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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------



For the quarterly period ended June 30, 2005



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from
 to
.



Commission file number: 0-51172



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CARDIOVASCULAR BIOTHERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 33-0795984                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



1700 West Horizon
Ridge Parkway, Suite 100

Henderson, Nevada

(Address of principal executive offices)



89012

(Zip Code)



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702-248-1174

(Registrants telephone number, including area code)



Former name, former address and former fiscal year, if changed since last
report: N/A



Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(D) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes  x    No ̈



Indicate by check mark whether the registrant is an
accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes ̈No  x.



As of August 3, 2005,
122,533,116 shares of the Registrants common stock were outstanding.



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##### Table of Contents



CARDIOVASCULAR
BIOTHERAPEUTICS, INC.



FORM 10-Q



FOR THE QUARTER ENDED JUNE 30, 2005



INDEX



|         |  |                                                                                                                                                                  |  |     
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                                                                  |  | Page
|PART I.  |  | FINANCIAL INFORMATION                                                                                                                                            |  |     
|         |  |                                                                                                                                                                 
|Item 1.  |  | Financial Statements                                                                                                                                             |  | 3   
|         |  |                                                                                                                                                                 
|         |  | Unaudited Balance Sheets at June 30, 2005 and December 31, 2004                                                                                                  |  | 3   
|         |  |                                                                                                                                                                 
|         |  | Unaudited Statements of Operations for the Six and Three Months Ended June 30, 2004 and 2005 and for the period from March 11, 1998 (inception) to June 30, 2005 |  | 4   
|         |  |                                                                                                                                                                 
|         |  | Unaudited Statements of Stockholders Equity (Deficit) for the period from March 11, 1998 (inception) to June 30, 2005                                           |  | 5   
|         |  |                                                                                                                                                                 
|         |  | Unaudited Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2005 and for the period from March 11, 1998 (inception) to June 30, 2005           |  | 6   
|         |  |                                                                                                                                                                 
|         |  | Notes to Unaudited Financial Statements                                                                                                                          |  | 8   
|         |  |                                                                                                                                                                 
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                            |  | 22  
|         |  |                                                                                                                                                                 
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                                       |  | 43  
|         |  |                                                                                                                                                                 
|Item 4.  |  | Controls and Procedures                                                                                                                                          |  | 43  
|         |  |                                                                                                                                                                 
|PART II. |  | OTHER INFORMATION                                                                                                                                                |  |     
|         |  |                                                                                                                                                                 
|Item 1.  |  | Legal Proceedings                                                                                                                                                |  | 44  
|         |  |                                                                                                                                                                 
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                      |  | 44  
|         |  |                                                                                                                                                                 
|Item 3.  |  | Defaults Upon Senior Securities                                                                                                                                  |  | 44  
|         |  |                                                                                                                                                                 
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                                                                              |  | 44  
|         |  |                                                                                                                                                                 
|Item 5.  |  | Other Information                                                                                                                                                |  | 44  
|         |  |                                                                                                                                                                 
|Item 6.  |  | Exhibits                                                                                                                                                         |  | 44  



2



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##### Table of Contents



PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------



CARDIOVASCULAR BIOTHERAPEUTICS, INC.

(formerly CARDIOVASCULAR GENETIC ENGINEERING, INC.)

(A Development Stage Company)



BALANCE SHEETS

DECEMBER 31, 2004 AND
JUNE 30, 2005 (UNAUDITED)



|                                                                                                                                                                                                    |  |                  |             |   |              |   |             |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----------- | - | ------------ | - | ----------- | -
|                                                                                                                                                                                                    |  | December 31,2004 |             |   | June 30,2005 |  
|ASSETS                                                                                                                                                                                              |  |                  |             |   |              |   |             |  
|Current Assets:                                                                                                                                                                                     |  |                  |             |   |              |   |             |  
|Cash and cash equivalents                                                                                                                                                                           |  | $                | 4,530,221   |   |              | $ | 13,467,096  |  
|Short-term investments                                                                                                                                                                              |  |                  | 85,362      |   |              |   | 111,013     |  
|Prepaid assets                                                                                                                                                                                      |  |                  | 479,500     |   |              |   | 689,944     |  
|                                                                                                                                                                                                    |  |                  |             |   |              |   |             |  
|Total Current assets                                                                                                                                                                                |  |                  | 5,095,083   |   |              |   | 14,268,053  |  
|Property and equipment, net                                                                                                                                                                         |  |                  | 30,119      |   |              |   | 28,245      |  
|Deferred offering costs                                                                                                                                                                             |  |                  | 866,512     |   |              |   |            |  
|Deferred debt financing costs, net                                                                                                                                                                  |  |                  | 712,664     |   |              |   |            |  
|Other assets                                                                                                                                                                                        |  |                  | 5,900       |   |              |   | 5,900       |  
|                                                                                                                                                                                                    |  |                  |             |   |              |   |             |  
|Total assets                                                                                                                                                                                        |  | $                | 6,710,278   |   |              | $ | 14,302,198  |  
|                                                                                                                                                                                                    |  |                  |             |   |              |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY DEFICIT                                                                                                                                                        |  |                  |             |   |              |   |             |  
|Current Liabilities:                                                                                                                                                                                |  |                  |             |   |              |   |             |  
|Current portion of convertible notes payable                                                                                                                                                        |  | $                | 1,035,000   |   |              | $ |            |  
|Accrued interest payable                                                                                                                                                                            |  |                  | 1,187,870   |   |              |   | 2,612       |  
|Due to affiliates                                                                                                                                                                                   |  |                  | 522,719     |   |              |   | 163,348     |  
|Accounts payable                                                                                                                                                                                    |  |                  | 713,280     |   |              |   | 259,148     |  
|Accrued payroll and payroll taxes                                                                                                                                                                   |  |                  | 18,075      |   |              |   | 38,346      |  
|                                                                                                                                                                                                    |  |                  |             |   |              |   |             |  
|Total current liabilities                                                                                                                                                                           |  |                  | 3,476,944   |   |              |   | 463,454     |  
|                                                                                                                                                                                                    |  |                  |             |   |              |   |             |  
|Convertible notes payable, net of current portion and net of debt discount of $1,745,001 and $0                                                                                                     |  |                  | 8,615,999   |   |              |   |            |  
|                                                                                                                                                                                                    |  |                  |             |   |              |   |             |  
|Total Liabilities                                                                                                                                                                                   |  |                  | 12,092,943  |   |              |   | 463,454     |  
|                                                                                                                                                                                                    |  |                  |             |   |              |   |             |  
|Commitments and contingencies                                                                                                                                                                       |  |                  |             |   |              |   |             |  
|Stockholders Equity (deficit):                                                                                                                                                                     |  |                  |             |   |              |   |             |  
|Convertible preferred stock, $0.001 par value; 10,000,000 shares authorized; 52,850 shares issued; 23,250 shares and 3,500 shares outstanding
at December 31, 2004 and June 30, 2005, respectively  |  |                  | 23          |   |              |   | 4           |  
|Common stock, $0.001 par value; 400,000,000 shares authorized; 112,649,650 shares issued and outstanding in December 31, 2004 and 122,475,616
issued and outstanding in June 30, 2005, respectively |  |                  | 112,650     |   |              |   | 122,476     |  
|Committed common stock                                                                                                                                                                              |  |                  | 2,000       |   |              |   | 138         |  
|Additional paid-in capital                                                                                                                                                                          |  |                  | 11,293,919  |   |              |   | 36,345,438  |  
|Deficit accumulated during the development stage                                                                                                                                                    |  |                  | (16,791,257 | ) |              |   | (22,629,312 | )
|                                                                                                                                                                                                    |  |                  |             |   |              |   |             |  
|Total stockholders equity (deficit)                                                                                                                                                                |  |                  | (5,382,665  | ) |              |   | 13,838,744  |  
|                                                                                                                                                                                                    |  |                  |             |   |              |   |             |  
|Total liabilities and stockholders equity (deficit)                                                                                                                                                |  | $                | 6,710,278   |   |              | $ | 14,302,198  |  
|                                                                                                                                                                                                    |  |                  |             |   |              |   |             |  



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



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##### Table of Contents



CARDIOVASCULAR BIOTHERAPEUTICS, INC.

(formerly CARDIOVASCULAR GENETIC ENGINEERING, INC.)

(A Development Stage Company)



STATEMENTS OF OPERATIONS

FOR THE SIX
AND THREE MONTH PERIODS ENDED JUNE 30, 2004 AND 2005 AND FOR

THE PERIOD FROM MARCH 11, 1998 (INCEPTION) TO JUNE 30, 2005

(UNAUDITED)



|                                        |  |                           |             |   |                             |   |             |                                                                 |  |   |             |   |  |   |             |   |  |             |  
|--------------------------------------- |  | ------------------------- | ----------- | - | --------------------------- | - | ----------- | --------------------------------------------------------------- |  | - | ----------- | - |  | - | ----------- | - |  | ----------- | -
|                                        |  | Six Months Ended June 30, |             |   | Three Months Ended June 30, |   |             | For the Period from March 11, 1998 (inception) to June 30, 2005 | 
|                                        |  | 2004                      |             |   | 2005                        |   |             | 2004                                                            |  |   | 2005        |   | 
|Operating expenses:                     |  |                           |             |   |                             |   |             |                                                                 |  |   |             |   |  |   |             |   |  |             |  
|Research and development (a)            |  |                           | 735,012     |   |                             |   | 1,195,114   |                                                                 |  |   | 281,613     |   |  |   | 782,397     |   |  | 7,582,002   |  
|Selling, general and administrative (b) |  |                           | 841,557     |   |                             |   | 3,214,249   |                                                                 |  |   | 538,642     |   |  |   | 1,866,707   |   |  | 9,764,880   |  
|                                        |  |                           |             |   |                             |   |             |                                                                 |  |   |             |   |  |   |             |   |  |             |  
|Total operating expenses                |  |                           | 1,576,569   |   |                             |   | 4,409,363   |                                                                 |  |   | 820,255     |   |  |   | 2,649,104   |   |  | 17,346,882  |  
|                                        |  |                           |             |   |                             |   |             |                                                                 |  |   |             |   |  |   |             |   |  |             |  
|Operating (Loss)                        |  |                           | (1,576,569  | ) |                             |   | (4,409,363  | )                                                               |  |   | (820,255    | ) |  |   | (2,649,104  | ) |  | (17,346,882 | )
|Other income (expenses)                 |  |                           |             |   |                             |   |             |                                                                 |  |   |             |   |  |   |             |   |  |             |  
|Interest Income                         |  |                           | 7,699       |   |                             |   | 123,254     |                                                                 |  |   | 7,699       |   |  |   | 76,215      |   |  | 185,628     |  
|Interest Expense                        |  |                           | (559,265    | ) |                             |   | (1,551,946  | )                                                               |  |   | (274,937    | ) |  |   |             |   |  | (5,447,804  | )
|Other Expenses                          |  |                           |            |   |                             |   |            |                                                                 |  |   |            |   |  |   |            |   |  | (5,254      | )
|Equity loss in unconsolidated investee  |  |                           |            |   |                             |   |            |                                                                 |  |   |            |   |  |   |            |   |  | (15,000     | )
|                                        |  |                           |             |   |                             |   |             |                                                                 |  |   |             |   |  |   |             |   |  |             |  
|Net Other Expenses                      |  |                           | (551,566    | ) |                             |   | (1,428,692  | )                                                               |  |   | (267,238    | ) |  |   | 76,215      |   |  | (5,282,430  | )
|Net (Loss)                              |  |                           | (2,128,135  | ) |                             |   | (5,838,055  | )                                                               |  |   | (1,087,493  | ) |  |   | (2,572,889  | ) |  | (22,629,312 | )
|                                        |  |                           |             |   |                             |   |             |                                                                 |  |   |             |   |  |   |             |   |  |             |  
|(Loss) per share                        |  |                           |             |   |                             |   |             |                                                                 |  |   |             |   |  |   |             |   |  |             |  
|Basic Loss per share                    |  | $                         | (0.02       | ) |                             | $ | (0.05       | )                                                               |  | $ | (0.01       | ) |  | $ | (0.02       | ) |  |             |  
|Diluted loss per share                  |  |                           | (0.02       | ) |                             |   | (0.05       | )                                                               |  |   | (0.01       | ) |  |   | (0.02       | ) |  |             |  
|                                        |  |                           |             |   |                             |   |             |                                                                 |  |   |             |   |  |   |             |   |  |             |  
|Shares used to calculate loss per share |  |                           |             |   |                             |   |             |                                                                 |  |   |             |   |  |   |             |   |  |             |  
|Basic                                   |  |                           | 110,190,100 |   |                             |   | 117,866,733 |                                                                 |  |   | 110,190,100 |   |  |   | 121,359,094 |   |  |             |  
|                                        |  |                           |             |   |                             |   |             |                                                                 |  |   |             |   |  |   |             |   |  |             |  
|Diluted                                 |  |                           | 110,190,100 |   |                             |   | 117,866,733 |                                                                 |  |   | 110,190,100 |   |  |   | 121,359,094 |   |  |             |  
|                                        |  |                           |             |   |                             |   |             |                                                                 |  |   |             |   |  |   |             |   |  |             |  



|                                                                            |  |   |        |  |   |         |  |   |        |  |   |         |  |   |          
|--------------------------------------------------------------------------- |  | - | ------ |  | - | ------- |  | - | ------ |  | - | ------- |  | - | ---------
|(a) Research & Development with Related Parties (Notes 4 and 9)             |  | $ | 23,041 |  | $ | 224,231 |  | $ | 11,520 |  | $ | 126,696 |  | $ | 1,209,184
|(b) Selling General and Administration with Related Parties (Notes 4 and 9) |  |   | 35,141 |  |   | 77,747  |  |   | 17,571 |  |   | 36,742  |  |   | 829,283  



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



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##### Table of Contents



CARDIOVASCULAR BIOTHERAPEUTICS, INC.

(formerly CARDIOVASCULAR GENETIC ENGINEERING, INC.)

(A Development Stage Company)

STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT)

FOR THE PERIOD FROM MARCH 11, 1998 (INCEPTION) TO JUNE 30, 2005 (UNAUDITED)



|                                                                       |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   |             |   |  |   |            |  
|---------------------------------------------------------------------- |  | ---------- | ------ | --------------------- | ------ | ------------------------------------- | ------- | - | ------------ | - | --------------- | - |  | ------------------------- |  | - | ------------------- |  | - | ------ | - |  | - | ---------- | - |  | - | ----------- | - |  | - | ---------- | -
|                                                                       |  | Date       |        | Price Per Equity Unit |        | Preferred Stock Series A, Convertible |         |   | Common Stock |   | Committed Stock |   |  | AdditionalPaid-In Capital |  |   | Accumulated Deficit |  |   | Total  |  
|                                                                       |  |            | Shares |                       |        | Amount                                |         |   | Shares       |   | Amount          |   |  |                           | 
|Balance, March 11, 1998 (date of inception)                            |  |            |        |                       |        |                                       |        |   |              | $ |                |   |  |                          |  | $ |                    |  | $ |       |   |  | $ |           |   |  | $ |            |   |  | $ |           |  
|Issuance of common stock to founders                                   |  | (1)        |        | $                     | 0.001  |                                       |         |   |              |   |                 |   |  | 93,050,000                |  |   | 93,050              |  |   | 67     |   |  |   | (92,186    | ) |  |   |             |   |  |   | 931        |  
|Issuance of common stock for cash                                      |  | 7/9/1998   |        |                       | 0.10   |                                       |         |   |              |   |                 |   |  | 300,000                   |  |   | 300                 |  |   |        |   |  |   | 29,700     |   |  |   |             |   |  |   | 30,000     |  
|Issuance of preferred stock for cash                                   |  | (1)        |        |                       | 9.85   |                                       | 52,850  |   |              |   | 53              |   |  |                           |  |   |                     |  |   |        |   |  |   | 520,347    |   |  |   |             |   |  |   | 520,400    |  
|Net loss                                                               |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   | (567,864    | ) |  |   | (567,864   | )
|                                                                       |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   |             |   |  |   |            |  
|Balance, December 31, 1998                                             |  |            |        |                       |        |                                       | 52,850  |   |              |   | 53              |   |  | 93,350,000                |  |   | 93,350              |  |   | 67     |   |  |   | 457,861    |   |  |   | (567,864    | ) |  |   | (16,533    | )
|                                                                       |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   |             |   |  |   |            |  
|Issuance of common stock to founders                                   |  | (2)        |        | $                     | 0.001  |                                       |         |   |              |   |                 |   |  | 4,580,000                 |  |   | 4,580               |  |   | (46    | ) |  |   | (4,488     | ) |  |   |             |   |  |   | 46         |  
|Issuance of common stock for cash                                      |  | 6/25/1999  |        |                       | 0.30   |                                       |         |   |              |   |                 |   |  | 66,800                    |  |   | 67                  |  |   |        |   |  |   | 19,933     |   |  |   |             |   |  |   | 20,000     |  
|Issuance of common stock for cash                                      |  | 6/25/1999  |        |                       | 0.30   |                                       |         |   |              |   |                 |   |  | 100,000                   |  |   | 100                 |  |   |        |   |  |   | 29,900     |   |  |   |             |   |  |   | 30,000     |  
|Issuance of common stock for cash                                      |  | 10/5/1999  |        |                       | 0.30   |                                       |         |   |              |   |                 |   |  | 340,000                   |  |   | 340                 |  |   |        |   |  |   | 101,660    |   |  |   |             |   |  |   | 102,000    |  
|Issuance of stock options for services                                 |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   | 82,293     |   |  |   |             |   |  |   | 82,293     |  
|Net loss                                                               |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   | (654,875    | ) |  |   | (654,875   | )
|                                                                       |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   |             |   |  |   |            |  
|Balance, December 31, 1999                                             |  |            |        |                       |        |                                       | 52,850  |   |              |   | 53              |   |  | 98,436,800                |  |   | 98,437              |  |   | 21     |   |  |   | 687,159    |   |  |   | (1,222,739  | ) |  |   | (437,069   | )
|                                                                       |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   |             |   |  |   |            |  
|Issuance of common stock to founders                                   |  | (3)        |        | $                     | 0.001  |                                       |         |   |              |   |                 |   |  | 2,120,000                 |  |   | 2,120               |  |   | (21    | ) |  |   | (2,078     | ) |  |   |             |   |  |   | 21         |  
|Issuance of common stock for cash                                      |  | 12/21/2000 |        |                       | 0.4117 |                                       |         |   |              |   |                 |   |  | 8,750,000                 |  |   | 8,750               |  |   |        |   |  |   | 3,593,250  |   |  |   |             |   |  |   | 3,602,000  |  
|Issuance of common stock for conversion of convertible preferred stock |  | (4)        |        |                       | 0.10   |                                       | (1,500  | ) |              |   | (2              | ) |  | 150,000                   |  |   | 150                 |  |   |        |   |  |   | (148       | ) |  |   |             |   |  |   | 0          |  
|Issuance of common stock for services                                  |  | (5)        |        |                       |        |                                       |         |   |              |   |                 |   |  | 583,300                   |  |   | 583                 |  |   |        |   |  |   | (583       | ) |  |   |             |   |  |   | 0          |  
|Issuance of stock options for services                                 |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   | 73,660     |   |  |   |             |   |  |   | 73,660     |  
|Net loss                                                               |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   | (2,232,877  | ) |  |   | (2,232,877 | )
|                                                                       |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   |             |   |  |   |            |  
|Balance, December 31, 2000                                             |  |            |        |                       |        |                                       | 51,350  |   |              |   | 51              |   |  | 110,040,100               |  |   | 110,040             |  |   |       |   |  |   | 4,351,260  |   |  |   | (3,455,616  | ) |  |   | 1,005,735  |  
|                                                                       |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   |             |   |  |   |            |  
|Issuance of common stock for cash                                      |  | 8/10/2001  |        |                       | 0.80   |                                       |         |   |              |   |                 |   |  | 150,000                   |  |   | 150                 |  |   |       |   |  |   | 119,850    |   |  |   |             |   |  |   | 120,000    |  
|Net loss                                                               |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   | (1,664,954  | ) |  |   | (1,664,954 | )
|                                                                       |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   |             |   |  |   |            |  
|Balance, December 31, 2001                                             |  |            |        |                       |        |                                       | 51,350  |   |              |   | 51              |   |  | 110,190,100               |  |   | 110,190             |  |   |       |   |  |   | 4,471,110  |   |  |   | (5,120,570  | ) |  |   | (539,219   | )
|                                                                       |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   |             |   |  |   |            |  
|Net loss                                                               |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   | (1,328,460  | ) |  |   | (1,328,460 | )
|                                                                       |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   |             |   |  |   |            |  
|Balance, December 31, 2002                                             |  |            |        |                       |        |                                       | 51,350  |   |              |   | 51              |   |  | 110,190,100               |  |   | 110,190             |  |   |       |   |  |   | 4,471,110  |   |  |   | (6,449,030  | ) |  |   | (1,867,679 | )
|                                                                       |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   |             |   |  |   |            |  
|Issuance of stock options for services                                 |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   | 47,120     |   |  |   |             |   |  |   | 47,120     |  
|Issuance of warrants for services                                      |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   | 119,744    |   |  |   |             |   |  |   | 119,744    |  
|Net loss                                                               |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   | (2,328,748  | ) |  |   | (2,328,748 | )
|                                                                       |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   |             |   |  |   |            |  
|Balance, December 31, 2003                                             |  |            |        |                       |        |                                       | 51,350  |   |              |   | 51              |   |  | 110,190,100               |  |   | 110,190             |  |   |       |   |  |   | 4,637,974  |   |  |   | (8,777,778  | ) |  |   | (4,029,563 | )
|                                                                       |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   |             |   |  |   |            |  
|Issuance of common stock for                                           |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   |             |   |  |   |            |  
|conversion of convertible notes                                        |  | (6)        |        |                       |        |                                       |         |   |              |   |                 |   |  | 1,649,550                 |  |   | 1,650               |  |   |        |   |  |   | 4,529,550  |   |  |   |             |   |  |   | 4,531,200  |  
|conversion of convertible preferred stock                              |  | (7)        |        |                       |        |                                       | (28,100 | ) |              |   | (28             | ) |  | 810,000                   |  |   | 810                 |  |   | 2,000  |   |  |   | (2,782     | ) |  |   |             |   |  |   |           |  
|Interest on benefit conversion feature                                 |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   | 2,050,000  |   |  |   |             |   |  |   | 2,050,000  |  
|Issuance of stock options for services                                 |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   | 79,177     |   |  |   |             |   |  |   | 79,177     |  
|Net loss                                                               |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   | (8,013,479  | ) |  |   | (8,013,479 | )
|                                                                       |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   |             |   |  |   |            |  
|Balance, December 31, 2004                                             |  |            |        |                       |        |                                       | 23,250  |   |              |   | 23              |   |  | 112,649,650               |  |   | 112,650             |  |   | 2,000  |   |  |   | 11,293,919 |   |  |   | (16,791,257 | ) |  |   | (5,382,665 | )
|                                                                       |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   |             |   |  |   |            |  
|Issuance of common stock for                                           |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   |             |   |  |   |            |  
|cash                                                                   |  | (8)        |        |                       |        |                                       |         |   |              |   |                 |   |  | 1,725,000                 |  |   | 1,725               |  |   |        |   |  |   | 14,709,660 |   |  |   |             |   |  |   | 14,711,385 |  
|conversion of convertible notes                                        |  | (6)        |        |                       |        |                                       |         |   |              |   |                 |   |  | 4,090,000                 |  |   | 4,090               |  |   | 138    |   |  |   | 10,326,773 |   |  |   |             |   |  |   | 10,331,001 |  
|conversion of convertible preferred stock                              |  | (7)        |        |                       |        |                                       | (19,750 | ) |              |   | (19             | ) |  | 3,975,000                 |  |   | 3,975               |  |   | (2,000 | ) |  |   | (1,956     | ) |  |   |             |   |  |   |           |  
|exercise of options                                                    |  | (10)       |        |                       |        |                                       |         |   |              |   |                 |   |  | 35,966                    |  |   | 36                  |  |   |        |   |  |   | 16,967     |   |  |   |             |   |  |   | 17,003     |  
|Issuance of warrant for cash                                           |  | (9)        |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   | 75         |   |  |   |             |   |  |   | 75         |  
|Net loss (unaudited)                                                   |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |           |   |  |   | (5,838,055  | ) |  |   | (5,838,055 | )
|                                                                       |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   |             |   |  |   |            |  
|Balance, June 30, 2005 (unaudited)                                     |  |            |        |                       |        |                                       | 3,500   |   |              | $ | 4               |   |  | 122,475,616               |  | $ | 122,476             |  | $ | 138    |   |  | $ | 36,345,438 |   |  | $ | (22,629,312 | ) |  | $ | 13,838,744 |  
|                                                                       |  |            |        |                       |        |                                       |         |   |              |   |                 |   |  |                           |  |   |                     |  |   |        |   |  |   |            |   |  |   |             |   |  |   |            |  



|(1) | Multiple transactions valued at the per share price in the year ended December 31, 1998
|--- | ---------------------------------------------------------------------------------------



|(2) | Multiple transactions valued at the per share price in the year ended December 31, 1999
|--- | ---------------------------------------------------------------------------------------



|(3) | Multiple transactions valued at the per share price in the year ended December 31, 2000
|--- | ---------------------------------------------------------------------------------------



|(4) | Preferred stock converted to common stock
|--- | -----------------------------------------



|(5) | Offering costs
|--- | --------------



|(6) | Multiple transactions at $2.00 and $4.00 in the year ended December 31, 2004 and the six month period ended June 30, 2005
|--- | -------------------------------------------------------------------------------------------------------------------------



|(7) | Multiple transactions at 100:1 conversion rate in the year ended December 31, 2004 and the six month period ended June 30, 2005
|--- | -------------------------------------------------------------------------------------------------------------------------------



|(8) | Public offering of 1,725,000 common shares at $10.00 per share
|--- | --------------------------------------------------------------



|(9) | Underwriters warrants sold with the public offing
|--- | -------------------------------------------------



|(10) | Multiple employee option exercises
|---- | ----------------------------------



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



5



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CARDIOVASCULAR BIOTHERAPEUTICS, INC.

(formerly CARDIOVASCULAR GENETIC ENGINEERING, INC.)

(A Development Stage Company)



STATEMENTS OF CASH FLOWS

FOR THE SIX
MONTH PERIODS ENDED JUNE 30, 2004 AND 2005 AND FOR

THE PERIOD FROM MARCH 11, 1998 (INCEPTION) TO JUNE 30, 2005

(UNAUDITED)



|                                                                            |  |    |   |  |                                         |            |   |                                                             |   |            |   |  |   |             |  
|--------------------------------------------------------------------------- |  | -- | - |  | --------------------------------------- | ---------- | - | ----------------------------------------------------------- | - | ---------- | - |  | - | ----------- | -
|                                                                            |  |    |   |  | For the Six Month PeriodsEnded June 30, |            |   | For the Periodfrom March 11,1998(inception) toJune
30, 2005 |  
|                                                                            |  |    |   |  | 2004                                    |            |   | 2005                                                        |   |           
|Cash flows from operating activities:                                       |  |    |   |  |                                         |            |   |                                                             |   |            |   |  |   |             |  
|Net loss                                                                    |  |    |   |  | $                                       | (2,128,135 | ) |                                                             | $ | (5,838,055 | ) |  | $ | (22,629,312 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  | (a | ) |  |                                         |            |   |                                                             |   |            |   |  |   |             |  
|Depreciation                                                                |  |    |   |  |                                         |           |   |                                                             |   | 6,297      |   |  |   | 14,622      |  
|Amortization of beneficial conversion feature                               |  |    |   |  |                                         |           |   |                                                             |   | 710,001    |   |  |   | 2,050,000   |  
|Amortization of deferred debt financing costs                               |  |    |   |  |                                         | 269,207    |   |                                                             |   | 712,664    |   |  |   | 2,135,715   |  
|Stock options issued for services rendered                                  |  |    |   |  |                                         | 48,720     |   |                                                             |   |           |   |  |   | 282,250     |  
|Warrants issued for services rendered                                       |  |    |   |  |                                         |           |   |                                                             |   |           |   |  |   | 119,744     |  
|Equity in loss of unconsolidated investee                                   |  |    |   |  |                                         |           |   |                                                             |   |           |   |  |   | 15,000      |  
|(Increase) decrease in:                                                     |  |    |   |  |                                         |            |   |                                                             |   |            |   |  |   |             |  
|Restricted cash                                                             |  |    |   |  |                                         | (110,000   | ) |                                                             |   |           |   |  |   |            |  
|Prepaid expenses                                                            |  |    |   |  |                                         | (342,746   | ) |                                                             |   | (210,444   | ) |  |   | (689,944    | )
|Other assets                                                                |  |    |   |  |                                         | (5,900     | ) |                                                             |   |           |   |  |   | (20,900     | )
|(Increase) decrease in:                                                     |  |    |   |  |                                         |           |   |                                                             |   |           |   |  |   |            |  
|Accounts payable                                                            |  |    |   |  |                                         | 180,446    |   |                                                             |   | (290,784   | ) |  |   | 423,492     |  
|Accrued payroll and payroll taxes                                           |  |    |   |  |                                         | (2,733     | ) |                                                             |   | 20,272     |   |  |   | 38,347      |  
|Accrued interest                                                            |  |    |   |  |                                         | 278,205    |   |                                                             |   | (1,185,258 | ) |  |   | 2,612       |  
|Other current liabilities                                                   |  |    |   |  |                                         | 110,000    |   |                                                             |   |           |   |  |   |            |  
|                                                                            |  |    |   |  |                                         |            |   |                                                             |   |            |   |  |   |             |  
|Net cash used in operating activities                                       |  | (a | ) |  |                                         | (1,702,936 | ) |                                                             |   | (6,075,307 | ) |  |   | (18,258,374 | )
|                                                                            |  |    |   |  |                                         |            |   |                                                             |   |            |   |  |   |             |  
|Cash flows from investing activities:                                       |  |    |   |  |                                         |            |   |                                                             |   |            |   |  |   |             |  
|Purchase of short term investments                                          |  |    |   |  |                                         | (75,000    | ) |                                                             |   | (25,651    | ) |  |   | (111,013    | )
|Proceeds from sale of short term investments                                |  |    |   |  |                                         |           |   |                                                             |   |           |   |  |   | (6,026      | )
|Purchase of property and equipment                                          |  |    |   |  |                                         | (16,640    | ) |                                                             |   | (4,423     | ) |  |   | (36,841     | )
|                                                                            |  |    |   |  |                                         |            |   |                                                             |   |            |   |  |   |             |  
|Net cash provided by (used in) investing activities:                        |  | (b | ) |  |                                         | (91,640    | ) |                                                             |   | (30,074    | ) |  |   | (153,880    | )
|                                                                            |  |    |   |  |                                         |            |   |                                                             |   |            |   |  |   |             |  
|Cash flows from financing activities:                                       |  |    |   |  |                                         |            |   |                                                             |   |            |   |  |   |             |  
|Net proceeds from sale of common stock                                      |  |    |   |  |                                         |           |   |                                                             |   | 15,547,972 |   |  |   | 19,451,972  |  
|Proceeds from the exercise of options                                       |  |    |   |  |                                         |           |   |                                                             |   | 17,003     |   |  |   | 17,003      |  
|Proceeds from sale of preferred stock                                       |  |    |   |  |                                         |           |   |                                                             |   |           |   |  |   | 520,400     |  
|Proceeds from issuance of notes payables                                    |  |    |   |  |                                         | 5,831,200  |   |                                                             |   |           |   |  |   | 14,092,200  |  
|Deferred debt financing cost                                                |  |    |   |  |                                         | (980,130   | ) |                                                             |   |           |   |  |   | (2,135,713  | )
|Proceeds from notes payable issued under Regulation D                       |  |    |   |  |                                         |           |   |                                                             |   |           |   |  |   | 800,000     |  
|Cash paid for deferred offering costs                                       |  |    |   |  |                                         | (125,864   | ) |                                                             |   |           |   |  |   | (866,512    | )
|Due to net increase (decrease) in affiliates                                |  |    |   |  |                                         | 366,016    |   |                                                             |   | (522,719   | ) |  |   |            |  
|Subscription receivable                                                     |  |    |   |  |                                         | 1,507,230  |   |                                                             |   |           |   |  |   |            |  
|                                                                            |  |    |   |  |                                         |            |   |                                                             |   |            |   |  |   |             |  
|Net cash provided by financing activities                                   |  | (c | ) |  |                                         | 6,598,452  |   |                                                             |   | 15,042,256 |   |  |   | 31,879,350  |  
|                                                                            |  |    |   |  |                                         |            |   |                                                             |   |            |   |  |   |             |  
|Increase (decrease) in cash and cash equivalents                            |  |    |   |  |                                         | 4,803,876  |   |                                                             |   | 8,936,875  |   |  |   | 13,467,096  |  
|Cash and cash equivalents at beginning of period                            |  |    |   |  |                                         | 1,634,327  |   |                                                             |   | 4,530,221  |   |  |   |            |  
|                                                                            |  |    |   |  |                                         |            |   |                                                             |   |            |   |  |   |             |  
|Cash and cash equivalents at end of period                                  |  |    |   |  | $                                       | 6,438,203  |   |                                                             | $ | 13,467,096 |   |  | $ | 13,467,096  |  
|                                                                            |  |    |   |  |                                         |            |   |                                                             |   |            |   |  |   |             |  
|Suplemental disclosure of cash flow information:                            |  |    |   |  |                                         |            |   |                                                             |   |            |   |  |   |             |  
|Interest paid                                                               |  |    |   |  | $                                       | 0          |   |                                                             | $ | 1,306,165  |   |  | $ | 1,310,515   |  
|                                                                            |  |    |   |  |                                         |            |   |                                                             |   |            |   |  |   |             |  
|Income taxes paid                                                           |  |    |   |  | $                                       | 400        |   |                                                             | $ | 400        |   |  | $ | 5,600       |  
|                                                                            |  |    |   |  |                                         |            |   |                                                             |   |            |   |  |   |             |  



|(a) | Including amount with related parties of $1,397,466, $647,766 and $7,218,133, respectively.
|--- | -------------------------------------------------------------------------------------------



|(b) | Including amount with related parties of $0, $0 and $0, respectively.
|--- | ---------------------------------------------------------------------



|(c) | Including amount with related parties of $763,500, $0 and $1,612,994, respectively.
|--- | -----------------------------------------------------------------------------------



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



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##### Table of Contents



Supplemental Disclosure of Non-Cash
Financing Activities



During the six months periods ended June 30, 2004
and 2005 and the period from March 11, 1998 (inception) to June 30, 2005 (unaudited), the Company issued 0, 0 and 99,750,000 shares of post-split adjusted common stock to founders, respectively



During the six months periods ended June 30, 2004 and 2005 and the period from March 11, 1998
(inception) to June 30, 2005 (unaudited), the Company issued 0, 0 and 583,000 shares of post-split adjusted common stock for services respectively



During the six months periods ended June 30, 2004 and 2005 and the period from March 11, 1998 (inception) to June 30, 2005 (unaudited), the Company recorded a beneficial
conversion feature in connection with the issuance of convertible notes payable Series II and Series IIa in the amount of $0, $0 and $2,050,000 respectively



During the six months periods ended June 30, 2004 and 2005 and the period from March 11, 1998 (inception) to June 30, 2005, 28,100, 19,750 and 49,350 shares of
convertible preferred stock were converted into 2,810,000, 1,975,000 and 4,935,000 shares of common stock, respectively. During the period ended June 30, 2005, 2,000,000 shares of committed common stock relating to the conversion of preferred shares
in fiscal 2004 were issued.



During the six months periods ended June 30, 2004
and 2005 and the period from March 11, 1998 (inception) to June 30, 2005, 0, $ 10,331,000 and $ 14,862,200 of convertible notes payable were converted into 0, 4,085,000 and 5,739,550 shares of common stock, respectively, and 50,000 shares of
committed common stock.



7



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##### Table of Contents



CARDIOVASCULAR BIOTHERAPEUTICS, INC.



NOTES TO FINANCIAL STATEMENTS



JUNE 30, 2005



|1. | BASIS OF PRESENTATION
|-- | ---------------------



The information contained in this report is unaudited, but in our opinion reflects all adjustments necessary to make the financial position and results of
operations for the interim periods a fair presentation of our operations and cash flows. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.



These financial statements should be read along with the financial statements
and notes that go along with the Companys audited financial statements, as well as other financial information for the fiscal year ended December 31, 2004 as presented in our Annual Report on Form 10-K. Financial presentations for prior
periods have been reclassified to conform to current period presentations. The results of operations for the three and six months ended June 30, 2005 and cash flows for the six months ended June 30, 2005 are not necessarily indicative of the results
that may be expected for the full fiscal year ending December 31, 2005.



|2. | DESCRIPTION OF BUSINESS
|-- | -----------------------



Cardiovascular BioTherapeutics, Inc. (formerly CardioVascular Genetic Engineering, Inc.) (Cardio) or (the Company) is a
development stage biopharmaceutical company, which is focused on developing and marketing a protein drug to be used in the treatment of coronary artery disease. Cardio was incorporated in Delaware on March 11, 1998 (Inception) as
CardioVascular Genetic Engineering, Inc. and in February 2004, changed its name to Cardiovascular BioTherapeutics, Inc. Since then, it has been engaged in research and development activities associated with bringing its products to the market.



|3. | INITIAL PUBLIC OFFERING AND OVER ALLOTMENT
|-- | ------------------------------------------



On February 11, 2005, the Companys S-1 registration for the issuance of 1,500,000 new common shares was declared effective. On February 16, 2005 the
Companys Initial Public Offering (IPO) was closed and the company received net proceeds of $13,622,500.



On March 10, 2005, the underwriter exercised its option for the over-allotment and the Company issued 225,000 common shares for the proceeds to the
Company of $2,030,625.



On February 16, 2004, the company sold
warrants to purchase 75,000 shares of common stock at 125% of the IPO price for $75.00 to the underwriter pursuant to the underwriting agreement. The warrants have a term of four years commencing on the date of the effective date of the IPO,
February 11, 2005.



|4. | TRANSACTIONS AND CONTRACTUAL RELATIONSHIPS WITH AFFILIATED ENTITIES
|-- | -------------------------------------------------------------------



Cardio is a member of an affiliated group, through common management, which includes Phage Biotechnology Corporation (Phage), Cardio Phage
International (CPI), Sribna Culya Biopharmaceuticals Inc. (Sribna), Proteomics Biopharmaceuticals Technologies Inc. (Proteomics), Zhittya Stem Cell Medical Research Company Inc. (Zhittya), Qure
Biopharmaceuticals, Inc. (Qure), known collectively as the (affiliates). The common management of Cardio and Phage spend a sufficient amount of their time with each Company to satisfy the needs for each company and the
remaining balance to other interests.



Daniel C. Montano, John W. Jacobs and
Mickael A. Flaa are, respectively, Chairman of the Board/Chief Executive Officer, Chief Operating Officer/Chief Scientific Officer, and Chief Financial Officer of both Cardio and Phage. Upon completion



8



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##### Table of Contents

of the public offering, Mr. Flaa and Mr. Jacobs joined Cardios board of directors. In addition, Alexander G. Montano, one of the Companys current
board members and the son of Daniel C. Montano, is also a board member of Phage. Daniel C. Montano is a principal stockholder in Cardio, Phage, Proteomics, Zhittya, and Qure.



The following are the business activities performed by each affiliate:



| |  |  | Phage is a developer of recombinant protein pharmaceuticals; certain of the Companys officers and directors control 41.2% and the Company controls 4.56% of the common stock of
Phage;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | CPI is a distributor for the future products for both Cardio and Phage in locations throughout the world other than North America, Europe, Japan, and, with respect to Cardio only,
the Republic of Korea, China, and Taiwan. Cardio and Phage each own 45% of CPI and each is able to appoint 45% of CPIs directors;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Sribna was developing a treatment for cancer utilizing cancer cell apotise;
| | - |  | ---------------------------------------------------------------------------



| |  |  | Proteomics was developing a non-injection method for medical protein;
| | - |  | ---------------------------------------------------------------------



| |  |  | Zhittya was researching adult stem cells; and
| | - |  | ---------------------------------------------



| |  |  | Qure was developing commercial medical applications.
| | - |  | ----------------------------------------------------



During the period from 1999 through 2001, the Company entered into transactions with these entities affiliated with the Companys CEO (Proteomics,
Zhittya, Qure and Sribna). These companies paid expenses on behalf of the Company aggregating $187,600. That amount was repaid without interest. These entities are all currently inactive. Additionally, Qure owns 630,000 shares of common stock of the
Company.



License Agreement



Cardio has a Joint Patent Ownership and License Agreement with Phage. Under
that agreement, Cardio and Phage, respectively, own an undivided one half interest in the U.S. and foreign patent rights necessary to develop and commercialize Cardio Vascu-Grow; and Phage agrees to provide certain technical development services to Cardio and to manufacture Cardio Vascu-Growfor Cardios clinical trials at cost. Any product Phage manufactures for Cardio
commercialization purposes is paid for on a percentage of sales basis as defined in the agreement. As a part of this agreement, Cardio is obligated, at its option, to either (i) pay to Phage ten percent of net sales for Cardio Vascu-Growmanufactured for Cardio by Phage or (ii) pay to Phage a six percent royalty based on Cardios
net sales price of Cardio Vascu-Growthat Phage does not manufacture for Cardio. This
agreement expires on the last to expire of the patent rights covered, including extensions.



Currently it is the Companys intention to contract with Phage for manufacturing of Cardio Vascu-Grow for the ongoing FDA trials and for further commercial production. However, Cardio has the right to and may choose to use a third party for
manufacturing. As of June 30, 2005, Cardio had cash and cash equivalents of $13,467,096 indicating that the Company has sufficient funds to be a viable entity on an ongoing basis should it choose to use a third party manufacturer.



Phage will manufacture the drug for Cardio in the United States clinical
trials, and may manufacture it for subsequent commercial production. Phage has three drugs that have been approved by the FDA to be administered to humans in clinical trials indicating Phage is capable of manufacturing drug products to acceptable
standards.



Furthermore, Cardio paid Phage for technical
development services and for manufacture of Cardio Vascu-Grow for clinical trials, which Phage provided to Cardio at cost. For the six months June 30, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998 (inception) to June 30, 2005 (unaudited) payments to
Phage relating to such services were $23,041, $224,231 and $1,209,184, respectively.



Administrative Support



For the six months June 30, 2004
(unaudited) and 2005 (unaudited) and the period from March 11, 1998 (inception) to June 30, 2005 (unaudited) Phage provided Cardio with administrative support in Phages research facility and billed Cardio for Phages actual costs incurred
plus Cardios pro-rata share (based on costs incurred for Cardio as compared to total Phage overhead costs) of Phages overhead costs. Payments to Phage for such support the six months ended June 30, 2004 (unaudited) and 2005 (unaudited)
and the period from March 11, 1998 (inception) to June 30, 2005 (unaudited) were $35,141, $77,747 and $829,283, respectively.



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Distribution Agreement



Cardio and Phage have entered into a distribution agreement with Cardio Phage International Inc., a Bahamian company (CPI), to handle
future distribution of Cardio Vascu-Grow and any
other products licensed to CPI when available for commercial distribution. CPIs territory is limited to areas other than the United States, Canada, Europe (as defined as the Ural Mountains west including Iceland, excluding Turkey and Cyprus),
Japan and with respect to Cardio only the Republic of Korea, the Republic of China and Taiwan. Phage and Cardio each own 45% of the CPI outstanding stock and the companies have the right to each appoint 45% of the CPI board. Cardio has made no
payments to CPI and does not anticipate making any payments in the near future.



Royalty Agreement



Cardio has entered into an
agreement with Dr. Stegmann, one of the Companys directors and Chief Clinical Officer, whereby Cardio will pay Dr. Stegmann a royalty of one percent of the Companys net revenue (as defined) from commercial sales of Cardio Vascu-Grow in exchange for rights granted to Cardio to utilize
the results of Dr. Stegmanns German clinical trials. This agreement terminates on December 31, 2013. Cardio has made no payments to Dr. Stegmann under this agreement.



Asia Distribution Agreement



On December 15, 2000, the Company entered into an agreement with Korea Biotechnology Development Co., Ltd. (KBDC) to commercialize
Cardios future products. Cardio transferred to KBDC the rights to manufacture and sell its products for 99 years in all of Korea, China, and Taiwan. In exchange, KBDC arranged the purchase of 8,750,000 shares of Cardios common stock for
$3,602,000. KBDC agreed to fund all of the regulatory approval process in Korea for any products of Cardio. In addition, KBDC agreed to pay a royalty of 10% of net revenues to Cardio. The royalties will be paid for the life of the agreement. Daniel
C. Montano, the Companys chairman, owns 17% of KBDC and is a former member of the board of directors. KBDC invested $200,000 in each of Sribna, Proteomics and Zhittya and invested $60,000 in CPI.



|5. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------



Development Stage Enterprise



The Company is a development stage company as defined in Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and
Reporting by Development Stage Enterprises. The Company is devoting substantially all of its present efforts to its formation, fundraising, and product development and approval. Its planned principal operations of selling its pharmaceutical
products have not yet commenced. For the period from March 11, 1998 (inception) through June 30, 2005 (unaudited), the Company has accumulated a deficit of $22,629,312. There can be no assurance that the Company will have sufficient funds available
to complete its research and development programs or be able to commercially manufacture or market any products in the future, that future revenue will be significant, or that any sales will be profitable. The Company expects operating losses to
increase for at least the next several years due principally to the anticipated expenses associated with the proposed product development, clinical trials and various research and development activities.



Stock Split



In February 2004, the Board of Directors approved, with the approval of the shareholders, a forward 100-to-1 common stock
split. The accompanying financial statements and notes to the financial statements have been retrospectively restated to reflect this split.



Use of Estimates



In preparing financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Actual results could differ from those
estimates. The most significant estimates relate to compensation expense for options, warrants and common stock issued for services.



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Cash and Cash Equivalents



For purposes of the statements of cash flow, the Company considers all highly liquid investments purchased with original
maturity of three months or less to be cash equivalents.



Short Term
Investments



Short-term investments
generally mature between three months to a year from the purchase date. Short term investments consist of Certificates of Deposits. As of December 31, 2004 and June 30, 2005 (unaudited), the short term investments were $85,362 and $111,013 ,
respectively.



Property, Plant, and Equipment



Property, plant, and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed by the straight-line method over the estimated useful life of the related asset, which management believes is 3 to 5 years. Expenditures for maintenance and repairs are charged to expense as incurred whereas
major betterments and renewals are capitalized.



Income Taxes



The Company utilizes SFAS No. 109, Accounting for
Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes
are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.



Fair Value of Financial Instruments



The Company measures its financial assets and liabilities in accordance with
generally accepted accounting principles. For certain of the Companys financial instruments, including cash, accounts payable and accrued expenses, and accrued compensation, the carrying amounts approximate fair value due to their short
maturities.



Research and Development Costs



The Company accounts for research and development costs in accordance with
SFAS No. 2, Accounting for Research and Development Costs. Research and development costs are charged to operations as incurred. Research and development costs consist of expenses incurred by third party consultants, contractors, and
suppliers in support of preclinical research and FDA clinical trials.



The Company has prepaid a portion of the Phase I FDA trial to C2R (Note 13). Such amount is included in prepaid expenses in the accompanying balance sheet. This amount will be offset against the final invoices from C2R for this FDA trial
and expensed.



Nonmonetary Transactions



Common stock issued for goods or services is recorded at estimated market
value of the common stock issued or the services performed, whichever is more readily determinable.



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Deferred Debt Financing Costs



Costs incurred in connection with the issuance of convertible notes payable are capitalized as deferred debt financing
costs. These costs primarily include commissions paid to the placement agent and are amortized over the term of the convertible notes payable. At December 31, 2004, there were $712,664 of these costs and none at June 30, 2005.



Concentrations of Credit Risk



The Company places its cash and cash equivalent with high quality financial
institutions, and at times it may exceed the Federal Deposit Insurance Corporation $100,000 insurance limit. As of December 31, 2004 and June 30, 2005 (unaudited), uninsured portions of cash amounted to $4,310,222 and $13,759,205, respectively.



Loss per Share



The Company calculates loss per share in accordance with SFAS No. 128,
Earnings per Share. Basic loss per share is computed by dividing the loss available to common shareholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share
except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Because the Company has
incurred net losses, basic and diluted loss per share are the same.



The following potential common shares have been excluded from the computation of diluted net loss per share for the years ended December 31, 2004 and June 30, 2005 (unaudited) since their effect would have been anti-dilutive:



|                            |  |                  |  |             
|--------------------------- |  | ---------------- |  | ------------
|                            |  | December 31,2004 |  | June 30,2005
|Convertible preferred stock |  | 2,325,000        |  | 350,000     
|Stock options               |  | 2,755,000        |  | 2,719,034   
|Warrants                    |  | 1,233,330        |  | 1,308,330   
|Convertible notes payable   |  | 4,143,000        |  |            



Deferred Offering Costs



Costs incurred in connection with the Companys IPO
were capitalized as of December 31, 2004. Upon completion of the IPO in February 2005, the costs were recorded as a reduction to additional paid-in capital. As of December 31, 2004 and June 30, 2005 (unaudited), the Company capitalized deferred
offering costs in the amount of $866,512 and $0, respectively. These amounts are included in deferred offering costs on the balance sheet at December 31, 2004 and as part of additional paid in capital at June 30, 2005



Stock-Based Compensation



The Company accounts for stock option grants to employees using the fair
value method prescribed in Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation and FIN 44, Accounting for Certain Transactions Involving Stock Compensation. In December 2002,
the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of
accounting for stock-based compensation. It also amends the disclosure requirements of SFAS No. 123. Since the Company has historically followed the fair value method prescribed by SFAS No. 123, the adoption of SFAS No. 148 has had no impact to the
Companys financial position or results of operations. However, the Companys financial statement disclosures have been designed to conform to the new disclosure requirements that SFAS No. 148 prescribes.



The Company accounts for stock option and warrant grants issued to
non-employees using the guidance of SFAS No. 123 and EITF No. 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, whereby the fair value of
such option and warrant grants is determined using the Black-Scholes option-pricing model at the earlier of the date at which the non-employees performance is completed or a performance commitment is reached.



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Recently Issued Accounting Pronouncements



In December 2003, the Financial Accounting Standards Board (the FASB) issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements. This pronouncement requires the consolidation of variable interest entities, as
defined, and is effective immediately for variable interest entities created after January 31, 2003, and for variable interest entities in which an enterprise obtains an interest after that date. The Company does not have any variable interest
entities, and therefore, this interpretation is not expected to have a material impact on the Companys financial statements.



In November 2004, the FASB issued SFAS No. 151, Inventory Costs. SFAS No. 151 amends the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage) under the guidance in ARB No. 43, Chapter 4, Inventory Pricing. Paragraph 5 of ARB No. 43, Chapter 4, previously stated that . . . under some circumstances, items
such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . . This Statement requires that those items be recognized as current-period
charges regardless of whether they meet the criterion of so abnormal. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not expect adoption of SFAS No. 151 to have a material impact on the Companys financial statements.



In December 2004, the FASB issued SFAS No. 152,
Accounting for Real Estate Time-Sharing Transactions. The FASB issued this Statement as a result of the guidance provided in AICPA Statement of Position (SOP) 04- 2, Accounting for Real Estate Time-Sharing Transactions. SOP
04-2 applies to all real estate time-sharing transactions. Among other items, the SOP provides guidance on the recording of credit losses and the treatment of selling costs, but does not change the revenue recognition guidance in SFAS No. 66,
Accounting for Sales of Real Estate, for real estate time-sharing transactions. SFAS No. 152 amends Statement No. 66 to reference the guidance provided in SOP 04-2. SFAS No. 152 also amends SFAS No. 67, Accounting for Costs and Initial
Rental Operations of Real Estate Projects, to state that SOP 04-2 provides the relevant guidance on accounting for incidental operations and costs related to the sale of real estate time-sharing transactions. SFAS No. 152 is effective for
years beginning after June 15, 2005, with restatements of previously issued financial statements prohibited. This statement is not applicable to the Company.



In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment to Opinion No. 29, Accounting for
Nonmonetary Transactions. Statement No. 153 eliminates certain differences in the guidance in Opinion No. 29 as compared to the guidance contained in standards issued by the International Accounting Standards Board. The amendment to Opinion
No. 29 eliminates the fair value exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Such an exchange has commercial
substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in periods beginning after June 15, 2005. Earlier application is
permitted for nonmonetary asset exchanges occurring in periods beginning after December 16, 2004. Management does not expect adoption of SFAS No. 153 to have a material impact on the Companys financial statements.



In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share
Based Payment (SFAS No. 123(R)). SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. SFAS No.123(R) requires that the
cost of share-based payment transactions (including those with employees and non-employees) be recognized in the financial statements. SFAS No. 123(R) applies to all share-based payment transactions in which an entity acquires goods or services by
issuing (or offering to issue) its shares, share options, or other equity instruments (except for those held by an ESOP) or by incurring liabilities (1) in amounts based (even in part) on the price of the entitys shares or other equity
instruments, or (2) that require (or may require) settlement by the issuance of an entitys shares or other equity instruments.



In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, Accounting for Conditional Asset Retirement Obligations. FIN No.
47 clarifies the meaning of the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations and clarifies when an entity would have sufficient information to
reasonably estimate the fair value of an asset retirement obligation. This interpretation is effective no later than the end of fiscal years ending after December 15, 2005 (December 31, 2005 for calendar-year companies). Retrospective application of
interim financial information is permitted but is not required. Management does not expect adoption of FIN No. 47 to have a material impact on the Companys financial statements.



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In April 2005, the Securities and Exchange Commission amended the compliance dates to allow companies to
implement SFAS No. 123(R) at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005, or Dec. 15, 2005 for small business issuers. As a result, SFAS No. 123(R) must be adopted by the Company by
the first quarter of 2006. Currently, the Company uses the Black-Scholes formula to estimate the value of stock options granted to employees and is evaluating option valuation models, including the Black-Scholes formula, to determine which model the
Company will utilize upon adoption of SFAS No. 123(R). The Company plans to adopt SFAS No. 123(R) using the modified-prospective method. We do not anticipate that adoption of SFAS No. 123(R) will have a material impact on our Companys
stock-based compensation expense.



In May 2005, the FASB issued
Statement of Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections an amendment to Accounting Principles Bulletin (APB) Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting
Changes in Interim Financial Statements though SFAS No. 154 carries forward the guidance in APB No. 20 and SFAS No. 3 with respect to accounting for changes in estimates, changes in reporting entity, and the correction of errors. SFAS No. 154
establishes new standards on accounting for changes in accounting principles, whereby all such changes must be accounted for by retrospective application to the financial statements of prior periods unless it is impracticable to do so. SFAS No. 154
is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005, with early adoption permitted for changes and corrections made in years beginning after May 2005.



|6. | CASH AND CASH EQUIVALENTS
|-- | -------------------------



Cash and cash equivalents consisted of the following at December 31, 2004, and June 30, 2005 (unaudited):



|                               |  |                  |           |              |   |           
|------------------------------ |  | ---------------- | --------- | ------------ | - | ----------
|                               |  | December 31,2004 |           | June 30,2005
|Cash in bank                   |  | $                | 4,530,221 |              | $ | 13,467,096
|Cash in short term investments |  |                  | 85,362    |              |   | 111,013   
|                               |  |                  |           |              |   |           
|Total                          |  | $                | 4,615,583 |              | $ | 13,578,109
|                               |  |                  |           |              |   |           



|7. | PREPAID AND OTHER CURRENT ASSETS
|-- | --------------------------------



Prepaid assets at December 31, 2004 and June 30, 2005 (unaudited), consisted of the following:



|                                    |  |                  |         |              |   |        
|----------------------------------- |  | ---------------- | ------- | ------------ | - | -------
|                                    |  | December 31,2004 |         | June 30,2005
|Prepaid clinical trial expenses (a) |  | $                | 400,000 |              | $ | 400,000
|Prepaid insurance                   |  |                  |        |              |   | 150,000
|Prepaid legal fees                  |  |                  | 62,500  |              |   | 56,172 
|Prepaid website services            |  |                  |        |              |   | 30,000 
|Prepaid other                       |  |                  | 17,000  |              |   | 53,772 
|                                    |  |                  |         |              |   |        
|                                    |  | $                | 479,500 |              | $ | 689,944
|                                    |  |                  |         |              |   |        



|(a) | Prepaid clinical trial expense is related to advance payments the Company made for its Phase I trial of Cardio Vascu-Grow to C2R. The Company will expense this amount against the final billings for the Phase
I trial progresses.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|8. | CONVERTIBLE NOTES PAYABLE
|-- | -------------------------



The Company issued convertible debt, as summarized below, payable to various individuals. As of December 31, 2004, the Company issued Series I, Series II
and Series IIa convertible promissory notes.



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Convertible note holders were required to notify the Company regarding their intent to convert their
convertible notes into common stock in the 30-day period following the completion of the Companys IPO.



As of June 30, 2005, four note holders with a total of $30,000 of convertible notes had notified the Company of their intention not to convert their notes
into common stock and these notes were paid in cash in the period ended June 30, 2005.



Series I Convertible Promissory Notes



The
Series I Convertible Promissory Notes were payable in one installment on the earlier of (i) thirty-six months from the date of issuance or (ii) 30 days after the successful completion of the Companys initial public offering. The notes were
convertible at the option of the holder into the Companys common stock. Interest at 7% per annum, compounded annually, was payable within 30 days of when the notes payable were due or converted into shares of the Companys common stock.
The conversion price for each share equaled $2 per share, provided however, if the purchase price of shares at the completion of the initial public offering was less than $4 per share, the conversion price would have been adjusted to equal 50% of
the initial public offering price.



These notes have been
converted into common shares. (See conversion details Note 10)



Series II
Convertible Promissory Notes



The Series II Convertible
Promissory Notes were payable in one installment on the earlier of (i) thirty-six months from the date of issuance or (ii) 30 days after the successful completion of the Companys initial public offering. The notes were convertible at the
option of the holder into the Companys common stock. Interest at 7% per annum, compounded annually, was payable within 30 days of when the notes payable were due or converted into shares of the Companys common stock. The conversion price
for each share equaled $4 per share, provided however, if the purchase price of shares at the completion of the initial public offering was less than $8 per share, the conversion price would have been adjusted to equal 50% of the initial public
offering price.



These notes have been converted into common
shares. (See conversion details Note 10)



Series IIa Convertible Promissory
Notes



In July 2004, the Company sold $800,000 of
convertible notes payable series IIa. The terms of the convertible notes payable series IIa are identical to the terms of the convertible notes payable series II as discussed above.



The convertible promissory notes were payable in one installment on the earlier of (i) thirty-six months from the date of
issuance or (ii) 30 days after the successful completion of the Companys initial public offering. The notes were convertible at the option of the holder into the Companys common stock. Interest at 7% per annum, compounded annually, was
payable within 30 days of when the convertible notes payable were due or converted into shares of the Companys common stock. The conversion price for each share equaled $4 per share, provided however, if the purchase price of shares at the
completion of the initial public offering was less than $8 per share, the conversion price would have been adjusted to equal 50% of the initial public offering price.



These notes have been converted into common shares. (See conversion details Note 10)



Components of Interest Expense



During the year ended December 31, 2004, the Company issued Series II and
Series IIa convertible promissory notes with an imbedded beneficial conversion feature. As such, in accordance with EITF Issue No. 98-5, Accounting for Securities with Beneficial Conversion Feature or Contingently Adjustable Conversion
Ratio and EITF Issue No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, the difference between the conversion price and the Companys estimated fair market value of its stock price on the commitment
date of the notes was calculated to be $2,050,000. The Companys estimate of fair market value resulting in a beneficial conversion feature was based on the Letter of Intent with the underwriters. This amount will be recognized in
the statement of operations as interest expense during the period from the commitment date of the notes to the maturity dates of the notes.



The Company recognized interest expense resulting from the beneficial conversion feature of $0, $710,001 and $2,050,000, respectively, for the six months
ended June 30, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998 (inception) to June 30, 2005 (unaudited).



Since the convertible promissory notes have a reset provision upon the completion of the initial public offering, the Company retested the convertible
notes payable for the beneficial conversion feature. Where the Company has issued convertible notes payable with beneficial conversion feature, the difference between the conversion price and the fair value of



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the common stock, at the effective initial public offering date, will be recorded as a debt discount and will be amortized to interest expense over the
redemption period of the convertible notes payable in accordance with EITF Issue No. 98-5, Accounting for Securities with Beneficial Conversion Feature or Contingently Adjustable Conversion Ratio and EITF Issue No. 00-27,
Application of Issue No. 98-5 to Certain Convertible Instruments. No additional Beneficial Conversion feature was required to be recovered.



In connection with these convertible notes payable, the Company incurred total financing costs of $2,135,715. These costs had been capitalized and were
being amortized over the term of the convertible notes payable. During the six month periods ended June 30, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998 (inception) to June 30, 2005 (unaudited), total financing costs of
$269,207, $712,664 and $2,135,715, respectively, were charged to interest expense.



For the six month periods ended June 30, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998 (inception) to June 30, 2005, the interest expense on the Series I, II and IIa convertible notes was
$278,205, $127,073 and $1,314,943, respectively.



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Outstanding balances of convertible notes payable were as follows:



|                                                  |  |                   |            |   |              |   |  
|------------------------------------------------- |  | ----------------- | ---------- | - | ------------ | - | -
|                                                  |  | December 31, 2004 |            |   | June 30,2005
|Series I                                          |  | $                 | 6,211,000  |   |              | $ | 
|Series II                                         |  |                   | 3,570,000  |   |              |   | 
|Series IIa                                        |  |                   | 580,000    |   |              |   | 
|                                                  |  |                   |            |   |              |   |  
|Total Convertible notes payable                   |  |                   | 10,361,000 |   |              |   | 
|Less discount for beneficial conversion           |  |                   | (2,050,000 | ) |              |   | 
|Plus amortization of discount to interest expense |  |                   | 1,339,999  |   |              |   | 
|Less current portion                              |  |                   | (1,035,000 | ) |              |   | 
|                                                  |  |                   |            |   |              |   |  
|                                                  |  | $                 | 8,615,999  |   |              | $ | 
|                                                  |  |                   |            |   |              |   |  



|9. | DUE TO AND FROM AFFILIATES
|-- | --------------------------



Due to/from affiliates at December 31, 2004 and June 30, 2005 (unaudited), consisted of the following:



|          |  |                  |         |              |   |        
|--------- |  | ---------------- | ------- | ------------ | - | -------
|          |  | December 31,2004 |         | June 30,2005
|Phage (a) |  | $                | 522,719 |              | $ | 163,348
|          |  |                  |         |              |   |        
|Total     |  | $                | 522,719 |              | $ | 163,348
|          |  |                  |         |              |   |        



|(a) | Unsecured amounts payable due from an affiliated party, interest payable at 7% per annum, and due on demand.
|--- | ------------------------------------------------------------------------------------------------------------



At December 31, 2004 and June 30, 2005 (unaudited), the Company incurred
technical development costs from Phage pursuant to the License Agreement (Note 2). The balances due to Phage represent unpaid amounts by the Company to Phage at December 31, 2004 and June 30, 2005 (unaudited), for these technical development
services.



Interest expense related to affiliates for the six
month periods ended June 30, 2004 (unaudited) and 2005 (unaudited), and the period from March 11, 1998 (inception) to June 30, 2005 (unaudited), were, $11,853, $8,953 and $112,307, respectively.



|10. | STOCKHOLDERS EQUITY
|--- | --------------------



Preferred Stock



During the six month periods ended June 30, 2005, eight convertible preferred shareholders elected to convert 19,750 of their preferred shares into
1,975,000 shares of common stock. The 2,000,000 shares of common stock, which as of December 31, 2004 had not been issued but were classified as committed common stock, were issued during this period.



At June 30, 2005, there was one remaining preferred stock holder with 3,500
shares outstanding, who chose to convert subsequent to period end (see note 14).



Common Stock



On February 11, 2005, the
Companys S-1 registration for the issuance of 1,500,000 new common shares was declared effective. On February 16, 2005 the Companys Initial Public Offering (IPO) was closed and the company received net proceeds of $13,622,500.



On March 10, 2005, the underwriter exercised its option for
the over-allotment and the Company issued 225,000 common shares for proceeds to the Company of $2,070,500.



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As of June 30, 2005 all convertible notes payable have been converted into common stock except $30,000
for which holders elected to be repaid. All common stock to be issued resulting from the conversion has been issued except 138,000 shares that are to be issued, and which are classified as committed common stock in the accompanying balance sheet.



During the period ended June 30, 2005, eight convertible
preferred shareholders elected to convert 19,750 of their preferred shares into 1,975,000 shares of common stock. In addition, 3 stock option holders exercised options to purchase 35,966 shares of common stock.



During the year ended December 31, 2004, 11 convertible preferred
shareholders elected to convert 28,100 of their convertible preferred shares into 2,810,000 shares of common stock. At December 31, 2004, 2,000,000 shares of common stock had not been issued and were classified as committed common stock.



During the year ended December 31, 2004, 72 convertible Series I, II, and
IIa note holders elected to convert $4,531,200 of notes into 1,649,550 shares of common stock.



Stock Option Transactions



The Company has the ability to issue stock options to both employees and non-employees under no formal stock option plans. It is managements intent to grant all options at exercise prices not less than 85% of the fair value of the
Companys common stock, as the Board of Directors, determines on the date of grant. Options typically expire ten years from the date of grant and generally vest immediately. During the period from March 11, 1998 (inception) through June 30,
2005, the Company had granted options to both employees and non-employee consultants.



In July 2004, the Company established the Cardiovascular BioTherapeutics, Inc. 2004 Stock Plan (the Stock Plan) permitting the awards of (a) incentive stock options within the meaning of section 422 of the
Code, (b) non-qualified stock options, (c) stock appreciation rights, and (c) restricted stock to directors, officers, employees and consultants. The Company reserved 5,000,000 shares for the Plan and limited the maximum number of shares to be
granted to any one individual in one year to 500,000. No awards have been made pursuant to this Plan.



During the six month period ended June 30, 2005 the Company issued no options.



During the period ended June 30, 2005, three stock option holders executed their options to purchase 35,966 shares of common
stock.



Warrants



On February 16, 2004, the company sold a warrant for 75,000 shares of common
stock at 125% of the IPO price for $75.00 to the underwriter pursuant to the underwriting agreement. The warrants have a term of four years commencing on the effective date of the IPO, February 11, 2005



Authorized Shares



At the Companys Annual Meeting on May 23, 2005, the shareholders approved to amend the Certificate of Incorporation to
increase the number of authorized shares of Common Stock to 400,000,000 shares. It also authorized the board of directors at its discretion to implement a two-for-one (2:1) stock split in the Common Stock of the Company, if at all, prior to the 2006
Annual Meeting of Stockholders.



|11. | RELATED PARTY TRANSACTIONS
|--- | --------------------------



During the six month periods ended June 30, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998 (inception) to June 30, 2005
(unaudited), Cardio paid Daniel C. Montano, Chairman of the Board, President and Chief Executive Officer, consulting fees in the amount of $0, $0 and $200,000, respectively.



During the six month periods ended June 30, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998
(inception) to June 30, 2005 (unaudited), Cardio paid Daniel C. Montano, Chairman of the Board, President and Chief Executive Officer, for employment services in the amount of $136,150, $191,538 and $1,096,148, respectively.



During the six month periods ended June 30, 2004 (unaudited) and 2005
(unaudited), and the period from March 11, 1998 (inception) to June 30, 2005 (unaudited), Cardio paid Vizier Management Company, Inc. controlled by Daniel C. Montano, Chairman of the Board, President and Chief Executive Officer, consulting fees in
the amount of $0, $0, and $116,000, respectively.



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Cardio paid commissions to GHL Financial Services Ltd. (GHL), in which a director is a
principal and owns 7.9% of the Company, for the overseas sale of the Companys convertible notes payable and Preferred Stock. During the six month periods ended June 30, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998
(inception) to June 30, 2005 (unaudited), Cardio paid GHL $980,130, $5,000, and $2,174,755, respectively.



Cardio paid consulting fees to Dr. Thomas Stegmann M.D., the Companys co-founder, to assist in the development process of its products. During the
six month periods ended June 30, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998 (inception) to June 30, 2005 (unaudited), Cardio paid Dr. Stegmann $135,000, $139,250 and $541,368, respectively.



Cardio paid C.K. Capital International and C&K Capital Corporation,
controlled by Alexander G. Montano, son of Dan C. Montano, for consulting services. During the six month periods ended June 30, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998 (inception) to June 30, 2005 (unaudited).
Consulting fees Cardio incurred were $0, $5,000 and $530,240, respectively.



During the six month periods ended June 30, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998 (inception) to June 30, 2005 (unaudited), Cardio paid Dr. Wolfgang Priemer, the Companys
co-founder, to assist in the development process of its products. Cardio paid Dr. Priemer $25,000, $5,000 and $151,055, respectively.



In August 2004, the Company guaranteed Phages obligations under a non-cancelable operating lease. (See note 3).



|12. | INCOME TAXES
|--- | ------------



Significant components of the provision for income taxes for the six month periods ended June 30, 2004 (unaudited), and 2005 (unaudited) were as follows:



|                           |  |              |     |              |   |    
|-------------------------- |  | ------------ | --- | ------------ | - | ---
|                           |  | June 30,2004 |     | June 30,2005
|Current                    |  |              |     |              |   |    
|Federal                    |  | $            |    |              | $ |   
|State                      |  |              | 400 |              |   | 400
|Deferred                   |  |              |     |              |   |    
|Federal                    |  |              |    |              |   |   
|State                      |  |              |    |              |   |   
|                           |  |              |     |              |   |    
|Provision for income taxes |  | $            | 400 |              | $ | 400
|                           |  |              |     |              |   |    



The Company had net
operating loss carry forwards for federal and state income tax purposes of approximately $16,465,000 and $18,056,000, respectively, which expire through 2020. The utilization of net operating loss carry forwards may be limited due to the ownership
change under the provisions of Internal Revenue Code Section 382 and similar state provisions.



The net operating loss carry-forwards are the only significant deferred income tax assets of the Company. They have been offset by a valuation allowance since management does not believe the recoverability of this
deferred tax assets during the next fiscal year is more likely than not. Accordingly, a deferred income tax benefit has not been recognized in these financial statements.



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|13. | COMMITMENTS AND CONTINGENCIES
|--- | -----------------------------



Leases



In April 2004, the Company entered into a non-cancelable operating lease agreement for office space that requires monthly payments of $5,882 and expires in October 2005. On May 2004, the Company gave a deposit of
$5,900. Building operating expenses are reconciled annually and any increase over the base year is billed prorata to the Company.



On August 2004, the Company guaranteed Phages obligations under a non-cancelable operating lease for laboratory and office space at University of
California Irvine Research Center. The lease is for 11,091 rentable square feet for the period September 1, 2004 through August 31, 2006, and provides for a monthly rent of approximately $35,500 plus shared building operating expenses. The Company
sub-leases space from Phage for approximately $2800 per month as part of the agreement for administrative services.



Employment Agreements



In April 2000, the Company entered into an employment agreement with its Chief Scientific Officer, effective May 1, 2000. Under the terms of employment
agreement, the Company paid a monthly salary of $3,000. Also, Cardio provided a vehicle allowance equal to $500 per month. The agreement was for three years and expired on April 15, 2003.



In July 2004, the Company entered into an employment agreement with a nonexecutive employee, effective August 1, 2004, under
the terms of which Cardio will pay a monthly salary of $10,000. The agreement is for three years and expires July 31, 2007.



Consulting Agreements



The Company entered into numerous consulting agreements whereby the consultants assisted the Company in the development process, regulatory affairs and
financial management. Consulting fees related to the various agreements were $104,000, $209,581 and $928,883, for the six month periods ended June 30, 2004 (unaudited), 2005 (unaudited) and the period from March 11, 1998 (inception) to June 30, 2005
(unaudited), respectively.



In addition to the consulting fees,
the Company issued 2,715,000 non-employee stock options, with an exercise price range of $0.30$4.00 per share. The options vested immediately and have a contract life of 10 years. The Company also issued 300,000 warrants with an exercise price
range of $0.80-$2 per share. The warrants are exercisable immediately and have a contract life of 10 years.



Service Agreements



On
October 24, 2001, the Company entered into a service agreement with Clinical Cardiovascular Research, L.L.C., (C2R). C2R is dedicated to the clinical development of investigational drugs and devices for cardiovascular indications. C2R
assists Cardio with the FDA approval process for its drug. Service fees for the six month periods ended June 30, 2004(unaudited), 2005(unaudited) and the period from March 11, 1998 (inception) to June 30, 2005(unaudited), were $451,509, $525,853 and
$2,339,421, respectively. The agreement is still on going as of June 30, 2005.



On October 20, 2000, the Company entered into a service agreement whereby the service provider intends to assist Cardio to develop the production method for the production of the Companys products. Service fees
for the three month periods ended March 31, 2004 (unaudited), 2005 (unaudited) and the period from March 11, 1998 (inception) to March 31, 2005 (unaudited), were $0 and $370,100 respectively. The principal in this company owns 18.25% of Phage
Biotechnology Corporation, the Company affiliated manufacturer. As of March 31, 2005, the agreement is still ongoing.



In 2001, the Company entered into a service agreement whereby Cardio will receive assistance in the drug development process. Service fees for three month
periods ended March 31, 2004 (unaudited), 2005 (unaudited) and the period from March 11, 1998 (inception) to March 31, 2005, (unaudited) were $43,428, $0 and $431,698, respectively. As of March 31, 2005, the agreement is still ongoing.



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Securities Act Compliance



Commencing in 2001 and ending in August 2004, the Company sold six series of convertible notes to investors who, with a few
exceptions, were not residents or citizens of the United States. The Company made these sales in reliance on the fact that either the sales occurred outside the United States and were thus not subject to the jurisdiction of the Securities Act or
were made to accredited investors pursuant to an exemption from registration provided by the Securities Act. The Companys counsel has advised that the availability of those exemptions cannot be determined with legal certainty and that it is
possible that the sale of some of the series of convertible notes may have violated the registration requirements of the Securities Act. As to most of those sales, a right of rescission may exist on which the statute of limitation has not run. For
those noteholders that elected to convert to common stock, the Company may have a contingent liability arising from the original purchase of the convertible notes that such noteholders converted. That liability would extend for up to three years
after the date of the sale of the applicable convertible note that was converted to common stock. The notes are convertible at either $2.00 per share or $4.00 per share. Accordingly, the market price of the common stock would likely have to decrease
by more than 50% from the anticipated $10 public offering price before a noteholder had a significant economic reason to pursue any potential rescission rights.



The Company is unable to accurately estimate any potential liability that may arise for this contingency.



Government Regulation



Regulation by government authorities in the United States and foreign countries is a significant factor in the development,
manufacture and marketing of products such as Cardio Vascu-Grow and in our ongoing research and product development activities. Cardio Vascu-Grow will require regulatory approval by government agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous preclinical studies and clinical
trials and other approval procedures of the FDA and similar regulatory authorities in foreign countries. Various federal and state statutes and regulations also govern or influence testing, manufacturing, safety, labeling, storage and record keeping
related to such products and their marketing. The process of obtaining these approvals and the subsequent substantial compliance with appropriate federal and state statutes and regulations require the expenditure of substantial time and financial
resources.



Preclinical studies are generally conducted in
laboratory animals to evaluate the potential safety and the efficacy of a product. Drug developers submit the results of preclinical studies to the FDA as a part of an investigative new drug application which must be approved before clinical trials
in humans may begin. Typically, clinical evaluation involves a time consuming and costly three-phase process.



|          |  |                                                                                                                                                                                                                             
|--------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Phase I   |  | Clinical trials are conducted with a small number of subjects to determine the early safety profile, maximum tolerated dose and pharmacokinetics of the product in human
volunteers.                                        
|          | 
|Phase II  |  | Clinical trials are conducted with groups of patients afflicted with a specific disease in order to determine preliminary efficacy, optimal dosages and expanded evidence of
safety.                                        
|          | 
|Phase III |  | Large scale, multi-center, comparative trials are conducted with patients afflicted with a target disease in order to provide enough data to demonstrate with substantial evidence the efficacy
and safety the FDA requires.



The Companys
current FDA approved trials combine the safety elements of a Phase I trial with the dosage elements of a Phase II clinical trial, including measuring clinical outcomes at different dosages of the drug in the target patient population, which is
no-option heart patients. Upon completion of our Phase I trial, the Company will notify the FDA of the safety results obtained from this study and plans to commence its Phase II trials in a larger patient population.



The FDA closely monitors the progress of clinical trials that are conducted
in the United States and may, at its discretion, reevaluate, alter, suspend or terminate the testing based upon the data accumulated to that point and the FDAs assessment of the risk/benefit ratio to the patient. This is no guaranty that the
FDA will not alter, suspend or terminate the testing.



Litigation



The Company may become involved in various legal
proceedings and claims which arise in the ordinary course of its business. The Company is not involved in any litigation at this time and is unaware of any claims that my be filed against it.



|14. | SUBSEQUENT EVENTS
|--- | -----------------



In July 2005, the last remaining convertible preferred shareholder elected to convert 3,500 of their preferred shares into 350,000 shares of common stock;
and one option holder executed a stock option to purchase 7,000 shares of common stock.



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------



This Form 10-Q, including but not limited to this section, may contain forward-looking statements. These statements
relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industrys actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. These risks and other factors include those listed under Risk Factors and elsewhere in
this Form 10-Q. We believe that the section entitled Risk Factors includes all material risks that could harm our business. In some cases, you can identify forward-looking statements by terminology such as may,
will, should, expects, plans, anticipates, believes, estimates, predicts, intends, potential, continue or the
negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.



We believe it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to
accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Stockholders are cautioned that all forward-looking statements involve risks and
uncertainties, and actual results may differ materially from those discussed as a result of various factors, including those factors described in the Risk Factors section of this Form 10-Q. Stockholders should not place undue reliance on
our forward-looking statements.



Although we believe
that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.



You should read the following discussion and analysis of our financial condition and results of operations together with
our financial statements and the related notes appearing in Item 1. of this Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q, including information with respect to our plans and
strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the Risk Factors set forth below in this section of this Form 10-Q for a discussion of important
factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.



Overview



We are a biopharmaceutical company focused on developing a new drug for the treatment of cardiovascular disease. We were
established in 1998, as a Delaware corporation, to commercialize the results of clinical research in cardiovascular disease treatment that Dr. Thomas Stegmann performed in the mid-1990s. We have never generated revenues. We are a development-stage
company and are still funding Phase I FDA clinical trials for our only current drug candidate, Cardio Vascu-Grow.



Since inception, we have generated significant losses. As of June 30, 2005, we had an accumulated deficit of $22,629,312. We expect to incur substantial and increasing losses for at least the next several years. We do not expect to generate
revenues unless and until the FDA approves Cardio Vascu-Grow and we begin marketing it. We expect to continue to spend significant amounts on the development of Cardio Vascu-Grow. We expect to incur significant commercialization costs when we recruit a domestic sales force. We also plan to continue to invest in research
and development for additional applications of Cardio Vascu-Grow and to develop new drug delivery technologies. Accordingly, we will need to generate significant revenues to achieve and then maintain profitability.



We have a limited history of operations. Through June 30, 2005, we have funded our operations primarily through the initial
public offering of our common stock and the private placements of convertible preferred stock, common stock and convertible notes. Our operating activities have fluctuated based on our ability to raise capital to fund our operations.



Most of our expenditures to date have been for research and development
activities and general and administrative expenses. We classify our research and development into two major classifications, pre-clinical and clinical. Preclinical activities include product analysis and development, primarily animal efficacy and
animal toxicity studies. Clinical activities include FDA Investigational New Drug (IND) submissions, the FDA trials, and the FDA approval process for commercialization. Research and development expenses represent costs incurred for preclinical and
clinical activities. We outsource our clinical trials and our manufacturing and development activities to third parties to maximize efficiency and minimize our internal overhead. Manufacturing is outsourced to an affiliated entity. We expense our
research and development costs as they are incurred.



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From our inception through June 30, 2005, our primary research and development activity has been the
testing of Cardio Vascu-Grow in animals and in a
no-option heart patient population. We are currently in an FDA trial designed to provide evidence for both safety and dosage levels. We have engaged Clinical Cardiovascular Research, L.L.C. (C2R) to manage this authorized FDA clinical
trial. During fiscal 2004, we began preclinical activities for the use of Cardio Vascu-Grow for the possible treatment of stroke and for peripheral vascular disease in legs, and wound healing. These activities continue. Additionally, in 2003, we began the preclinical activities
to develop a catheter delivery system to the human heart for Cardio Vascu-Grow. These activities continue. We have outsourced these preclinical activities to independent research and design firms.



Our research and development expenses incurred through June 30, 2005 were expenses related primarily to the development of Cardio Vascu-Grow for the no-option patient population. We
expect to incur additional research and development expenses of approximately $8,450,000 at various stages relating to Cardio Vascu-Grow for the no-option patient population prior to its anticipated commercial launch in the United States. These additional expenses are subject
to the risks and uncertainties associated with clinical trials and the FDA review and approval process. As a result, these additional expenses could exceed our estimated amounts, possibly materially. We are uncertain as to what we expect to incur in
future research and development costs for our preclinical activities as these amounts are subject to the outcome of current preclinical activities, managements continuing assessment of the economics of each individual research and development
project and the internal competition for project funding.



General and administrative expenses consist primarily of personnel and related expenses and general corporate activities and through June 30, 2005 have focused primarily on the activities of administrative support, marketing, intellectual
property rights, corporate compliance and preparing the company to be a public company. We anticipate that general and administrative expenses will increase as a result of the expected expansion of our operations, facilities and other activities
associated with the planned expansion of our business, together with the additional costs associated with operating as a public company. We will incur sales and marketing expenses as we build our sales force and marketing capabilities for Cardio
Vascu-Grow, subject to receiving required
regulatory approvals. We expect these expenses to be material.



We have not generated taxable income to date. At June 30, 2005, net operating losses available to offset future taxable income for federal income tax purposes were approximately $16,465,000. If not utilized, federal net operating loss carry
forwards will expire through 2020. To date, we have not recognized the potential tax benefit of our net operating losses on our balance sheets or statements of operations. The future utilization of our net operating loss carry forwards may be
limited based upon changes in ownership pursuant to regulations promulgated under the Internal Revenue Code. We will incur changes in ownership from both our initial public offering and from the conversion of our convertible preferred stock and
convertible notes payable, which may result in limitations to our net operating loss carry forwards.



SUMMARY OVERVIEW OF THE SECOND FISCAL QUARTER ENDED JUNE 30, 2005



Clinical Research & Development



During the six month period ended June 30, 2005, we added one additional medical institution, University of Alabama Medical Center, Birmingham, Alabama, for a total of six facilities now conducting human studies that
C2R is managing for our FDA clinical trials. We added seven more patients, for a total now of 19 patients in our current trial who have been administered Cardio Vascu-Grow. To date we have received no reports of adverse effects due to the injections of our drug.



Nine additional patients will be enrolled in this study, and we anticipate
that the final results from this FDA authorized Phase I clinical trial will be similar to the human results achieved in Dr. Stegmanns first two human clinical trials in Germany in the late 1990s. At the conclusion of this trial, we will file a
report with the FDA listing any adverse events or other safety issues observed with Cardio Vascu-Grow and then we plan to commence a Phase II study in an expanded patient population with additional clinical trial sites added. Given that the FDA will ultimately determine the course, and
therefore the timing, of our clinical trials, we estimate the injections into patients for our Phase II and pivotal Phase III clinical trials should be completed in 2007.



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Pre-Clinical Research & Development



Wound Healing. During the six month period ended June 30, 2005, three animal trials were completed that demonstrated
that Cardio Vascu-Grow was a safe and efficacious
agent in healing wounds in diabetic mice. In addition it was demonstrated that little, if any, Cardio Vascu-Grow was absorbed into the blood stream after topical application to the wound surface.



MPI Research, Inc. conducted these three tests for us at a cost of approximately $108,000. These studies will be submitted as part of our IND application
to the FDA to commence clinical trials. We can terminate our agreement with MPI Research, Inc. without incurring penalty by giving 30 days written notice of our intent to terminate.



Peripheral Vascular Disease.Lower extremity peripheral vascular disease (PVD) occurs in the blood vessels of the
legs and feet. PVD is a progressive disease that involves the hardening and narrowing of the arteries due to a gradual buildup of plaque. PVD of the lower extremities is a major cause of diminished ability to walk and advanced cases can lead to leg
amputation. Estimates of prevalence of PVD in the U.S. range from 8-14 million patients with hospitalization of about 250,000 patients annually. Treatment options include angioplasty, stenting and other catheter-based procedures to dissolve clots.
An area of research we are exploring is growing new blood vessels with Cardio Vascu-Grow. that may improve the blood supply to the legs and feet to decrease pain and prevent tissue loss. We are collaborating with the American Cardiovascular Research Institute (Norcross, GA) which has conducted two
animal efficacy studies for us at a cost of $120,000. Injections of Cardio Vascu-Grow were given 3 times a week for a 2-week period into the ischemic leg. Results from these studies demonstrated that Cardio Vascu-Grow caused a statistically significant increase in new blood vessel formation and iliac blood flow in the legs of the
treated animals. Toxicity studies to support an IND application to the U.S. FDA are currently ongoing with MPI Research, Inc. at a cost of approximately $63,000. In addition, a clinical protocol for Phase I studies in diabetic patients is being
prepared by C2R at a cost of $100,000.



Stroke.According to the American Heart Association 2005 Update, stroke is the third leading cause of death in the United States behind heart disease and cancer. Those who survive almost always live with some diminished capacity. Animal studies
conducted by J.L. Ellsworth and associated persons, reported in the 2003 edition of Journal of Cerebral Blood Flow & Metabolism published by Lippincott Williams & Wilkens, Inc., have shown the potential of growth factor therapy in
limiting the severity of brain damage after a stroke. A stroke is characterized by an area of the brain where the brain cells are dead and cannot grow back. However, surrounding this area of dead cells is an area of damaged living cells that are
capable of being restored if an increased blood supply can be provided. This is our target area for treatment with Cardio Vascu-Grow.



During the six month period ended June 30, 2005, two animal studies for stroke were performed by Neurological Testing Inc., Charleston South Carolina, at
a cost of $40,000. These studies indicated and confirmed that Cardio Vascu-Grow could significantly reduce the volume of stroke in the animals. An additional study at a cost of $64,000 is currently in progress with Neurological Testing, Inc.



Chronic Back Pain and Lumbar Ischemia. Chronic back pain, which we
estimate based on published reports, affects, 26 million Americans, has recently been linked in published reports to blockage of blood vessels supplying the lower back, leading to a condition referred to as lumbar ischemia. European medical
researchers have speculated that chronic back pain resulting from blockage of blood vessels in the lower back precedes the blockage of coronary arteries in the heart by ten years. We are planning to participate in a proof of concept clinical trial
in Europe in the second half of 2005 to test whether Cardio Vascu-Grow can successfully treat chronic back pain. If the results are positive, we plan to then file an application to the U.S. FDA to allow a study to begin in chronic back pain patients in the U.S.



Intestinal Ischemia. Cardiovascular disease in the intestinal tract
can cause severe pain in people, even after the simple act of eating. A new potential application for Cardio Vascu-Grow is in the growing of new blood vessels in the digestive tract to address the medical problem of intestinal ischemia and pancreatitis. Smaller blood
vessels that feed the intestines or pancreas can become blocked by the same atherosclerotic process that affects the coronary arteries in the heart. This results in restricted blood flow to the digestive tract, which can lead to pain, reduced
absorption of nutrients, and diminished clearance of waste. We have just started work in this area, which affects a large number of mainly elderly. It is estimated by various physicians that this disease will affect almost everyone over the age of
70 to some degree.



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Initial Public Offering and Over Allotment



On February 11, 2005, the SEC declared effective our S-1 registration statement for the new issuance of 1,500,000 common
shares. On February 16, 2005, our Initial Public Offering (IPO) was closed and we received net proceeds of $13,622,500. On March 10, 2005, the underwriter exercised its option for the over-allotment and we issued 225,000 common shares for proceeds
to us of $2,030,625. As a part of the IPO we sold warrants to purchase 75,000 shares of common stock to the underwriters for $75.00



Conversion of Promissory Notes and Preferred Stock



At March 31, 2005, all but four note holders with a total of $30,000 of convertible notes had notified us of their intention to convert their notes into
common stock. In May 2005, one of these converted note holders elected to receive $10,000 cash in lieu of the 5,000 common stock shares issued to him. These were paid in cash in the second quarter of 2005.



During the period ended June 30, 2005, eight convertible preferred
shareholders elected to convert 19,750 of their preferred shares into 1,975,000 shares of common stock.



At June 30, 2005, there was one remaining preferred stockholder with 3,500 shares outstanding.



Critical Accounting Policies



Our managements discussion and analysis of our financial condition and
results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting
periods. On an ongoing basis, we evaluate our estimates and judgments related to these estimates. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



While our significant accounting policies are more fully described in our
financial statements appearing in this Form 10-Q, we believe that the following accounting policies relating to stock-based compensation charges are most critical to aid you in fully understanding and evaluating our reported financial results.



Stock Based Compensation. We account for stock option
grants to employees using the Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (see Note 8 to our financial statements). In December 2002, the FASB issued SFAS No. 148, Accounting
for Stock-Based CompensationTransition and Disclosure. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. It
also amends the disclosure requirements of SFAS No. 123. Since we have not issued stock options to employees from March 11, 1998 (inception) to December 31, 2003, the adoption of SFAS No. 148 has had no impact to our financial position or results of
operations through that point in time. We issued stock options to employees in the year ended December 31, 2004 and recorded expense associated with the issuance of the options of $57,792. We anticipate granting options in the future to attract and
retain independent board members, employees and others.



We
account for stock option and warrant grants issued to non-employees using the guidance of SFAS No. 123 and EITF No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, whereby the fair market value of such option and warrant grants is determined using the Black-Scholes option-pricing model at the earlier of the date at which the non-employees performance is completed or a performance
commitment is reached. The Black Scholes model is affected by our estimates of the life of the option or warrant, the volatility of our stock price, and the effective interest rate on the date of grant. Changes or differences in the assumptions in
the estimates could result in significant differences in the amounts recorded.



Research and Development Costs. We account for research and development costs in accordance with SFAS No. 2, Accounting for Research and Development Costs. Research and development costs are charged
to operations as incurred.



Development Stage
Enterprise. We are a development stage company as defined in Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises. We are devoting substantially all of our
present efforts to our formation, fundraising, and product development and approval. Our planned principal operations



25



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of selling our pharmaceutical products have not yet commenced. For the period from March 11, 1998 (inception) through June 30, 2005, we have accumulated a
deficit of $22,629,312. There can be no assurance that we will have sufficient funds available to complete our research and development programs or be able to commercially manufacture or market any products in the future, that future revenue will be
significant, or that any sales will be profitable. We expect operating losses to increase for at least the next several years due principally to the anticipated expenses associated with the proposed product development, clinical trials and various
research and development activities.



Results of Operations



Six Months Ended June 30, 2005 and 2004



Our activities during the six month period ended June 30, 2005 consisted
almost entirely of research and development and general corporate activities to support our FDA Phase l clinical trial. Research and development expenses increased 63% from $735,014 to $1,195,114 for the six months ended June 30, 2004 and 2005
respectively. We began our Phase l FDA clinical trial with our first patient in December 2003. The trial has continued through 2005. In addition, we increased our pre-clinical activity in exploring other applications for our drug candidate Cardio
Vascu-Growth in the areas of stroke recovery, wound healing, Peripheral Vascular Disease, chronic back pain, and intestinal ischemia. Our total increase in pre-clinical and clinical trial costs for the six months ended June 30, 2005 was $334,000. We
also increased the size of our scientific staff and increased our commitment to our FDA regulatory consultants resulting in increased personnel costs of $110,000.



|                             |  |                          |         |      |   |           |  |         |         |  |    |  
|---------------------------- |  | ------------------------ | ------- | ---- | - | --------- |  | ------- | ------- |  | -- | -
|                             |  | Six Months EndedJune 30, |        
|                             |  | 2004                     |         | 2005 |   | $Change   |  | %Change |        
|Research and development (a) |  | $                        | 735,014 |      | $ | 1,195,114 |  | $       | 460,100 |  | 63 | %
|                             |  |                          |         |      |   |           |  |         |         |  |    |  



|(a) | Includes $23,041 and $224,231 paid to Phage Biotechnology Corporation
|--- | ---------------------------------------------------------------------



General and administrative expenses increased 282% from $841,557 to $3,214,249 for the six months ended June 30, 2005 and 2004, respectively. The increase
resulted from an increase in our administrative costs in building necessary personnel and administrative infrastructure of $391,000. Marketing increased $670,000 and travel increased $215,000 as we became more active in our marketing and corporate
development activities, and $258,000 of expenses relating to our company co-sponsoring the International Association of Regenerative Medicine Conference. Additionally, we incurred $417,000 of expenses related to being a public company, an increase
in legal and accounting expenses of $275,000 and an increase in outside support services of $94,000.



|                               |  |                          |         |      |   |           |  |         |           |  |     |  
|------------------------------ |  | ------------------------ | ------- | ---- | - | --------- |  | ------- | --------- |  | --- | -
|                               |  | Six Months EndedJune 30, |        
|                               |  | 2004                     |         | 2005 |   | $Change   |  | %Change |          
|General and administrative (b) |  | $                        | 841,557 |      | $ | 3,214,249 |  | $       | 2,399,692 |  | 282 | %
|                               |  |                          |         |      |   |           |  |         |           |  |     |  



|(b) | Includes $35,141 and $77,747 paid to Phage Biotechnology Corporation
|--- | --------------------------------------------------------------------



Interest income increased to $123,254 from 7,699 for the six months ended June 30, 2005 and 2004, respectively. This is a result of a higher level of cash
and marketable securities available for investment during the first six months of fiscal 2005.



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|                |  |                          |       |      |   |         |  |         |         |  |      |  
|--------------- |  | ------------------------ | ----- | ---- | - | ------- |  | ------- | ------- |  | ---- | -
|                |  | Six Months EndedJune 30, |      
|                |  | 2004                     |       | 2005 |   | $Change |  | %Change |        
|Interest income |  | $                        | 7,699 |      | $ | 123,254 |  | $       | 115,555 |  | 1501 | %
|                |  |                          |       |      |   |         |  |         |         |  |      |  



Interest expense
increased 177% to $1,551,946 from $559,265 for the six months ended June 30, 2005 and 2004, respectively. Of this amount, $712,461 was related to charging off the entire amount of unamortized deferred debt financing costs and $710,001 of unamortized
debt discount, both of which were non-cash expenses.



|                 |  |                          |         |      |   |           |  |         |         |  |     |  
|---------------- |  | ------------------------ | ------- | ---- | - | --------- |  | ------- | ------- |  | --- | -
|                 |  | Six Months EndedJune 30, |        
|                 |  | 2004                     |         | 2005 |   | $Change   |  | %Change |        
|Interest expense |  | $                        | 559,265 |      | $ | 1,551,946 |  | $       | 992,681 |  | 177 | %
|                 |  |                          |         |      |   |           |  |         |         |  |     |  



Three Months Ended
June 30, 2005 and 2004



Our activities during the three
month period ended June 30, 2005 consisted almost entirely of research and development and general corporate activities to support our FDA Phase l clinical trial. Research and development expenses increased 178% from $281,613 to $782,397 for the
three months ended June 30, 2004 and 2005 respectively. We have increased our pre-clinical activity in exploring other applications for our drug candidate Cardio Vascu-Growth in the areas of stroke recovery, wound healing, Peripheral Vascular
Disease, chronic back pain, and intestinal ischemia. Our total increase in trial costs for the three months ended June 30, 2005 was $290,000. We also increased the size of our scientific staff and increased our commitment to our FDA regulatory
consultants resulting in increased personnel costs of $133,000.



|                             |  |                            |         |      |   |         |  |         |         |  |     |  
|---------------------------- |  | -------------------------- | ------- | ---- | - | ------- |  | ------- | ------- |  | --- | -
|                             |  | Three Months EndedJune 30, |        
|                             |  | 2005                       |         | 2004 |   | $Change |  | %Change |        
|Research and development (c) |  | $                          | 281,613 |      | $ | 782,397 |  | $       | 500,784 |  | 178 | %
|                             |  |                            |         |      |   |         |  |         |         |  |     |  



|(c) | Includes $11,520 and $126,696 paid to Phage Biotechnology Corporation
|--- | ---------------------------------------------------------------------



General and administrative expenses increased 247% from $538,642 to $1,866,707 for the three months ended June 30, 2005 and 2004, respectively. The
increase resulted from an increase in our administrative costs in building necessary personnel and administrative infrastructure of $230,000. Marketing increased $600,000 and travel increased $66,000 as we became more active in our marketing and
corporate development activities. Additionally, we incurred $174,000 of expenses related to being a public company, an increase in legal and accounting expenses of $250,000 and an increase in outside support services of $63,000.



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|                               |  |                            |         |      |   |           |  |         |           |  |     |  
|------------------------------ |  | -------------------------- | ------- | ---- | - | --------- |  | ------- | --------- |  | --- | -
|                               |  | Three Months EndedJune 30, |        
|                               |  | 2004                       |         | 2005 |   | $Change   |  | %Change |          
|General and administrative (d) |  | $                          | 538,642 |      | $ | 1,866,707 |  | $       | 1,328,065 |  | 247 | %
|                               |  |                            |         |      |   |           |  |         |           |  |     |  



|(b) | Includes $17,571 and $36,742 paid to Phage Biotechnology Corporation
|--- | --------------------------------------------------------------------



Interest income increased from $7,699 to $76,215 for the three months ended June 30, 2005 and 2004, respectively. This is a result of a higher level of
cash and marketable securities available for investment during the comparative periods.



|                |  |                            |       |      |   |         |  |         |        |  |     |  
|--------------- |  | -------------------------- | ----- | ---- | - | ------- |  | ------- | ------ |  | --- | -
|                |  | Three Months EndedJune 30, |      
|                |  | 2004                       |       | 2005 |   | $Change |  | %Change |       
|Interest income |  | $                          | 7,699 |      | $ | 76,215  |  | $       | 68,143 |  | 885 | %
|                |  |                            |       |      |   |         |  |         |        |  |     |  



Interest expense
decreased 100% for the three months ended June 30, 2005 and 2004, respectively, due to the conversion of all the convertible notes in March 2005.



|                 |  |                             |         |      |   |         |  |   |          |   |  |      |  
|---------------- |  | --------------------------- | ------- | ---- | - | ------- |  | - | -------- | - |  | ---- | -
|                 |  | Three Months Ended June 30, |        
|                 |  | 2004                        |         | 2005 |   | $Change |  |   | %Change  |  
|Interest expense |  | $                           | 274,937 |      | $ |        |  | $ | (274,937 | ) |  | -100 | %
|                 |  |                             |         |      |   |         |  |   |          |   |  |      |  



Liquidity and Capital Resources



Sources of Liquidity



Since our inception and through June 30, 2005, we have financed our
operations through the initial public offering of our common stock and the private sale of our capital stock and our convertible notes. Through June 30, 2005, we have received net proceeds of approximately $33,000,946 from the issuance of shares of
common stock, convertible preferred stock and convertible notes payable. The table below summarizes our sales of equity securities and convertible notes through June 30, 2005.



|                                                                                                                                                                       |  |              |           
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----------
|Security                                                                                                                                                               |  | Net Proceeds
|Convertible Preferred Stock converts to common stock at 100/1, non-voting, no dividend                                                                                 |  | $            | 520,400   
|Common Stock                                                                                                                                                           |  |              | 3,904,000 
|                                                                                                                                                                       |  |              |           
|Total net proceeds from stock issuances                                                                                                                                |  |              | 4,424,400 
|                                                                                                                                                                       |  |              |           
|Convertible NotesSeries I                                                                                                                                             |  |              |           
|7% notes payable convertible into common stock at $2 per share or after an initial public offering (IPO) at $2 per share or 50% of
the IPO Price, whichever is lower |  |              | 7,138,793 
|Convertible NotesSeries II                                                                                                                                            |  |              |           
|7% notes payable convertible into common stock at $4 per share or after an IPO at $4 per share or 50% of the IPO Price, whichever is
lower                             |  |              | 4,973,958 
|Convertible NotesSeries IIa                                                                                                                                           |  |              |           
|7% notes payable convertible into common stock at $4 per share or after an IPO at $4 per share or 50% of the IPO Price, whichever is
lower                             |  |              | 753,667   
|                                                                                                                                                                       |  |              |           
|Total net proceeds for issuance of our convertible notes payable                                                                                                       |  |              | 12,866,418
|                                                                                                                                                                       |  |              |           
|Net proceeds from the Initial Public Offering                                                                                                                          |  |              |           
|1,725,000 shares of common stock sold at $10.00 per share net of the Underwriters discount of 7% and non-accountable expenses of
2.75%                                |  |              | 15,693,125
|                                                                                                                                                                       |  |              |           
|Option exercises                                                                                                                                                       |  |              |           
|35,966 stock option exercised                                                                                                                                          |  |              | 17,003    
|                                                                                                                                                                       |  |              |           
|Total net proceeds from financings through June 30, 2005                                                                                                               |  | $            | 33,000,946
|                                                                                                                                                                       |  |              |           



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As of June 30, 2005, we had $13,578,109 in cash, cash equivalents and short-term investments. We believe
that our available cash will be sufficient to fund anticipated levels of operations through at least the end of 2006.



In March 2005, we have received notification from $10,341,000 worth of our convertible note holders of their intent to convert their notes into common
stock, and they subsequently converted those notes into common stock. The remaining liability of $20,000 was paid in cash. In May 2005, one of these converted note holders elected to receive $10,000 cash in lieu of the 5,000 shares issued to him.



Income Taxes



As of June 30, 2005, we had net operating loss carry forwards for federal
income taxes of approximately $16,465,000. Our utilization of the net operating loss and tax credit carry forwards may be subject to annual limitations pursuant to Section 382 of the Internal Revenue Code, and similar state provisions, as a result
of changes in our ownership structure resulting from our initial public offering and from the conversion of our convertible preferred stock and convertible notes. The annual limitations may result in the expiration of net operating losses and
credits prior to utilization.



At June 30, 2005, we had
deferred tax assets representing primarily the benefit of net operating loss carry forwards. We did not record a benefit for the deferred tax asset because realization of the benefit was uncertain and, accordingly, a valuation allowance is provided
to offset the deferred tax asset.



Cash Flow



Six Months ended June 30, 2005 and 2004



For the six months ended June 30, 2005, our operating activities consumed
cash of $6,075,307, an increase of $4,372,281 over the six months ended June 30, 2004. Our activity level in 2005 increased dramatically over the level of activity in 2004 in both our research and development activities and our general and
administrative activities because we were able to raise cash through the sale of our common stock. This liquidity allowed us to proceed with the FDA Phase l trial, add needed administrative capability and personnel, resume our marketing activities,
and move forward with preparing the company to be a public company.



Purchase of short term investments consumed $25,651 of cash combined with $4,423 of capital expenditures for property and equipment, resulting in $30,074 of cash consumed in investing activities for the period ended June 30, 2005, which was
a decrease of $61,566 over the six months ended June 30, 2004.



Financing activities generated $15,042,256 of cash during the year ended June 30, 2005, an increase of $8,443,804 over the six months ended June 30, 2004. This increase is primarily related to completion of our Initial Public Offering
exceeding the proceeds from the sale of convertible notes payable during the six months ended June 30, 3004 and 2003 respectively.



Funding Requirements



Over the next 12 months, we expect to devote substantial resources to continue our research and development efforts and to develop our sales, marketing
and manufacturing programs associated with the commercialization and launch of Cardio Vascu-Grow. Our funding requirements will depend on numerous factors, including:



| |  |  | the scope and results of our clinical trials;
| | - |  | ---------------------------------------------



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| |  |  | advancement of other uses for our product candidate into development;
| | - |  | ---------------------------------------------------------------------



| |  |  | the timing of, and the costs involved in, obtaining regulatory approvals;
| | - |  | -------------------------------------------------------------------------



| |  |  | the cost of commercialization activities, including product marketing, sales and distribution;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-related costs, including litigation costs, if any, and the result of
such litigation; our ability to establish, enforce and maintain collaborative arrangements and activities required for product commercialization; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our revenues, if any, from successful development and commercialization of our potential products.
| | - |  | --------------------------------------------------------------------------------------------------



We do not expect to generate significant additional funds unless and until we obtain marketing approval for, and begin
selling, Cardio Vascu-Grow. We believe that the key factors that will affect our
internal and external sources of cash are:



| |  |  | our ability to successfully obtain marketing approval for and to commercially launch Cardio Vascu-Grow;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | the success of our other preclinical and clinical development programs; and
| | - |  | ---------------------------------------------------------------------------



| |  |  | the receptivity of the capital markets to financings by biotechnology companies.
| | - |  | --------------------------------------------------------------------------------



While, based on historical as well as budgeted expenditures, we believe that we will have sufficient liquidity to satisfy
our cash requirements, and do not expect to need to raise additional funds in the near future, if our existing resources prove to be insufficient to satisfy our liquidity requirements, we may need to raise additional external funds through the sale
of additional equity or debt securities. The sale of additional equity securities will result in additional dilution to our stockholders. Additional financing may not be available in amounts or on terms acceptable to us or at all. If we are unable
to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned research, development and commercialization activities, which could harm our financial condition and operating results.



Contractual Obligations and Commercial Commitments



The following table summarizes our long-term contractual obligations as of
June 30, 2005:



|                            |  |       |   |                 |   |           |  |           |   |                  |   |   |  |   |  
|--------------------------- |  | ----- | - | --------------- | - | --------- |  | --------- | - | ---------------- | - | - |  | - | -
|                            |  | Total |   | Less than1 Year |   | 1-3 Years |  | 3-5 Years |   | More than5 Years
|Long-term debt obligations  |  | $     |  |                 |   |          |  |           |  |                  |   |  |  |   | 
|Operating lease obligations |  |       |  |                 |   |          |  |           |  |                  |   |  |  |   | 
|                            |  |       |   |                 |   |           |  |           |   |                  |   |   |  |   |  
|Total                       |  | $     |  |                 | $ |          |  | $         |  |                  | $ |  |  | $ | 
|                            |  |       |   |                 |   |           |  |           |   |                  |   |   |  |   |  

---

Our major outstanding contractual
obligations are summarized as follows:



In April 2004, we
assumed the remainder of a non-cancelable operating lease agreement for office space in Henderson, Nevada, that requires monthly payments of $5,882 and expires in October 2005. In May 2004, we paid a deposit of $5,900. Building operating expenses
are reconciled annually and any increase over the base year is billed pro rata among the buildings tenants.



We entered into an agreement with Phage, our affiliate, in which we agreed to jointly own and license from one another the right to use certain patents
including the patents related to Cardio Vascu-Grow. As a part of that agreement, (a)
Phage has agreed to provide product and support services for our preclinical and clinical trials at a price equal to Phages direct and indirect cost of services provided, and (b) at our election, we are obligated to either (i) pay to Phage ten
percent of our net sales for Cardio Vascu-Growmanufactured for us by Phage or (ii) pay
to Phage a six percent royalty based on our net sales



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price of Cardio Vascu-Growfor which we use a manufacturer other than Phage. This agreement expires on the last to expire of the patent rights covered including extensions.



We have entered into an agreement with Phage and Cardio Phage International,
Inc. (CPI), an affiliate, pursuant to which CPI will act as distributor for the products of both Phage and us in locations throughout the world other than North America, Europe, Japan, China and the Republic of Korea. Pursuant to that
agreement, CPI is obligated to pay us an amount equal to 50% of CPIs gross revenue from sales of our product less CPIs direct and certain indirect costs.



In August 2004, we guaranteed Phages obligations under its lease for laboratory and office space at University of
California Irvine Research Center. The lease is for 11,091 rentable square feet for the period September 1, 2004 through August 31, 2006, and provides for a monthly rent of approximately $35,500 plus shared building operating expenses.



On October 24, 2001, we entered into a service agreement with a clinical
research organization, Clinical Cardiovascular Research, LLC (C2R). C2R is dedicated to the clinical development of investigational drugs and devices for cardiovascular indications. C2R will assist us with the FDA approval process for
its drug. C2Rs fees are based on negotiated rates for services plus expenses. During the six month periods ended June 30, 2005 and 2004 we expended approximately $526,000 and $451,509 for these services, respectively.



We have signed a royalty agreement with Dr. Stegmann which provides him with
a one percent royalty on net revenue from the sale of our Cardio Vascu-Growproduct, if
any, through December 31, 2013, measured quarterly and payable 90 days after each quarter end.



On December 15, 2000, we entered into an agreement with Korea Biotechnology Development Co., Ltd. (KBDC) for the manufacture and distribution of our products in certain areas of Asia. As a part of this
agreement, KBDC arranged the purchase of 8,750,000 shares of our common stock for $3,602,000 by Cardio Korea, Ltd. KBDC agreed to fund all of the regulatory approval process in Korea for any of our products. In addition, KBDC agreed to pay us a
royalty of ten percent of net revenues from sales in its Asian territories.



We entered into a contract in June 2004 with Catheter and Disposables Technologies, Inc. to design, develop and fabricate two different prototype catheter products that will allow the administration of Cardio
Vascu-Growby catheter procedures. The cost for the first prototype which was delivered
and tested was $70,000. During the six month period ended June 30, 2005 we expended approximately $25,000 for these services. Design changes will be made in the second prototype catheter at a cost of approximately $28,000.



On May 4, 2005, the Company entered into a marketing agreement with JDM
Consulting to implement a wide-ranging marketing and shareholder awareness program. Service for the six months period ended June 30, 2004 (unaudited), 2005 (unaudited) and the period from March 11, 1998 (inception) to June 30, 2005 (unaudited), were
$0, $570,000 and $570,000 respectively. As of June 30, 2005 the agreement is still ongoing.



Off-Balance Sheet Transactions



At June 30, 2005, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.



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Recently Issued Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board (the FASB) issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements. This pronouncement requires the consolidation of variable interest entities, as
defined, and is effective immediately for variable interest entities created after January 31, 2004, and for variable interest entities in which an enterprise obtains an interest after that date. We do not have any variable interest entities, and
therefore, this interpretation is not expected to have a material impact on our financial statements.



In November 2004, the FASB issued SFAS No. 151, Inventory Costs. SFAS No. 151 amends the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage) under the guidance in ARB No. 43, Chapter 4, Inventory Pricing. Paragraph 5 of ARB No. 43, Chapter 4, previously stated that . . . under some circumstances, items
such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . . This Statement requires that those items be recognized as current-period
charges regardless of whether they meet the criterion of so abnormal. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for inventory costs incurred during fiscal Six months beginning after June 15, 2005. Management does not expect adoption of SFAS No. 151 to have a material impact on our financial statements.



In December 2004, the FASB issued SFAS No. 152, Accounting for Real
Estate Time-Sharing Transactions. The FASB issued this Statement as a result of the guidance provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. SOP 04-2 applies to all real
estate time-sharing transactions. Among other items, the SOP provides guidance on the recording of credit losses and the treatment of selling costs, but does not change the revenue recognition guidance in SFAS No. 66, Accounting for Sales of
Real Estate, for real estate time-sharing transactions. SFAS No. 152 amends Statement No. 66 to reference the guidance provided in SOP 04-2. SFAS No. 152 also amends SFAS No. 67, Accounting for Costs and Initial Rental Operations of Real
Estate Projects, to state that SOP 04-2 provides the relevant guidance on accounting for incidental operations and costs related to the sale of real estate time-sharing transactions. SFAS No. 152 is effective for Six months beginning after
June 15, 2005, with restatements of previously issued financial statements prohibited. This statement is not applicable to the Company.



In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment to Opinion No. 29, Accounting for
Nonmonetary Transactions. Statement No. 153 eliminates certain differences in the guidance in Opinion No. 29 as compared to the guidance contained in standards issued by the International Accounting Standards Board. The amendment to Opinion
No. 29 eliminates the fair value exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Such an exchange has commercial
substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in periods beginning after June 15, 2005. Earlier application is
permitted for nonmonetary asset exchanges occurring in periods beginning after December 16, 2004. Management does not expect adoption of SFAS No. 153 to have a material impact on the Companys financial statements.



In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share
Based Payment (SFAS No. 123(R)). SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123(R) requires that the
cost of share-based payment transactions (including those with employees and non-employees) be recognized in the financial statements. SFAS No. 123(R) applies to all share-based payment transactions in which an entity acquires goods or services by
issuing (or offering to issue) its shares, share options, or other equity instruments (except for those held by an ESOP) or by incurring liabilities (1) in amounts based (even in part) on the price of the entitys shares or other equity
instruments, or (2) that require (or may require) settlement by the issuance of an entitys shares or other equity instruments.



Management must adopt SFAS No. 123(R) by the first quarter of 2006. We currently use the Black-Scholes formula to estimate the value of stock options
granted to employees and is evaluating option valuation models, including the Black-Scholes formula, to determine which model we will utilize upon adoption of SFAS No. 123(R). Management plans to adopt SFAS No. 123(R) using the modified-prospective
method. We do not anticipate that adoption of SFAS No. 123(R) will have a material impact on our stock-based compensation expense.



In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, Accounting for Conditional Asset Retirement Obligations. FIN No.
47 clarifies the meaning of the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations and clarifies when an entity would have sufficient



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information to reasonably estimate the fair value of an asset retirement obligation. This interpretation is effective no later than the end of fiscal years
ending after December 15, 2005 (December 31, 2005 for calendar-year companies). Retrospective application of interim financial information is permitted but is not required. Management does not expect adoption of FIN No. 47 to have a material impact
on our financial statements.



In May 2005, the FASB issued
Statement of Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections an amendment to Accounting Principles Bulletin (APB) Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting
Changes in Interim Financial Statements though SFAS No. 154 carries forward the guidance in APB No. 20 and SFAS No. 3 with respect to accounting for changes in estimates, changes in reporting entity, and the correction of errors. SFAS No. 154
establishes new standards on accounting for changes in accounting principles, whereby all such changes must be accounted for by retrospective application to the financial statements of prior periods unless it is impracticable to do so. SFAS No. 154
is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005, with early adoption permitted for changes and corrections made in years beginning after May 2005.



RISK FACTORS



Risks Related to the Company



We have a history of losses and expect to incur substantial losses and
negative operating cash flows for the foreseeable future, and we may never achieve or maintain profitability.



Since our inception, we have incurred significant net losses. As a result of ongoing operating losses, we had an accumulated deficit of approximately
$22,629,312 as of June 30, 2005. We are not currently profitable. Even if we succeed in developing and commercializing Cardio Vascu-Grow, we expect to incur substantial losses for the foreseeable future and may never become profitable. We also expect to incur significant capital expenditures and anticipate that our expenses will
increase substantially in the foreseeable future as we:



| |  |  | seek regulatory approvals for Cardio Vascu-Grow;
| | - |  | -------------------------------------------------



| |  |  | develop, formulate, manufacture and commercialize Cardio Vascu-Grow;
| | - |  | ---------------------------------------------------------------------



| |  |  | implement additional internal systems and infrastructure; and
| | - |  | -------------------------------------------------------------



| |  |  | hire additional clinical, scientific, administrative and sales and marketing personnel.
| | - |  | ---------------------------------------------------------------------------------------



We also expect to experience negative cash flow for the foreseeable future as we fund our operating losses and capital
expenditures. As a result, we will need to generate significant revenues to achieve and maintain profitability. We do not expect to generate revenues unless Cardio Vascu-Growis approved, and may not be able to generate these revenues even if it is approved, and we may never achieve profitability in the
future.



At June 30, 2005, we had $13,578,109 in cash, cash
equivalents and short-term investments. Although there can be no assurances, we believe that our available cash and cash equivalents will be sufficient to fund anticipated levels of operations through at least the end of 2007 since the assumed
conversion of most of our convertible notes has occurred.



If we continue to
incur operating losses for a period longer than we anticipate, we will be unable to advance our development program and complete our clinical trials.



Developing a new product and conducting clinical trials for multiple disease indications is expensive. We expect that we will fund our capital
expenditures and operations over at least the next six years with our current resources and the net proceeds of our initial public offering. We may need to raise additional capital sooner, however due to a number of factors, including:



| |  |  | an acceleration of the number, size or complexity of the clinical trials;
| | - |  | -------------------------------------------------------------------------



| |  |  | slower than expected progress in developing Cardio Vascu-Grow;
| | - |  | ---------------------------------------------------------------



| |  |  | higher than expected costs to obtain regulatory approvals;
| | - |  | ----------------------------------------------------------



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| |  |  | higher than expected costs to develop or protect our intellectual property;
| | - |  | ---------------------------------------------------------------------------



| |  |  | higher than expected costs to develop our sales and marketing capability; and
| | - |  | -----------------------------------------------------------------------------



| |  |  | the possibility that a significant number of our convertible note-holders elect to have their notes paid in full rather than convert them to common stock.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



In the future we may not be able to raise additional necessary capital on favorable
terms, if at all.



We do not know whether additional
financing will be available when needed, or on terms favorable to us or our stockholders. We may raise any necessary funds through public or private equity offerings, debt financings or additional corporate collaboration and licensing arrangements.
To the extent we raise additional capital by issuing equity securities, our stockholders will experience dilution. If we raise funds through debt financings, we may become subject to restrictive covenants. To the extent that we raise additional
funds through collaboration and licensing arrangements, we may be required to relinquish some rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us.



Cardio Vascu-Growis currently our only drug product. Because the development of Cardio Vascu-Growis subject to a substantial degree of technological uncertainty, we may not succeed in developing it.



Unlike many pharmaceutical companies which have a number of products in
development and which utilize many technologies, we are dependent on our basic drug technology for the success of our company. While our core technology has a number of potentially beneficial uses, if that core technology is not commercially viable,
we currently do not have others to fall back on and our business will fail.



Cardio Vascu-Growis still in research and development
and we do not expect it to be commercially available for the foreseeable future, if at all. The drug is currently in a Phase I clinical trial to primarily measure the safety of the product. Only a small number of research and development programs
ultimately result in commercially successful drugs. Potential products that appear to be promising at early stages of development may not reach the market for a number of reasons. These reasons include the possibility that the potential products
may:



| |  |  | be found ineffective or cause harmful side effects during preclinical studies or clinical trials;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | fail to receive necessary regulatory approvals;
| | - |  | -----------------------------------------------



| |  |  | be precluded from commercialization by proprietary rights of third parties;
| | - |  | ---------------------------------------------------------------------------



| |  |  | be difficult to manufacture on a large scale; or
| | - |  | ------------------------------------------------



| |  |  | be uneconomical or fail to achieve market acceptance.
| | - |  | -----------------------------------------------------



If any of these potential problems occurs, we may never successfully market Cardio Vascu-Grow.



We may not receive regulatory approvals for Cardio Vascu-Grow.



Regulation by government authorities in the United States and foreign countries is a significant factor in the development, manufacture and marketing of Cardio Vascu-Growand in ongoing research and product development activities. Cardio Vascu-Growis still in research and development and we have not yet requested or received regulatory approval to commercialize it from the FDA
or any other regulatory body. The process of obtaining these approvals and the subsequent substantial compliance with appropriate federal and state statutes and regulations require spending substantial time and financial resources. If we fail to
obtain, or encounter delays in obtaining or maintaining regulatory approvals, it could adversely affect the marketing of Cardio Vascu-Grow, as well as our liquidity and capital resources.



In particular, human therapeutic products are subject to rigorous preclinical testing and clinical trials and other approval
procedures of the FDA and similar regulatory authorities in foreign countries. Various federal and state statutes and regulations also govern or influence testing, manufacturing, safety, labeling, storage and record-keeping related to these products
and their marketing. Any delay in, or suspension of, our clinical trials will delay the filing of our applications with the FDA to market the drug in the United States and, ultimately, our ability to commercialize Cardio Vascu-Growand generate product revenues.



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In connection with our clinical trials, we face the risks that:



| |  |  | we or the FDA may suspend the trials;
| | - |  | -------------------------------------



| |  |  | we may discover that Cardio Vascu-Growmay cause harmful side effects;
| | - |  | ----------------------------------------------------------------------



| |  |  | the results may not replicate the results of earlier, smaller trials;
| | - |  | ---------------------------------------------------------------------



| |  |  | the results may not be statistically significant;
| | - |  | -------------------------------------------------



| |  |  | patient recruitment may be slower than we expected;
| | - |  | ---------------------------------------------------



| |  |  | patients may drop out of the trials;
| | - |  | ------------------------------------



| |  |  | patients may die during the trials, even though treatment with Cardio Vascu-Growmay not have caused those deaths; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | we may not be able to produce sufficient quantities of Cardio Vascu-Growto complete the trails.
| | - |  | ------------------------------------------------------------------------------------------------



We may encounter delays or difficulties in our Cardio Vascu-Growclinical trials, which may delay or preclude regulatory approval of Cardio Vascu-Grow.



In order to commercialize Cardio Vascu-Growfor coronary heart disease treatment, we must obtain regulatory approvals for that use. Satisfaction of regulatory requirements
typically takes many years, is expensive and involves compliance with requirements covering research and development, testing, manufacturing, quality control, labeling and promotion of drugs for human use. To obtain regulatory approvals, we must,
among other requirements, complete clinical trials demonstrating that Cardio Vascu-Growis safe and effective for a particular disease treatment.



We
have commenced treatment of the first patients in the planned Phase I clinical trials of Cardio Vascu-Growfor the treatment of advanced heart disease patients. Cardio Vascu-Growis currently our only product candidate in clinical trials. Ongoing or future clinical trials may demonstrate that Cardio Vascu-Growis neither safe nor effective.



We may encounter delays or rejections in the regulatory approval process because of additional government regulation (FDA or otherwise) during the period
of product development, clinical trials and FDA regulatory review. Such delays or rejections may be caused by failure to comply with applicable penalties, recall or seizure of any approved products, total or partial suspension of production or
injunction, as well as other regulatory action against Cardio Vascu-Growor us.



Outside the United States, our ability to market a product is
contingent upon receiving clearances from the appropriate regulatory authorities in the various foreign jurisdictions. These foreign regulatory approval processes each include all of the risks associated with FDA clearance described above.



We depend on one independent clinical investigator to conduct our clinical
trials for Cardio Vascu-Grow.



We are depending on Clinical Cardiovascular Research, LLC, an independent
clinical investigator, to conduct clinical trials under their agreements with us. This investigator is not our employee and we cannot control the amount or timing of resources that it devotes to our programs. If our independent investigator fails to
devote sufficient time and resources to our drug development programs, or if its performance is substandard, it will delay the approval of our FDA application and our introduction of Cardio Vascu-Grow. Our investigator may also have relationships with other commercial entities, some of which may compete with us. If our independent
investigator assists our competitors at our expense, it could harm our competitive position.



If we are unable to retain and recruit qualified scientists it will delay our development efforts.



As of June 30, 2005, we had two scientist employees, John W. Jacobs, Ph.D. and Kenneth A. Thomas, Ph.D., and twelve scientists under month to month
contracts, including our Chief Clinical Officer, Thomas Stegmann, M.D. The loss of any of our lead scientists, Thomas Stegmann, M.D., John W. Jacobs, Ph.D. or Kenneth A. Thomas, Ph.D., could impede the achievement of our development objectives.



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Furthermore, recruiting and retaining qualified scientific personnel to perform research and development
work in the future will also be critical to our success. We may be unable to attract and retain qualified scientific personnel on acceptable terms given the competition among biotechnology, pharmaceutical and health care companies, universities and
non-profit research institutions for experienced scientists.



If any of our
key senior executives discontinue their employment with us, our efforts to develop our business may be delayed.



We are highly dependent on the principal members of our management team and the loss of our Chairman, President and Chief Executive Officer, Daniel C.
Montano, or our Chief Financial Officer, Mickael A. Flaa, or our Chief Operating Officer, John W. Jacobs, could impede the achievement of our development efforts and objectives.



Prior activities of our Chief Executive Officer, as well as certain conflicts of interest that he has, may increase the risks of an
investment in our company.



Daniel C. Montano, our
Chairman of the Board, President, Chief Executive Officer and the owner of 25.01% of the voting control of our company, was engaged in the securities, investment banking and venture capital business for approximately 30 years ending in 1998. During
that time, Mr. Montano or the firms he controlled were the subject of arbitrations, fines, disciplinary actions and sanctions imposed by the SEC and the National Association of Securities Dealers, Inc. (NASD), including a cease and desist order the
SEC entered in 1992. The order required that Mr. Montano permanently cease and desist from continuing and causing any further material misrepresentations and/or omitting to state material facts in the offer or sale of a security. All administrative
action was concluded on those matters over five years ago based on events occurring several years before.



The clinical trials of our product under the regulations of the FDA have not been affected by Mr. Montanos prior regulatory issues, and we do not
expect them to be. However, to the extent we seek approval from other regulatory agencies in the future, Mr. Montanos past activities may cause closer examination by such agencies, which could affect the outcome of the approval process or the
timing and expense involved. In addition, our ability to establish other business relationships may be delayed or adversely affected.



Also, as set forth in the following two risk factors, Mr. Montano has substantial potential conflicts of interest due to his position as Chairman of the
Board, President, Chief Executive Officer and significant stockholder of Phage, our affiliate that manufactures Cardio Vascu-Growfor us.



There
can be no assurance that Mr. Montanos past history in the investment banking industry or his potential conflicts of interest will not have a negative effect on us or on his ability to serve our company.



Our principal executive officers devote less than all of their business time to us.



Our Chief Executive Officer and President, Daniel C.
Montano, along with Chief Financial Officer and Vice President, Mickael A. Flaa, and Chief Scientific Officer and Chief Operating Officer and Vice President, John W. Jacobs, will each only be devoting a sufficient amount of their business time to us
to discharge 100% of their duties, and may devote time to an affiliated company which does business with us and the balance of their time on other business affairs. We do not have employment agreements with our executive officers or key employees.
See following Risk Factor about potential conflicts of interest. Thomas Stegmann, M.D., one of our board members and our Chief Clinical Officer, devotes a sufficient amount of his business time to our affairs and the balance to The Fulda Medical
Center in Germany. Accordingly, our principal executive officers may not have sufficient time to devote to our operations.



Our relationship with Phage Biotechnology Corporation, and the relationship of our senior executive officers to Phage, creates potential for conflicts of interest.



We have a number of relationships with Phage, an
affiliated company, which may create conflicts of interest. Pursuant to a joint ownership and license agreement with Phage, subject to certain contractual commitments, we own a one-half undivided interest in the U.S. and foreign patents and patent
applications necessary to develop and commercialize Cardio Vascu-Grow. We entered this
agreement to protect our ability to obtain patent protection on processes developed in conjunction with Phage which processes might be useful to Phage in other unrelated products. Pursuant to that agreement, we also have an exclusive license to
develop and commercialize Cardio Vascu-Grow. Phage provides technical development
services to us, and currently is our sole supplier of Cardio Vascu-Grow. In addition to
Cardio Vascu-Grow, Phage is currently in the process of developing other drug products
that are not expected to have any relation to our proposed product



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or business. Notwithstanding the foregoing, nothing in our agreements precludes Phage from participating in activities competitive to ours.



Daniel C. Montano owns beneficially approximately 25.01% of our outstanding
voting stock. Mr. Montano also owns 18.25% of the outstanding voting stock of Phage. He is the Chairman of the Board and Chief Executive Officer of both companies. In addition, we own 4.56% of Phages outstanding common stock. Additionally,
certain of our officers and directors (including Daniel C. Montano, Alexander G. Montano, Grant Gordon, Joong Ki Baik and Thomas Ingram) own or hold voting control over an aggregate of 41.20% of Phages outstanding common stock; however, they
have no agreement to vote together.



Mr. Montano devotes as
much time as necessary to our affairs, and devotes time as necessary to Phages affairs and the balance to other investment interests.



John W. (Jack) Jacobs is our Chief Operating Officer and Chief Scientific Officer and serves in the same positions with Phage. He joined our board of
directors upon the closing of our initial public offering. He devotes as much time as necessary to our affairs, and devotes time as necessary to Phages affairs and the balance to other investment interests.



Mickael A. Flaa is our Chief Financial Officer and serves the same role with
Phage. He joined our board of directors upon the closing of our initial public offering. He devotes as much time as necessary time to our affairs, and devotes time as necessary to Phages affairs and the balance to other investment interests.



Such individuals owe a fiduciary duty of loyalty to us. They
also owe similar fiduciary duties to Phage. However, due to their responsibilities to serve both companies, there is potential for conflicts of interest. At any particular time, the needs of Phage could cause one or more of these executive officers
to devote attention to Phage at the expense of devoting attention to us. In addition, matters may arise that place the fiduciary duties of these individuals in conflicting positions. Such conflicts will be resolved by our conflicts resolution
committee, comprised of independent directors and directors having no affiliation with Phage. If this occurs, matters important to us could be delayed. The results of such delays are not susceptible to accurate predictions but could include, among
other things, delay in the production of sufficient amounts of Cardio Vascu-Growto
complete our clinical trials on our preferred timetable or to meet potential commercial demands if our clinical trials are successful and we receive FDA approval to sell the drug in the U.S. Such delays potentially could increase our costs of
development or reduce our ability to generate revenue. Our officers will use every effort to avoid material conflicts of interest generated by their responsibilities to Phage, but no assurance can be given that material conflicts will not arise
which could be detrimental to our operations and financial prospects.



We
may be subject to claims that we or our employees have wrongfully used or disclosed alleged trade secrets of former employers.



As is commonplace in the biotechnology industry, we employ now, and may hire in the future, individuals who were previously employed at other
biotechnology or pharmaceutical companies, including competitors or potential competitors. Although there are no claims currently pending against us, we may be subject to claims that we or certain employees have inadvertently or otherwise used or
disclosed trade secrets or other proprietary information of former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and
would be a significant distraction to management.



We have no marketing
experience, sales force or distribution capabilities. If our products are approved, and we are unable to recruit key personnel to perform these functions, we may not be able to commercialize them successfully.



Although we do not currently have any marketable products, our ability to
produce revenues ultimately depends on our ability to sell our products if and when they are approved by the FDA. We currently have no experience in marketing or selling pharmaceutical products and we do not have a marketing and sales staff or
distribution capabilities. If we fail to establish successful marketing and sales capabilities or fail to enter into successful marketing arrangements with third parties, our ability to generate revenues will suffer.



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We do not have manufacturing capability. We rely on only one supplier, which is an affiliate, for our bulk drug
product. Any problems experienced by such supplier could negatively affect our operations.



We have entered into an agreement with our affiliated company, Phage, to manufacture Cardio Vascu-Growfor us and to supply it to us. The agreement with Phage expires August 15, 2021, unless we co-develop additional patents and then
the agreement will expire on the date of the last patent to expire. Further, any significant problem that Phage or one of Phages suppliers experiences could result in a delay or interruption in the supply of materials to us until that supplier
cures the problem or until we locate an alternative source of supply. Any delay or interruption would likely lead to a delay or interruption in the production of Cardio Vascu-Growand could negatively affect our operations. In addition, as part of the drug approval process for Cardio Vascu-Grow, Phage will be inspected by the FDA prior to approval of the drug. Phage has the necessary approvals
to manufacture Cardio Vascu-Growfor our clinical trials. If we obtain FDA approval for
Cardio Vascu-Grow, Phage will be required to use a facility that the FDA certifies as in
compliance with good manufacturing practices, or GMP, in order to manufacture the drug for use in commercial quantities. Any delay in obtaining such approval could delay our distribution of Cardio Vascu-Growand thus negatively affect our ability to generate revenues.



Governmental and third-party payors may subject any products developed by us to sales and pharmaceutical pricing controls that could
limit our product revenues and delay profitability.



The
continuing efforts of government and third-party payors to contain or reduce the costs of health care through various means may reduce our potential revenues. These payors efforts could decrease the price that we receive for any products we
may develop and sell in the future. In addition, third-party insurance coverage may not be available to patients for any products we develop. If government and third-party payors do not provide adequate coverage and reimbursement levels for our
products, or if price controls are enacted, our ability to generate revenues will suffer.



If physicians and patients do not accept products for which we obtain marketing approval, we may not recover our investment.



If the FDA approves our products for marketing, their commercial success will depend upon the medical community and patients
accepting our products as being safe and effective. A number of factors could affect the market acceptance of our products, including:



| |  |  | the timing and receipt of marketing approvals;
| | - |  | ----------------------------------------------



| |  |  | the safety and efficacy of the products;
| | - |  | ----------------------------------------



| |  |  | the emergence of equivalent or superior products;
| | - |  | -------------------------------------------------



| |  |  | the cost-effectiveness of the products; and
| | - |  | -------------------------------------------



| |  |  | effective marketing.
| | - |  | --------------------



Our profitability will depend on the markets acceptance of Cardio Vascu-Growat a profitable price which may depend upon the agreement of third party payors to reimburse it. If the medical community and
patients do not ultimately accept any products developed by us as being safe and effective, as well as cost effective, we may not recover our investment and our business may fail.



If we fail to adequately protect our intellectual property rights, our competitors may be able to take advantage of our research and
development efforts to develop competing drugs.



Fibroblast growth factor 1, or FGF-1, and derivatives are powerful stimulators of new blood vessel growth. Our intellectual property rights cover certain methods of manufacturing and using these forms, but do not cover the primary structure
of the FGF-1 and derivatives and there are other ways to manufacture FGF-1 not covered by our patents. Consequently, we may not prevent others from manufacturing FGF-1 by a different technology. Moreover, other uses of FGF-1 are not covered by our
existing patents.



Our commercial success will depend in part
on our success in obtaining patent protection for our key products or processes. Our patent position, like that of other biotechnology and pharmaceutical companies, is highly uncertain. One uncertainty is that the United States Patent and Trademark
Office, or PTO, may deny or require significant narrowing of claims made under our patent applications.



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Due to the unpredictability of the biotechnological sciences, the PTO, as well as patent offices in other
jurisdictions, has often required that patent claims reciting biotechnology-related inventions be limited or narrowed substantially to cover only the specific innovations exemplified in the patent application, thereby limiting their scope of
protection. Further, technology that is disclosed in patent applications is ordinarily published before it is patented. As a result, if we are not able to get patent protection, we will not be able to protect that technology through trade secret
protection. Thus, if we fail to obtain patents having sufficient claim scope or fail to adequately protect our trade secrets, we may not be able to exclude competitors from using our key products or processes.



Even if the PTO grants patents with commercially valuable claim scope, our
ability to exclude competitors will subsequently depend on our successful assertion of these patents against third party infringers and our successful defense of these patents against possible validity challenges. Our competitors, many of which have
substantial resources and have made significant investments in competing technologies, may make, use or sell our proprietary products or processes despite our intellectual property. Litigation may be necessary to enforce our issued patents or
protect our trade secrets. The prosecution of intellectual property lawsuits is costly and time-consuming, and the outcome of such lawsuits is uncertain. This is particularly true for our patents, since the courts often consider these technologies
to involve unpredictable sciences. An adverse determination in litigation could result in narrowing of our scope of protection or the loss of our intellectual property, thereby allowing competitors to design around or make use of our intellectual
property and sell our products in some or all markets. Thus, if any of our patents are invalidated or narrowed in litigation, we may not be able to exclude our competitors from using our key technologies.



Another risk regarding our ability to exclude competitors is that our issued
patents or pending applications could be lost or narrowed if competitors with overlapping technologies provoke an interference proceeding (determination of first to invent) at the PTO. The defense and prosecution of interference proceedings are
costly and time-consuming to pursue, and their outcome is uncertain. Similarly, a third party may challenge the validity of one or more of our issued patents by presenting evidence of prior publications to the PTO and requesting reexamination of
such patent(s). Thus, even if we are able to obtain patents that cover commercially significant innovations, one or more of our patents may be lost or substantially narrowed by the PTO through an interference or reexamination proceeding.
Consequently, we may not be able to exclude our competitors from using our technologies.



Third party patents, or extensions of third party patents beyond their normal expiration dates, could prevent us from making, using or selling our preferred products and processes, or require us to take license(s),
or require us to defend against claims of patent infringement.



We may have a limited opportunity to operate freely. Our commercial success will depend in part on our freedom to make, use and sell certain of our preferred drug products and processes. If third party patents have claims that cover any of
these products or processes, then we will not be free to operate as described in our business plan, without invalidating or obtaining license(s) to such patents. We may not be successful in identifying and invalidating prior claims of invention.
Similarly, a license may be unavailable or prohibitively expensive. In either case, we may have to redesign our products or processes. Such redesign efforts may take significant time and money, and such redesign efforts may fail to yield
scientifically, clinically or commercially feasible options. If we are unable to develop products or processes that lie outside the scope of the third partys patent claims, and we continue to operate, then we may be faced with claims of patent
infringement, wherein the third party may seek to enjoin us from continuing to operate within our claim scope and seek monetary compensation for commercial damages resulting from our infringing activity.



The biotechnology and pharmaceutical industry has been characterized by
extensive patent litigation and companies have deployed intellectual property litigation to gain a competitive advantage.



The defense of patent infringement suits is costly and time-consuming and their outcome is uncertain. An adverse determination in litigation could subject
us to significant liabilities, require us to obtain licenses from third parties, or restrict or prevent us from selling our products in certain markets. Although patent and intellectual property disputes are often settled through licensing or
similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties. Furthermore, the necessary licenses may not be available to us on satisfactory terms, if at all. Thus, as discussed above, if third
party patents cover any aspect of our products or processes, then we may lack freedom to operate in accordance with our business plan. Among such patents are various patents owned by third parties that cover the manufacture, sale and use of various
forms of FGF-1. If necessary, we believe we can avoid possible infringement of these patents by designing around them, obtaining licenses or delaying entry into certain markets, until expiration of the relevant patents. Nevertheless, there remains
some risk arising from these patents.



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If product liability lawsuits are successfully brought against us, we may incur substantial damages and demand for the
potential products may be eliminated or reduced.



The
testing and marketing of medical products is subject to an inherent risk of product liability claims. Regardless of their merit or eventual outcome, product liability claims may result in:



| |  |  | decreased demand for Cardio Vascu-Growor its withdrawal from the market even if it had previously been approved;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | injury to our reputation and significant media attention;
| | - |  | ---------------------------------------------------------



| |  |  | withdrawal of clinical trial volunteers;
| | - |  | ----------------------------------------



| |  |  | costs of litigation; and
| | - |  | ------------------------



| |  |  | substantial monetary awards to plaintiffs.
| | - |  | ------------------------------------------



We currently maintain product liability insurance specifically issued for the clinical trials in progress with coverage of $2,000,000. This coverage may
not be sufficient to fully protect us against product liability claims. We intend to expand our product liability insurance coverage to include the sale of commercial products if we obtain marketing approval for any of our product candidates. Our
inability to obtain sufficient product liability insurance at an acceptable cost to protect against product liability claims could prevent or limit the commercialization of our products and expose us to liability in excess of our coverage.



Competition and technological change may make our potential product and
technology less attractive or obsolete.



We compete with
pharmaceutical and biotechnology companies that are pursuing other forms of treatment for the diseases Cardio Vascu-Growtargets. All potential competitors that we know about are working on gene therapies. For example, GenVec, Inc. is working on a gene therapy drug that has been introduced into the hearts of patients.
Boston Scientific Corporation and Corautus Genetics Inc. are working together to develop a gene therapy to treat coronary artery disease via a catheter. No efficacy results of either of these projects have been made public. We also may face
competition from companies that may develop internally or acquire competing technology from universities and other research institutions. As these companies develop their technologies, they may develop competitive positions that may prevent or limit
our product commercialization efforts.



Some of our competitors
are established companies with greater financial, scientific, marketing and other resources than us. Other companies may succeed in developing products earlier than we do, obtaining FDA approval for products more rapidly than we do or developing
products that are more effective than our product candidates. Research and development by others may render our technology or product candidates obsolete or noncompetitive or result in treatments or cures superior to any therapy we develop.



Our common stock has a limited trading history, and we expect that the
price of our common stock will fluctuate substantially.



Our common stock started trading on the Over-the-Counter Bulletin Board (OTCBB) on March 10, 2005. Prior to then there was no public market for shares of our common stock. An active public trading market may not develop or, if developed,
may not be sustained. The market prices for securities of biotechnology and pharmaceutical companies historically have been highly volatile, and the market has, from time to time, experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. The market price of our common stock may be affected by a number of factors, including, but not limited to:



| |  |  | regulatory or payor reimbursement developments in the United States or other countries;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | product liability claims or other litigation;
| | - |  | ---------------------------------------------



| |  |  | the announcement of new products or product enhancements by us or our competitors;
| | - |  | ----------------------------------------------------------------------------------



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| |  |  | quarterly variations in our or our competitors results of operations;
| | - |  | ----------------------------------------------------------------------



| |  |  | changes in earnings estimates or comments by securities analysts;
| | - |  | -----------------------------------------------------------------



| |  |  | developments in our industry;
| | - |  | -----------------------------



| |  |  | the result of our clinical trials;
| | - |  | ----------------------------------



| |  |  | developments in patent or other proprietary rights;
| | - |  | ---------------------------------------------------



| |  |  | general market conditions;
| | - |  | --------------------------



| |  |  | future sales of common stock by existing stockholders; and
| | - |  | ----------------------------------------------------------



| |  |  | public concern as to the safety of our drugs.
| | - |  | ---------------------------------------------



If any of the risks described in this Risk Factors section occurs, it could cause our stock price to fall dramatically and may expose us to class action
securities lawsuits which, even if unsuccessful, would be costly to defend and a distraction to management.



A sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.



Sales of a substantial number of shares of our common stock in the public market could harm the market price of our common stock. A significant number of
shares in excess of 10,000,000 shares of our common stock are available for resale under Rule 144. In addition, there will be approximately 30,630,000 and 69,498,300 additional shares of common stock eligible for sale beginning August 11, 2006 and
February 11, 2006, respectively, upon the expiration of lock-up arrangements between certain of our stockholders and underwriters. As additional shares of our common stock become available for resale in the public market, the supply of our common
stock will increase, which could decrease the price.



Our principal
stockholders have significant voting power and may take actions that may not be in the best interests of our other stockholders.



Our officers, directors and principal stockholders together control approximately 81.68% of our outstanding common stock. These stockholders have signed
an agreement to act together, and will be able to control our management and affairs in all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of
ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of our common stock. This concentration of ownership may not be in the best interest of our other stockholders.



Anti-takeover provisions in Delaware law could discourage a takeover and may prevent or
frustrate any attempt by stockholders to change the direction or our management.



The provisions of Section 203 of the Delaware General Corporate Law govern our company, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These
provisions of the Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our company and could delay or impede a merger, tender offer, or proxy contest involving our company. Any delay or prevention of
a change of control transaction could cause the market price of our common stock to decline. Such provisions also make it difficult for stockholders to change the direction or management of the company.



We have broad discretion in how we use the net proceeds from our recent initial public
offering, and we may not use these proceeds effectively.



Our management will have broad discretion as to the application of the net proceeds of our recent public offering. Our stockholders may not agree with the manner in which our management chooses to allocate and spend the net proceeds.
Moreover, our management may use the net proceeds for corporate purposes that may not increase our profitability or our market value.



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In selling our convertible notes, we may have violated the registration requirements of the Securities Act of 1933
(Securities Act) which, if it occurred, would give noteholders a right to rescind their purchases.



Commencing in 2001 and ending in August 2004, we sold six series of convertible notes, each bearing interest at a rate of 7%. The proceeds raised from the
sale of all series of these notes have been used for operating costs and clinical trials. The notes were sold to investors who, with few exceptions, were not residents or citizens of the United States. We made these sales in reliance on the fact
that either the sales occurred outside the United States and were thus not subject to the jurisdiction of the Securities Act or were made to accredited investors pursuant to an exemption from registration provided by the Securities Act. Our counsel
has advised us that the availability of those exemptions cannot be determined with legal certainty because we did not comply with all of the provisions of exemption safe-harbors for such sales offered by rules promulgated under the Securities Act by
the Securities and Exchange Commission. Thus, it is possible that the sale of some of the series of convertible notes may have violated the registration requirements of the Securities Act. As to most of those sales, a right of rescission may exist
on which the statute of limitations has not run. For those noteholders that elected to convert to common stock, we may have a contingent liability arising from the original purchase of the convertible notes that such noteholders converted. If the
sales to noteholders that have converted to common stock had to be rescinded, our total potential liability could be $14,892,200 plus interest. That liability would extend for up to six years after the date of the sale of the applicable convertible
note that was converted to common stock. The notes were convertible at either $2.00 per share or $4.00 per share. Accordingly, the market price of our common stock would likely have to decrease by more than 50% from the $10 public offering price
before a noteholder had a significant economic reason to pursue any potential rescission rights.



We incur increased costs as a result of being a public company.



As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley
Act of 2002, as well as new rules the Securities and Exchange Commission subsequently implemented, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal and
financial compliance costs and to make some activities more time-consuming and costly. For example, as a result of becoming a public company, we have added independent directors, created additional board committees and adopted policies regarding
internal controls and disclosure controls and procedures. In addition, we will incur additional costs associated with our public company reporting requirements. We also expect these new rules and regulations to make it more difficult and more
expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult
for us to attract and retain qualified persons to serve on our board of directors or as executive officers. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.



Our securities are quoted on the OTC Bulletin Board, which will limit the liquidity and
price of our securities more than if our securities were quoted or listed on a national exchange.



Our common stock is quoted for trading on the OTC Bulletin Board. Our ability to have a liquid trading market develop for our common stock will be
diminished if our common stock is not approved for quotation on a national exchange.



If our common stock becomes subject to the SECs penny stock rules, our stockholders may find it difficult to sell their stock.



If the trading price of our common stock was less than $5.00 per share, our common stock will become subject to the SECs penny stock rules. Before a
broker-dealer can sell a penny stock, the penny stock rules require the firm to first approve the customer for the transaction and receive from the customer a written agreement to the transaction. The firm must furnish the customer a document
describing the risks of investing in penny stocks. The broker-dealer must tell the customer the current market quotation, if any, for the penny stock and the compensation the firm and its broker will receive for the trade. Finally, the firm must
send monthly account statements showing the market value of each penny stock held in the customers account. These disclosure requirements tend to make it more difficult for a broker-dealer to make a market in penny stocks, and could,
therefore, reduce the level of trading activity in a stock that is subject to the penny stock rules. Consequently, if our common stock becomes subject to the penny stock rules, our stockholders may find it difficult to sell their shares.



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|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------



Our exposure to market risk is confined to our cash and cash equivalents. We invest in high-quality financial instruments, primarily money market funds,
federal agency notes, and United States treasury notes, which we believe are subject to limited credit risk. We currently do not hedge interest rate exposure. The effective duration of our portfolio is less than three months and no security has an
effective duration in excess of three months. Due to the short-term nature of our investments, we do not believe that we have any material exposure to interest rate risk arising from our investments. We currently do not have any derivative
instruments.



Most of our transactions are conducted in United
States dollars, although we do have some development and commercialization agreements with vendors located outside the United States. Transactions under certain of these agreements are conducted in United States dollars. If the exchange rate changed
by ten percent, we do not believe that it would have a material impact on our results of operations or cash flows.



|Item 4. | Controls and Procedures
|------- | -----------------------



Evaluation of Disclosure Controls and Procedures



The Companys management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the
companys disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the companys disclosure controls and
procedures were effective as of the end of the period covered by this report.



Internal Control Over Financial Reporting



Not
applicable.



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PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------



We are not a party to any litigation.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------



None.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------



None.



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



On April 19, 2005, we filed a Definitive Notice and Proxy Statement on Schedule 14A with the Securities and Exchange Commission setting forth proposals
submitted to shareholders on which they are requested to vote at our 2005 Annual Meeting of Stockholders to be held on May 23, 2005 at 10:00AM, Pacific Time, at Green Valley Ranch Resort & Spa, 2300 Paseo Verde Drive, Henderson, Nevada 89052,
for the following purposes:



| | 1. | To elect directors to serve until the 2006 Annual Meeting of Stockholders;
| | -- | --------------------------------------------------------------------------



| | 2. | To ratify the appointment of Singer Lewak Greenbaum & Goldstein LLP as the independent registered public accounting firm of the Company for the year ending December 31, 2005;
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | To amend the Companys Certificate of Incorporation to increase the number of authorized shares of Common Stock to 400,000,000 shares;
| | -- | --------------------------------------------------------------------------------------------------------------------------------------



| | 4, | To authorize the Board of Directors to implement a two-for-one (2:1) stock split in the Common Stock of the Company, if at all, prior to the 2006 Annual Meeting of Stockholders; and
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. | To transact such other business as may properly come before the meeting or any adjournment(s) thereof.
| | -- | ------------------------------------------------------------------------------------------------------



On May 23, 2005, a quorum was present and a majority of the shareholders passed proposals 1 through 4 above at the 2005
Annual Meeting of Stockholders. The amendment to the Certificate of Incorporation, pursuant to proposal 3 above, was filed and became effective with the Secretary of the State of Delaware on May 23, 2005 increasing the number of authorized shares of
Common Stock to 400,000,000 shares. No other business came before the meeting.



|Item 5. | Other Information
|------- | -----------------



None.



|Item 6. | Exhibits
|------- | --------



The following exhibits are filed as part of this report:



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                  
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                          
|              | 
|3(i)          |  | Certificate of Amendment to the Restated Certificate of Incorporation of CardioVascular BioTherapeutics, Inc. increasing the number of authorized shares of Common Stock to 400,000,000 shares
(incorporated by reference to Appendix A of the Registrants Definitive Proxy Statement on Schedule 14A, File No. 000-51172, filed with the Securities and Exchange Commission on April 19, 2005).
|              | 
|31.1          |  | Certification of Principal Executive Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                            
|              | 
|31.2          |  | Certification of Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                            
|              | 
|32            |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                   



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SIGNATURES



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



Date: August 11, 2005



CARDIOVASCULAR BIOTHERAPEUTICS, INC.By:

/s/    MICKAEL A. FLAAMickael A. Flaa Chief Financial Officer




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