at December 31, 2007 of $1.3 million was sufficient to fund our
      operations through mid March 2008. On March 25, 2008 we received a loan of
      $150,000 and we will need additional loans for the weeks ahead to continue
      our
      operations until the 100 Day FDA letter (“FDA Letter”) commenting on our PMA
      application is received. We are currently having discussions with current
      shareholders and potential investors about possible financing alternatives,
      similar to the loan received on March 25, to continue our operations until
      the
      receipt of the FDA Letter (which we reported in a Form 8K report dated February
      29. 2008 was expected sometime in early 2008 but has not yet been received).
      Depending on the contents of the FDA Letter, we hope to raise at least an
      additional $3,000,000, and up to $4,000,000, after the FDA Letter is received
      to
      continue operations until a final determination about our ORCEL product is
      made
      by the FDA. Assuming an approval, we will then need to secure additional
      financing for our operations thereafter. See Note 17 regarding additional
      financing. We anticipate that at least a portion of the approximately 15,500,000
      Series M Warrants with a $0.50 exercise price, issued in June and July 2007
      and
      expiring thirty days after an announcement from us that FDA approval has been
      received, will be exercised in those thirty days and that the proceeds will
      allow us to continue operations until the completion of a new larger private
      placement or debt financing as soon as possible thereafter.





If
      we are
      not able to secure financing through the end of the FDA process and /or if
      we do
      not obtain FDA clearance for the sale of ORCEL in its cryopreserved form for
      the
      treatment of venous stasis ulcers, it may be difficult to impossible for us
      to
      raise capital to continue our business operations.





We
      currently incur costs of approximately $600,000 on a monthly basis. However,
      the
      amount of cash we consume each month fluctuates, depending, among other things,
      on whether we are incurring expenses for services provided by third party
      suppliers in connection with either clinical trial or contract manufacturing
      activities and what payments we have to make on our outstanding debt. We have
      determined that, if necessary, there are certain measures that we can take
      to
      reduce our monthly costs by approximately fifty percent if we think it is
      required to continue our operations.





As
      of
      December 31, 2007, we owed $1.75 million to trade creditors of which
      approximately $.4 million or 24% was owed to our contract manufacturer, Lonza
      Walkersville, Inc. (see Note 13). Of the remaining $1.35 million, payment of
      approximately $1.1 million was past due.





While
      we
      have arranged for payment of some of our obligations over a period of time,
      and
      have to make other payments of past due obligations to our current and ongoing
      suppliers, our ability to make payments we have agreed to pay and to ensure
      continued receipt of needed supplies, and to continue reducing our past due
      obligations, will depend on our ability to secure needed financing.





We
      hope
      to obtain additional funds through the sale of our securities to the public
      and
      through private placements, debt financing or other short-term loans. We may
      not
      be able to secure any future financing nor may we be able to reach the larger
      patient population markets of persons with venous stasis ulcers and diabetic
      foot ulcers, with funds that we may be able to raise. We are also likely to
      continue to encounter difficulties which are common to development stage
      companies, including unanticipated costs relating to development, delays in
      the
      testing of products, regulatory approval and compliance and
      competition.





Our
      capital funding requirements depend on numerous factors, including:





·
            the
                progress and magnitude of our research and development programs;


·
            the
                time involved in obtaining regulatory approvals for the commercial
                sale of
                our ORCEL product in its cryopreserved form to treat venous stasis
                ulcers
                and, later, diabetic foot ulcers;


·
            the
                costs involved in filing and maintaining patent claims;


·
            technological
                advances;


·
            competitive
                and market conditions;


·
            the
                successful implementation of the agreements we have entered into
                with
                Lonza for manufacturing of our ORCEL product;


·
            our
                ability to establish and maintain other collaborative arrangements,
                and


·
            arrangements
                we may make to market our ORCEL product for commercial sales and
                the cost
                and effectiveness of such
                arrangements.




F14


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


We
      believe that our cash and cash equivalents on hand at December 31, 2007, and
      the
      additional funds we will need to raise in 2008, may enable us to continue our
      operations for the next twelve months. The final determination from the FDA
      on
      our PMA application will greatly affect all our financing efforts. There can
      be
      no assurances that the FDA will approve our PMA application and even if it
      does
      that we can raise additional funds.





These
      financial statements have been prepared assuming that we will continue as a
      going concern. Successful future operations depend upon the successful
      development and marketing of our ORCEL product. Historically we have funded
      our
      operating losses by periodically raising additional sources of capital. If
      additional funding is not available to us when needed, we may not be able to
      continue operations. No adjustments have been made to the accompanying
      financials as a result of this uncertainty.





***Principles
      of Consolidation***





The
      consolidated financial statements include the accounts of the Company and its
      wholly owned subsidiary. All intercompany balances and transactions have been
      eliminated.





***Common
      Stock Reverse Split***





On
      June
      24, 2003, we effected a reverse stock split of our common shares outstanding,
      whereby every stockholder, warrant and option holder, was granted one new common
      share or warrant or option to purchase common shares, for every ten outstanding
      common shares (or its equivalent). The par value of the common shares remained
      unchanged at $.001 per share. The exercise prices of all warrants and options
      outstanding were adjusted as a result of this reverse split. The conversion
      rates of the preferred stock outstanding were also adjusted.





On
      July
      24, 2006, we effected another reverse stock split of our outstanding common
      stock, whereby every stockholder received one new share of common stock for
      every fifteen shares previously owned. All share and per share data in these
      financial statements have been adjusted to give effect to the reverse stock
      split. The par value of the common stock remained unchanged at $.001 per share.
      The exercise prices of all our warrants and options outstanding were adjusted
      as
      a result of this reverse split. The conversion rates of the preferred stock
      outstanding were also adjusted because of this reverse split.





***Reclassification***





Certain
      2006 amounts have been reclassified to conform with the 2007
      presentation.





**2
      - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





***Revenue
      Recognition***





Product
      revenue is recognized upon shipment of ORCEL when title and risk of loss pass
      to
      the customer, which occurs when the end user customer receives the product.
      Royalties from licensees will be based on third-party sales of licensed products
      and will be recorded in accordance with contract terms when third-party results
      are reliably measurable and collectibility is reasonably assured. Fees paid
      to
      us upon entering a license agreement are recognized when earned as defined
      by
      the terms of the agreement.





In
      accordance with EITF Issue No. 00-21, *Revenue
      Arrangements with Multiple Deliverables* ,
      we
      review each contract to determine if there are multiple revenue-generating
      activities that constitute more than one unit of accounting. Revenue is
      recognized for each unit of accounting based on revenue recognition criteria
      relevant to that unit. Up-front payments are deferred, if appropriate, and
      recognized into revenues over the obligation period.





***Research
      and Development Costs***





We
      are in
      the business of research and development and therefore, all research and
      development costs, including payments relating to products under development,
      research, consulting agreements and personnel costs, are expensed when
      incurred.


F15


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


Research
      and Development costs aggregated $4,226,051 and $8,179,780, for the years ending
      2007 and 2006, respectively. Research and Development costs are comprised of
      production and laboratory costs which are inclusive of clinical trial
      expenditures, rent, consulting, personnel, and depreciation and amortization
      expenses.





***Depreciation
      and Amortization***





Property
      and equipment are carried at cost, less any grants received for construction.
      In
      1996, we received a $400,000 grant toward the construction of our new laboratory
      and office facilities and we received an additional grant of $130,000 in 1998.





Office
      furniture and equipment and laboratory equipment are depreciated on the
      straight-line basis over the estimated lives of the assets (5 years). Leasehold
      improvements are amortized over the shorter of the term of the related lease
      or
      the life of the asset.





***Intangible
      Assets***





Our
      intangible assets consist of patent application costs. We amortize these
      separately identifiable assets over their estimated useful lives. Patent
      application costs relate to our U.S. patent application and application fees
      in
      foreign jurisdictions and consist of legal and other direct fees. The
      recoverability of the patent application costs is dependent upon, among other
      matters, obtaining further FDA approvals for the use of the underlying
      technology.





***Impairment
      of Long-Lived Assets***





We
      review
      long-lived assets, which consist of fixed assets and patent application costs,
      for possible impairment whenever events or changes in circumstances indicate
      that the carrying amount of an asset may not be recoverable. We have determined,
      based on estimated future cash flows, that no provision is necessary for the
      impairment of long-lived assets at December 31, 2007.





***Foreign
      Currency Translation***





We
      conducted some of our research and development at our laboratory in Sydney,
      Australia. However, because all Australian expenditures were funded from the
      United States, we determined that the functional currency of our Australian
      office was the U.S. dollar. As of December 31, 2002, we terminated all of our
      research and development activities at our laboratory in Sidney. Additionally,
      with the acquisition of Hapto Biotech in April 2006 we acquired an Israeli
      operating facility. Accordingly, current assets and current liabilities are
      remeasured into the functional currency using current exchange rates and
      non-current assets and liabilities are remeasured using historical exchange
      rates. Expense accounts are measured using the average rate in effect for the
      year.





***Use
      of Estimates***





In
      preparing financial statements in conformity with accounting principles
      generally accepted in the United States of America, management is required
      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, as well as the reported amounts of revenues and
      expenses during the reporting period. Actual results could differ from those
      estimates.





***Income
      Taxes***





Deferred
      tax assets and liabilities are recognized for the estimated future tax
      consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      bases. Deferred tax assets and liabilities are measured using enacted tax rates
      in effect for the years in which those temporary differences are expected to
      be
      recovered or settled. The effect on deferred tax assets and liabilities of
      a
      change in tax rates is recognized in income in the period that includes the
      enactment date. A valuation allowance is provided for as it is more likely
      than
      not that the deferred tax assets will not be realized.





In
      June
      2006, the Financial Accounting Standard Board (“FASB”) issued FASB
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
      interpretation of FASB Statement 109” (FIN 48), which prescribes a recognition
      threshold and measurement process for recording in the financial statements
      uncertain tax positions taken or expected to be taken in a tax return.
      Additionally, FIN 48 provides guidance on the derecognition, classification,
      accounting in interim periods and disclosure requirements for uncertain tax
      positions. The provisions of FIN 48 were effective for our fiscal year beginning
      January 1, 2007. FIN 48 did not have a material impact on our financial
      statements.


F16


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




***Cash
      and Cash Equivalents***





For
      purposes of the statement of cash flows, we consider all highly liquid debt
      instruments purchased with original maturities of three months or less to be
      cash equivalents. Cash equivalents consist principally of money market funds.
      The fair value of cash and cash equivalents approximates the recorded amount
      because of the short-term maturity of such instruments.





***Net
      Income (Loss) Per Share***





Net
      income (loss) per common share is based on the weighted-average number of common
      shares outstanding during the periods.





Basic
      net
      income (loss) per share is computed by dividing the net income (loss)
      attributable to common shareholders by the weighted-average common shares
      outstanding for the period. Diluted net income (loss) per share reflects the
      weighted-average common shares outstanding plus the potential dilutive effect
      of
      securities or contracts which are convertible to common shares, such as options,
      warrants and convertible preferred stock. Basic
      and diluted net income (loss) per share includes warrants to purchase 978,600
      and 811,333 shares of common stock at December 31, 2007 and 2006, respectively,
      exercisable at prices ranging from $0.01 to $.015 per share reflected as
      outstanding from the date of grant. For the year ended December 31, 2007, we
      included in diluted earnings per share an aggregate of 36,419,657 common shares
      upon conversion of outstanding preferred stock, as well as 98,210 shares
      issuable upon exercise of stock options whose prices are below the average
      market prices during the period they were outstanding in 2007. In addition,
      we
      added back $5,231,744 of deemed dividends on preferred stock for the year ended
      December 31, 2007 in calculating diluted earnings per share.





Options
      and warrants to purchase shares of common stock, except as otherwise noted
      above, were not included in the computation of diluted net income (loss) per
      share in each of the years presented because to do so would have been
      antidilutive for the periods presented.





The
      amount of options and warrants excluded are as follows:





Year ended December 31,2007
            
            2006Warrants
            
            
            50,200,752
            
            
            4,918,496Stock
                Options – in plan
            
            
            3,143,493
            
            
            82,731Stock
                Options – outside of plan
            
            
            6,667
            
            
            515,576




Additionally,
      the effect of conversion of our preferred stock at December 31, 2006 was
      excluded from the weighted average share calculation, as the effect would be
      antidilutive. An aggregate of 1,586,297 shares of common stock would have been
      issuable upon conversion of the preferred stock outstanding at December 31,
      2006.


F17


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


***Share
      Based Compensation***





Effective
      January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS)
      No. 123 (revised 2004), “Share-Based Payment,” (SFAS 123(R)) using the modified
      prospective method of adoption. SFAS 123(R) requires companies to recognize
      compensation expense for an amount equal to the fair value of the share-based
      award issued. Under the modified prospective method, financial statement amounts
      for prior periods have not been restated to reflect the fair value method of
      recognizing compensation cost relating to stock options.





Prior
      to
      the adoption, we accounted for stock option plans under the recognition and
      measurement principles of Accounting Principles Board No. 25 “Accounting for
      Stock Issued to Employees” (APB 25). Compensation expense was not recognized for
      employee stock options because they were granted with strike prices that were
      not less than the fair market value of our stock on the date of the grant.
      Compensation expense was recorded for other share-based payments primarily
      including performance shares and deferred compensation.





The
      weighted average grant-date fair value of stock options granted during the
      years
      ended December 31, 2007 and 2006 was estimated at $0.44 and $0.64, respectively
      using the Black-Scholes option-pricing model. This model used the following
      assumptions:





2007
            
            2006Dividend
                yield
            
            
            0.00
            %
            
            0.00
            %Volatility
            
            
            90
            %
            
            86
                - 88
            %Risk-free
                rate of return
            
            
            3.88-
                4.27
            %
            
            4.41-
                5.01
            %Expected
                life
            
            
            3-5
                years
            
            
            5
                years




The
      fair
      value of each of our stock option awards is expensed on a straight-line basis
      over the vesting period of the options, which is generally four years. Expected
      volatility is based on the historical volatility of our stock with reasonable
      assumptions regarding projected future events. The risk-free rate of interest
      for periods within the contractual life of the stock option award is based
      on
      the yield curve of a zero-coupon U.S. Treasury bond on the date the award is
      granted with a maturity equal to the expected term of the award. We use
      historical data to estimate forfeitures within our valuation model. The expected
      life of our stock option awards is derived from historical experience and
      represents the period of time that awards are expected to be outstanding. There
      remains approximately $591,000 of unrecognized compensation cost from stock
      options already granted under the plan, which is related to unvested shares
      and
      is being recognized over the required service period, generally four
      years.





For
      stock
      warrants or options granted to non-employees we measure fair value of the equity
      instruments utilizing the Black Scholes method if that value is more reliably
      measurable than the fair value of the consideration or the service received.
      We
      amortize such cost over the related period of service.





***Effect
      of New Accounting Standards***





In
      December 2007, the FASB issued SFAS No. 141(R). SFAS 141(R) expands the
      definition of a business combination and requires acquisitions to be accounted
      for at fair value. These fair value provisions will be applied to contingent
      consideration, in-process research and development and acquisition
      contingencies. Purchase accounting adjustments will be reflected during the
      period in which an acquisition was originally recorded. Additionally, the new
      standard requires transaction costs and restructuring charges to be expensed.
      SFAS 141(R) is effective for us for acquisitions closing during and subsequent
      to the first quarter of fiscal 2009. We are currently assessing the impact
      of
      SFAS 141(R) on our results of operations, financial condition and cash
      flows.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 permits
      companies the option, at specified election dates, to measure financial assets
      and liabilities at their current fair value, with the corresponding changes
      in
      fair value from period to period recognized in the income statement.
      Additionally, SFAS 159 establishes presentation and disclosure requirements
      designed to facilitate comparisons between companies that choose different
      measurement attributes for similar assets and liabilities. SFAS 159 is effective
      starting on January 1, 2008, with an early adoption date of January 1, 2007.
      We
      are currently assessing the impact of SFAS 159 on our results of operations,
      financial condition and cash flows.


F18


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
      157). SFAS 157 establishes a framework for measuring fair value that is based
      on
      the assumptions market participants would use when pricing an asset or liability
      and establishes a fair value hierarchy that prioritizes the information to
      develop those assumptions. Additionally, the standard expands the disclosures
      about fair value measurements to include disclosing the fair value measurements
      of assets or liabilities within each level of the fair value hierarchy. SFAS
      157
      is effective starting on January 1, 2008, with an early adoption date of January
      1, 2007. We are currently assessing the impact of SFAS 157 on our results of
      operations, financial condition and cash flows.





**3
      - CONCENTRATION OF CREDIT RISK**





We
      maintain cash and money market accounts primarily at two financial institutions
      located in New York City. The FDIC insures cash accounts for amounts up to
      $100,000. At times, our balances exceed such FDIC limits. We have not
      experienced any losses in such accounts.





**4
      - PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS**





On
      April
      14, 2006, we closed our acquisition of Hapto Biotech (Hapto), a privately-held
      company focused on the development of two proprietary fibrin derived platform
      technologies: Fibrin Micro Beads (FMB’s) and Fibrin based peptides, (HaptidesTM).
      Hapto’s research indicates that FMB’s have the ability to optimize the recovery,
      potential delivery and therapeutic value of adult stem cells. In October 2004,
      we initiated our relationship with Hapto by forming a joint venture to combine
      our proprietary collagen biomaterial technology and Hapto’s HaptideTM peptide
      technology to develop non cellular, biologically active enhanced biomaterials
      to
      promote the attraction and attachment of cells for wound healing,
      reconstructive, cosmetic, tissue regeneration and dental applications. Both
      of
      these technologies were early stage nascent technologies which we purchased
      understanding that additional research and development investment was necessary
      (pre-clinical efficacy studies are still in process). We believed that the
      Haptides and the FMB’s will eventually produce some long term licensing
      opportunities in the areas enumerated above. The sole purpose of the acquisition
      was to acquire the technologies. The acquisition essentially consisted of a
      few
      patents covering the formulation of the FMB’s and HaptidesTM , minimal bench
      laboratory equipment, and three full time employees consisting of one scientist
      and two lab technicians. We determined that there was minimal value associated
      with the acquired patents due to the early stage of the technology. Additionally
      we believed that the acquired employees knowledge was transferable and our
      continuing research and development would be supervised by our Chief Scientist
      and other Forticell employees. We believe that due to the early stages of the
      development of Hapto’s technology, that the Hapto assets we acquired do not
      constitute a business. In addition, at the date of acquisition, the
      technological feasibility of the acquired technology had not yet been
      established and the technology has no future alternative uses. For such
      acquisition we issued a net total of 2,031,119 shares (net of 26,214 shares
      of
      common stock returned from escrow) of our common stock to the Hapto shareholders
      and granted them warrants to purchase an additional 200,000 shares of our common
      stock at $4.50 per share. On May 3, 2006, 26,214 shares of our common stock
      was
      returned from escrow by certain former shareholders of Hapto Biotech, Inc.
      because of $126,614 of legal expenditures we paid which were owed by Hapto,
      and
      which Hapto and we agreed exceeded the permitted amount of Hapto liabilities
      surviving our acquisition of Hapto. The investment banking firm of Rodman and
      Renshaw, LLC (R&R) acted as our advisor in this acquisition. R&R
      received three-year warrants to purchase 266,667 shares of our common stock
      at
      $4.50 per share for their advisory services. Based on the market price of our
      common stock on April 14, 2006, and valuing the warrants we issued to Hapto’s
      shareholders as well as those issued to our investment advisor using the Black
      Scholes formula, the purchase price for Hapto was $10,694,571. The purchase
      price allocation which includes the purchase price of $10,694,571; together
      with
      legal and other charges of $223,824, and negative goodwill of $155,348, for
      a
      total of $11,073,743, was recorded as purchased in-process research and
      development, and accordingly, expensed immediately. The Black Scholes model
      used
      to calculate the value of the warrants to the Hapto shareholders and R & R
      utilized the following factors: a three year term, risk-free rate of 3.73%,
      86%
      volatility and no dividend yield. In connection with this acquisition we
      contract certain research services from Hadasit Medical Research Services and
      Development Ltd. (Hadasit). One of our directors, serves as managing director
      of
      Hadasit. Hadasit billed us approximately $101,000 and $157,000 for these
      research services in 2007 and 2006, respectively. Of this amount, $110,216
      was
      due Hadasit at December 31, 2007.




F19


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**5
      - PROPERTY AND EQUIPMENT**





Property
      and equipment consist of the following at December 31, 2007:





Laboratory
                equipment
            
            $
            1,872,207Office
                furniture and equipment
            
            
            1,414,236Leasehold
                improvements
            
            
            1,158,0894,444,532Accumulated
                depreciation and amortization
            
            
            4,244,260$
            200,272





Depreciation
      and amortization expense for the years ended December 31, 2007 and 2006 was
      approximately $75,000 and $107,000, respectively.





As
      of
      December 31, 2007 and 2006 included above was $543,000 in equipment purchased
      under capital leases and $541,000 and $538,000 in accumulated amortization,
      respectively.





**6
      - PATENTS**





Patent
      application costs are stated at cost less amortization computed by the
      straight-line method over the useful life of the patent. As of December 31,
      2007
      patents, net of accumulated amortization, were as follows:





ExpirationPatents subject to Amortization
            
            DateComposite
                Culture Skin (CCS)
            
            2/1/2011
            
            $
            1,005,273Manufacturing
                of Bi-layered Collagen Sponge
            
            12/28/2020
            
            
            33,761Cryopreservation
                Process
            
            12/26/2021
            
            
            91,4071,130,441Accumulated
                amortization
            
            
            
            
            721,361$
            409,080





Amortization
      expense for the years ended December 31, 2007 and 2006, was $101,000 and
      $96,000, respectively. The estimated annual amortization expense expected,
      based
      on current intangible balances, for the years 2008 through 2011 is approximately
      $104,000 per year.





Our
      U.S.
      patent for CCS was issued in 1994. During 2002 and 2003 we were issued two
      patents by the United States Patent Office. The first patent covers unique
      manufacturing processes for our tissue-engineered product, ORCEL. These
      processes specifically relate to the manufacturing of our bi-layered collagen
      sponge structure and when implemented, can reduce the current manufacturing
      costs of ORCEL. This patent was issued on December 31, 2002. The second patent
      covers the freezing process for ORCEL. This process, referred to as
      cryopreservation, gives our product a minimum shelf life of seven months, as
      opposed to only a few days when our product is not cryopreserved. This second
      patent was issued on October 28, 2003.





There
      can
      be no assurance that any patent will provide commercial benefits to us. We
      have
      determined that no provision for impairment is necessary at December 31,
      2007.


F20


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**7
      - ACCOUNTS PAYABLE AND ACCRUED EXPENSES**





Accounts
      payable and accrued expenses consist of the following at December 31,
      2007:





Accounts
                payable
            
            $
            1,753,431Accrued
                cancellation agreement payouts (note 9)
            
            
            400,000Accrued
                compensation
            
            
            103,000Accrued
                professional fees
            
            
            115,145Accrued
                expenses
            
            
            236,440Due
                to Hadasit (note 4)
            
            
            110,216Deferred
                income (note 13)
            
            
            50,000$
            2,768,232





Included
      in accounts payable is $427,576 due to Lonza related to our Cell Therapy
      Manufacturing Agreement, see Note 13.





**8 –
      HISTORICAL FINANCING TRANSACTIONS**





Each
      share of our common stock is entitled to one vote.





**Authorized
      shares:** In
      September 2001, we, with shareholder approval, increased the authorized amount
      of our common stock to 35,000,000 shares and authorized the issuance of up
      to
      1,000,000 shares of preferred stock. In February 2003, we, with shareholder
      approval, increased the authorized amount of our common stock to 200,000,000
      shares. In December 2007, we, with shareholder approval, increased the
      authorized amount of our common stock to 300,000,000 shares.





**Founders:** Pursuant
      to an agreement between Dr. Eisenberg and the other founders (the “Other
      Founders”), a business relationship was formed by the founders for the
      manufacture and sale of products derived from the Technology (the “Business
      Agreement”). Under the terms of the Business Agreement, Dr. Eisenberg, who was
      the owner of all of our capital stock (4,000 shares) agreed to license the
      Technology to us and sell 70% of our shares for a purchase price of $1,000,000
      to the Skin Group. Dr. Eisenberg was paid $85,000 in connection with this
      agreement as reimbursement for his expenses ($35,000 during the period from
      inception (March 12, 1991) to December 31, 1991 and $50,000 during the year
      ended December 31, 1992). The Other Founders initially owned all of the stock
      of
      the Skin Group (6,358 shares). On July 27, 1992, the Skin Group was merged
      with
      and into Forticell.





**First
      private placement:** In March
      1991, the Skin Group issued, in a private placement, 1,450 shares for $65,000.
      In June and October 1991, the Skin Group issued an aggregate 994 shares, to
      a
      then director of ours (the “Director”) for aggregate gross proceeds of $250,000.





**Second
      private placement:** Commencing in November 1991, the Skin Group issued 530 shares under a second
      private placement for $750,006. The 530 shares consisted of 354 shares issued
      during 1991 and 176 issued shares during 1992 for $500,000 and $250,006,
      respectively. Under the second private placement an additional 152 of our shares
      were issued for $215,467. In addition, the Director was granted warrants to
      purchase 49 of our shares at $1,413.75 per share.





**Stock
      purchase agreement entered into with the Director:** In June
      1992, 354 of our shares were sold to the Director for a total purchase price
      of
      $499,998. The purchase price was payable in installments and shares and warrants
      were issued in installments pro rata with the payment of the purchase price.
      During the years ended December 31, 1992 and 1993, the Director paid $299,998
      and $200,000, respectively, and was issued 212 and 142 shares, respectively.
      In
      addition, the Director was granted warrants to purchase 531 shares (319 and
      213
      of which were granted in 1992 and 1993, respectively) at an exercise price
      of
      $1,413.75 per share; such warrants were exercised on December 29,
      1998.





Further,
      in connection with the Director’s purchase of the 354 shares, in 1993, the Other
      Founders granted to the Director options to purchase from them an aggregate
      of
      494 of our shares, at a price of $750 per share. In 1993, the Director exercised
      such option in part, and purchased 327 shares from the Other Founders at the
      option price of $750 per share. The remaining balance of such options expired
      April 15, 1994.


F21


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**Third
      private placement:** Pursuant
      to a third private placement that commenced on January 13, 1993, and concluded
      on March 31, 1993, we sold an aggregate of 731 shares at $1,500 per share for
      $1,096,500. Subsequent to such offering, in 1993, we sold an additional 150
      shares at $1,500 per share for $225,000. In connection with such purchases,
      all
      purchasers received certain registration rights.





**Stock
      purchase agreement with Home Insurance Company dated July 19,
      1993:** Pursuant
      to a Stock Purchase Agreement dated July 19, 1993, by and between us and the
      Home Insurance Company (Home Insurance), we sold to Home Insurance 741 shares
      of
      common stock for an aggregate purchase price of $999,999, or $1,350 per share.
      In connection with such purchase, Home Insurance received certain registration
      rights.





**Shares
      issued in exchange for commission:** In 1993,
      we issued 4 shares to an individual as compensation for commissions in
      connection with the sale of our shares. Such commissions are included in share
      issuance expenses. The stock issued was valued at $1,500 per share.





In
      August
      1993, the Director entered into a stock option agreement with Dr. Eisenberg
      and
      the Other Founders, pursuant to which he received the right to purchase an
      aggregate of 667 shares owned by such persons in various amounts and at various
      times, at a purchase price of $1,500 per share. As of December 31, 1993, the
      Director had exercised options and purchased 34 shares under such agreement
      at
      $1,500 per share. The remaining balance of such options has
      expired.





**Fourth
      private placement:** Pursuant
      to a fourth private placement consummated in July 1994, we sold an aggregate
      of
      263 shares at between $1,500 and $1,875 per share for aggregate proceeds of
      $397,712.





**Stock
      purchase agreement with Home Insurance dated July 22, 1994:** Pursuant
      to a Stock Purchase Agreement dated July 22, 1994, between Forticell and Home
      Insurance, we sold to Home Insurance 333 shares of common stock for an aggregate
      purchase price of $500,000, or $1,500 per share. In connection with such
      purchase, Home Insurance received certain registration rights and warrants
      to
      purchase 67 shares of common stock at $1,800 per share, which expired on July
      21, 1997.





**Rent
      forgiveness:** During
      the year ended December 31, 1995, Dr. Eisenberg’s father waived the rights to
      $40,740 of unpaid rent which was accounted for as additional paid-in
      capital.





**Initial
      Public Offering:** On
      January 19, 1996, we completed an initial public offering of 8,000 units for
      aggregate proceeds of $6,000,000. Each unit consisted of one share of our common
      stock, one Class A warrant to purchase one share of common stock at $1,500
      and
      one Class B warrant to purchase one share of common stock at $2,250. As of
      December 31, 1998, 7,225 Class A warrants were exercised and the balance expired
      unexercised. The Class B warrants were originally set to expire in January
      1999.
      We extended the expiration date to March 31, 2000. The Class B warrants were
      subject to redemption by us at $1.50 per warrant. We received gross proceeds
      of
      approximately $1,282,000 and $10,823,000 and net proceeds of approximately
      $1,262,000 and $10,165,000 as a result of the exercise of warrants in 1998
      and
      1997, respectively.




**Fifth
      private placement:** In
      November 1996, we completed a private placement of our securities from which
      we
      received gross proceeds of $6,220,797 and net proceeds of approximately
      $5,733,000 (after deducting approximately $487,000 in placement fees and other
      expenses of such private placement). We sold 6,394 shares of common stock in
      such private placement at average prices of $973.50 per share. In addition,
      we
      granted five-year warrants to placement agents to purchase such number of shares
      equal to 10% of the number of shares of common stock sold by such placement
      agents, exercisable at prices equal to 120% of the prices paid for such shares.
      Pursuant to the purchasers’ request, we registered all 6,394 shares.





**Options
      and warrants issued for services:** During
      1992 and 1993, we issued warrants to purchase 44 shares at $1,413.75 per share,
      and during 1995 we issued warrants to purchase 134 shares at $1,500 per share
      to
      members of our Scientific Advisory Board. During 1996 and 1997, we issued
      warrants to purchase 1,614 shares at $900 to $1,800 per share to the Director
      and certain others. These warrants expired at various dates through November
      2001.


F22


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


On
      January 20, 1996, we granted “lock-up warrants” entitling shareholders to
      purchase an aggregate of 2,594 shares of our common stock at a price of $150
      per
      share. All unexercised warrants expired on January 18, 2000. At different times
      during 1996, seven persons exercised such warrants and purchased 226 shares
      of
      common stock at the $150 per share exercise price. The issuance of such lock-up
      warrants was in consideration for such shareholders signing lock-up agreements
      agreeing not to sell or transfer shares of our common stock purchased at prices
      of $1,350 or more per share until January 20, 1997. At different times during
      the third quarter of 1997, eight persons exercised such warrants and purchased
      an aggregate of 141 shares of common stock at the $150 per share exercise price.
      During 1998, nine persons exercised such warrants and purchased an aggregate
      of
      641 shares of common stock at the $150 per share exercise price. During 1999,
      five persons exercised such warrants and purchased an aggregate of 94 shares
      of
      common stock at the $150 per share exercise price. There were no underwriting
      discounts or commissions given or paid in connection with any of the foregoing
      warrant exercises.




During
      the third quarter of 1997, we granted to one person and its seven designees
      four-year warrants to purchase an aggregate of 250 shares of common stock,
      at an
      exercise price of $1,800 per share. Such warrants were not exercisable until
      July 18, 1998 and were granted in consideration for consulting services rendered
      to us.





During
      the fourth quarter of 1997, we granted to one person and its six designees
      four-year warrants to purchase an aggregate of 250 shares of common stock,
      at an
      exercise price of $1,800 per share. Such warrants were not exercisable until
      July 18, 1998 and were granted in consideration for consulting services rendered
      to us.





During
      1998, warrants for 125 shares, mentioned in the two previous paragraphs, were
      exercised utilizing the cashless exercise option of the warrant agreement.
      We
      issued 42 shares upon this exercise.





During
      the third quarter of 1997, we granted to one person a one-year warrant to
      purchase an aggregate of 4 shares of common stock, at an exercise price of
      $1,800 per share. Such warrants were granted in consideration for consulting
      services rendered to us. The warrant was exercised during 1998.





We
      recorded consulting expense of approximately $65,000 as a result of these grants
      during the year ended December 31, 1998.





During
      the fourth quarter of 1997, we granted five-year warrants to our three executive
      officers to purchase an aggregate of 1,600 shares of common stock, at an
      exercise price of $1,800 per share. Such warrants were granted in consideration
      for services rendered to us. The exercise of such warrants was contingent upon
      the occurrence of certain events, which were considered probable at December
      31,
      1997. As of December 31, 1998, five of the six events had occurred so that
      1,233
      of those warrants became vested. As a result, we recorded compensation expense
      of approximately $80,000 in December 1997 and $1,185,000 for the year ended
      December 31, 1998. The balance of the warrants became vested upon the exercise
      of warrants owned by a director in December 1998 in accordance with the terms
      of
      certain compensation provisions as approved by our Board of
      Directors.





In
      consideration for services rendered by him as our director in the five-year
      period from 1992 to 1996 for which he never received compensation, we extended
      by one year to December 31, 1998 the expiration date of warrants owned by a
      director to purchase an aggregate of 580 shares, exercisable at $1,413.75 per
      share. As a result, we recorded compensation expense of approximately $420,000,
      during the fourth quarter of 1997. All of these warrants were exercised on
      December 29, 1998.





During
      the fourth quarter of 1998, we granted five-year options to our three executive
      officers to purchase an aggregate of 3,472 shares of common stock, at exercise
      prices ranging from $1,819.50 to $1,866 per share. The exercise of such options
      was contingent upon the occurrence of certain events. All of these options
      became vested upon the exercise of warrants owned by a director in December
      1998
      in accordance with the terms of certain compensation provisions as approved
      by
      our Board of Directors. As a result, we recorded compensation expense of
      approximately $495,000 in December 1998.





**Sixth
      private placement:** In
      December 1998, we completed a private placement of our securities from which
      we
      received proceeds of $2,000,000. In addition, we granted three-year warrants
      to
      the purchaser to purchase 334 shares at $1,800 per share. We sold 1,333 shares
      of common stock in such private placement. We allocated the $2,000,000 proceeds
      amongst the common stock and warrants based upon the relative fair market value
      of the stock at the date of issuance and the estimated fair value of the
      warrants using the Black-Scholes option pricing model. We assigned values to
      the
      common stock and warrants issued of $1,788,698 and $211,302,
      respectively.




F23


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**Seventh
      private placement:** In March
      1999, we completed a private placement of 2,594 shares of our common stock
      to
      twenty investors from which we received proceeds of $3,405,076. In addition,
      each investor also received a three-year warrant to purchase 20% of the number
      of shares of our common stock such investors purchased in such private
      placement. The prices at which such warrants were exercisable were $1,875 per
      share for one half, and $2,175 per share for the other half, of the number
      of
      shares issuable upon exercise of such warrants. We allocated the $3,405,076
      proceeds amongst the common stock and warrants based upon the relative fair
      market value of the stock at the date of issuance and the estimated fair market
      value of the warrants using the Black-Scholes option pricing model. We assigned
      values to the common stock and warrants issued to the investors of $3,168,785
      and $236,291, respectively. Oscar Gruss & Son, Incorporated (Gruss) acted as
      placement agent in such private placement. For its services as placement agent,
      we paid Gruss $272,406 and granted Gruss a five-year warrant to purchase an
      aggregate of 260 shares of our common stock at an exercise price of $1,575
      per
      share. The value assigned to the Gruss warrants was $232,000. Other share
      issuance costs amounted to $106,002.





**Eighth
      private placement:** In
      December 1999, we completed a private placement of 10,909 shares of our common
      stock to two institutional funds from which we received proceeds of
      approximately $9,000,000. Share issuance costs amounted to approximately
      $9,500.





**Ninth
      private placement:** In March
      2000, we completed a private placement of 444 shares of our common stock to
      one
      fund from which we received proceeds of approximately $1,000,000. In addition,
      we paid a placement agent who introduced us to the fund a fee of approximately
      $43,400 and granted such placement agent a five year warrant to purchase 18
      shares of our common stock at an exercise price of $2,250 per share. The value
      assigned to the warrant was $23,000, which was reflected as share issuance
      costs. Other share issuance costs amounted to $3,200.





**Tenth
      private placement:** In
      September 2000, we completed a private placement of 8,318 shares of our common
      stock to ten investors from which we received approximately $8,421,000. In
      addition, we paid the placement agent who introduced us to the investors a
      fee
      of approximately $525,400. Other share issuance costs amounted to approximately
      $46,500.





Options
      issued for services: In April 2001, we issued options to purchase 400 shares
      of
      our common stock, at $1,042.50 per share, to certain professionals. The
      estimated fair value of $188,080 for such options was charged to general and
      administrative expenses.





During
      2002, we completed a private placement with several investors, in which we
      raised cash proceeds of $8,200,000, issued convertible preferred shares, issued
      warrants to purchase common shares and granted common stock as dividends.





**Obligation
      under Revenue Interest Assignment:** On
      August 29, 2001, as amended February 2003, we entered into a Revenue Interest
      Assignment Agreement (RIAA) with Paul Royalty Fund L.P. (PRF). Such RIAA was
      to
      terminate on December 31, 2011. Under such agreement we were eligible to receive
      $10,000,000 during 2001. We received $6,000,000 during 2001 and the remaining
      $4,000,000 in January 2002.





In
      February 2003, PRF and we signed an amendment to the agreement, restating and
      updating certain provisions of the original agreement, including removing
      requirements for additional funding to be provided by PRF. In connection
      therewith, PRF purchased 50 shares of our Series B convertible preferred stock
      investing $500,000, and for which we issued to PRF 4,872 shares of our common
      stock and granted PRF warrants to purchase an aggregate of 3,334 shares of
      our
      common stock, at exercise prices of $225 per share for 1,667 shares and at
      $300
      per share for the other 1,667 shares. The February 2003 amendments to our
      agreements with PRF provided, among other things, for (a) the election of one
      director designated by PRF, (b) the right of one observer (other than such
      director) selected by PRF to attend and observe all meetings of our Board of
      Directors and (c) for us to use our best efforts to have independent directors
      who are acceptable to both us and PRF, including a director designated by PRF,
      as a majority of our Board of Directors.




In
      consideration for the $10,000,000, PRF would receive a minimum of 3.33% of
      the
      first $100,000,000 of annual sales, plus 1.99% of annual sales in excess of
      $100,000,000, of ORCEL in the United States, Canada and Mexico. The amounts
      received from PRF were classified as debt in accordance with our interpretation
      of Emerging Issues Task Force (EITF) Issues No. 88-18, “Sales of Future
      Revenue”. PRF bore the risk of revenue interest paid being significantly less
      than the current revenue interest obligation, as well as the reward of revenue
      interest paid to it being significantly greater than the current revenue
      interest obligation. Therefore we were under no obligation to make any other
      payments to PRF in the scenario when no repurchase right (as defined) was
      triggered and no significant interest payments are made. Conversely, we would
      be
      obligated to continue to make revenue interest payments in the scenario where
      sales are sufficiently high to result in amounts due under the RIAA being in
      excess of the current revenue interest obligation.


F24


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


We
      had
      granted PRF a security interest in our United States and Canadian patents and
      trademarks relating to our technology for our ORCEL product (collectively,
      the
“Pledged Assets”), to secure payments required to be made by us to PRF under
      this agreement. Pursuant to the default provisions of the agreement PRF could
      have required us to repurchase their revenue interest at the put option exercise
      price which is defined as a price which would yield an internal rate of return
      to PRF of 30%.





Additionally
      we agreed not to issue any new debt or equity securities that contain mandatory
      cash dividend or redemption provisions through the revenue interest period
      (ending December 31, 2011).





We
      also
      had the option to repurchase PRF’s interest upon the occurrence of a change in
      control of the Company or a complete divestiture by us of our interests in
      our
      products, for an amount of cash flows that would generate a 35% internal rate
      of
      return to PRF.




As
      described in Note 9, in the fourth quarter of 2006, we agreed on terms which
      were later incorporated into a January 29, 2007 agreement, amended June 18,
      2007
      (the Exchange Agreement) we entered into with Paul Royalty Fund L.P. (PRF)
      for
      the restructuring of our obligation under our RIAA.





**Series
      A Convertible Preferred Stock (old):** On June
      25, 2002, our board of directors unanimously adopted an amendment to our
      certificate of incorporation designating 2,000 shares out of the 1,000,000
      shares of preferred stock that we are authorized to issue, as Series A
      convertible preferred stock, and designating the relative rights and preferences
      of the Series A convertible preferred stock. The stated value, which is also
      the
      liquidation preference of the Series A convertible preferred stock, was **$** 10,000
      per share. We were required to pay dividends on the Series A preferred shares,
      at the rate of 6% per annum of the $10,000 liquidation preference per share,
      through June 30, 2003; at the rate of 9% per annum thereafter until June 30,
      2004; and thereafter at the rate of 12% per annum. At our option such dividends
      could be paid in our common stock at the “conversion price” for the conversion
      of such dividends if such shares of common stock had been registered under
      the
      Securities Act of 1933 for sale in the public securities markets. The conversion
      price was fixed initially at $225.00 per share of our common stock. There are
      no
      shares of this old Series A convertible preferred stock outstanding. In November
      2004, the designation establishing the rights and preferences of the old Series
      A convertible preferred stock was eliminated from our certificate of
      incorporation so that we are no longer authorized to issue any more old Series
      A
      convertible preferred stock.





**Series
      B Convertible Preferred Stock:** On
      November 7, 2002, our board of directors adopted an amendment to our certificate
      of incorporation designating 1,200 shares out of the 1,000,000 shares of
      preferred stock that we are authorized to issue, as Series B convertible
      preferred stock at a stated value of $10,000 per share. Dividends on the Series
      B preferred shares were payable at the rate of 12% per annum, in cash or shares
      of common stock, at our option, except that in the first year, dividends were
      payable, in advance, in shares of common stock. The
      Series B preferred stock was convertible into common shares at any time at
      the
      option of the investor, based on a fixed conversion rate of not less than $45,
      or commencing after February 1, 2003, based on an alternative conversion rate
      equal to 90% of the average of the five lowest volume weighted average prices
      for our common stock for the twenty trading days immediately prior to
      conversion, subject to a floor price of $37.50.





**Series
      C Convertible Preferred Stock:** On May
      23, 2003, our board of directors adopted an amendment to our certificate of
      incorporation designating 2,000 shares out of the 1,000,000 shares of preferred
      stock that we are authorized to issue, as Series C convertible preferred stock
      at a stated value of $6,000 per share. Dividends on the Series C preferred
      shares were payable at the rate of 10% per annum, in cash or shares of common
      stock, at our option.





The
      Series C preferred stock was convertible into common shares at any time at
      the
      option of the investor, based on a fixed conversion rate of $30 per share.





**Series
      B & C – Elimination of Designation** ***:*** On June
      16, 2005, the designations establishing the rights and preferences of our Series
      B and C convertible preferred stock, of which no shares were any longer
      outstanding, were eliminated from our certificate of incorporation so that
      we
      are no longer authorized to issue any more Series B or C convertible preferred
      stock.





F25


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE**)**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**Series
      D Convertible Preferred Stock:** On
      August 19, 2003, our board of directors adopted an amendment to our certificate
      of incorporation designating 2,000 shares out of the 1,000,000 shares of
      preferred stock that we are authorized to issue, as Series D convertible
      preferred stock at a stated value of $10,000 per share. In the event we declare
      a cash dividend on our common stock we will be required to pay a dividend on
      each share of our Series D preferred stock in an amount equal to the cash
      dividend paid on one share of our common stock multiplied by the number of
      shares of our common stock into which such one share of our Series D preferred
      stock can be converted.





Each
      holder of Series D preferred stock may, at such holder’s option, subject to
      certain limitations, elect to convert all or any portion of the shares of Series
      D preferred stock held by such holder into a number of fully paid and
      nonassessable shares of our common stock equal to the quotient of (i) the Series
      D liquidation preference ($10,000 per Series D preferred share) divided by
      (ii)
      the Series D conversion price of $37.50 per share. The conversion price is
      subject to customary adjustments to the Series D conversion price in the event
      of stock splits, stock combinations, stock dividends, distributions and
      reclassifications and other corporate events.





As
      later
      described below, on January 30 and 31, 2006, the holders of 5,948.6148
      outstanding shares of our Series D Convertible Preferred Stock entered into
      agreements with us agreeing to exchange all of their shares of our Series D
      Convertible Preferred Stock into an equal number of shares of our new Series
      D-1
      Convertible Preferred Stock.





**Issuance
      of 12% Convertible Debentures:** In
      March
      2002, we engaged an investment-banking firm to act as our advisor and to assist
      in raising capital for us in the form of either debt or equity
      financing.





On
      May
      13, 2002, we issued $2,333,000 of 12% convertible debentures, which were
      convertible into common shares at the lesser of $504 or the price per share
      of
      the equity securities to be issued in a subsequent financing. These debentures,
      payable April 10, 2003, bore interest at the rate of 12% per annum, up to
      October 10, 2002 and 18% thereafter. We also issued 1,940 stock purchase
      warrants as part of this May 13, 2002 financing, exercisable at $675 per share
      for up to five years from the date of grant. The warrants had price protection
      features whereby the price of the warrants can be reduced to the prices at
      which
      common stock or common stock equivalents are thereafter sold by us.





On
      June
      28, 2002, $600,000 of these debentures sold on May 13, 2002 were converted
      into
      old Series A preferred stock at 110% of face value. Additionally, on June 28,
      2002, we issued an additional $250,000 of 12% convertible debentures and
      $1,200,000 in old Series A convertible preferred stock. The total face value
      of
      the preferred stock issued was $1,870,000 which consisted of the $1,200,000
      of
      cash proceeds received, the $600,000 face value of converted debentures and
      the
      $70,000 of additional conversion face value. The old Series A preferred stock
      was convertible into common shares at a rate of $225 per share. The old Series
      A
      preferred stock had provisions whereby redemption was out of our control;
      therefore, the preferred stock was classified as temporary equity.





On
      June
      28, 2002, we also issued 4,364 common stock purchase warrants, at an exercise
      price of $281.30 per common share for a five-year period. Of the 4,364, an
      aggregate of 208 warrants were issued with the convertible debentures, with
      the
      remainder issued with the Series A preferred stock. The warrants also had
      similar price protection features, whereby the price of the warrants can be
      reduced to the prices at which common stock or common stock equivalents were
      thereafter sold by us.





During
      the third quarter 2002, we issued $1,425,000 in convertible debentures, with
      terms comparable to those issued in the second quarter. Additionally, 11,875
      warrants were issued with similar terms to warrants issued on May 13, 2002.
      In
      October and November 2002, prior to our Series B preferred stock financing,
      we
      issued an additional $1,900,000 in convertible debentures and 15,834 warrants,
      with terms comparable to those issued earlier in 2002.





We
      deferred the payment of interest due on June 30 and September 30, 2002, pending
      the completion of our Series B preferred stock financing. These debentures
      along
      with the accrued interest were convertible into equity securities if we
      completed the sale of at least $5,000,000 in equity securities by July 12,
      2002,
      which date was extended through November 13, 2002. On November 13, 2002, these
      debentures and accrued interest were converted into Series B preferred stock
      with the closing of the Series B preferred stock financing. These were converted
      at the rate of 110% of the debentures plus accrued interest into $10,000 par
      value Series B convertible preferred shares.





The
      relative estimated fair value of the warrants issued in connection with the
      debentures of $440,523 was recorded as debt discount, as well as the estimated
      fair value of the beneficial conversion features of $1,042,663. Both of these
      values were amortized over the remaining life of the convertible debentures,
      or
      through April 10, 2003. Upon conversion, the remaining unamortized beneficial
      conversion features were charged to interest expense.


F26


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


The
      relative estimated fair value of the warrants issued in connection with the
      Series A preferred stock of $559,289 was recorded as a discount to the preferred
      stock and was reflected as interest expense on the date of issuance.
      Additionally, the estimated fair value of the beneficial conversion feature
      of
      $1,097,886 has been recorded as an additional discount and reflected as interest
      expense. The old Series A preferred stock had no redemption date, and therefore
      the charge to interest expense was reflected immediately as the conversion
      privilege was exercisable immediately.





**First
      Sale of Series B Convertible Preferred Stock:** In
      November and December 2002, we issued 938.2742 shares of Series B convertible
      preferred stock to several investors in a private placement for an aggregate
      of
      $8,178,000, which included $1,070,000 of new Series B preferred stock and the
      conversion of the aforementioned convertible debentures and convertible Series
      A
      preferred stock. We recorded a loss on extinguishment of debentures and
      preferred shares of $1,004,027, principally due to the additional buying power
      granted to the investors resulting from the difference between the present
      value
      of the original debt and the revised present value. The convertible debentures
      and convertible Series A preferred stock were converted at 110% of face value
      plus accrued interest. In addition, these investors were granted old Series
      A
      warrants to purchase 62,552 shares of our common stock at an exercise price
      of
      $.15. These old Series A warrants vested immediately and were exercised
      immediately, upon grant. The investors were also granted Series B-1 and B-2
      warrants, which could be used to purchase 36,199 and 31,276 shares of common
      stock at an exercise price of $225 and $300 per share, respectively. These
      B-1
      warrants were exercisable beginning August 13, 2003 and expire seven years
      from
      the date of grant and the B-2 warrants were also exercisable beginning November
      13, 2003 and expire seven years from date of grant. We assigned values to the
      Series B preferred stock of $9,382,742 and the Series A (old), B-1 and B-2
      warrants issued to the investors of $2,245,206, $694,447 and $539,390, or
      $3,479,043 in the aggregate, based upon the relative fair market value of the
      stock at the date of issuance and the estimated fair market value of the
      warrants, using the Black-Scholes option pricing model.





The
      warrants issued with the second quarter and third quarter 2003 financings were
      exchanged for B-1 warrants, issued in the fourth quarter of 2003.





The
      first
      year’s dividends on the Series B preferred stock were paid in advance in common
      shares at the rate of 12% upon issue of the preferred shares and were to be
      paid
      semiannually in subsequent years, in either cash or common shares, at our
      election, until the preferred stock is converted to common shares. For the
      first
      year’ dividends totaling $1,125,559, paid in common stock, the investors were
      issued 25,021 shares of common stock, of which 19,566 shares were issued in
      November 2002 and 5,455 shares in January 2003.





In
      addition, certain of the investors were given options to purchase, for one
      year
      and for amounts ranging from 100% to 200% of their investments, additional
      shares of the Series B convertible preferred stock at the price paid for such
      stock by investors on November 13, 2002.




H.C.
      Wainwright & Company, Inc. (Wainwright) acted as placement agent in this
      private placement. For its services as placement agent, we paid Wainwright
      $601,490. Legal and other professional fees totaled $155,997. All but $136,046
      of the $755,487 aggregate costs was amortized to interest expense when the
      $5,908,000 convertible debentures and $1,200,000 of Series A preferred stock
      were converted to Series B preferred stock. In connection with such conversion
      to the Series B shares, we granted Wainwright and its agents warrants to
      purchase 53,333 and 33,333 shares of common stock, at an exercise price of
      $0.15
      and $225, respectively, exercisable immediately upon issue and August 13, 2003,
      respectively. These warrants expired on January 31, 2003 and will expire seven
      years from issue, respectively. In December 2002, we issued 2,352 shares of
      common stock upon exercise of the $0.15 warrants granted to Wainwright. The
      fair
      market value assigned to the Wainwright warrants was $280,000 and $24,615,
      or
      $304,615 in the aggregate, for the $0.15 warrants and the $225 warrants,
      respectively. Total share issuance costs were $866,612 inclusive of professional
      fees, the $136,046 referred to above fees paid to Wainwright, and the fair
      value
      of the aforementioned warrants. Issuance costs for the Series B preferred stock
      are reflected as a reduction of the proceeds from the sale of the preferred
      stock.


F27


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**Second
      Sale of Series B Convertible Preferred Stock:** In
      February 2003, we received gross proceeds of $2,000,000 from the sale of our
      Series B convertible preferred stock. We issued to such investors 200 shares
      of
      Series B convertible preferred stock, 19,487 shares of common stock (including
      6,154 shares of common stock constituting the first year's dividends on such
      200
      shares of Series B convertible preferred stock, which dividends were paid in
      advance, and 13,333 shares of common stock, which were issued upon exercise
      of
      old Series A warrants, exercised at $15 per share) and warrants to purchase
      an
      additional 13,334 shares of common stock, of which warrants to purchase 6,667
      (the B-1 warrants) shares were exercisable at $225 per share and warrants to
      purchase the other 6,667 (the B-2 warrants) shares were exercisable at $300
      per
      share. In May and June 2003, in conjunction with the conversion of virtually
      all
      of the Series B preferred stock and our reverse stock split, these B-1 and
      B-2
      warrants were amended and restated to provide for exercise prices of $60 and
      $75, respectively. PRF did not convert its 50 shares of Series B preferred
      stock
      on May 23, 2003 and, accordingly, the exercise price of its B-1 and B-2 Warrants
      were not amended and remained at their original exercise price of $225 and
      $300,
      respectively.





Wainwright
      acted as placement agent in this private placement and in addition to cash
      compensation, we granted warrants to purchase an aggregate of 2,513 shares
      of
      common stock, exercisable at $0.15 per share, to employees of the placement
      agent firm. The fair value of these warrants was $86,692. Total share issuance
      costs were $393,488 inclusive of professional and investment banking fees and
      the fair value of the aforementioned warrants. Issuance costs for the Series
      B
      preferred stock are reflected as a reduction of the proceeds from the sale
      of
      the preferred stock. **** During
      2004 certain of these warrants to purchase 2,164 shares of our common stock
      were
      exercised. We received $325.





Dividends
      were payable in cash or common shares at our option, at the rate of 12% per
      annum. An accrued dividend of $50,000 at December 31, 2004 was provided for
      within stockholders’ deficit, as it was our intention to issue common shares in
      payment of the dividend. These dividends were paid upon the conversion of the
      Series B preferred on January 5, 2005 as later described below.





**Sale
      of Series C Convertible Preferred Stock:**  In
      May
      and July 2003, we received gross proceeds of $5,690,000 from the sale of 948
      shares of Series C convertible preferred stock, issuing warrants to purchase
      113,800 shares of our common stock exercisable at $54 per share. Our Series
      C
      preferred stock had a stated value of $6,000 per share and was convertible
      into
      189,667 shares of common stock at $30 per share. In addition, in connection
      with
      the Series C financing, investors, other than Paul Royalty Fund, agreed to
      convert their Series B preferred shares into common shares or their equivalent.
      As a result, 605.389 shares of Series B preferred stock were converted into
      161,437 shares of common stock and 482.885 shares of Series B preferred stock
      were converted into an equal number of shares of Series D preferred stock (with
      a common stock equivalent of 128,769 shares). The Series D convertible preferred
      stock was non-redeemable and had a stated value of $10,000 per share. As part
      of
      the May 2003 Series C financing, employees of the investment-banking firm which
      arranged the Series C financing were granted warrants to purchase 9,968 shares
      of our common stock at an exercise price of $0.15 per share as part of their
      compensation. Accordingly, we recorded $269,000 in Series C preferred share
      issuance costs related to the warrants issued. Total share issuance costs were
      $797,327 inclusive of professional and investment banking fees and the fair
      value of the aforementioned warrants. **** Issuance
      costs for the Series C preferred stock are reflected as a reduction of the
      proceeds from the sale of the preferred stock.




Dividends
      were payable in cash or common shares at our option, at the rate of 10% per
      annum. An accrued dividend of $563,805 and $336,550 at December 31, 2004 and
      2003, respectively, was provided for within stockholders’ deficit. In January
      2005 we issued common shares in payment of these dividends.





Based
      on
      the relative fair market value of the preferred stock at the dates of issuance
      and the estimated fair market value of the warrants, using the Black-Scholes
      option pricing model, at December 31, 2003, we assigned values to the Series
      C
      preferred stock and the Series C warrants of $4,464,368 and $1,225,632,
      respectively. Similarly, we assigned values to the Series D preferred stock,
      based on values previously assigned to the Series B preferred stock.





Additionally,
      since the effective conversion price of the Series C preferred stock on the
      date
      of issuance was lower than the market value of the common shares on that date,
      we recognized $691,000 of additional discounts on the preferred issuances.
      This
      conversion feature was charged to retained earnings as accretion of
      discount.





In
      August
      2003, holders of 483 shares of Series B convertible preferred stock converted
      their shares into an equal number of shares of Series D convertible preferred
      stock.





In
      June
      and October 2004, a holder of 35.624 shares of Series C preferred stock with
      a
      value of $137,752, converted its shares into 7,125 shares of common stock.
      Additionally we issued 916 shares of our common stock valued at $30,099 as
      payment of dividends on the converted Series C preferred stock.


F28


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**





**Deemed
      Dividend:** In
      conjunction with these conversions, all Series B-1 and B-2 warrants were amended
      to provide for revised exercise prices of $60 and $75, respectively. Paul
      Royalty Fund did not exercise its right to convert its 50 shares of Series
      B
      preferred stock into common stock or its equivalent and as such, its B-1 and
      B-2
      warrants were not amended and remained at their original exercise prices of
      $225
      and $300, respectively. As a result of the change in the B-1 and B-2 warrants
      at
      May 23, 2003, we recognized a deemed dividend to investors of
      $519,000.





**Warrant
      issued for consulting services:** During
      July 2003, we granted a warrant to purchase 10,000 shares at an exercise price
      of $30 per share to a vendor in consideration for twelve months of consulting
      services. In accordance with the agreement, 50% of the shares, or 5,000 shares,
      vested immediately, with the balance vesting upon the six-month anniversary
      in
      January 2004. As a result, we recorded expense of $87,000 in 2003 and $94,393
      during 2004 representing the value of the additional 5,000 shares which had
      vested.





**Promissory
      note transactions:** In
      connection with the issuance of $9,776,626 of promissory notes to investors
      placed in 2003 and 2004, we paid our placement agent a fee equivalent to 3.33
      shares for every $1,000 of the promissory notes and recorded this as deferred
      debt issuance cost which was then amortized over the life of the note to
      interest expense. An aggregate of 32,589 shares were issued in 2004 consisting
      of 10,467 shares valued at $287,000 (in 2003) relating to notes placed in 2003
      and 22,122 shares valued at $746,202 relating to notes placed in
      2004.





On
      October 27, 2004 holders of $9,206,000 of investor promissory notes agreed
      to
      extend the maturity date of their notes from November 5, 2004 to December 31,
      2004. In consideration of this extension we increased the interest rate for
      the
      fourth quarter of the calendar year to 12% and issued 3,000 common shares for
      each $1,000,000 of principal amount held, or 27,618 common shares, which we
      issued in 2005. The modification was not considered significant and thus these
      shares were valued at $30 per share, or $828,540 in the aggregate, and was
      charged to interest expense in the fourth quarter. These shares were issued
      in
      2005 upon our confirmation of each noteholders’ accredited investor status. In
      connection therewith, we issued 18,468 shares of common shares and 34.31 shares
      of our Series D preferred stock (equivalent to 9,150 common
      shares).





As
      provided in the promissory notes, if we received $5,000,000 of gross proceeds
      from a qualified financing, we could elect to prepay the notes and any accrued
      and unpaid interest in cash or in our stock. See January 2005 private placement
      discussion below.





**Special
      warrant offer:** On
      November 16, 2004, we made a Special Warrant Offer (SWO) to all holders of
      our
      Series B-1, B-2 and C warrants. Such warrants were originally issued in
      connection with our Series B and C preferred stock financings in November and
      December 2002 and in February, May and July 2003 described above. At the time
      of
      the SWO there were outstanding and eligible for the SWO: 44,533 and 1,667 Series
      B-1 warrants exercisable to purchase our common stock at $60 and $225 per common
      share, respectively; 36,276 and 1,667 Series B-2 warrants exercisable to
      purchase our common stock at $75 and $300 per common share, respectively, and
      113,800 Series C warrants to purchase our common stock at $54 per common share.
      Under the terms of the SWO, the holders were entitled to purchase 1/3 of such
      shares they could otherwise purchase at a reduced exercise price of $25.05
      per
      common share. Concurrently with such exercise they would receive 2/9 of such
      shares they could otherwise purchase at the reduced exercise price of $0.15
      per
      common share, and they would surrender the right to purchase their remaining
      4/9
      of such shares they could otherwise purchase. Each warrant holder participating
      in the SWO received a new warrant to purchase 30% of the common shares acquired
      by such purchaser in the SWO. The SWO was concluded December 3, 2004. Holders
      of
      32,786 of our Series B-1 warrants, 28,756 of our Series B-2 warrants, and
      107,000 of our Series C warrants participated in the SWO. Participation in
      the
      offering resulted in aggregate gross proceeds of $1,438,019 consisting of cash
      proceeds of $1,338,019 and $100,000 relating to the settlement of an existing
      promissory note obligation. There were no fees paid to our placement agent
      in
      connection with the SWO. We issued 33,132 shares of our common stock and
      233.8274 shares of Series D convertible preferred stock, which are equivalent
      to
      62,354 shares of common stock. We also issued five-year Series E warrants to
      the
      investors to purchase an additional 28,646 shares of our common stock for $27
      per share. As a result of the SWO, the warrant holders who participated in
      the
      offering were considered to have received a deemed dividend aggregating
      $1,120,500 based upon a Black Scholes calculation considering the valuation
      of
      the warrants prior to the November 16, 2004 offering and subsequent to the
      offering. On December 16, 2004, pursuant to a Special Warrant Offer which
      reduced the exercise prices of a portion of the 3,334 warrants that Paul Royalty
      Fund, L.P. (PRF) received in February 2003 to $15 in exchange for the surrender
      of the balance, warrants to purchase 1,852 shares of our common stock were
      exercised for which we received $27,889, and warrants to purchase 1,482 shares
      of our common stock were surrendered to us. As a result of the Special Warrant
      Offer PRF was considered to have received a deemed dividend of approximately
      $2,500 based on a Black Scholes calculation considering the valuation of the
      warrants prior to the December 16, 2004 offering and immediately subsequent
      to
      the offering. Inclusive of Paul Royalty Fund’s SWO, we recorded an aggregate
      deemed dividend of $1,123,000.


F29


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**





**Warrant
      issued in connection with equipment lease:** In
      connection with an equipment lease agreement dated February 27, 2004, we issued
      a two-year warrant to purchase 937 shares of our common stock at $48.75 per
      share. We valued the warrant utilizing a Black-Scholes valuation model at
      $18,500. On February 27, 2006, the warrant expired unexercised.





**January
      2005 private placement:** On
      January 5, 2005 we entered into a number of agreements with institutional and
      accredited investors (collectively, the “purchasers”) that provided us with:





·
            Gross
                aggregate cash proceeds of $5,403,302 from the sale of 432,264 shares
                of
                our common stock (the “private placement”) to former holders of our Series
                C preferred shares and other purchasers at $12.50 per share (the
“purchase
                price”) with each receiving a five year warrant to purchase one share of
                common stock at $27 per share (Series E warrant) for every two shares
                purchased. We granted each of the purchasers in the $5,403,302 private
                placement the right to purchase, within 45 days after the closing
                date,
                additional shares of our common stock and our Series E warrants on
                the
                same terms as in the private placement in an amount not to exceed
                25% of
                their original cash investment in the private placement;****





·
            The
                Series E warrants, with certain exceptions, provide that if we sell
                shares
                of our common stock at prices below the exercise prices of those
                warrants,
                or issue other securities convertible into, or which entitle the
                holder to
                purchase, shares of our common stock, which could result in the sale
                of
                our common stock at a price which in effect (taking into consideration
                the
                price paid for the convertible security or the warrant or the option)
                is
                less than the exercise price of the Series E warrants, then the exercise
                price of the Series E warrants will be reduced by a portion of the
                difference between the exercise price and the lower price at which
                the
                common stock was, or effectively could be, acquired. That percentage
                by
                which the exercise price of the Series E warrants could be reduced
                depends not only on the lower price at which our common stock was,
                or
                could be, acquired, but also by the ratio that the number of shares
                of our
                common stock that were, or could be, so acquired bears to the total
                number
                of shares of our common stock that would be outstanding after such
                sale of
                our common stock, or the conversion of securities convertible into,
                or the
                exercise of such warrants or options to purchase, our common stock.
                We
                analyzed the warrants in accordance with Emerging Issue Task Force
                Issue
                No. 00-19 “Accounting for Derivative Financial Instruments Indexed to and
                Potentially Settled in a Company’s Own Stock” (EITF 00-19) to determine
                their proper classification as
                equity.





·
            All
                our outstanding Series C preferred shares at January 5, 2005, or
                approximately 913 Series C preferred shares, with a liquidation preference
                of $5,476,256 plus accrued and unpaid dividends, an aggregate value
                of
                $6,357,104, were exchanged for 508,568 shares of our common stock
                or
                equivalent Series D preferred shares (certain shares were issued
                as a
                Series D preferred equivalent as described below) and five-year warrants
                to purchase 254,284 shares of our common stock at $27.00 per share.
                Upon
                the exchange, the holders of the Series C preferred shares received
                a
                warrant to purchase one share of common stock for each two shares
                of our
                common stock they received in the exchange. This exchange was offered
                to
                Series C preferred shareholders if they participated in the private
                placement sale of our common stock for an amount equal to 30% of
                the
                liquidation preference amounts of their Series C preferred shares
                exchanged for our common stock. The Series C holders provided gross
                cash
                proceeds of $1,642,877 (30% of $5,476,256) of the $5,403,302 aggregate
                gross proceeds received by us in the private placement. The conversion
                of
                the Series C preferred shares was beneficial to the Series C preferred
                holders since the original certificate of designations called for
                conversion using a $30 price per share for our common stock. This
                would
                have resulted in 211,903 shares being issued with a fair value on
                January
                5, 2005 of $3,019,625. Instead the holders received 508,568 shares
                consisting of 218,912 shares of common stock, and 289,656 common
                shares in
                the form of a Series D preferred equivalent as described above, whose
                combined value on January 5, 2005 was $7,247,099, and a warrant to
                purchase 254,284 shares of common stock whose value was determined
                to be
                $2,125,974. The warrant value was determined utilizing a Black Scholes
                pricing model with $14.25 stock price on January 5, 2005, expected
                life of
                five years, risk-free rate of 3.73%, volatility factor of 86% with
                no
                dividend yield. The excess value of $6,353,448, representing the
                aggregate
                value of the shares and warrant ($9,373,073) issued over what would
                have
                been issued under the original conversion ($3,019,625), was recorded
                as a
                deemed dividend to the Series C preferred
                holders.


F30


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**





·
            As
                a result of our receipt of over $5,000,000 in the private placement
                we
                could and did elect to repay $9,626,626 (principal balance outstanding
                at
                January 5, 2005) of our outstanding promissory notes, accrued interest
                of
                $674,587 and an added 20% premium, in all $12,361,456, by issuing
                to each
                noteholder so many shares of common stock equal to the principal,
                accrued
                interest and premium of each divided by the $12.50 purchase price.
                Each
                noteholder also received a Series E warrant for each common share
                received, or 988,917 Series E warrants. We recorded a loss on settlement
                of $10,328,199 in connection with this transaction consisting of
                the 20%
                premium of $2,060,243 and the value of the 988,917 warrants which
                was
                $8,267,956. The warrant value was determined utilizing a Black Scholes
                pricing model with $14.25 stock price on January 5, 2005, expected
                life of
                five years, risk-free rate of 3.73%, and a volatility factor of 86%
                with
                no dividend yield.





·
            Purchasers,
                Series C Holders and holders of the Notes whose participation in
                these
                transactions would result in ownership of common stock in excess
                of 9.99%
                of our issued and outstanding shares of common stock could elect
                to
                receive instead of our common stock, shares of our Series D convertible
                preferred stock convertible into the same number of shares of our
                common
                stock.





We
      issued
      an aggregate 1,181,384 shares of common stock, 2,806.37 shares of Series D
      preferred stock (convertible into 748,364 shares of common stock), and five-year
      Series E warrants to purchase 1,459,333 shares of our common stock at an
      exercise price of $27 per share, as a result of these transactions.





Four
      investors exercised their additional right to purchase shares within 45 days
      on
      the same terms as the placement, and we received gross proceeds of $127,719.
      We
      issued 10,217 shares and five year warrants to purchase 5,109 shares of our
      common stock at an exercise price of $27 per share for such additional
      investments by these four investors.





After
      January 5, 2007, subject to a registration statement then being effective for
      the common stock underlying the warrants, the warrants may be redeemed by us,
      if
      our common stock closes above $54 for ten consecutive trading days. The warrants
      contain cashless exercise as well as customary anti-dilution
      provisions.





In
      connection with these transactions, we paid Burnham Hill Partners, a division
      of
      Pali Capital (“BHP”), our placement agent, commissions consisting of cash
      equaling 10% of the $5,403,302 of gross cash proceeds we received from the
      private placement. The placement agent and its assigns received warrants to
      purchase 181,892 shares of our common stock exercisable at $14.25 per share.
      We
      paid $86,872 in legal and accounting expenses in connection with the private
      placement. At any time within three years after the date of the placement,
      we
      will pay the placement agent cash equal to 6% of the gross proceeds received
      by
      us from the exercise of the warrants issued to the investors who purchased
      shares of common stock for cash in the private placement. We also entered into
      an agreement under which the placement agent provided financial advisory
      services to us through September 30, 2005, for a fee of $250,000. The fee was
      amortized over the period of service. The agreement provided that payment of
      such fee would be deferred until our cash balance exceeds $10,000,000. Pursuant
      to a new advisory agreement dated September 23, 2005, we agreed that the
      placement agent may apply all or a portion of the $250,000 Advisory Fee as
      purchase price for the common stock and common stock purchase warrants sold
      in
      the financing which we closed October 12, 2005.





**Series
      B conversion:** In
      accordance with an agreement dated May 23, 2003 amongst the holders of Series
      B
      preferred stock which provided for conversion of our outstanding Series B
      preferred stock should all of the holders of Series C preferred stock convert
      their preferred shares to common stock (which occurred at the January 5, 2005
      closing as described above), PRF, the sole remaining holder of Series B
      preferred stock, converted its 50 shares of Series B preferred stock into 14,710
      shares of common stock, which included common shares for $51,616 in accrued
      dividends.





**February
      2005 private placement** On
      February 9, 2005, we completed a private placement with one investor from which
      we received aggregate gross proceeds of $100,000. We issued to the investor
      8,000 shares of our common stock and a five-year warrant to purchase 4,000
      shares of our common stock at $27 per share. We paid our placement agent 10%
      of
      the gross proceeds and a five-year warrant to purchase 1,200 shares of our
      common stock exercisable at $14.25 per share. We incurred legal expenses of
      $3,727 for this transaction.





We
      had
      undertaken to register all shares of our common stock in our January 5 and
      February 9, 2005 private offerings as well as all shares of our common stock
      issuable upon exercise of all the warrants and conversion of Series D preferred
      stock issued in the January 5, 2005 offering, within 10 days after filing of
      our
      Annual Report on Form 10-KSB with the Securities and Exchange Commission, which
      Form 10-KSB we filed on March 31, 2005. In April 2005, in consideration for
      the
      waiving of penalties we would have to pay for failure to file our registration
      statement at a date no later than April 13, 2005, we entered into agreements
      with our Series E Warrant holders who purchased our common stock and received
      registration rights in our January 5 and February 9, 2005 private offerings,
      to
      modify the exercise price of their Series E Warrants from $27 to $22.50.
      Utilizing a Black Scholes valuation model we recorded a deemed dividend to
      these
      warrant holders of $67,217. Such value was determined utilizing a model with
      a
      stock price of $9.15, expected life of five years, risk free rate of 3.99%,
      volatility of 86% and no dividend yield.


F31


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**





**2005
      promissory note financing:** Beginning May 27, 2005 and thereafter, we received gross loan proceeds of
      $3,186,000 through the issuance of 8% promissory notes due December 31, 2005.
      The outstanding principal together with all unpaid and accrued interest would
      automatically convert into equity securities issued by us in an equity
      financing, or a combination of equity financings, with gross proceeds of at
      least $5,000,000, such conversion to be at the same price per equity security
      as
      the equity securities sold in the equity financing; provided, however, that
      for
      purposes of determining the number of equity securities including warrants
      to be
      received upon such conversion, the dollar amount due the noteholder would first
      be multiplied by a factor of 1.2 times. In order to induce certain investors
      to
      participate in this financing the exercise price of the noteholders’ Series E
      warrants to purchase 798,897 shares of common stock received in our January
      5,
      2005 private placement was reduced from an exercise price of $27 and $22.50
      per
      share to an exercise price of $.015 per share. Utilizing a Black Scholes
      valuation model we determined the value of this warrant exercise price reduction
      to be $2,212,436. Such amount was recorded as a debt discount and amortized
      to
      interest expense over the life of the notes.





Additionally,
      an investor holding in excess of 9.99% of our shares on a fully diluted basis
      who purchased $150,000 of those promissory notes, entered into a funding
      commitment for an additional $1,208,000. The exercise of such investor’s
      repriced warrants to purchase 241,253 shares of our common stock was limited
      to
      an amount determined by multiplying the 241,253 warrants by the percentage
      of
      the $1,358,000 commitment actually funded. Such investor agreed to provide
      us
      with such additional $1,208,000 by the later of the filing of our pre-market
      approval application for our confirmatory venous leg ulcer trial, or March
      31,
      2006. We received $150,000 towards this amount on September 14, 2005 in the
      form
      of a loan for which we issued an 8% promissory note (to be automatically
      converted into our equity securities the same as our other promissory notes,
      described above). That left a balance to be paid to us under that commitment
      of
      $1,058,000. As later described, on March 15, 2006, we received an additional
      $250,000 bridge loan from this investor which further reduced this funding
      commitment to $808,000. In connection with this loan from this investor we
      agreed to release the investor from the remaining $808,000 funding commitment
      and allow for the full exercise of the investor’s 241,253 warrants. We paid a
      cash fee of 5% of the gross loan proceeds to our financial advisor in connection
      with all such loans.





On
      September 29, 2005 we received an additional $150,000 loan for which we issued
      an 8% promissory note due December 31, 2005 with similar terms to the $3,186,000
      of promissory notes issued in the prior quarter.





**Lonza
      suite deal:**  On
      July
      12, 2005, we entered into an agreement with our manufacturing and marketing
      partner, Lonza Walkersville, Inc. **** (successor
      by acquisition to Cambrex Bio Science Walkersville, Inc.), whereby for the
      six-month period May 1 to October 31, 2005 the $128,750 monthly charges we
      incurred for rental of a production suite used to produce ORCEL at their
      Maryland facility would be accrued by them for later conversion into shares
      of
      our common stock and warrants. The aggregate accrued charge during the six-month
      period of $772,500 was converted at $11.25 per common share, for 68,667 shares
      of common stock. We also issued to Lonza three year warrants to purchase 103,000
      shares of our common stock exercisable, at $27 per share. Each of these
      securities carried certain registration rights. At December 31, 2005, we had
      accrued a charge for the six month period from May 1 to October 31, 2005 based
      on the fair value of the 68,667 shares and warrants to purchase 103,000 shares
      of our common stock at $27 per share. We determined that the fair value of
      our
      common stock and warrants was a more reliable measure then the monthly suite
      fee
      charged. Accordingly, we recorded a liability of $235,500 to reflect the fair
      value of our common stock and warrants to be issued as payment for rental of
      the
      production suite. In accordance with the terms of the agreement, the conversion
      was effectuated in December 2006 resulting in the issuance of the above common
      shares and warrant and removal of the liability. We entered into a similar
      arrangement in 2006 as described below under Lonza Suite Deal II.





**Service
      agreement:**  On
      July
      18, 2005, we entered into a three-month service agreement with a financial
      communications group whereby we agreed to grant it a warrant to purchase 3,334
      shares of our common stock, exercisable as follows: (i.) 1,667 shares
      exercisable at $7.50 per share, which vested immediately, and (ii.) 1,667 shares
      exercisable at $15 per share, which vested upon the Company and the financial
      communications group extending the term of the service agreement. Such agreement
      was extended. Utilizing a Black-Scholes valuation model we recorded a general
      and administrative charge of $4,903 for these warrants.


F32


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**





On
      December 1, 2005, in partial consideration for services rendered by the above
      group to us we granted them three-year warrants to (i) purchase 1,667 shares
      of
      our common stock at an exercise price of $7.50 per share, which vested on March
      31, 2006, and (ii) to purchase an additional 1,667 shares of our common stock
      at
      an exercise price of $15 per share, which vest only if we and the service
      provider extended the original three-month term of the service agreement beyond
      March 31, 2006. Utilizing a Black-Scholes valuation model we recorded a general
      and administrative charge of $2,286 for the initial warrant to purchase 1,667
      shares at $7.50 per share. The
      contract was not extended beyond March 31, 2006.





**October
      2005 private placement:** On
      October 12th and 31st, 2005, we completed a private placement in which:





·
            We
                issued 972,718 shares of common stock at a purchase price of $3.75
                per
                share for aggregate gross proceeds of $3,647,691 (approximately $2,650,000
                of which was received on October 12, 2005) and issued to each purchaser
                our Series F common stock purchase warrants to purchase 50% of the
                number
                of common shares purchased, or an aggregate of 486,359 shares. The
                Series
                F warrants are exercisable at $7.50 per share. Investors holding
                an
                aggregate 392,072 Series E warrants who purchased our common stock
                and
                Series F warrants in this private placement in an amount equal to
                at least
                40% of their past cash investments in our January 2005 equity private
                placement (which was completed at $12.50 per share and in which they
                purchased our common stock and our Series E warrants), or who converted
                our promissory notes on that January 5, 2005 date to shares of our
                common
                stock and Series E warrants, had the exercise price of their
                Series E warrants held by them reduced to $.015 from $27 and $22.50
                per share. The modification of the warrant value was recorded as
                a deemed
                dividend of $1,053,088 based on a Black Scholes valuation. Such valuation
                was determined utilizing a stock price of $4.50, expected life of
                five
                years, risk free rate of 4.32%, volatility of 88% and no dividend
                yield.





·
            The
                Series F warrants contain certain anti-dilution provisions. We may
                redeem
                the Series F warrants if our common stock trades above $15 for ten
                consecutive trading days. We analyzed the warrants in accordance
                with EITF
                00-19 to determine their proper classification as equity.





·
            On
                October 12, 2005, the terms of all of the $3,486,000 of outstanding
                promissory notes at September 30, 2005 were amended to reduce the
                amount
                of gross proceeds we had to receive in equity financings to trigger
                the
                conversion of the notes to our equity securities, from the original
                $5,000,000 to $2,514,000. In consideration of this amendment the
                holders
                received 1,334 seven-year Series F warrants to purchase our common
                stock
                at $7.50 per common share for each $100,000 of outstanding principal
                amount of the note that was converted into our equity securities,
                or
                46,480 Series F warrants. As a result of our receipt of gross proceeds
                of
                approximately $2,650,000 from the sale of our equity securities on
                October
                12, 2005, all of the promissory notes we issued after May 26, 2005,
                including accrued and unpaid interest of $98,463 and an added 20%
                premium,
                in all $4,301,355 were converted into an aggregate of 1,147,028 shares
                of
                our common stock. We actually issued 423,128 shares of our common
                stock
                and 2,714.624 Series D Preferred (equivalent to 723,900 shares of
                common
                stock), and Series F warrants to purchase an additional aggregate
                619,994
                shares of common stock at $7.50 per share.****We
                recorded a loss on settlement of $2,753,254 in connection with this
                transaction consisting of the 20% premium of $716,892 and the value
                of the
                warrants to purchase 619,994 shares of $2,036,362. The warrant value
                was
                determined utilizing a Black Scholes pricing model with $4.50 stock
                price
                on October 12, 2005, expected life of seven years, risk-free rate
                of
                4.37%, and a volatility factor of 88% with no dividend yield.





Purchasers
      whose participation in this private placement whose holdings would result in
      ownership in excess of 9.99% of our outstanding common stock were given the
      option to receive Series D preferred shares which would be convertible into
      the
      same number of shares of our common stock they would otherwise have acquired
      in
      that October 2005 private placement.





We
      were
      required to file a registration statement registering the shares of the common
      stock and the shares of our common stock issuable upon exercise of our
      Series F warrants, which we sold in that October 2005 private placement.
      That registration statement was required to be filed no later than January
      6,
      2006. We were required to use our best efforts to have the registration
      statement declared effective within 60 business days thereafter. Such
      registration rights agreement provided, before it was modified, that if the
      registration statement was not filed by January 6, 2006, or was not declared
      effective within 90 business days of its filing we must pay the investors cash
      liquidated damages equal to 1.5% of the amount they invested in the current
      private placement for the first 30 days of our default, and 1% of the amount
      invested for each 30 days thereafter. Our agreement with those purchasers
      provided that the holders of a majority of the shares of our common stock we
      were required to register pursuant to that agreement (the “majority holders”)
      could modify and/or waive our obligations under that agreement and such
      modification and/or waiver would be binding on all the purchasers in that
      private placement. On January 30, 2006 the majority holders (i) waived our
      obligation to pay any liquidated damages for our failure to file the
      registration statement by January 6, 2006; (ii) extended to June 7, 2006, then
      later extended to September 15, 2006, the time by which the registration
      statement had to be declared effective before we had to pay any liquidated
      damages and (iii) permitted us to include in such registration statement shares
      of our common stock we may issue, or that will be issuable, in (x) a
      transaction in which we acquire by merger another biotechnology company and/or
      (y) a new private placement of our securities in which we raise up to
      $10,000,000.


F33


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**





Such
      modification and waiver enabled us to pursue an acquisition and a private
      placement without incurring those liquidated damages expenses. The registration
      statement covering such shares was declared effective August 7,
      2006.





BHP
      received a cash fee equal to 10% of the gross proceeds (including cash received
      for our promissory notes issued since May 2005, approximately half of which
      we
      paid to BHP upon placement of the notes) received by us in that October 2005
      private placement. BHP received warrants to purchase 211,975 shares of our
      common stock at an exercise price of $4.50 per common share. BHP reserved the
      option to take $174,300 (see April 2006 transaction which follows) of their
      fee
      to purchase our common stock and our Series F warrants at the same price as
      paid by the investors in that October 2005 private placement for those
      securities. Additionally, as a result of such private placements and sale of
      our
      promissory notes, pursuant to our agreement with BHP, placement agent warrants
      for the purchase of 183,092 shares of our common stock at an exercise price
      of
      $14.25 per share, which we issued to BHP and its designees in connection with
      the January 2005 private placement of our common stock and our Series E
      warrants, had their exercise price reduced to $5.25 per share. The modification
      of the warrant value was recorded as a deemed dividend of $143,942 based on
      a
      Black Scholes valuation. We paid $109,306 in legal and accounting expenses
      in
      connection with the October 2005 private placement. For a period of 36 months
      ending in October 2008 we shall pay BHP a cash fee of 6% of the proceeds we
      receive from the exercise of any of our warrants issued to investors who paid
      cash for our securities.





For
      a
      period of nine months ending July 31, 2006, BHP had the right to act as our
      exclusive placement agent in connection with our subsequent financings. During
      that period, BHP would have been entitled to an industry standard fee for
      completion of a strategic transaction by us. BHP both waived its right to act
      as
      placement agent with respect to a proposed private placement financing we had
      to
      complete and waived its fee for the Hapto acquisition which we were negotiating.





Purchasers
      in the October 2005 private placement had the right for a period which ended
      on
      the earlier of six months after their purchase of our common stock and our
      Series F warrants, or upon our announcement of a transaction in which we will
      issue at least 1,333,333 shares of our common stock (a “Material Transaction”),
      to participate in any equity financing by us in connection with or relating
      to
      such Material Transaction, so that each purchaser can maintain its percentage
      ownership of our common stock as of the date immediately prior to the date
      of
      such equity financing.





The
      exercise prices of our Series F warrants issued to the purchasers in our private
      placement on October 12, 2005 and on October 31, 2005, and to the note holders,
      were to be adjusted if during the earlier of (a) the six-month period after
      the
      date of issuance of the Series F warrants, or (b) when we announce a Material
      Transaction,





(i)
            we
                sell our equity securities in a financing at a price equal to or
                greater
                than $3.75 per share, the exercise price of our Series F warrants
                held by
                such persons will be reduced (or increased but not beyond the current
                $7.50 per share exercise price of our Series F warrants) to the exercise
                price of the warrants issued in such equity financing,
                or





(ii.)
            we
                sell our equity securities in a financing for less than $3.75 per
                share
                (notwithstanding that such equity financing is consummated following
                the
                announcement of the Material Transaction), the exercise price of
                our
                Series F warrants held by such persons will be reduced to the price
                per
                share for which we sell our equity securities in such
                financing.





In
      a
      press release dated December 15, 2005, we announced our letter of intent to
      acquire Hapto Biotech. We considered this a Material Transaction. No adjustment
      to the October 2005 private placement purchaser’s warrants were required as a
      result.


F34


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**





**Series
      D-1 Convertible Preferred Stock:** On
      January 30 and 31, 2006, the holders of 5,948.6148 outstanding shares of our
      Series D Convertible Preferred Stock entered into agreements with us agreeing
      to
      exchange all of their shares of our Series D Convertible Preferred Stock into
      an
      equal number of shares of our new Series D-1 Convertible Preferred Stock. The
      primary difference between the Series D Preferred shares and the Series D-1
      Preferred shares was that the liquidation preference of the Series D
      Preferred shares was $10,000 per share and that of the Series D-1 Preferred
      shares was $10 per share. On August 24, 2006 the Board of Directors adopted
      the
      Certificate of Designations of the Relative Rights and Preferences of our Series
      D-1 Convertible Preferred Stock. Each Series D-1 Preferred share is convertible
      into 266.666 shares of our common stock. Therefore the 5,948.6148 shares are
      convertible into 1,586,297 shares of our common stock. ****





**Series
      E warrant exercises** :
      Various
      investors holding Series E warrants to purchase 13,144 shares of our common
      stock at $0.015 per share exercised such rights. Additionally on May 15, 2006
      investors holding Series E warrants to purchase 126,590 shares of our common
      stock at $0.015 exercised such right on a cashless basis. Based on a $3.60
      closing price they received 126,063 shares of our common stock.




**Vendor
      settlement:** On
      March
      17, 2006, we settled a vendor liability of approximately $102,000 for $35,000
      payable in seven equal monthly installments of $5,000 and a three-year warrant
      to purchase 19,000 shares of our common stock at an exercise price of $3.75
      per
      share. The warrant was valued at $54,982 utilizing a Black Scholes model with
      the following assumptions: expected life of 3 years, volatility factor of 86%,
      risk free rate of 4.64%, and no expected dividend yield. The warrant has
      piggyback registration rights for the underlying shares of common
      stock.





**Lonza
      suite deal II:** On
      February 13, 2006 we entered into an agreement with our manufacturing and then
      marketing partner, Lonza, whereby for the six-month period January 1 to June
      30,
      2006 the $132,612 monthly charges we incur for rental of a production suite
      used
      to produce ORCEL at their Maryland facility, Lonza agreed to accept 49,116
      shares of our common stock monthly in lieu of cash payment. Accordingly, we
      issued 294,693 shares for six months of suite fees during the first half of
      2006. We determined that the fair value of our common stock and warrants was
      a
      more reliable measure then the monthly suite fee charged. Accordingly, the
      shares were valued at $1,119,834 using the closing market price of our common
      stock at the end of each monthly performance period. We also issued to Lonza
      a
      three-year warrant exercisable July 1, 2006 to purchase 73,673 shares of our
      common stock at $11.25 per share. The warrant was valued at $67,505 on the
      date
      of agreement utilizing a Black Scholes model with the following assumptions:
      expected life of 3 years, volatility factor of 86%, risk free rate of 4.66%,
      and
      no expected dividend yield. The warrant was amortized over the six-month period
      of the agreement. Each of these securities carry certain registration rights.
      The **** common
      shares issued to Lonza were subject to registration rights and potential
      liquidated damages.





**Fees
      due former investment banker:** In April
      2006, pursuant to an agreement reached in December 2005 to settle certain
      advisory fees ($250,000) and placement fees ($174,300) due to our former
      investment banker, we issued 113,147 shares of our common stock at $3.75 per
      share and Series F warrants to purchase 56,573 shares exercisable at $7.50
      per
      share in lieu of a cash payment of the $424,300. Separately, the former
      investment banker received a $50,000 fee from our April 2006 placement as a
      termination fee. This $50,000 fee was treated as a cost of doing the April
      2006
      private placement and accordingly offset the proceeds. It was also agreed that
      the investment banker would receive placement agent fees for any funds raised
      in
      the April 2006 private placement from investors who participated in our earlier
      financings in which such investment banker or its principals acted as placement
      agent. In this regard we paid the investment banker $25,000, and issued Series
      H
      warrants to purchase 10,000 shares of our common stock at $7.50 per share to
      the
      investment banker and its designees.





**Bridge
      Financing:** In March
      2006, we received $445,000 in short-term loans. We received two loans for
      $130,000 and $65,000, respectively, from two of our executive officers. These
      loans were non-interest bearing and automatically payable from the proceeds
      of
      our future financings. $35,000 was repaid on April 6, 2006 with the balance
      paid
      from the proceeds of our April 17, 2006 private placement of our equity
      securities described hereafter. The third loan for $250,000 bore interest at
      8%
      per annum and was from the investor who had committed to provide us with
      $1,058,000 by the later of the filing of our pre-market approval application
      for
      our confirmatory venous leg ulcer trial, or March 31, 2006. This $250,000 loan
      automatically converted into the equity securities we issued in our April 2006
      private placement at 1.2 times the note’s principal and accrued interest amount.
      This amounted to $301,333 and we recorded additional interest expense of
      $51,133. For this amount the investor received 301.333 shares of Series E
      preferred stock and a Series H warrant to purchase 100,444 shares of our common
      stock at $7.50 per share. We recorded the fair value of the warrants similar
      to
      the other Series H warrants as described hereafter. Additionally we agreed
      that
      since the investor provided us with the funds earlier than was required, upon
      conversion of such $250,000 loan to our equity securities, we would forego
      such
      investor’s remaining commitment to provide us with $808,000 of additional
      financing, and that the earlier repricing (upon commitment) of our warrants
      held
      by such investor would not be affected.


F35


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**





On
      April
      5, 2006, we received a $200,000 short-term loan from a third party due April
      30,
      2006 to be repaid at 110% of principal plus accrued interest at 8% per annum
      on
      the original $200,000 principal balance. We issued a three-year warrant to
      purchase 3,333 shares of our common stock at an exercise price of $7.50 per
      share to the lender. The warrant was valued at $7,262 utilizing a Black Scholes
      model with the following assumptions: expected life of 3 years, volatility
      factor of 86%, risk free rate of 4.79%, and no expected dividend yield. On
      April
      18, 2006, we repaid this note with interest, or $220,778. Accordingly, we
      charged the $7,262 warrant value to interest expense.





**Conversion
      of Series D Preferred Stock:** In
      May
      2006, the holder of 323.4008 shares of Series D preferred stock converted such
      shares into 86,240 shares of our common stock.





**Series
      E Convertible Preferred Stock:** On
      April
      17, 2006, we completed a private placement sale for aggregate gross proceeds
      from accredited investors of $6,176,000. We issued an aggregate of 6,176 shares
      of our 6% Series E Convertible Preferred Stock (Series E Preferred) and
      five-year Series H warrants to purchase 2,058,667 shares of our common stock
      at
      $7.50 per share. We incurred placement fees of $608,200 (inclusive of $50,000
      termination fee to the former placement agent described above), legal expenses
      of $36,856, and other expenses of $4,115, or an aggregate cost of the financing
      of $649,171. In addition to cash fees we issued warrants to our investment
      banker, Rodman & Renshaw, LLC (R&R), who served as placement agent. R
& R received warrants to purchase 153,017 shares at $7.50 per share. Another
      finder received a warrant to purchase 39,517 shares at $7.50 per share. Due
      to
      the warrants being recorded as a liability at issuance (see below), the net
      proceeds were allocated entirely to the warrants. As such, the fair value of
      the
      warrants exceeded the proceeds and thus there is no beneficial conversion
      discount. The Series E Preferred was entitled to vote on an “as converted” basis
      on all matters submitted to a vote by the holders of our common stock. At any
      time these investors could convert their preferred stock into our common stock
      at a $3 per common share conversion price. In August 2006 certain investors
      holding 295 Series E Preferred shares converted their shares and accrued
      dividends at the $3 conversion price into 100,250 shares of our common stock.
      On
      September 6, 2006, the investors were obligated to convert their preferred
      stock
      by dividing their $1,000 per preferred share purchase price plus dividends
      at 6%
      per annum from April 17, 2006 by the lesser of $3, or 90% of the average of
      the
      volume weighted average prices for our common stock for the twenty trading
      days
      following July 24, 2006 (the effective date of the 1 for 15 reverse split of
      our
      common stock). On such date, the remaining 6,182.333 Series E Preferred shares
      were automatically converted into 2,721,828 shares of our common stock pursuant
      to the terms of the Certificate of Designation of the Rights and Preferences
      for
      the Series E Preferred. The Series H warrants carried full ratchet price and
      quantity reset provisions should we sell our common stock or our other
      securities convertible into, or exercisable for, our common stock, at an
      effective price per common share less than the $7.50 exercise price of the
      warrants. Such warrants provided that the $7.50 per share exercise price would
      be reduced to the price, if lower, at which we sell our common stock in the
      future, or the effective cost to the purchaser of our common stock upon
      conversion of equity securities, or exercise of warrants or options, we may
      sell
      or grant in the future. Additionally, such warrants provided that the number
      of
      shares of our common stock that the holders of the Series H warrants could
      purchase when the exercise price of the Series H warrant is so reduced, would
      be
      that number of shares which the aggregate exercise price of the Series H
      Warrants could purchase before the reduction of the exercise price at the new,
      reduced exercise price. We registered under the Securities Act of 1933, all
      of
      the shares of our common stock we issued as a result of the conversion of the
      Series E Preferred and issuable upon exercise of such Series H warrants. The
      registration statement for those shares was declared effective on August 7,
      2006.





Each
      Investor who participated in the April 17, 2006 placement retained the right
      to
      participate in a subsequent equity financing up to an amount equivalent to
      100%
      of any subsequent financing closed by us prior to August 7, 2007, on the same
      terms, conditions and price of such subsequent financing.





Under
      Section 170 of the Delaware General Corporation Law, we were prohibited from
      paying a dividend in cash to the holders of Series E Preferred. We notified
      such
      investors that we would increase the basis of their preferred stock for any
      accrued dividends. Such investors were given the right to notify us not to
      increase their basis but receive our common stock instead. No investors notified
      us that they elected to receive our common stock. Dividends of $151,035 were
      paid to Series E Preferred holders in common stock upon conversion of their
      Series E Preferred.




**Elimination
      of Series D and E Preferred Stock Certificates of Designations:** On
      December 26, 2007 the designation establishing the rights and preferences of
      our
      Series D and E Preferred, of which no shares were any longer outstanding, was
      eliminated from our certificate of incorporation so that we are no longer
      authorized to issue any more Series D and E Preferred.


F36


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**





**Change
      in value of warrants:** Due
      to
      the nature of the volume weighted average calculation required under the Series
      E Preferred whereby the final conversion price of the underlying common stock
      was not immediately known and under the rules promulgated by EITF No. 00-19,
      we
      were initially required to reclassify the fair value of all of our existing
      outstanding warrants, because it was unknown whether we would have enough
      authorized shares to settle our outstanding warrants due to the unknown number
      of shares needed for the Series E Preferred, from our equity accounts at the
      date of the Series E Preferred transaction and record them as a warrant
      liability. At April 17, 2006, we recorded a liability for the fair value of
      all
      of our outstanding warrants, or $20,829,822, inclusive of an $8,878,822 fair
      value for our Series H warrants issued in the April 17, 2006 private placement.
      As of September 5, 2006, the date on which the holder of our Series E Preferred
      had to convert their Series E Preferred to common stock, the fair value of
      our
      warrants was revised to $5,736,591 in accordance with EITF No. 00-19. The
      reduction in the fair value of the warrants at September 5, 2006 from the
      initial value of $20,829,822 recorded on April 17, 2006, resulted in income
      of
      $15,093,231. The net amount of $12,042,565 on our December 31, 2006 statements
      of operations under the caption “Change in fair value of warrants” represents
      the net effect of the reduction in fair value of the warrants ($15,093,231)
      offset by the charge for the excess value of the Series H warrants ($8,878,822)
      over the consideration ($5,828,162 consideration received consisting of
      $5,526,829 net proceeds in the private placement in which they were sold and
      a
      $250,000 promissory note including interest of $51,333 which was converted
      as
      described above into Series E Preferred) received in the April 17, 2006 private
      placement or $3,050,666. A Black Scholes model using the respective remaining
      expected lives of our warrants, a dividend yield of zero, estimated volatility
      of approximately 86%, and a risk free rate of 4.59% was used to calculate the
      respective fair values at September 5, 2006.





**Deemed
      dividend:** Our
      April
      2006 private placement described above resulted in the repricing of our Series
      E
      and F warrants because of the anti-dilution provisions of those warrants. Series
      E warrants to purchase 47,840 shares of common stock at $22.50 per share were
      repriced to $11.34 per share resulting in a deemed dividend of $28,113. Series
      E
      warrants to purchase 254,279 shares of our common stock at $27.00 per share
      were
      repriced to $13.06 per share resulting in a deemed dividend of $158,357. Series
      E PA warrants to purchase 183,092 shares of our common stock at $5.25 per share
      were repriced to $5.02 per share resulting in a deemed dividend of $2,519.
      Series F warrants to purchase 1,162,926 shares of our common stock at $7.50
      per
      share were repriced to $6.45 per share resulting in a deemed dividend of
      $88,983. We calculated aggregate deemed dividends of $277,972 utilizing a Black
      Scholes model that compared the exercise price of the new warrants to the old
      warrant with the following assumptions for the Series E and F warrants: expected
      life of 5 (Series E) and 7 (Series F) years, volatility factor of 86%, risk
      free
      rate of 4.93% (Series E) and 4.96% (Series F), and no expected dividend yield.





**9 –
      2007 FINANCING TRANSACTIONS**





**Directors
      and Officer Premium Financing Agreement:** On
      February 2, 2007, we entered into a commercial premium finance agreement with
      First Insurance Funding Corp. of New York in the amount of $138,000. The
      financing agreement bore interest at 7.3 % and required nine monthly payments
      of
      $15,803 beginning March 2007. The financing was utilized to fund the premium
      payments for our directors and officers insurance policy and was repaid as
      of
      December 31, 2007.





**Restricted
      Stock Award to Directors:** On
      February 19, 2007, the Board of Directors awarded 60,000 shares and 50,000
      shares, respectively to Dr. Lilien and Dr. Schiff, for their service as members
      on our Audit Committee. Both awards were made as a result of our long
      outstanding fees due these directors for their services and to ensure their
      continuing services. The awards were made pursuant to the 2006 Stock Award
      and
      Incentive Plan which was approved by our shareholders in December 2007.





**Exchange
      Agreement – Secured Bridge Financing:** In the
      fourth quarter of 2006, we agreed on terms which were later incorporated into
      a
      January 29, 2007 agreement, and amended June 18, 2007 (the Exchange Agreement).
      We entered into this Exchange Agreement with Paul Royalty Fund L.P. (PRF) for
      the restructuring of our obligation under our RIAA (as described in Note 8)
      upon
      the completion of at least $8,000,000 of financing and other terms. Among those
      other terms, the Exchange Agreement required cancellation of termination of
      employment agreements we had with our then chairman and chief executive officer,
      Messrs. Katz and Lipstein, and to the resignation of Messrs. Katz and Lipstein
      as officers and directors of our company, as well as other conditions described
      hereafter. The agreement was necessary for us to secure bridge financing. We
      and
      PRF agreed that the first $2,800,000 of any amount we had to pay PRF pursuant
      to
      our then existing revenue interest assignment agreements with PRF would be
      paid
      to lenders of bridge loans made to us after September 2006. Those bridge loans
      enabled us to continue our operations while final terms could be negotiated
      relating to the restructuring of our obligation to PRF. Such restructuring
      enabled us to complete a private placement of our equity
      securities.


F37


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**





During
      the fourth quarter of 2006 we received bridge loans aggregating
      $1,060,000.  During
      the period January through June 2007, we received bridge loans aggregating
      $1,949,000. One of the loans for $110,000 from our former officers was repaid
      from another bridge loan. In all we received $2,899,000 of these loans which
      matured on various dates between February 28 and June 30, 2007and had been
      due
      on demand anytime after such dates. These loans accrued interest at 15% per
      annum after their due dates. The loans were repayable in cash at 110% of their
      face value. Noteholders were to be issued a warrant exercisable for one share
      of
      our common stock for each dollar of the face value of the Note (the "Bridge
      Warrant"). The Bridge Warrant was to have terms identical to the warrants we
      issued in the Private Placement or the conversion price of the financing if
      no
      warrants were issued. The Bridge Warrants have piggyback registration rights
      for
      the shares of our common stock issuable upon the exercise of such warrants.
      The
      lenders had the option to roll their loan at 125% of the loaned amount plus
      any
      accrued interest into our June 18, 2007 private placement described hereafter.





**Series
      H Warrant Offer:** Beginning February 13, 2007 through June 8, 2007 we made an offer to the holders
      of our Series H Warrants which had been issued in our April 17, 2006
      private placement, contingent on 100% acceptance by all holders, for them to
      exchange their Series H Warrants for such number of shares of our common
      stock that they could purchase upon exercise of their Series H Warrants,
      plus a new five year warrant to purchase, at an exercise price of $1 per share,
      25% of the shares of our common stock they receive in such exchange. Holders
      of
      Series H warrants to purchase an aggregate of 2,002,444 out of an aggregate
      of 2,169,111 (92%) shares of our common stock that could be purchased upon
      exercise of all our Series H warrants, accepted our exchange offer.
      Although we did not receive 100% acceptance of our offer, we nevertheless agreed
      to conclude the exchange with those holders of our Series H Warrants who
      had theretofore accepted our offer contingent upon the following:





·
            the
                surrender by the holder of his Series H Warrant(s) to us no later
                than
                July 20, 2007 by delivering them to us at our offices,
                and


·
            an
                agreement to waive any claims they may have against us pursuant to
                all the
                agreements entered into with us in connection with their purchases
                of
                shares of our Series E Preferred, all dated as of March 16,
                2006.





We
      agreed
      to honor our exchange offer with any holder of our Series H Warrants who
      had agreed to the exchange prior to June 8, 2007 at 5 p.m. and who now
      agreed to the above conditions. Acceptance of this offer was based on when
      the
      holder returned his Series H Warrant.





On
      June
      10, 2007, our Board of Directors voted to reduce the exercise price of the
      Series H Warrants from $7.50 per share to $0.50 per share of our common
      stock pursuant to the provisions of Section 3 (g) of the Series H Warrants.
      On June 27, 2007, our Board of Directors reduced the $0.50 per share exercise
      price to $0.01 pursuant to the same provision. As a result of these price
      reductions we recorded a deemed dividend charge of $1,043,305. This was based
      on
      the difference in value before and after the price reduction as determined
      by a
      Black Scholes Model using a 90% volatility factor, no dividends, and risk free
      rates of 5.05% and 4.95%, respectively.





Holders
      of Series H warrants to purchase 2,002,444 shares exchanged their warrants
      for
      the same number of shares of common stock and Series A warrants to purchase
      an
      aggregate of 500,606 shares at $1 per share. The Series A warrants were warrants
      that were issued in the private placement described hereafter. In connection
      therewith we recorded a deemed dividend charge of $244,487 representing the
      difference in value of the warrants returned versus the common stock and
      warrants issued. We utilized a Black Scholes model using risk free rates ranging
      from 4.80 to 4.91%, no dividends, and 90% volatility to determine the charge.





**Convertible
      Preferred Stock:** On
      June
      14, 2007, , our board of directors adopted an amendment to our certificate
      of
      incorporation designating the following series of preferred shares out of the
      1,000,000 shares of preferred stock that we are authorized to issue:





(a)
            20,000
                shares as Series A convertible preferred stock. The liquidation preference
                of the Series A convertible preferred stock is $10,000 per share.
                Each
                share of Series A convertible preferred stock is convertible into
                20,000
                shares of common stock.


(b)
            500
                shares as Series A-1 convertible preferred stock. The liquidation
                preference of the Series A-1 convertible preferred stock is also
                $10,000
                per share. Each share of Series A-1 convertible preferred stock is
                convertible into 20,000 shares of common
                stock.


F38


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


(c)
            500
                shares as Series A-2 convertible preferred stock. The liquidation
                preference of the Series A-2 convertible preferred stock is also
                $10,000
                per share. Each share of Series A-2 convertible preferred stock is
                convertible into 2,000 shares of common
                stock.


(d)
            20,000
                shares as Series D-2 convertible preferred stock. Each share of Series
                D-2
                convertible preferred stock is convertible into 1,000 shares of common
                stock.





The
      Series A, A-1, A-2, and D-2 shares have no voting rights in the election of
      directors or general corporate matters, but none of the rights of these classes
      of preferred stock set forth in their respective certificates of designation
      can
      be altered, amended, or repealed without the consent of such class.





**Series
      A and other simultaneous financing transactions:** On June
      18, 2007 we completed a number of simultaneous transactions as
      follows:





·
            We
                completed the initial closing of our Series A Convertible Preferred
                Stock
                (A Preferred) financing.


·
            We
                extinguished our Revenue Interest Obligation with Paul Royalty Fund,
                L.P.


·
            We
                entered into cancellation agreements to cancel the termination of
                employment agreements we had with our former chairman and former
                chief
                executive officer.





The
      A
      Preferred financing had subsequent closings on July 25 and July 31, 2007. Such
      transactions resulted in additional compensation under the aforementioned
      cancellation agreements. All of the above transactions are described below:





*A
      Preferred Financing* *:*





*First
      Closing:* On June
      18, 2007, we completed a private placement of our A Preferred with warrants
      attached to a group of accredited investors. We sold 579.148 shares of A
      Preferred for $10,000 per share (its stated value) and received gross cash
      proceeds from such sales of $5,791,475. At the same time holders of bridge
      notes
      who had loaned us an aggregate of $2,701,500, with $94,264 of accrued interest,
      or $2,795,764, exchanged their bridge notes for an aggregate of 349.470 of
      our A
      Preferred shares with warrants attached at 125% of the face value, or
      $3,494,705, of their bridge notes. Since these bridge notes were paid with
      A
      Preferred shares, which are convertible into common stock, no discount was
      recorded upon the settlement of the bridge notes. We repaid $197,500 of bridge
      notes, or $226,936 including a $19,750 premium and $9,686 of accrued interest.
      All noteholders also received our five-year Series A warrants to purchase an
      aggregate of 2,899,000 shares of common stock at $1 per share. We recorded
      a
      $1,003,747 charge to interest expense representing the value of these warrants.
      This value was determined using a Black Scholes model with the following
      assumptions: 90% volatility, no dividends, a stock price of $0.55, and a risk
      free rate of 5.07%. Each $10,000 A Preferred share converts into 20,000
      shares of our common stock at a conversion rate of $0.50 per common share.
      The
      resulting 928.618 shares of A Preferred, consisting of the above described
      579.148 sold and the 349.470 from the bridge note conversion, can be converted
      into an aggregate of 18,572,360 shares of our common stock. Each holder of
      A
      Preferred shares received a five year warrant to purchase 50% of the number
      of
      such holder’s A Preferred as converted shares, or to all such holders warrants
      to purchase an aggregate 9,286,180 shares of our common stock exercisable at
      $1
      per share. Additionally each purchaser and bridge loan investor who acquired
      A
      Preferred shares also received Series M warrants which are exercisable at $0.50
      per share at any time hereafter until thirty days after (and if) we have
      announced receipt of written notice of FDA clearance for our commercial sales
      of
      ORCEL for the treatment of venous stasis ulcers. The number of Series M warrants
      issued was correlated to the type of investor. Purchasers and bridge note
      investors who participated in the private placement received Series M warrants
      to purchase 50% of the A Preferred as converted shares that they received in
      the
      private placement, and 100% if they invested $3,500,000 or more (the Lead
      Investor) in the purchase of A Preferred shares. We issued Series M warrants
      to
      purchase an aggregate 12,836,180 shares of our common stock to investors in
      the
      private placement and to our bridge loan investors. Those purchasers and bridge
      loan investors who received Series M warrants also received five year Series
      M-1
      warrants, exercisable at $1 per share, entitling them to purchase 50% of the
      number of our common shares they purchase upon exercise of their Series M
      warrants. We issued Series M-1 warrants to purchase an aggregate 6,418,090
      shares of common stock at $1 per share to investors in the private placement
      and
      to our bridge loan investors.





*Second
      Closing* :
      On July
      25, 2007, we completed the second closing of our private placement of our A
      Preferred with warrants attached to a group of accredited investors. We sold
      212.100 shares of A Preferred for $10,000 per share (its stated value) and
      received gross cash proceeds from such sales of $2,121,000. The 212.100 shares
      of A Preferred can be converted into 4,242,000 shares of our common stock.
      The
      purchasers in the second closing received an aggregate of: Series A warrants
      to
      purchase 2,121,000 shares of our common stock at $1 per share, Series M warrants
      to purchase 2,121,000 shares of our common stock at $0.50 per share, and Series
      M-1 warrants to purchase 1,060,500 shares of our common stock at $1 per share.


F39


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**





*Third
      Closing* :
      On July
      31, 2007, we completed the third closing of our private placement of our A
      Preferred with warrants attached to a group of accredited investors. We sold
      50.950 shares of A Preferred for $10,000 per share (its stated value) and
      received gross cash proceeds from such sales of $509,500. The 50.950 shares
      of A
      Preferred can be converted into 1,019,000 shares of our common stock. The
      purchasers in the third closing received an aggregate of: Series A warrants
      to
      purchase 509,500 shares of our common stock at $1 per share, Series M warrants
      to purchase 509,500 shares of our common stock at $0.50 per share, and Series
      M-1 warrants to purchase 254,750 shares of our common stock at $1 per share.
      One
      of the subscribers in this closing purchased his 15 shares with a $150,000
      subscriber note receivable bearing interest at 5% per annum that is due on
      February 15, 2008.





*Subscriber
      Closing:* On
      December 20, 2007, $110,000 of our $150,000 subscriber note receivable
      representing 11 shares was paid, leaving a $40,000 subscriber note balance
      remaining.





As
      a
      result of the A Preferred having a conversion rate that was in-the-money on
      the
      date of issuance, the A Preferred has a beneficial conversion feature with
      an
      intrinsic value of $4,720,660. This is because the aggregate 1,187.668 preferred
      shares (not including 4 shares of A Preferred issuable on payment of the $40,000
      unpaid balance of the subscription note receivable) are convertible into
      23,753,360 common shares at a discount of approximately $0.20 per share,
      representing approximately the difference between weighted average market price
      of a common share, or $0.54 per common share from the four closings, and the
      effective conversion price of approximately $0.34. Although the conversion
      price
      for the A Preferred is $0.50, we have to allocate a portion of the value of
      the
      proceeds to the attached warrants (we utilized a Black Scholes model to compute
      the relative fair value of the warrants and considered certain probabilities
      of
      the warrants being exercised) to determine the effective conversion price of
      the
      A Preferred. Our Black Scholes model used the following assumptions: market
      prices of $0.55, $0.51, $0.50, and $0.38 based on the respective dates of the
      four closings, risk free rates ranging from 3.20 to 5.07%, no dividends,
      expected lives ranging from one to five years, and 90% volatility. The
      beneficial conversion feature amount was recorded as a preferred stock deemed
      dividend and was accreted immediately.




The
      placement agent who arranged the private placement financing received 10% of
      the
      cash proceeds we received from the bridge note loans and in the private
      placement, and five year Placement warrants to purchase 3,156,670 shares of
      our
      common stock exercisable at $0.55 per share. In addition, under an advisory
      agreement with our placement agent, primarily as compensation for negotiating
      our recent restructuring transactions (the exchange transaction with PRF and
      the
      cancellation of termination of employment agreements with our chief executive
      officer and chairman, and in connection with the exchange of our outstanding
      Series H warrants for shares of our common stock and our new Series A warrants,
      each described in the notes to this report) we agreed to issue warrants,
      identical to those issued in the Series A financing, to purchase 2,000,000
      shares of our common stock exercisable at $0.55 per share. This warrant was
      valued at $796,706 using a Black Scholes model with no dividends, a 90%
      volatility factor, market price of $0.55, a five year life, and a risk free
      rate
      of 5.07%. In addition we agreed to exchange our common stock for our outstanding
      Series E PA, Series F and Series F PA warrants held by our placement agent,
      its
      affiliates or designees, or sub-agents that participated in the Series A
      Financing. The warrants were valued on the date of the exchange using a Black
      Scholes model using the exercise prices of the various warrants exchanged,
      market price of $0.55, no dividends, a 90% volatility factor, and risk free
      rates ranging from 5.05% to 5.07%. The warrant value, $230,424, was
      then
      compared against the corresponding value of the 931,032 shares to be
      issued ,
      $512,067 based on the market value on the date of the exchange, for
      a net
      charge of $281,643. The aggregate value of the advisory agreement, or
      $1,078,349, is included in general and administrative expenses. We also agreed
      in such advisory agreement that the placement agent will be paid a transaction
      fee based on the closing of a strategic transaction in the future of 3% of
      the
      first $50 million, 2% of the next $50 million up to $100 million, and 1% of
      aggregate consideration we receive in excess of $100 million. Such advisory
      agreement will be in effect until June 15, 2008.





In
      summary, in the three closings of our Series A Convertible Preferred Stock,
      beginning June 18, 2007 and ending July 31, 2007, we sold an aggregate of
      842.198 shares of A Preferred with warrants attached and received gross cash
      proceeds of $8,381,980 and a subscribed note receivable for $40,000. Of this
      amount, we immediately repaid $226,936 to bridge loan holders who did not wish
      to participate in the private placement, and paid our placement agent fees
      aggregating $1,132,098. As part of the first closing, holders of $2,701,500
      of
      previously outstanding convertible bridge notes, the proceeds of which were
      used
      to finance our operations during the months of October 2006 to the first closing
      on June 18, 2007, exchanged their notes with $94,264 of interest, or $2,795,764,
      at 125% of their face value, or $3,494,705, for 349.470 shares of A Preferred
      with warrants attached. The total outstanding 1,191.668 shares of A Preferred
      can be converted into 23,833,360 shares of our common stock. We issued Series
      A
      warrants to purchase an aggregate of 11,916,680 shares of our common stock
      at $1
      per share, Series M warrants to purchase an aggregate of 15,466,680 shares
      of
      our common stock at $0.50 per share, and Series M-1 warrants to purchase an
      aggregate of 7,733,340 shares of our common stock at $1 per share. Our placement
      agent received five-year warrants to purchase an aggregate of 3,156,670 shares
      of our common stock at $0.55 per share.


F40


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**





*Early
      Extinguishment of Revenue Interest Obligation* *:* Also
      on
      June 18, 2007, and in conjunction with the completion of the above equity
      financing, we entered into the Amended and Restated Exchange Agreement (Exchange
      Agreement) with Paul Royalty Fund, L.P. whereby PRF exchanged its interest
      in
      our future revenues (recorded in our financial statements as a $43,401,000
      liability at June 18, 2007) for 500 shares of our new Series A-1 Convertible
      Preferred Stock (A-1 Preferred) and 500 shares of our of Series A-2 Convertible
      Preferred Stock (A-2 Preferred), each share having a liquidation preference
      of
      $10,000. The aggregate $10,000,000 liquidation preference amount of the A-1
      and
      A-2 Preferred can be converted to common stock at conversion rates of $0.50
      and
      $5 per share, respectively, or an aggregate of 11,000,000 common shares on
      an as
      converted basis for both the A-1 and A-2 Preferred. Our earlier agreements
      with
      PRF were cancelled and PRF’s liens were therefore removed from our intellectual
      property.





Our
      Exchange Agreement with PRF also provided for the following:





·
            Reimbursement
                of PRF for its legal expenses;





·
            Resignations
                of our chairman and chief executive officer, and the execution by
                us, and
                our chairman and chief executive officer, of agreements canceling
                the
                termination of employment agreements we entered into with our chairman
                and
                chief executive officer in 2002. Such termination of employment agreements
                would have required us to make payments to our chairman and chief
                executive officer based upon a multiple of their five-year average
                annual
                salaries, as they are defined in those 2002 agreements, if we had
                terminated their employment with us. The cancellation agreements
                are
                described below;





·
            Resignation
                of five of our seven directors, the election of new directors with
                one
                designee from PRF, and the election of our President, Dr. Costa
                Papastephanou, as our new chief executive officer (CEO).





On
      June
      21, 2007, Costa Papastephanou was named our CEO and also elected to our Board
      of
      Directors. Dr. Papastephanou had been employed as our president and chief
      operating officer since February 2001. Mark Eisenberg, Steven Lilien, and Allen
      Schiff resigned as directors on June 21, 26, and 27, 2007, respectively. Drs.
      Lilien and Schiff were members of our audit and compensation committees. Also
      pursuant to such agreement, on June 22, 2007, the resignations of Ron Lipstein,
      our former chief executive officer, and Steven Katz, our former chairman, as
      directors became effective. Dr. Katz was a member of our compensation
      committee.





On
      June
      29, 2007 the Board of Directors resolved that the Board should consist of six
      directors and elected Shepard Goldberg, Mark Bagnall and John Leone to fill
      some
      of the vacancies created by the resignations of five of our directors. Mr.
      Leone
      was designated as a director by PRF. Mr. Leone was chosen by the Board of
      Directors to be our Lead Director on September 26, 2007. **





As
      a
      result of the A-1 Preferred having a conversion rate that was in-the-money
      on
      the date of issuance it has a beneficial conversion feature with an intrinsic
      value of $500,000. This is because the shares are convertible into 10,000,000
      common shares at a discount of approximately $0.05 per share, representing
      the
      difference between the market price of a common share, or $0.55 per common
      share
      on June 18, 2007, and the effective conversion price of approximately $0.50.
      The
      beneficial conversion feature amount was recorded as a preferred stock deemed
      dividend and was accreted immediately. We recorded the A-1 and A-2 preferred
      at
      their respective fair value based on the value of the conversion shares for
      the
      A-1 preferred and based on the value of a bond with similar characteristics
      for
      the A-2 preferred.




We
      recorded a gain on the early extinguishment of the revenue interest obligation
      of $35,527,695.


F41


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**





*Cancellation
      Agreements* *:* As
      required by the terms of the Exchange Agreement with PRF, we entered into
      Cancellation Agreements with our former chief executive officer and our former
      chairman canceling termination of employment agreements we entered into with
      them in 2002. Such termination of employment agreements required substantial
      payments we would have to make to them in the event of the involuntary
      termination of their employments with us. Under such Cancellation Agreements
      we
      made initial payments of $235,000 and $65,000, respectively, to them (including
      $25,000 to each as part of the consideration for cancellation of the deferred
      compensation we owed them). They surrendered options to purchase an aggregate
      of
      508,909 shares of common stock at prices ranging from $3.75 to $54 per share.
      Thirty days after we receive the first response from the FDA to our pre-market
      application for clearance to make commercial sales of ORCEL to treat venous
      stasis ulcers (the FDA’s 100 Day Letter), we will pay them $90,000 and $45,000,
      respectively. Seven months after we receive the FDA’s 100 Day Letter we will pay
      them $190,000 and $75,000, respectively. The post 100 Day Letter payments
      of $90,000 and $45,000, respectively, will be accelerated in certain events.
      Our former
      chief executive officer and our former chairman received five-year warrants
      to
      purchase 2,382,022 and 2,328,001 shares, respectively, of our common stock
      at
      $0.55 per share. We will also issue additional five year warrants to each of
      them entitling them to purchase so many shares of our common stock equal to
      31⁄2%
      of the number of shares of our common stock we issue, or are required to issue
      upon conversion or exercise of securities we issue, in the period ending
      30 days after (and if) we publicly announce that we have received FDA
      clearance for commercial sales of our ORCEL product for the treatment of venous
      leg ulcers: (i) in financings in which we receive up to $6,300,000 and
      (ii) to
      our creditors in satisfaction of our obligations to them in excess of the number
      of shares we issue in such period in satisfaction of $3,000,000 of debt we
      owe.
      The additional warrants we may issue to our chief
      executive officer and
      chairman will also be exercisable at $0.55 per common share





Pursuant
      to a resolution adopted by our Board of Directors in 2001, we were required
      to
      pay to our former chief executive officer and former chairman of our Board
      of
      Directors, one percent each of all moneys received by us from investors in
      our
      equity securities or certain lenders. We were also required to issue to each
      of
      them options to purchase such number of shares of our common stock equal to
      ten
      percent of the shares issued by us in an equity financing, which options are
      exercisable at the prices paid by the investors for the shares we sell in the
      equity financing. Pursuant to such resolution, in October and November 2005
      we
      granted to each of them seven-year options entitling each of them to purchase
      211,975 shares of our common stock (423,950 in the aggregate) at an exercise
      price of $3.75 per share as a result of our sale of 2,119,746 shares of our
      common stock in a private placement in the latter part of 2005. We did not
      grant
      to either of them options to purchase ten percent of the number of shares of
      our
      common stock that the purchasers of our Series E Preferred received upon
      conversion of their Series E Preferred, with the exercise price of such
      options being the price per share of common stock such purchasers will have
      paid
      for our common stock they receive. We did not, with their consent, grant them
      options because of private placement sales of our equity securities prior to
      October 2005.





We
      owed
      deferred compensation to our former chief executive officer and our former
      chairman of $233,300 and $366,221, respectively. Our former chairman and our
      former chief executive officer agreed to cancel these obligations and all other
      obligations ($23,981) we owed them in exchange for payments of $25,000 each
      and
      an option to purchase 12 of our A Preferred shares for our former chief
      executive officer and 8 of our A Preferred shares for our former chairman
      (liquidation preference of $10,000 per share), plus the number of Series A,
      M,
      and M-1 warrants they would have received if they had purchased such A Preferred
      shares for the $10,000 per share price paid by the investors in our most recent
      private placement. Such options are exercisable at $100 per A Preferred share
      (plus the percentage of Series A, M and M-1 warrants comparable to the
      percentage that the purchased A Preferred share(s) has to the total of A
      Preferred shares that could be purchased upon the full exercise of the option.)
      The option expires thirty days after, and if, we publicly announce FDA clearance
      for sale of our ORCEL product to treat venous stasis ulcers.





Included
      in personnel expense is a severance charge for the costs associated with the
      cancellation agreements which can be summarized as follows:


Payments
                made at cancellation
            
            $
            280,000Payments
                to be made in future accrued
            
            
            400,000Warrants
                to purchase common shares:4,710,022
                @ $0.55 per share
            
            
            1,855,515Options
                to purchase 20 shares ofA
                preferred with attached warrants
            
            
            198,000Surrender
                of options to purchase508,909
                common shares
            
            
            (92,498
            )Deferred
                compensation and otherliabilities
                forgiven
            
            
            (623,502
            )Legal
                expenses
            
            
            19,200$
            2,036,715


F42


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


We
      determined the value of the warrants utilizing a Black Scholes model, lives
      equivalent to the term of the warrant, no dividends, risk free rates ranging
      from 4.60% to 5.07% depending on the lives of the warrants or options, and
      a 90%
      volatility factor. The warrants were issued in conjunction with our Series
      A
      closings so we used the market prices on the three respective 2007 closings
      dates of June 18, July 25, and July 31 or $0.55, $0.51, and $0.50,
      respectively.





*Other
      significant aspects of the private placement and financing transactions were:*





·
            We
                filed a required registration statement by September 18, 2007 for
                the
                shares of our common stock (a) into which the A Preferred and the
                A-1
                Preferred shares can be converted and (b) issuable upon exercise
                of our
                Series M warrants. We were required to have such registration statement
                declared effective by February 15, 2008. Such filing was declared
                effective February 14, 2008.





·
            The
                exercise prices of the warrants and the conversion price of the Series
                A
                and A-1 Preferred will be adjusted downward (full-ratchet anti-dilution
                protection) for any equity issuances (other than permitted issuances)
                hereafter made by us at a price lower than the conversion price of
                the
                preferred stock or the exercise price of the warrants. Such full
                ratchet
                protection will cease and become standard weighted average anti-dilution
                protection 30 days after, and if, we publicly announce that we were
                successful in obtaining FDA clearance for commercial sale of ORCEL
                for the
                treatment of venous stasis ulcers.





·
            Subject
                to a registration statement being in effect or Rule 144 being available
                for public sale of the shares of our common stock issuable upon conversion
                of the A Preferred shares (a) if the closing bid price of the our
                common
                stock is equal to or greater than $1.50 for ten (10) consecutive
                trading
                days, 1/3 of the A Preferred stated value shall automatically convert
                into
                shares of our common stock; (b) if the closing bid price is equal
                to or
                greater than $2 for ten (10) consecutive trading days then such portion
                of
                the A Preferred liquidation preference shall automatically convert
                into
                shares of our common stock so that, together with the earlier automatic
                conversion, 2/3 of the original stated value shall have converted,
                and (c)
                if the closing bid price of our common stock is equal to or greater
                than
                $3 for ten (10) consecutive trading days then all of the A Preferred
                stated value not theretofore converted shall automatically convert
                into
                shares of our common stock.





·
            Beginning
                June 18, 2008, the Series A Warrants may be exercised pursuant to
                a
                cashless exercise if the common stock underlying the warrants are
                not
                included for public sale in an effective registration statement.





·
            With
                the exception of $3,000,000 of securities issued prior to December
                31,
                2007 used to settle trade payables, ranking pari passu with the A,
                A-1,
                and A-2 Preferred shares and issuable only if the FDA clearance for
                commercial sale of ORCEL for treatment of venous stasis ulcers has
                not yet
                been obtained, as long as $2,000,000 of stated valued of the A and
                A-1
                Preferred shares remain outstanding we are prohibited from issuing
                any
                securities that rank senior to or pari passu with the A, A-1, and
                A-2
                Preferred shares without the approval of at least 50% of the A Preferred
                shares and the A-1 Preferred shares outstanding, voting together
                as one
                class.





·
            As
                long as the A Preferred shares are outstanding, the Lead Investor
                will
                receive the right for the period ending June 17, 2010 to purchase
                up to
                40% of the securities being offered in subsequent financings (as
                defined)
                on the terms being offered in such future
                financings.





·
            As
                long as A and A-1 Preferred shares are outstanding, and as long as
                we have
                not received FDA clearance for commercial sale of ORCEL for treatment
                of
                venous stasis ulcers, the holders may exchange their preferred shares
                at
                their stated values for equity securities which have more favorable
                terms
                that we sell in a future financing.





**Vendor
      settlements:** On
      December 17, 2007 and December 26, 2007 we issued 5.25 shares and 4.663 shares,
      or 9.913 shares of A Preferred in the aggregate, for $42,000 and $29,740,
      respectively, or $71,840 in the aggregate, of vendor liabilities. As a result
      of
      the A Preferred having a conversion rate that was less on the dates of issuance
      than the then market prices of our common stock, the A Preferred had a
      beneficial conversion feature with an aggregate intrinsic value of
      $11,084. **** The
      A
      Preferred shares are convertible into an aggregate 198,260 common shares at
      a
      discount of approximately $0.06 per share, representing the difference between
      the market prices of a common share of $0.47 on December 17, 2007 and $0.36
      on
      December 26, 2007, and the effective conversion prices of approximately $0.40
      and $0.32, on such respective dates. **** The
      beneficial conversion feature amount was recorded as a preferred stock deemed
      dividend and was accreted immediately.


F43


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**





**10 –
      WARRANTS OUTSTANDING**





The
      following table summarizes warrant activity during the period from March 12,
      1991 (inception) through December 31, 2007(excluding the Class A and B warrants
      which were issued during the initial public offering of our common
      stock):


Price Range ($)
              
              WarrantsMarch
                  12, 1991 (inception)Granted
              
              
              1,413.75
              
              
              49Balance,
                  December 31, 1991
              
              
              1,413.75
              
              
              49Granted
              
              
              1,413.75
              
              
              367Balance,
                  December 31, 1992
              
              
              1,413.75
              
              
              416Granted
              
              
              1,413.75   -   
                  1,800.00
              
              
              322Balance,
                  December 31, 1993
              
              
              1,413.75   -   
                  1,800.00
              
              
              738Granted
              
              
              1,800.00
              
              
              67Balance,
                  December 31, 1994
              
              
              1,413.75  
                  -    1,800.00
              
              
              805Granted
              
              
              1,500.00
              
              
              26Expired
              
              
              1,413.75
              
              
              (18
              )Balance,
                  December 31, 1995
              
              
              1,413.75  
                  -    1,800.00
              
              
              813Granted
              
              
              150.00  
                  -    1,500.00
              
              
              3,411Exercised
              
              
              1,500.00
              
              
              (226
              )Expired
              
              
              1,800.00
              
              
              (16
              )Balance,
                  December 31, 1996
              
              
              150.00   -   
                  1,800.00
              
              
              3,982Granted
              
              
              1,800.00  
                  -    2,137.50
              
              
              2,204Expired
              
              
              1,800.00
              
              
              (67
              )Balance,
                  December 31, 1997
              
              
              150.00   -   
                  2,137.50
              
              
              6,119Granted
              
              
              1,800.00  
                  -    2,100.00
              
              
              500Exercised
              
              
              150.00  
                  -    1,800.00
              
              
              (1,372
              )Expired
              
              
              1,800.00
              
              
              (723
              )Balance,
                  December 31, 1998
              
              
              150.00  
                  -    2,137.50
              
              
              4,524Granted
              
              
              1,875.00  
                  -    2,175.00
              
              
              778Exercised
              
              
              150.00
              
              
              (94
              )Expired
              
              
              900.00   -   
                  1,413.27
              
              
              (114
              )Balance,
                  December 31, 1999
              
              
              150.00  
                  -    2,137.50
              
              
              5,094Granted
              
              
              2,250.00
              
              
              18Exercised
              
              
              1,800.00
              
              
              (13
              )Expired
              
              
              150.00   -    1,500.00
              
              
              (1,034
              )Balance,
                  December 31, 2000
              
              
              1,155.00   -   
                  2,250.00
              
              
              4,065Expired
              
              
              1,155.00   -   
                  1,800.00
              
              
              (1,429
              )Balance,
                  December 31, 2001
              
              
              1,155.00   -    2,250.00
              
              
              2,636Granted
              
              
              .15   -      
                  937.20
              
              
              148,068Exercised
              
              
              .15
              
              
              (64,933
              )Expired
              
              
              .15   -   
                  2,175.00
              
              
              (11,290
              )Balance,
                  December 31, 2002
              
              
              .15   -   
                  2,250.00
              
              
              74,481Granted
              
              
              .15   -    
                    225.00
              
              
              157,948Exercised
              
              
              .15   -        
                  60.00
              
              
              (26,584
              )Expired
              
              
              2,100.00
              
              
              (167
              )Balance,
                  December 31, 2003
              
              
              .15  
                  -    1,800.00
              
              
              205,678Granted
              
              
              .15   -       225.00
              
              
              34,583Exercised
              
              
              .15  
                  -       300.00
              
              
              (97,651
              )Surrendered
              
              
              54.00  
                  -       300.00
              
              
              (76,389
              )Expired
              
              
              2,100.00
              
              
              (314
              )Balance,
                  December 31, 2004
              
              
              30.00  
                  -    1,800.00
              
              
              65,907Granted
              
              
              0.015  
                  -         27.00
              
              
              2,974,861Exercised
              
              
              0.015
              
              
              (243,901
              )Expired
              
              
              675.00  
                  -    1,800.00
              
              
              (258
              )Balance,
                  December 31, 2005
              
              
              
              
              
              2,796,609Granted
              
              
              3.75  
                  -         27.00
              
              
              3,083,891Exercised
              
              
              0.015
              
              
              (139,734
              )Expired
              
              
              30.00  
                  -         48.75
              
              
              (10,937
              )Balance,
                  December 31, 2006
              
              
              
              
              
              5,729,829Granted
              
              
              0.50  
                  -         
                   1.00
              
              
              48,382,999Exchanged
              
              
              0.01  
                  -          
                  2.15
              
              
              (2,933,476
              )Balance,
                  December 31, 2007
              
              
              
              
              
              51,179,352


F44


FORTICELL
          BIOSCIENCE ,
          INC.
 (A
          DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


T he
      following table summarizes data about outstanding warrants as of December 31,
      2007





WeightedAverage
            
            WeightedRemaining
            
            AverageRange of
            
            Number
            
            contractual
            
            Exercise
            
            Numberexercise prices
            
            outstanding
            
            Life (years)
            
            Price
            
            exercisable$0.01
                to $0.015
            
            
            978,600
            
            
            2.59
            
            $
            0.014
            
            
            978,600$0.50
                to $0.55
            
            
            25,333,373
            
            
            2.04
            
            $
            0.52
            
            
            25,333,373$1.00
            
            
            23,049,626
            
            
            4.49
            
            $
            1.00
            
            
            15,316,286$1.79
                to $7.50
            
            
            1,613,347
            
            
            3.01
            
            $
            3.55
            
            
            1,613,347$11.25
                to $75.00
            
            
            204,406
            
            
            1.61
            
            $
            25.79
            
            
            204,40651,179,352
            
            
            
            
            
            
            
            
            43,446,012





7,733,340
      Series M-1 warrants to purchase our common stock at $1 per share are exercisable
      proportionate to the holders exercise of Series M warrants to purchase our
      common stock at $0.50 per share.





**11
      -** **SHARE
      BASED COMPENSATION**





*1996
      Plan:* **** In
      April
      1996, the Board of Directors and stockholders approved the adoption of the
      1996
      Stock Option Plan (the “1996 Plan”). The 1996 Plan provided for the grant of
      options to purchase up to 2,333 shares of our common stock. **** In
      August
      1998, the stockholders and Board of Directors ratified and approved an amended
      and restated 1996 Plan increasing the maximum number of shares of our common
      stock for which stock options may be granted from 2,333 to 10,333
      shares. **** In
      August
      2000, the stockholders and Board of Directors ratified and approved the second
      amendment to our Amended and Restated 1996 Plan increasing the number of shares
      of our common stock for which options have been or could be granted under the
      Plan from 10,333 to 20,000 shares. **** In
      February 2003, the stockholders and Board of Directors ratified and approved
      an
      amended and restated 1996 Plan, increasing the maximum number of shares of
      our
      common stock for which stock options may be granted from 20,000 to 30,000
      shares. The 1996 Plan provides for granting of options to purchase our common
      stock at not less than the fair value of such shares on the date of the grant.
      Some of the options generally vest ratably over a four-year period, while others
      vest immediately. The options generally expire after seven years **.** As
      of
      December 31, 2007, no options were available for grant under the 1996
      Plan.





*1998
      Grant:* We
      recognized approximately $1,696,000 of compensation expense for options and
      warrants issued to officers and our directors in 1998. Such options and warrants
      were accounted for as variable option grants. Such options and warrants had
      vested prematurely in December 1998, upon the exercise of warrants owned by
      one
      of our directors, in accordance with the terms of certain compensation
      provisions provided for and approved by our Board of
      Directors.


F45


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


*Out
      of Plan Options:* During
      the years ended December 31, 2005, 2003 and 2002, we issued 423,950, 59,626,
      and
      25,333 options, respectively, to our former chief executive and former chairman,
      which were granted outside of our Stock Option Plan. Such options to purchase
      508,909 shares of our common stock were cancelled in connection with our
      cancellation agreements with these former executives described in Note 9. During
      the year ended December 31, 2004 we issued 6,667 options to a director which
      were also granted outside of our Stock Option Plan. These options vested
      immediately and expire seven years from date of grant.





*2003* *Performance
      Shares:* **** During
      2003, an allocation of 120,000 restricted shares of common stock were granted
      to
      officers and certain employees. The issuance of these shares was contingent
      on
      our achieving certain milestones. On January 5, 2005, we issued 66,667 and
      22,667 of these shares to our chief executive officer and chairman,
      respectively, for having achieved a milestone of raising in excess of
      $15,000,000 over a specified period. On June 27, 2005, we allocated the
      remaining 30,666 shares of our common stock to certain executive officers and
      other employees. Out of this 30,666 allocation, we issued an aggregate of 19,666
      shares to our chief operating and chief financial officers. Grants of the
      remaining 11,000 shares allocated to three employees were conditioned on meeting
      certain performance criteria. One of those employees met such performance
      criteria at December 31, 2005 and December 31, 2006 and 667 and 1,333, or an
      aggregate 2,000 shares, were issued to him. The remaining 9,000 shares were
      forfeited as it was determined the performance criteria was not reached. The
      related charges were reflected as additional paid in capital and deferred
      compensation in the statement of shareholders’ deficit. The 111,000 shares
      issued all vested on May 31, 2007. We recorded a charge to deferred compensation
      of $752,000 based on the fair value of these restricted shares. The deferred
      compensation for the 111,000 issued shares was amortized over the 29-month
      vesting period. Included in personnel expense are charges of $128,183 and
      $334,678 for the years ended December 30, 2007 and 2006, respectively,
      reflecting the amortization of this deferred compensation amount. These shares
      have certain registration rights. The stock grant agreements with these
      individuals all provided that in lieu of a direct cash payment, these
      individuals may transfer a portion of these shares back to us to satisfy their
      minimum future personal tax withholding liability arising from the receipt
      of
      these shares, for which we will pay their tax obligation. Pursuant to those
      provisions, an aggregate 35,126 shares were transferred back to us by these
      individuals upon their vesting in 2007 to satisfy the approximately $27,000
      tax
      liability paid by us on their behalf, and the remaining 75,874 shares were
      retained by them.





*2005
      Plan:* In July
      2005, the stockholders approved the adoption of the 2005 Stock Option Plan
      (the
“2005 Plan”). The 2005 Plan provides for the grant of options to purchase up to
      66,667 shares of our common stock. These options may be granted to employees,
      our officers, our non-employee directors, consultants, and advisors. The 2005
      Plan provides for granting of options to purchase our common stock at not less
      than the fair value of such shares on the date of the grant. As of December
      31,
      2007, none of these options were available for grant under the 2005
      Plan.





*2006
      Plan:* On
      August 24, 2006 the Board of Directors adopted the Forticell Bioscience, Inc.
      2006 Stock Award and Incentive Plan (the “2006 Plan”). The 2006 Plan, as amended
      and approved by shareholders on December 20, 2007, provides for grants of up
      to
      6,000,000 shares of our common stock that may be awarded to our employees,
      directors, consultant and advisors. The awards maybe in the form of restricted
      stock or incentive stock options. The grants will be made by the compensation
      committee of the Board of Directors or, in some cases, by a sub-committee of
      the
      compensation committee, and may require a performance component. The members
      of
      that sub-committee are both non-employee directors.





On
      December 11, 2006 the Board of Directors awarded 500,000 shares of restricted
      stock from the 2006 Plan, of which 200,000 shares was awarded to a member of
      management and 300,000 shares to two senior level employees. These shares were
      issued after January 1, 2008 and vest over a five-month period ending May 31,
      2008. See Note 17. The shares granted to any of these employees, or pro-rata
      portions thereof, will be forfeited if during any time over this seventeen-month
      period, such employee’s employment with us is terminated. Due to the high
      probability that these members of management would be retained through May
      31,
      2008, we recorded a charge of $114,000 related to these awards in deferred
      compensation and are amortizing this charge over the 17 month period of service.
      No other performance criteria were established for these awards. Included in
      personnel expense are charges of $80,471 for the year ended December 30, 2007
      reflecting the amortization of this deferred compensation amount.





On
      September 26, 2007, our Board of Directors awarded seven-year options to
      purchase 1,000,000, 250,000, and an aggregate 450,000 shares of our common
      stock, respectively to our CEO, our chief financial officer, and other employees
      of ours. Additionally an award of options to purchase an aggregate of 250,000
      shares of our common stock was made to the five independent members of our
      Board
      of Directors. Each was awarded an option to purchase 50,000 shares. All these
      options are exercisable at $0.38, the closing market price on the day these
      options were awarded.


F46


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**





On
      October 22, 2007, our Board of Directors awarded seven-year options to purchase
      500,000, 550,000, and an aggregate 450,000 shares of our common stock,
      respectively to our CEO, our chief financial officer, and other employees of
      ours. All these options were exercisable at $0.52, the closing market price
      of
      our common stock on the day these options were awarded. Additionally, our
      directors awarded 300,000 restricted shares of our common stock to our CEO
      which
      vest in equal annual tranches of 100,000 each over a three year period as long
      as our CEO continues to be employed by us. All such awards were made under
      the
      2006 Plan. Due to the high probability that our CEO will be retained through
      October 22, 2010, we will amortize a charge of $68,400 related to this
      restricted share award over the 36 month period of service. No other performance
      criteria were established for these awards. Included in personnel expense are
      charges of $4,200 for the year ended December 31, 2007 reflecting the
      amortization of this amount.





As
      of
      December 31, 2007, 1,749,770 shares of our common stock remained available
      for
      grant under the 2006 Plan.





The
      exercise price for all stock options awarded is the market price of our common
      stock on the date the option is granted.





Our
      Board
      of Directors or its Stock Option Committee has determined the exercise price
      for
      all stock options awarded. The following table summarizes the stock option
      activity through December 31, 2007:





WeightedaverageexerciseNumber
            
            price ($)Granted –
                adoption of stock option plan
            
            
            1,040
            
            $
            1,062.00Balance,
                December 31, 1996
            
            
            1,040
            
            
            1,062.00Granted
            
            
            820
            
            
            1,791.00Forfeited,
                expired
            
            
            (20
            )
            
            994.50Balance,
                December 31, 1997
            
            
            1,840
            
            
            1,387.50Granted
            
            
            4,598
            
            
            1,815.00Exercised
            
            
            (45
            )
            
            1,113.00Forfeited,
                expired
            
            
            (96
            )
            
            1,678.50Balance,
                December 31, 1998
            
            
            6,297
            
            
            1675.50Granted
            
            
            2,660
            
            
            1,630.50Forfeited,
                expired
            
            
            (1,474
            )
            
            2,239.50Balance,
                December 31, 1999
            
            
            7,483
            
            
            1,549.50Granted
            
            
            3,000
            
            
            1,194.00Exercised
            
            
            (23
            )
            
            1,050.00Forfeited,
                expired
            
            
            (299
            )
            
            1,240.50Balance,
                December 31, 2000
            
            
            10,161
            
            
            1,845.00Granted
            
            
            5,043
            
            
            889.50Forfeited,
                expired
            
            
            (1,649
            )
            
            1,111.50Balance,
                December 31, 2001
            
            
            13,555
            
            
            1,281.00Granted
            
            
            7,701
            
            
            193.50Forfeited,
                expired
            
            
            (2,109
            )
            
            1,152.00Balance,
                December 31, 2002
            
            
            19,147
            
            
            859.50Granted
            
            
            10,724
            
            
            33.00Forfeited,
                expired
            
            
            (6,658
            )
            
            1,260.30Balance,
                December 31, 2003
            
            
            23,213
            
            
            362.40Granted
            
            
            8,633
            
            
            28.80Forfeited,
                expired
            
            
            (3,291
            )
            
            304.80Balance,
                December 31, 2004
            
            
            28,555
            
            
            231.00Granted
            
            
            2,400
            
            
            4.95Forfeited,
                expired
            
            
            (1,985
            )
            
            230.10Balance,
                December 31, 2005
            
            
            28,970
            
            
            212.40Granted
            
            
            71,867
            
            
            0.90Forfeited,
                expired
            
            
            (18,106
            )
            
            260.46Balance,
                December 31, 2006
            
            
            82,731
            
            
            18.13Granted
            
            
            3,450,000
            
            
            0.44Forfeited,
                expired
            
            
            (15,834
            )
            
            19.33Balance,
                December 31, 2007
            
            
            3,516,897
            
            $
            0.77Exercisable,
                December 31, 2007
            
            
            921,324
            
            $
            1.66


F47


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**





There
      was
      no aggregate intrinsic value of the outstanding and exercisable options since
      all of the option grants were priced at or above the December 31, 2007 stock
      price of $0.38.





The
      following table summarizes information concerning currently outstanding and
      exercisable options as of December 31, 2007:





Weighted
            
            
            
            
            
            Weightedaverage
            
            Weighted
            
            
            
            average
            
            Weightedremaining
            
            average
            
            
            
            remaining
            
            averageNumber
            
            contractual
            
            exercise
            
            Number
            
            contractual
            
            exerciseRange of exercise price ($)
            
            Outstanding
            
            life (years)
            
            price ($)
            
            exercisable
            
            life (years)
            
            price ($)0.38-0.55
            
            
            3,497,000
            
            
            6.76
            
            
            0.44
            
            
            906,843
            
            
            6.75
            
            
            0.452.85    -          14.70
            
            
            10,200
            
            
            3.30
            
            
            5.64
            
            
            5,567
            
            
            1.79
            
            
            7.6427.00   
                -          33.75
            
            
            6,633
            
            
            2.78
            
            
            29.59
            
            
            5,850
            
            
            2.72
            
            
            29.2045.00-131.25
            
            
            2,147
            
            
            1.48
            
            
            62.37
            
            
            2,147
            
            
            1.48
            
            
            62.37523.50-907.50
            
            
            707
            
            
            0.87
            
            
            812.00
            
            
            707
            
            
            0.87
            
            
            812.00930.00-1,059.00
            
            
            210
            
            
            0.32
            
            
            981.90
            
            
            210
            
            
            0.32
            
            
            981.903,516,897
            
            
            6.74
            
            
            0.77
            
            
            921,324
            
            
            6.68
            
            
            1.66





Share-based
      compensation expense is included in personnel expense. We recorded additional
      compensation cost of $271,407 in 2007 and $41,200 in 2006 associated with the
      adoption of SFAS 123(R).





**12
      - RELATED PARTY TRANSACTIONS**





***Due
      to Founder***





Pursuant
      to an amended agreement, we had engaged the services of Dr. Mark Eisenberg,
      one
      of our former directors, who was also one of our founders, as a consultant
      through August 31, 2005. During 2003, we terminated our agreement with Dr.
      Eisenberg and discontinued research activities in Australia. For the period
      from
      inception to December 31, 2003, production and laboratory costs included
      compensation due to Dr. Eisenberg of approximately $1,029,000. In accordance
      with the settlement agreement we entered into with Dr. Eisenberg, we recorded
      consulting expense of $194,656 for the remainder of the consulting fees due
      under our consulting agreement with Dr. Eisenberg. Additionally, we recorded
      $28,881 in rent expense that we owed Dr. Eisenberg for the space we occupied
      in
      the Australian laboratory. The total amount due Dr. Eisenberg under the
      settlement agreement aggregated $398,574 which represented unpaid consulting
      fees of $304,478, the rent for the Australian laboratory, and $65,215 of
      advances made by Dr. Eisenberg on our behalf. We settled the balance due Dr.
      Eisenberg in 2004 by issuing options to purchase 6,667 shares of our common
      stock at an exercise price of $30 per share. We recorded the $398,574 settlement
      in 2004 as a contribution of capital given that the settlement was with our
      director. These options will expire in 2009.





***Research
      Collaboration***





On
      October 11, 2004 we entered into a collaboration with Hapto Biotech, Inc.,
      for
      the purpose of further developing promising product leads identified through
      a
      research collaboration established in September 2002 between us and Hapto
      Biotech, utilizing each company’s proprietary technologies. The activities of
      the two entities had been conducted in a new entity, Hapto / Ortec
      Collaboration, LLC. The agreement provided for a license to us if the
      collaboration is successful in developing other technology (as defined) which
      can be used to treat hard to heal chronic wounds (as defined). This
      collaboration arrangement was terminated when we acquired Hapto Biotech, Inc.
      on
      April 14, 2006. See Note 4.


F48


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**13
      - COMMITMENTS AND CONTINGENCIES**





**Lease
      with Columbia University:** In March
      1996, we entered into a five-year lease for our laboratory and offices in
      Columbia University’s Audubon Biomedical Science and Technology Park in New York
      City. Construction of the laboratory and office facility was completed in July
      1996 and became fully operational in November 1996. We utilize our laboratory
      facilities to produce ORCEL for research and development activities including
      cell expansion and biomaterial research. ****





**Second
      Amendment of Columbia Lease:** On
      December 18, 2003, we amended the lease agreement with Columbia University,
      extending the lease term to December 2005. With this amendment, we agreed to
      pay
      Columbia University $25,588 a month for past due rent commencing on February
      1,
      2004 and ending on December 31, 2005.





**Third
      Amendment of Columbia Lease:** On
      March
      16, 2006 we agreed to a two-year lease extension of the aforementioned lease
      agreement until December 31, 2007 for our then 14,320 square foot New York
      City
      lab and office facility, commencing January 1, 2006. We agreed to a monthly
      rental of $60,860 or $730,320 per annum. We have the option to renew for an
      additional two years at the rate of $63,843 per month, or $766,120 annually.





**New
      Jersey Lease Termination:** On
      August 5, 2002, we reached an agreement with the New Jersey Economic Development
      Authority (NJEDA) to terminate a 2001 lease and to enter into a new lease
      covering production and office space. Monthly payments under such lease began
      on
      January 1, 2003. On June 9, 2003 NJEDA and we executed an agreement to terminate
      this lease. Based on the terms of this settlement, a termination cost of
      $978,000 was agreed upon. The termination costs were settled by applying the
      $623,000 security deposit, plus accrued interest thereon, with the balance
      of
      $340,000 paid on June 11, 2003. In 2003, we recorded a lease termination cost
      of
      $1,119,166 consisting of the aforementioned $978,000 together with $141,166
      of
      other costs that we incurred in connection with the build-out of the leasehold.
      We continued to rent space in North Brunswick, New Jersey pursuant to a lease
      until its expiration on July 31, 2004, at a rent of $2,300 per month.





**Cell
      Therapy Manufacturing Agreement**





In
      October 29, 2003 we entered into an agreement commencing November 1, 2003 with
      Lonza Walkersville, Inc. (successor by acquisition of **** Cambrex
      Bio Science Walkersville, Inc.), a subsidiary of Lonza Corporation (Lonza),
      for
      Lonza to manufacture ORCEL in Lonza’s Walkersville, Maryland facilities. The
      Lonza manufacturing facility is required to meet FDA’s good manufacturing
      processes standards. Lonza is experienced in the manufacture of cell-based
      medical products such as our ORCEL.





Our
      agreement with Lonza requires us to pay Lonza $136,591 per month, or $1,639,092
      per year, for the use of a production suite in their facility located in
      Walkersville, Maryland. In January 2007 Lonza agreed to temporarily suspend
      such
      payments until such time as our financial condition improves and we again
      require the use of the production suite (See Modified Manufacturing Agreement
      and Termination of Sales Agency Agreement with Lonza below). The payments we
      will make to Lonza will increase to $175,000 monthly, or $2,100,000 per year,
      if
      we require Lonza to build us a larger production facility to meet our
      requirements for the production of ORCEL. In 2006 we incurred charges of
      $1,591,350 for the use of Lonza’s production facility. These amounts are
      included in product and laboratory costs. Such annual payments include some
      services and overhead expenses provided and paid for by Lonza. These annual
      payments we are required to make increase 3% per annum on the anniversary of
      the
      commencement date. We are required to pay 50% of the cost of the construction
      of
      that larger production facility, but not more than $1,000,000. However, the
      amount we contribute to the construction of that larger facility will be repaid
      to us by credits against a portion of the future annual payments of $2,100,000
      and of certain other payments we are required to make to Lonza after the larger
      facility is in use. We are also required to pay specified hourly charges for
      the
      Lonza employees engaged in the production of ORCEL as well as certain other
      charges. After construction of the larger production facility we are required
      to
      acquire from Lonza virtually all of our requirements for ORCEL that Lonza can
      produce. Prior to our election to have Lonza construct the larger production
      facility for us, either we or Lonza may terminate the agreement on six months
      notice by us and twelve months notice by Lonza. If we elect to have Lonza
      construct the larger production facility for us the agreement will continue
      for
      six years after the larger production facility is constructed. However, even
      after such construction we and Lonza may elect to scale down over the following
      three years the portion of our requirements for ORCEL that Lonza will produce
      for us. We may elect the scale down period at any time after one year after
      the
      larger production facility is constructed and in operation in which event there
      are additional payments we must make to Lonza. If we elect the scale down period
      after one year we must pay Lonza $2,625,000 and if we elect the scale down
      period after two years we must pay Lonza $1,050,000. If we elect the scale
      down
      periods in either of those two years, we forfeit our right to receive any
      further credits (up to the amount of our contribution to the cost of the larger
      production facility) against payments we are thereafter required to make to
      Lonza. Either Lonza or we may elect the scale down period later than three
      years
      after that facility is in operation and neither of us will be required to make
      any additional payments to the other because of that election. If after the
      construction of the larger production facility we breach a material term of
      our
      agreement with Lonza, or elect to terminate the agreement, we will have to
      pay
      Lonza the following amounts:


F49


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**





If termination occurs after the following
              anniversary of the construction of the
              larger production facility
            
            Amount
              of
              Payment6
                years
            
            $
            1,050,0005
                years, but less than 6 years
            
            
            1,575,0004
                years, but less than 5 years
            
            
            2,625,0003
                years, but less than 4 years
            
            
            3,675,0002
                years, but less than 3 years
            
            
            5,250,0001
                year, but less than 2 years
            
            
            6,300,000





In
      addition, upon such termination we will forfeit our right to receive any further
      credits (up to the amount of our contribution to the cost of the larger
      production facility) against future payments we may have to make to
      Lonza.





**Modified
      Manufacturing Agreement and Termination of Sales Agency Agreement with
      Lonza:** On
      September 26, 2007, we entered into an agreement with Lonza Bio Science of
      Walkersville, Inc. (Lonza), formerly known as Cambrex Bio Science of
      Walkersville, Inc. whereby Lonza agreed:





·
            to
                perform certain defined work in a timely manner necessary to support
                our
                application for FDA Pre-Market Approval of our ORCEL product;


·
            to
                modify the terms of our October 29, 2003 Manufacturing Agreement,
                as
                previously amended, prescribing rates for labor and lower production
                suite
                fees than we previously agreed to and which we have to pay to Lonza,
                and


·
            to
                apply $100,000 held as a security deposit against outstanding amounts
                we
                owe Lonza.





We
      paid
      Lonza $750,000 to be applied against amounts we owe it. We agreed that we would
      pay Lonza on March 31, 2008, on account of its labor charges and production
      suite fees hereafter incurred, as well as for the remainder of our currently
      outstanding obligations, an amount which will be the lesser of the amount we
      then owe, or 25% of the net proceeds we receive from the sale of our equity
      securities in the first quarter of 2008. Any remaining outstanding balance
      we
      owe will be due on July 1, 2008. In addition, we and Lonza agreed to terminate
      the Sales Agency Agreement which provided for Lonza marketing and selling our
      ORCEL product and related Licensing and Security Agreements, all dated October
      18, 2004, that Lonza and we had entered into. Lonza agreed to turn over to
      us
      its records related to its sales efforts.





**License
      Agreement:** In
      October 2003, we entered into an exclusive License Agreement with Teva Medical
      Limited, a subsidiary of Teva Pharmaceutical Industries Ltd. (Teva) for the
      sales and marketing of our ORCEL product in Israel. This ten-year agreement,
      beginning on the date the product is launched for marketing in Israel, requires
      Teva to seek regulatory and reimbursement approval for ORCEL in Israel. We
      received an upfront payment of $50,000 in 2003 which we recorded as deferred
      income, see Note 7. We will receive an additional $50,000 within thirty days
      of
      grant of reimbursement approval in Israel, and another $100,000 within 30 days
      of attainment of aggregate net sales of $3,000,000 in Israel within any period
      of twelve consecutive calendar months. The agreement also provides for pricing
      ORCEL and terms of payment. Additionally Teva will pay us royalties of 10%
      of
      net sales in Israel up to $5,000,000 per annum. If sales are in excess of
      $5,000,000 annually Teva will pay us 10% on the first $5,000,000 of sales in
      Israel and a 20% royalty on sales above $5,000,000 in Israel. As of December
      31,
      2007, regulatory and reimbursement approval has not yet been received in Israel.





**Material
      Transfer and Technology Evaluation Agreement:** On
      December 21, 2007, we entered into a Material Transfer and Technology Evaluation
      Agreement with CJ CheilJedang Corp (CJ), a South Korean Corporation, for which
      we received $150,000 in January 2008 and we then provided CJ with 10 grams
      of
      research grade fibrin microbeads (FMB). We granted CJ the exclusive right for
      one year to use Ortec’s FMB technology for extraction of mesenchymal stem cells
      (MSCs) from umbilical cord blood. We will also provide technical support and
      consultation as needed and draft protocols on the use of our FMB technology.
      The
      FMB’s will be used only for research and development in the use of MSCs
      extracted from umbilical cord blood for the in vivo treatment of damaged and/or
      diseased tissues. If the research performed during the one-year evaluation
      period is successful, we may thereafter negotiate a definitive patent licensing
      and product development agreement.


F50


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**





***Supply
      Agreement***





**Cell
      supply agreement:** In April
      2004, we entered into a Material Supply Agreement with ES Cell International
      Pte
      Ltd. (ESI). Under the terms of the agreement, we provided ESI with human skin
      cells generated from cell lines developed and manufactured by us for use in
      our
      ORCEL product. We received a $50,000 up-front fee upon the signing of the
      agreement and we received an additional $150,000 upon first delivery of certain
      specified cell lines. We have recorded these amounts in interest and other
      income in 2004.





***Government
      Regulation***





We
      are
      subject to extensive government regulation. Products for human treatment are
      subject to rigorous preclinical and clinical testing procedures as a condition
      for clearance by the FDA and approval by similar authorities in foreign
      countries prior to commercial sale. Presently, we have submitted our Pre-Market
      Application to the FDA for the use of cryopreserved ORCEL in the treatment
      of
      venous stasis ulcers, which application includes the results of our human
      clinical trials; however, it is not possible for us to determine whether the
      results achieved from the human clinical trials will be sufficient to obtain
      FDA
      clearance. If we are unable to obtain FDA clearance, we may no longer be able
      to
      continue our operations. It is not possible for us to determine whether the
      results achieved from that human clinical trial will be sufficient to obtain
      FDA
      clearance.





**14
      - INCOME TAXES**




Income
        taxes are accounted for under the asset and liability method. Under this
        method,
        deferred tax assets and liabilities are recognized for the future tax
        consequences attributable to differences between the financial statement
        carrying amounts of existing assets and liabilities and their respective
        tax
        bases and operating loss and tax credit carryforwards. Deferred tax assets
        and
        liabilities are measured using enacted tax rates expected to apply to taxable
        income in the years in which those temporary differences are expected to
        be
        recovered or settled. In assessing the realizability of deferred tax assets,
        management considers whether it is more likely than not that some portion
        or all
        of the deferred tax assets will not be realized. The ultimate realization
        of
        deferred tax assets is dependent upon the generation of future taxable income
        during the periods in which those temporary differences are expected to become
        deductible.
 
 Under
        Section 382 of the Internal Revenue Code of 1986, as amended, our use of
        Federal
        and New York State net operating loss (“NOL”) carryforwards are limited as we
        have experienced an ownership change, as defined in Section 382. Based on
        our
        analysis of changes in stock ownership during 2007 and following the completion
        of our June 2007 private placement (See Note 9) we determined that an ownership
        change had occurred on June 18, 2007. As a result, there is a material
        limitation on our use of Federal and New York State NOL carryforwards. As
        of
        December 31, 2007 we had approximately $8,700,000 of Federal and New York
        State
        NOL carryforwards available to offset future taxable income after considering
        the Section 382 limitation. We may have built in gains and losses that will
        be
        recognized during the five year recognition period following the date of
        the
        ownership change that could impact the limitation. These carryforwards expire
        in
        various years through 2027.
 
 For
        financial statement purposes, a valuation allowance of approximately $5,105,000
        at December 31, 2007 has been recognized to offset entirely our deferred
        tax
        assets, which arose primarily from our NOL carry-forwards for tax purposes,
        as
        the realization of such deferred tax assets is uncertain. Components of our
        deferred tax asset are as follows:
 
 Net
                  operating loss carry-forwards
              
              $
              3,646,000Non
                  cash compensation
              
              
              1,366,000Other
              
              
              93,0005,105,000Valuation
                  allowance
              
              
              (5,105,000
              )Net
                  deferred tax asset
              
              $
              -  F51


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


The
      income tax benefit of $250,000 for 2007 principally consists of a credit granted
      to us under a New York State (NYS) Qualified Emerging Technology Company
      program. The program provides cash incentives to emerging technology companies
      with emerging technology products whose sales are under $10,000,000, a workforce
      less than 101 employees of which 75% must be in NYS, and research and
      development activities in NYS with a ratio for funds to net sales greater than
      or equal to 6 percent.





The
      following reconciles the income taxes computed at the federal statutory rate
      to
      the amounts recorded in our statement of operations:





Year ended December 31,2007
            
            2006Income
                tax provision (benefit) at the statutory rate
            
            $
            4,483,000
            
            $
            (6,287,000
            )State
                and local income taxes, net of federal benefit
            
            
            (165,000
            )
            
            (1,968,000
            )Permanent
                difference
            
            
            3,408,000
            
            
            (5,051,000
            )Permanent
                limitation of NOLs under Section 382
            
            
            44,444,000
            
            
            -Prior
                year under accruals
            
            
            12,087,000
            
            
            -Effect
                of valuation allowance
            
            
            (64,507,000
            )
            
            12,817,000$
            (250,000
            )
            $
            (489,000
            )





**15
      - FAIR VALUE OF FINANCIAL INSTRUMENTS**





Statement
      of Financial Accounting Standards No. 107, “Fair Value of Financial
      Instruments,” requires disclosure of the estimated fair value of an entity’s
      financial instrument assets and liabilities. For us, financial instruments
      consist principally of cash and cash equivalents, loans payable and other
      long-term obligations.





The
      following methods and assumptions were used to estimate the fair value of each
      class of financial instrument for which it is practicable to estimate that
      value.





***Cash
      and Cash Equivalents***





The
      carrying value reasonably approximates fair value because of the short-term
      maturity of those instruments.





***Loans
      Payable and Capital Lease Obligations***





Based
      on
      borrowing rates currently available to us for other financings with similar
      terms and maturities, the carrying value of our loans payable and capital lease
      obligations approximate their fair value.





**16
      - RETIREMENT PLAN**





We
      maintain a defined contribution 401(k) savings plan (401(k) plan) for the
      benefit of eligible employees. Under the 401(k) plan, a participant may elect
      to
      defer a portion of annual compensation. Contributions to the 401(k) plan are
      immediately vested in plan participants' accounts. Plan expenses were $5,301
      and
      $4,235 for the years ended December 31, 2007 and 2006, respectively. We do
      not
      match employee contributions.


F52


FORTICELL
        BIOSCIENCE ,
        INC.
 (A
        DEVELOPMENT STAGE ENTERPRISE)
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**17
      - SUBSEQUENT EVENTS**





On
      February 2, 2008, we entered into a commercial premium finance agreement with
      First Insurance Funding Corp. of New York in the amount of $139,390. The
      financing agreement bore interest at 7.3 % and required ten monthly payments
      of
      $14,393 beginning March 2008. The financing was utilized to fund the premium
      payments for our directors and officers insurance policy.





On
      February 21, 2008 the Internal Revenue Service notified us they were going
      to do
      a routine audit of our 401(k) plan and related 5500 tax filing for the year
      ended December 31, 2005.





On
      March
      13, 2008, we obtained the consents of our Series A and A-1 Preferred Stock
      Holders to borrow up to $4,000,000. These consents were required by agreements
      we made with the investors who purchased our Series A and acquired our Series
      A-1 and A-2 preferred stock in June – July 2007.





On
      March
      25, 2008, one of the purchasers of our Series A preferred stock loaned us
      $150,000. We will pay the lender 14% interest per annum and warrants
      in the form of our Series A warrants we issued in our June-July 2007 private
      placement. Such warrants will be exercisable (a) at the exercise price of,
      and
      (b) for the number of shares per dollar issuable upon exercise of, warrants
      we
      may issue in our next financing. We are
      obligated to repay the loans and interest on the earlier of June 19, 2008 or
      the
      first closing of a larger loan or from the sale of our equity securities, from
      either of which we will try to secure not less than $3,000,000 after we receive
      the FDA “100-Day letter” commenting on the results of our completed clinical
      trial for use of our ORCEL product to treat venous stasis ulcers.





The
      following equity transactions occurred during the first quarter of
      2008:





·
            Our
                former chief executive officer and former chairman exercised stock
                options
                paying $1,200 and $800, respectively, to purchase 12 and 8 Series
                A
                Preferred shares (convertible into 240,000 and 160,000 common shares
                respectively) with attached warrants. The attached warrants they
                received
                were as follows: Series A warrants to purchase 120,000 and 80,000
                common
                shares exercisable at $1 per share, Series M warrants to purchase
                120,000
                and 80,000 common shares at $0.50 per share, and Series M-1 warrants
                to
                purchase 60,000 and 40,000 shares at $1 per share.





·
            We
                issued an aggregate of 200,000 shares to our CFO (80,000) and two
                other
                members of management in connection with our December 11, 2006 restricted
                stock award grant.





·
            Holders
                of an aggregate 75.289 Series A Preferred shares, including the above
                20
                Series A Preferred shares issued to our former chairman and chief
                executive, elected to convert such shares into an aggregate of 1,505,780
                shares of our common stock.





F53