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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 March 31, 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 May 9, 2005, 121,619,650 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 MARCH 31, 2005



INDEX



|         |  |                                                                                                                                                           |  |     
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                                                           |  | Page
|         |  |                                                                                                                                                          
|PART I.  |  | FINANCIAL INFORMATION                                                                                                                                     |  | 3   
|         |  |                                                                                                                                                          
|Item 1.  |  | Financial Statements                                                                                                                                      |  | 3   
|         |  |                                                                                                                                                          
|         |  | Unaudited Balance Sheets at December 31, 2004 and March 31, 2005                                                                                          |  | 3   
|         |  |                                                                                                                                                          
|         |  | Unaudited Statements of Operations for the Three Months Ended March 31, 2004and 2005 and for the period from March 11, 1998 (inception) to March 31, 2005 |  | 5   
|         |  |                                                                                                                                                          
|         |  | Unaudited Statements of Stockholders Equity (Deficit) for the period fromMarch 11, 1998 (inception) to March 31, 2005                                     |  | 6   
|         |  |                                                                                                                                                          
|         |  | Unaudited Statements of Cash Flows for the Three Months Ended March 31, 2004and 2005 and for the period from March 11, 1998 (inception) to March 31, 2005 |  | 7   
|         |  |                                                                                                                                                          
|         |  | Notes to Unaudited Financial Statements                                                                                                                   |  | 10  
|         |  |                                                                                                                                                          
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                     |  | 22  
|         |  |                                                                                                                                                          
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                                |  | 40  
|         |  |                                                                                                                                                          
|Item 4.  |  | Controls and Procedures                                                                                                                                   |  | 40  
|         |  |                                                                                                                                                          
|PART II. |  | OTHER INFORMATION                                                                                                                                         |  | 41  
|         |  |                                                                                                                                                          
|Item 1.  |  | Legal Proceedings                                                                                                                                         |  | 41  
|         |  |                                                                                                                                                          
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                               |  | 41  
|         |  |                                                                                                                                                          
|Item 3.  |  | Defaults Upon Senior Securities                                                                                                                           |  | 41  
|         |  |                                                                                                                                                          
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                                                                       |  | 41  
|         |  |                                                                                                                                                          
|Item 5.  |  | Other Information                                                                                                                                         |  | 41  
|         |  |                                                                                                                                                          
|Item 6.  |  | Exhibits                                                                                                                                                  |  | 41  



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
MARCH 31, 2005 (UNAUDITED)



|                                   |  |                  |           |               |   |           
|---------------------------------- |  | ---------------- | --------- | ------------- | - | ----------
|                                   |  | December 31,2004 |           | March 31,2005
|                                   |  |                  |           | (unaudited)  
|ASSETS                             |  |                  |           |               |   |           
|Current assets                     |  |                  |           |               |   |           
|Cash and cash equivalents          |  | $                | 4,530,221 |               | $ | 17,309,632
|Short-term investments             |  |                  | 85,362    |               |   | 85,651    
|Prepaid assets                     |  |                  | 479,500   |               |   | 708,825   
|                                   |  |                  |           |               |   |           
|Total current assets               |  |                  | 5,095,083 |               |   | 18,104,108
|                                   |  |                  |           |               |   |           
|Property and equipment, net        |  |                  | 30,119    |               |   | 30,925    
|                                   |  |                  |           |               |   |           
|Deferred offering costs            |  |                  | 866,512   |               |   |          
|                                   |  |                  |           |               |   |           
|Deferred debt financing costs, net |  |                  | 712,664   |               |   |          
|                                   |  |                  |           |               |   |           
|Other assets                       |  |                  | 5,900     |               |   | 5,900     
|                                   |  |                  |           |               |   |           
|Total Assets                       |  | $                | 6,710,278 |               | $ | 18,140,933
|                                   |  |                  |           |               |   |           



3

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)



BALANCE SHEETS - Continued

DECEMBER 31, 2004 AND MARCH 31, 2005 (UNAUDITED)



|                                                                                                                                                                                                     |  |                  |             |   |               |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----------- | - | ------------- | - | ----------- | -
|                                                                                                                                                                                                     |  | December 31,2004 |             |   | March 31,2005 |  
|                                                                                                                                                                                                     |  |                  |             |   | (unaudited)   |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                                                                |  |                  |             |   |               |   |             |  
|Current liabilities                                                                                                                                                                                  |  |                  |             |   |               |   |             |  
|Current portion of convertible notes payable                                                                                                                                                         |  | $                | 1,035,000   |   |               | $ | 20,000      |  
|Accrued interest payable                                                                                                                                                                             |  |                  | 1,187,870   |   |               |   | 1,308,777   |  
|Due to affiliates                                                                                                                                                                                    |  |                  | 522,719     |   |               |   |            |  
|Accounts payable                                                                                                                                                                                     |  |                  | 713,280     |   |               |   | 388,802     |  
|Accrued payroll and payroll taxes                                                                                                                                                                    |  |                  | 18,075      |   |               |   | 18,724      |  
|                                                                                                                                                                                                     |  |                  |             |   |               |   |             |  
|Total current liabilities                                                                                                                                                                            |  |                  | 3,476,944   |   |               |   | 1,736,303   |  
|                                                                                                                                                                                                     |  |                  |             |   |               |   |             |  
|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  |   |               |   | 1,736,303   |  
|                                                                                                                                                                                                     |  |                  |             |   |               |   |             |  
|Commitments and contingencies                                                                                                                                                                        |  |                  |             |   |               |   |             |  
|Stockholders deficit                                                                                                                                                                                |  |                  |             |   |               |   |             |  
|Convertible preferred stock, $0.001 par value; 10,000,000 shares authorized; 52,850 shares issued; 23,250 shares and 20,750 shares outstanding
at December 31, 2004 and March 31, 2005, respectively |  |                  | 23          |   |               |   | 21          |  
|Common stock, $0.001 par value; 200,000,000 shares authorized, 112,649,650 shares issued and outstanding in December 31, 2004 and 120,407,150
issued and outstanding in March 31, 2005, respectively |  |                  | 112,650     |   |               |   | 120,408     |  
|Committed common stock                                                                                                                                                                               |  |                  | 2,000       |   |               |   | 351         |  
|Additional paid-in capital                                                                                                                                                                           |  |                  | 11,293,919  |   |               |   | 36,340,273  |  
|Deficit accumulated during the development stage                                                                                                                                                     |  |                  | (16,791,257 | ) |               |   | (20,056,423 | )
|                                                                                                                                                                                                     |  |                  |             |   |               |   |             |  
|Total stockholders (deficit)                                                                                                                                                                        |  |                  | (5,382,665  | ) |               |   | 16,404,630  |  
|                                                                                                                                                                                                     |  |                  |             |   |               |   |             |  
|Total liabilities and stockholders (deficit)                                                                                                                                                        |  | $                | 6,710,278   |   |               | $ | 18,140,933  |  
|                                                                                                                                                                                                     |  |                  |             |   |               |   |             |  



4

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
THREE MONTH PERIODS ENDED MARCH 31, 2004 AND 2005 AND FOR

THE PERIOD FROM MARCH 11, 1998 (INCEPTION) TO MARCH 31, 2005

(UNAUDITED)



|                                                                                                                                                |  |                                            |             |   |                                                              |   |             |             |  |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | ----------- | - | ------------------------------------------------------------ | - | ----------- | ----------- |  | - | ----------- | -
|                                                                                                                                                |  | For theThree Month Periods Ended March 31, |             |   | For thePeriod fromMarch 11, 1998(Inception) toMarch
31, 2005 |  
|                                                                                                                                                |  | 2004                                       |             |   | 2005                                                         |   |            
|                                                                                                                                                |  | (unaudited)                                |             |   | (unaudited)                                                  |   |             | (unaudited) | 
|Operating expenses                                                                                                                              |  |                                            |             |   |                                                              |   |             |             |  |   |             |  
|Research and development (including amounts with related parties of $11,521, $127,785 and $2,031,011 respectively (Notes 4 and
9))              |  | $                                          | 453,401     |   |                                                              | $ | 412,717     |             |  | $ | 6,799,605   |  
|Selling, general and administrative (including amounts with related parties of $781,070, $131,864 and $4,799,006, respectively (Notes 4 and
9)) |  |                                            | 302,915     |   |                                                              |   | 1,347,542   |             |  |   | 7,898,173   |  
|                                                                                                                                                |  |                                            |             |   |                                                              |   |             |             |  |   |             |  
|Total operating expenses                                                                                                                        |  |                                            | 756,316     |   |                                                              |   | 1,760,259   |             |  |   | 14,697,778  |  
|                                                                                                                                                |  |                                            |             |   |                                                              |   |             |             |  |   |             |  
|Operating loss                                                                                                                                  |  |                                            | (756,316    | ) |                                                              |   | (1,760,259  | )           |  |   | (14,697,778 | )
|                                                                                                                                                |  |                                            |             |   |                                                              |   |             |             |  |   |             |  
|Other income (expenses)                                                                                                                         |  |                                            |             |   |                                                              |   |             |             |  |   |             |  
|Interest income                                                                                                                                 |  |                                            |            |   |                                                              |   | 47,412      |             |  |   | 109,786     |  
|Interest expense                                                                                                                                |  |                                            | (284,328    | ) |                                                              |   | (1,552,319  | )           |  |   | (5,448,177  | )
|Other expenses                                                                                                                                  |  |                                            |            |   |                                                              |   |            |             |  |   | (5,254      | )
|Equity in loss of unconsolidated investee                                                                                                       |  |                                            |            |   |                                                              |   |            |             |  |   | (15,000     | )
|                                                                                                                                                |  |                                            |             |   |                                                              |   |             |             |  |   |             |  
|Net other expenses                                                                                                                              |  |                                            | (284,328    | ) |                                                              |   | (1,504,907  | )           |  |   | (5,358,645  | )
|                                                                                                                                                |  |                                            |             |   |                                                              |   |             |             |  |   |             |  
|Net loss                                                                                                                                        |  | $                                          | (1,040,644  | ) |                                                              | $ | (3,265,166  | )           |  | $ | (20,056,423 | )
|                                                                                                                                                |  |                                            |             |   |                                                              |   |             |             |  |   |             |  
|Loss per share                                                                                                                                  |  |                                            |             |   |                                                              |   |             |             |  |   |             |  
|Basic loss per share                                                                                                                            |  | $                                          | (0.01       | ) |                                                              | $ | (0.03       | )           |  |   |             |  
|Diluted loss per share                                                                                                                          |  | $                                          | (0.01       | ) |                                                              | $ | (0.03       | )           |  |   |             |  
|Shares used to calculate loss per share                                                                                                         |  |                                            |             |   |                                                              |   |             |             |  |   |             |  
|Basic                                                                                                                                           |  |                                            | 110,190,100 |   |                                                              |   | 114,290,178 |             |  |   |             |  
|                                                                                                                                                |  |                                            |             |   |                                                              |   |             |             |  |   |             |  
|Diluted                                                                                                                                         |  |                                            | 110,190,100 |   |                                                              |   | 114,290,178 |             |  |   |             |  
|                                                                                                                                                |  |                                            |             |   |                                                              |   |             |             |  |   |             |  



5

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 (DEFICIT)

FOR THE PERIOD FROM
MARCH 11, 1998 (INCEPTION) TO MARCH 31, 2005 (UNAUDITED)



|                                                                       |  |            |  |                      |        |                             |         |   |              |        |                      |        |  |                          |  |   |                    |  |   |        |   |  |   |            |   |  |   |             |   |  |   |            |  
|---------------------------------------------------------------------- |  | ---------- |  | -------------------- | ------ | --------------------------- | ------- | - | ------------ | ------ | -------------------- | ------ |  | ------------------------ |  | - | ------------------ |  | - | ------ | - |  | - | ---------- | - |  | - | ----------- | - |  | - | ---------- | -
|                                                                       |  | Date       |  | Price perequity unit |        | Preferred stock convertible |         |   | Common stock |        | CommittedCommonstock |        |  | Additionalpaid-incapital |  |   | Accumulateddeficit |  |   | 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       | ) |  |   |            |   |  |   |           |  
|Issuance of common stock for services                                  |  | (5)        |  |                      |        |                             |        |   |              |        |                     |        |  | 583,300                  |  |   | 583                |  |   |       |   |  |   | (583       | ) |  |   |            |   |  |   |           |  
|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, net of issuance costs of $2,538,616                              |  | (8)        |  |                      |        |                             |        |   |              |        |                     |        |  | 1,725,000                |  |   | 1,725              |  |   |       |   |  |   | 14,709,661 |   |  |   |            |   |  |   | 14,711,386 |  
|Conversion of convertible notes                                        |  | (6)        |  |                      |        |                             |        |   |              |        |                     |        |  | 3,782,500                |  |   | 3,783              |  |   | 351    |   |  |   | 10,336,866 |   |  |   |            |   |  |   | 10,341,000 |  
|Conversion of convertible preferred stock                              |  | (7)        |  |                      |        |                             | (2,500  | ) |              |        | (2                   | )      |  | 2,250,000                |  |   | 2,250              |  |   | (2,000 | ) |  |   | (248       | ) |  |   |            |   |  |   |           |  
|Issuance of warrant for cash                                           |  |            |  |                      |        |                             |        |   |              |        |                     |        |  |                         |  |   |                   |  |   |       |   |  |   | 75         |   |  |   |            |   |  |   | 75         |  
|Net loss (unaudited)                                                   |  |            |  |                      |        |                             |        |   |              |        |                     |        |  |                         |  |   |                   |  |   |       |   |  |   |           |   |  |   | (3,265,166  | ) |  |   | (3,265,166 | )
|                                                                       |  |            |  |                      |        |                             |         |   |              |        |                      |        |  |                          |  |   |                    |  |   |        |   |  |   |            |   |  |   |             |   |  |   |            |  
|Balance, March 31, 2005                                                |  |            |  |                      |        |                             | 20,750  |   |              | $      | 21                   |        |  | 120,407,150              |  | $ | 120,408            |  | $ | 351    |   |  | $ | 36,340,273 |   |  | $ | (20,056,423 | ) |  | $ | 16,404,630 |  
|                                                                       |  |            |  |                      |        |                             |         |   |              |        |                      |        |  |                          |  |   |                    |  |   |        |   |  |   |            |   |  |   |             |   |  |   |            |  



|(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 three month period ended March 31, 2005
|--- | ----------------------------------------------------------------------------------------------------------------------------



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



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



6

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 CASH FLOWS

FOR THE
THREE MONTH PERIODS ENDED MARCH 31, 2004 AND 2005 AND FOR

THE PERIOD FROM MARCH 11, 1998 (INCEPTION) TO MARCH 31, 2005

(UNAUDITED)



|                                                                                                                                                  |  |                                             |            |   |                                                                |   |            |             |  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------- | ---------- | - | -------------------------------------------------------------- | - | ---------- | ----------- |  | - | ----------- | -
|                                                                                                                                                  |  | For the Three Month Periods Ended March 31, |            |   | For the Period fromMarch 11, 1998 (Inception) toMarch 31, 2005 |  
|                                                                                                                                                  |  | 2004                                        |            |   | 2005                                                           |   |           
|                                                                                                                                                  |  | (unaudited)                                 |            |   | (unaudited)                                                    |   |            | (unaudited) | 
|Cash flows from operating activities                                                                                                              |  |                                             |            |   |                                                                |   |            |             |  |   |             |  
|Net loss (including amounts with related parties of $792,591, $259,649 and $6,830,016, respectively (Notes 4 and 9))                              |  | $                                           | (1,040,644 | ) |                                                                | $ | (3,265,166 | )           |  | $ | (20,056,423 | )
|Adjustments to reconcile net loss to net cash provided by operating activities                                                                    |  |                                             |            |   |                                                                |   |            |             |  |   |             |  
|Depreciation                                                                                                                                      |  |                                             |           |   |                                                                |   | 1,533      |             |  |   | 9,858       |  
|Amortization of benefit conversion feature                                                                                                        |  |                                             | 20,556     |   |                                                                |   | 710,001    |             |  |   | 2,050,000   |  
|Amortization of deferred debt financing costs                                                                                                     |  |                                             | 117,220    |   |                                                                |   | 712,664    |             |  |   | 2,135,715   |  
|Stock options issued for services rendered                                                                                                        |  |                                             | 47,120     |   |                                                                |   |           |             |  |   | 282,250     |  
|Warrants issued for services rendered                                                                                                             |  |                                             |           |   |                                                                |   |           |             |  |   | 119,744     |  
|Equity in loss of unconsolidated investee                                                                                                         |  |                                             |           |   |                                                                |   |           |             |  |   | 15,000      |  
|(Increase) decrease in                                                                                                                            |  |                                             |            |   |                                                                |   |            |             |  |   |             |  
|Prepaid expenses                                                                                                                                  |  |                                             | (105,530   | ) |                                                                |   | (229,250   | )           |  |   | (708,750    | )
|Other assets                                                                                                                                      |  |                                             |           |   |                                                                |   |           |             |  |   | (20,900     | )
|Increase (decrease) in                                                                                                                            |  |                                             |            |   |                                                                |   |            |             |  |   |             |  
|Accounts payable                                                                                                                                  |  |                                             | 178,678    |   |                                                                |   | (324,477   | )           |  |   | 389,799     |  
|Accrued payroll and payroll taxes                                                                                                                 |  |                                             | 383        |   |                                                                |   | 649        |             |  |   | 18,724      |  
|Accrued interest                                                                                                                                  |  |                                             | 146,552    |   |                                                                |   | 120,907    |             |  |   | 1,308,777   |  
|                                                                                                                                                  |  |                                             |            |   |                                                                |   |            |             |  |   |             |  
|Net cash used in operating activities (including amounts with related parties of $792,591, $259,649 and $6,830,016, respectively (Notes 4 and
9)) |  |                                             | (635,673   | ) |                                                                |   | (2,273,139 | )           |  |   | (14,456,206 | )
|                                                                                                                                                  |  |                                             |            |   |                                                                |   |            |             |  |   |             |  



7

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 CASH FLOWS - Continued

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2004 AND 2005 AND
FOR

THE PERIOD FROM MARCH 11, 1998 (INCEPTION) TO MARCH 31, 2005

(UNAUDITED)



|                                                                                                                                                |  |                                             |   |  |                                                                |   |  |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------- | - |  | -------------------------------------------------------------- | - |  | ----------- | -
|                                                                                                                                                |  | For the Three Month Periods Ended March 31, |   |  | For the Period fromMarch 11, 1998 (Inception) toMarch 31, 2005 |  
|                                                                                                                                                |  | 2004                                        |   |  | 2005                                                           |   | 
|                                                                                                                                                |  | (unaudited)                                 |   |  | (unaudited)                                                    |   |  | (unaudited) |  
|Cash flows from investing activities                                                                                                            |  |                                             |   |  |                                                                |   |  |             |  
|Purchase of short term investment                                                                                                               |  |                                            |   |  | (289                                                           | ) |  | (85,651     | )
|Proceeds from sale of short term investments                                                                                                    |  |                                            |   |  |                                                               |   |  | (6,026      | )
|Purchase of property and equipment                                                                                                              |  | 1,800                                       |   |  | (2,339                                                         | ) |  | (34,757     | )
|                                                                                                                                                |  |                                             |   |  |                                                                |   |  |             |  
|Net cash provided by (used in) operating activities (including amounts with related parties of $ 0, $0 and $0, respectively (Notes 4 and
9))    |  | 1,800                                       |   |  | (2,628                                                         | ) |  | (126,434    | )
|                                                                                                                                                |  |                                             |   |  |                                                                |   |  |             |  
|Cash flows from financing activities                                                                                                            |  |                                             |   |  |                                                                |   |  |             |  
|Net proceeds from sale of common stock                                                                                                          |  |                                            |   |  | 15,577,898                                                     |   |  | 19,481,898  |  
|Proceeds from sale of preferred stock                                                                                                           |  |                                            |   |  |                                                               |   |  | 520,400     |  
|Proceeds from issuance of notes payables                                                                                                        |  | 4,581,250                                   |   |  |                                                               |   |  | 14,092,200  |  
|Deferred debt financing cost                                                                                                                    |  | (990,580                                    | ) |  |                                                               |   |  | (2,135,713  | )
|Proceeds from notes payable issued under Reg D                                                                                                  |  |                                            |   |  |                                                               |   |  | 800,000     |  
|Cash paid for deferred offering costs                                                                                                           |  |                                            |   |  |                                                               |   |  | (866,512    | )
|Due to net increase (decrease) in affiliates                                                                                                    |  | 290,580                                     |   |  | (522,719                                                       | ) |  |            |  
|Subscription receivable                                                                                                                         |  | 1,638,504                                   |   |  |                                                               |   |  |            |  
|                                                                                                                                                |  |                                             |   |  |                                                                |   |  |             |  
|Net cash provided by financing activities (including amounts with related parties of $763,500, $0 and $1,612,994, respectively (Notes 4 and
9)) |  | 5,519,834                                   |   |  | 15,055,179                                                     |   |  | 31,892,273  |  
|                                                                                                                                                |  |                                             |   |  |                                                                |   |  |             |  



8

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 CASH FLOWS - Continued

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2004 AND 2005 AND
FOR THE PERIOD FROM

MARCH 11, 1998 (INCEPTION) TO MARCH 31, 2005







|                                                  |  |                                           |           |                                                              |   |             |  |   |           
|------------------------------------------------- |  | ----------------------------------------- | --------- | ------------------------------------------------------------ | - | ----------- |  | - | ----------
|                                                  |  | For theThree Month PeriodsEnded March 31, |           | For thePeriod fromMarch 11, 1998(Inception) toMarch
31, 2005
|                                                  |  | 2004                                      |           | 2005                                                         |  
|                                                  |  | (unaudited)                               |           | (unaudited)                                                  |   | (unaudited)
|Net increase in cash and cash equivalents         |  |                                           | 4,882,361 |                                                              |   | 12,779,411  |  |   | 17,309,632
|Cash and cash equivalents, beginning of period    |  |                                           | 1,634,327 |                                                              |   | 4,530,221   |  |   |          
|                                                  |  |                                           |           |                                                              |   |             |  |   |           
|Cash and cash equivalents, end of period          |  | $                                         | 6,516,888 |                                                              | $ | 17,309,632  |  | $ | 17,309,632
|                                                  |  |                                           |           |                                                              |   |             |  |   |           
|Supplemental disclosures of cash flow information |  |                                           |           |                                                              |   |             |  |   |           
|Interest paid                                     |  | $                                         |          |                                                              | $ | 112,304     |  | $ | 116,654   
|                                                  |  |                                           |           |                                                              |   |             |  |   |           
|Income taxes paid                                 |  | $                                         | 200       |                                                              | $ | 200         |  | $ | 5,000     
|                                                  |  |                                           |           |                                                              |   |             |  |   |           



Supplemental disclosure of non-cash
financing activities



During the three month periods ended March 31, 2004
and 2005 and the period from March 11, 1998 (inception) to March 31, 2005, the Company issued 0, 0 and 99,750,000 shares of post-split adjusted common stock to founders, respectively.



During the three month periods ended March 31, 2004 and 2005 and the period from March 11, 1998 (inception) to March 31, 2005, the Company
issued 0, 0 and 583,000 shares of post-split adjusted common stock for services, respectively.



During the three month periods ended March 31, 2004 and 2005 and the period from March 11, 1998 (inception) to March 31, 2005, the Company recorded a beneficial conversion feature in connection with the issuance of
convertible notes payable Series II and IIa in the amount of $0, $0 and $2,050,000, respectively.



During the three month periods ended March 31, 2004 and 2005 and the period from March 11, 1998 (inception) to March 31, 2005, 0, 2,500 and 32,100 shares of convertible preferred stock were converted into 0, 250,000,
and 3,210,000 shares of common stock respectively. During the period ended March 31, 2005, 2,000,000 shares of committed common stock relating to the conversion of preferred shares in fiscal 2004 were issued.



During the three month periods ended March 31, 2004 and 2005 and the period from March 11,
1998 (inception) to March 31, 2005, 0, $10,341,000 and $14,872,200 of convertible notes payable were converted into 0, 3,782,500 and 5,432,050 shares of common stock respectively, and 351,000 shares of committed common stock.



9



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##### Table of Contents



CARDIOVASCULAR BIOTHERAPEUTICS, INC.



NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)



MARCH 31, 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 presentation. The results of operations for the three months ended March 31, 2005 and cash flows for the three months ended March 31, 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 $2,070,500.



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 an estimated 40% of their time with 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 of the public offering, Mr. Flaa and Mr. Jacobs joined Cardios
board of directors. In addition, Alexander G.



10



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##### Table of Contents

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 their option, to either (i) pay to Phage ten percent of our 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 which 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 March 31, 2005, Cardio had cash and cash equivalents of $17,395,283, which the Company
believes is sufficient funding for the Company to be a viable entity on an on 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 of the drug.
Phage has three drugs which have been approved by the FDA to be administered to humans in clinical trials. As of March 31, 2005, Phage had approximately $3,125,000 in cash and management believes it to be adequately capitalized to meet its
foreseeable needs for additional drug development.



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 three months March 31, 2004 (unaudited) and 2005 (unaudited) and the period from
March 11, 1998 (inception) to March 31, 2005 (unaudited) payments to Phage relating to such services were $11,521, $97,535 and $1,082,488, respectively.



Administrative Support



For the three months March 31, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998 (inception) to March 31, 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 three months ended March 31, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998 (inception) to March 31, 2005 (unaudited) were $17,570, $41,005 and
$792,632, 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 March 31, 2005 (unaudited), ended the Company has accumulated a deficit of $20,056,423. 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.



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.



12



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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 March 31, 2005 (unaudited), the short term investments were $85,362 and $85,651, 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
6). 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.



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 are amortized over the term of the convertible notes payable. At December 31, 2004 there were $712,664 of these costs and none at
March 31, 2005.



Concentrations of Credit Risk



The Company places its cash/cash equivalent with high
quality financial institutions, and at times it may exceed the Federal Deposit Insurance Corporation insurance limit. As of December 31, 2004 and March 31, 2005 (unaudited), uninsured portions of cash amounted to $4,310,222 and $17,167,611,
respectively.



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##### Table of Contents

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 March 31 2005 (unaudited), since their effect would have been anti-dilutive:



|                            |  |                  |  |              
|--------------------------- |  | ---------------- |  | -------------
|                            |  | December 31,2004 |  | March 31,2005
|Convertible preferred stock |  | 2,325,000        |  | 2,075,000    
|Stock options               |  | 2,755,000        |  | 2,755,000    
|Warrants                    |  | 1,233,330        |  | 1,308,330    
|Convertible notes payable   |  | 4,143,000        |  | 10,000       



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 March 31, 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 March 31, 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 prescribed by SFAS No. 148.



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.



Recently Issued Accounting Pronouncement



In November 2002, the FASB issued FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. In the course of business, the Company has a contractual guarantee in the form of an operating lease.
However, this guarantee is limited and does not represent significant commitments or contingent liabilities of the indebtedness of others. This pronouncement is effective for financial statements issued after December 15, 2002 and is not expected to
have a material impact on the Companys financial statements.



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.



14



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##### Table of Contents

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.



On April 14, 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.



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



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



|                               |  |                   |           |                |   |           
|------------------------------ |  | ----------------- | --------- | -------------- | - | ----------
|                               |  | December 31, 2004 |           | March 31, 2005
|Cash in bank                   |  | $                 | 6,516,689 |                | $ | 17,309,632
|Cash in short term investments |  |                   |          |                |   | 85,651    
|                               |  |                   |           |                |   |           
|Total                          |  | $                 | 6,516,689 |                | $ | 17,395,283
|                               |  |                   |           |                |   |           



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##### Table of Contents

|7. | PREPAID ASSETS
|-- | --------------



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



|                                    |  |                   |         |                |   |        
|----------------------------------- |  | ----------------- | ------- | -------------- | - | -------
|                                    |  | December 31, 2004 |         | March 31, 2005
|Prepaid clinical trial expenses (a) |  | $                 | 400,000 |                | $ | 400,000
|Prepaid insurance (b)               |  |                   |         |                |   | 206,250
|Prepaid legal fees                  |  |                   | 62,500  |                |   | 62,500 
|Prepaid website services            |  |                   |         |                |   | 30,000 
|Prepaid other                       |  |                   | 17,000  |                |   | 10,075 
|                                    |  |                   |         |                |   |        
|Total                               |  | $                 | 479,500 |                | $ | 708,825
|                                    |  |                   |         |                |   |        

---

|(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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Prepaid insurance is the annual premium for Directors and Officers insurance.
|--- | -----------------------------------------------------------------------------



|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.



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.



At March 31, 2005, all but three note holders with a total of $20,000 of
convertible notes had notified the Company of their intention to convert their notes into common stock. These remaining notes are to be paid in cash in the second quarter of 2005.



Series I Convertible Promissory Notes



The Series I Convertible Promissory Notes are 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 are convertible at the option of the holder into the Companys common stock. Interest at 7% per annum, compounded annually, will be payable within 30-days
of when the notes payable are due or converted into shares of the Companys common stock. The conversion price for each share will equal $2 per share, provided however, if the purchase price of shares at the completion of the initial public
offering is less than $4 per share, the conversion price will be adjusted to equal 50% of the initial public offering price.



Series II Convertible Promissory Notes



The Series II Convertible Promissory Notes are 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 are convertible at the option of the holder into the Companys common stock. Interest at 7% per annum, compounded annually, will be payable within
30-days of when the notes payable are due or converted into shares of the Companys common stock. The conversion price for each share will equal $4 per share, provided however, if the purchase price of shares at the completion of the initial
public offering is less than $8 per share, the conversion price will be adjusted to equal 50% of the initial public offering price.



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.



16



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##### Table of Contents

The convertible promissory notes are 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 are convertible at the option of the holder into the Companys common stock. Interest at 7% per annum, compounded
annually, will be payable within 30-days of when the convertible notes payable are due or converted into shares of the Companys common stock. The conversion price for each share will equal $4 per share, provided however, if the purchase price
of shares at the completion of the initial public offering is less than $8 per share, the conversion price will be adjusted to equal 50% of the initial public offering price.



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 three months ended March 31, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998
(inception) to March 31, 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 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 have been capitalized and are
being amortized over the term of the convertible notes payable. During the three month periods ended March 31, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998 (inception) to March 31, 2005 (unaudited), total financing costs
of $117,220, $712,664 and $2,135,715, respectively, were charged to interest expense.



For the three month periods ended March 31, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998 (inception) to March 31, 2005, the interest expense on the Series I, II and IIa convertible notes
was $146,552, $120,907 and $1,308,777, respectively.



Outstanding balances of convertible notes payable were as follows:



|                                                  |  |                   |            |   |                |   |         |  
|------------------------------------------------- |  | ----------------- | ---------- | - | -------------- | - | ------- | -
|                                                  |  | December 31, 2004 |            |   | March 31, 2005 |  
|Series I                                          |  | $                 | 6,211,000  |   |                | $ | 20,000  |  
|Series II                                         |  |                   | 3,570,000  |   |                |   |        |  
|Series IIa                                        |  |                   | 580,000    |   |                |   |        |  
|                                                  |  |                   |            |   |                |   |         |  
|Total convertible notes payable                   |  |                   | 10,361,000 |   |                |   | 20,000  |  
|Less discount for beneficial conversion           |  |                   | (2,050,000 | ) |                |   |         |  
|Plus amortization of discount to interest expense |  |                   | 1,339,999  |   |                |   |         |  
|Less current portion                              |  |                   | (1,035,000 | ) |                |   | (20,000 | )
|                                                  |  |                   |            |   |                |   |         |  
|Convertible notes payable, net of current portion |  | $                 | 8,615,999  |   |                | $ | 0       |  
|                                                  |  |                   |            |   |                |   |         |  



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##### Table of Contents

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



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



|          |  |                   |         |                |   |  
|--------- |  | ----------------- | ------- | -------------- | - | -
|          |  | December 31, 2004 |         | March 31, 2005
|Phage (a) |  | $                 | 522,719 |                | $ | 
|          |  |                   |         |                |   |  
|Total     |  | $                 | 522,719 |                | $ | 0
|          |  |                   |         |                |   |  



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



At December 31, 2004 and March 31, 2005 (unaudited), the Company incurred
technical development costs due to Phage pursuant to the License Agreement (Note 4). The balances due to Phage represent unpaid amounts by the Company to Phage at December 31, 2004 and March 31, 2005 (unaudited), for these technical development
services.



Interest expense related to due to affiliates for
the three month periods ended March 31, 2004 (unaudited) and 2005 (unaudited), and the period from March 11, 1998 (inception) to March 31, 2005 (unaudited), were, $ 3,052, $8,953 and $112,307, respectively.



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



Preferred Stock



During the three month periods ended March 31, 2005, 2 convertible preferred shareholders elected to convert 2,500 of their preferred shares into 250,000
shares of common stock. The 2,000,000 shares of common stock which as of December 31, 2004 had not been issued and classified as committed common stock were issued during this period.



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 the proceeds to the
Company of $2,070,500.



In March 2005, 332 convertible note
holders elected to convert, $10,341,000 of notes into 4,133,000 shares of common stock.



During the period ended March 31, 2005, two convertible preferred shareholders elected to convert 2,500 of their preferred shares into 250,000 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 determined by the Board of Directors, 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 March 31,
2005, the Company had granted options to both employees and non-employee consultants.



18



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##### Table of Contents

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 non-employees. 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 three month period ended March 31, 2005 the Company issued no
options.



Warrants



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 effective date of the IPO, February 11, 2005.



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



During the three month periods ended March 31, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998 (inception) to March 31, 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 three month periods ended March 31, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998
(inception) to March 31, 2005 (unaudited), Cardio paid Daniel C. Montano, Chairman of the Board, President and Chief Executive Officer, for employment services in the amount of $0, $80,769 and $985,379, respectively.



During the three month periods ended March 31, 2004 (unaudited) and 2005
(unaudited), and the period from March 11, 1998 (inception) to March 31, 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.



Cardio paid
commissions to GHL Financial Services LTD (GHL), in which a director designate 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 three month
periods ended March 31, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998 (inception) to March 31, 2005 (unaudited), Cardio paid GHL $763,500, $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 three month periods ended March 31, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998 (inception) to March 31, 2005 (unaudited), Cardio paid Dr.
Stegmann $0, $25,250 and $427,368, 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 three month periods ended March 31, 2004 (unaudited) and 2005 (unaudited) and the period from
March 11, 1998 (inception) to March 31, 2005 (unaudited). Consulting fees incurred by Cardio were $0, $5,000 and $530,240, respectively.



During the three month periods ended March 31, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998 (inception) to March 31, 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 $0, $5,000 and $151,055, respectively.



In August 2004, the Company guaranteed Phages obligations under a
non-cancelable operating lease. (See note 9)



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



Significant components of the provision for income taxes for the three month periods ended March 31, 2004 (unaudited) and 2005 (unaudited) were as
follows:



|                           |  |           |     |      |   |    
|-------------------------- |  | --------- | --- | ---- | - | ---
|                           |  | March 31,
|                           |  | 2004      |     | 2005
|Current                    |  |           |     |      |   |    
|Federal                    |  | $         |    |      | $ |   
|State                      |  |           | 200 |      |   | 200
|Deferred                   |  |           |     |      |   |    
|Federal                    |  |           |    |      |   |   
|State                      |  |           |    |      |   |   
|                           |  |           |     |      |   |    
|Provision for income taxes |  | $         | 200 |      | $ | 200
|                           |  |           |     |      |   |    



The Company had a net
operating loss carry forwards for the federal and state income tax purposes of approximately $13,055,000 and $15,000,000 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.



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



Leases



On April 27, 2004, the Company entered into a non-cancelable operating lease agreement for office space which requires monthly payments of $5,882 and expires in October 2005. The Company has two one-year options to
renew the lease. On May 1, 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 25, 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.



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 the 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 $40,000, $128,915 and $848,217, 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), 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. Also, the Company 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.



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##### Table of Contents

Service Agreements



On October 24, 2001, the Company entered into a service agreement with a 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 three month periods ended March 31, 2004(unaudited), 2005(unaudited)
and the period from March 11, 1998 (inception) to March 31, 2005(unaudited), were $249,573, $156,200, $249,615 and $2,063,183, respectively. As of March 31, 2005, the agreement is still on going.



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, $0 and $370,100, respectively. The principal in this company owns 18.25% of Phage Biotechnology Corporation, the Companys 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 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 $43,428, $0 and $431,698, respectively. As of March 31, 2005, the agreement is still ongoing.



Securities Act Compliance



Commencing in 2001 and ending in August 2004, the Company sold three 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 statutes of limitation has not run. The right of rescission is essentially a moot issue for those noteholders that do not elect to convert their notes to
common stock (except to the extent that the interest due as a part of a rescission might exceed the interest due on a payoff of a convertible note) because, by their terms, the notes are due and payable with accrued interest 30 days after completion
of the initial public offering. For those noteholders that elect 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.



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|          |  |                                                                                                                                                                                                                                
|--------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 required by the FDA.



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 plans to apply to the FDA to commence its Phase III pivotal trials.



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 is not involved in any litigation and is unaware of any claims that may be filed against it.



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



In April 2005, three convertible preferred shareholders elected to convert 9,000 of their preferred shares into 900,000 shares of common stock.



|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.



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Overview of the Company



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 performed by Dr. Thomas Stegmann 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 our inception,
we have generated significant losses. As of March 31, 2005, we had an accumulated deficit of $20,056,423. We expect to incur substantial and increasing losses for at least the next several Three months. We do not expect to generate revenues unless
and until Cardio Vascu-Grow is approved by the
FDA 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 March 31, 2005, we have funded our operations primarily through the initial
public offering of our common stock and the private placement 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.



From our
inception through March 31, 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. Additionally, in 2003, we began the preclinical activities to develop a catheter delivery system to the human heart for Cardio Vascu-Grow. We have outsourced these preclinical activities to independent research or design firms.



Our research and development expenses incurred through March 31, 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 $8,000,000 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 March 31, 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 and we expect these expenses to be material.



We have not generated taxable income to date. At March 31, 2005, net operating losses available to offset future taxable income for federal income tax
purposes were approximately $15,000,000. 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



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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.



OVERVIEW OF THE FIRST FISCAL QUARTER ENDED MARCH 31, 2005



Clinical Research & Development



During
the three months ended March 31, 2005, we added one additional medical institution, University of Alabama Medical Center, Birmingham, Alabama, for a total of six facilities now conducting clinical activities for our FDA clinical trials that C2R is
managing. We completed four more patients, for a total now of 16 patients who have been administered Cardio Vascu-Grow in our FDA clinical trial. To date we have received no reports of adverse effects due to the injections of our drug.



Twelve 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 and based on
the results of the trial, we will discuss with the FDA the possibility of proceeding directly to a Phase III trial. Based in part on the results of our discussions with the FDA, we will make a decision as to whether to submit a protocol for a Phase
II or Phase III clinical trial. At the conclusion of the current Phase I clinical study, the FDA may require us to do more than one additional clinical trial as going straight to Phase III trials is not typical. Given that the FDA will ultimately
determine the course, and therefore the timing, of our clinical trials, we estimate the schedule for these trials to be as follows: 1) If we are allowed and choose to proceed directly to a Phase III trial, the injections into patients for our
clinical trials are estimated to be completed in 2006. 2) If we are required to or choose to proceed to a Phase II trial and then to a Phase III trial, the injections into patients for our clinical trials are estimated to be completed in 2007.



Pre-Clinical Research & Development



Stroke.According to the American Heart Association 2004 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 quarter ended March
31, 2005, the first animal studies in stroke performed by Neurological Testing Inc., Charleston South Carolina, at a cost of $20,000, was completed and indicated that Cardio Vascu-Grow could significantly reduce the volume of stroke in the animals. An additional study at
a cost of $20,000 is currently in progress with Neurological Testing, Inc.



Chronic Back Pain and Lumbar Ischemia. Published reports estimate one out of eight people will suffer from chronic back pain at some time in their lives. European medical researchers have recently proposed that
one cause of chronic back pain is the blockage of blood vessels supplying the lower back, leading to a condition referred to as lumbar ischemia. These same 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.A.



Intestinal Ischemia. Cardiovascular disease in the intestinal tract can cause severe pain in people, even after the simple act of eating a meal. 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 which 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 investigating this
condition, which affects a large number of mainly elderly people. Various physicians estimate this disease will affect, to some degree, almost everyone over the age of 70.



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Wound Healing. Animal trials have been initiated through MPI Research Inc. for this new
application for Cardio Vascu-Grow. The rate of
wound healing in diabetic mice, which, like their human counterparts, have slow-healing wounds, healed much more rapidly when a salve containing Cardio Vascu-Grow was applied to their wounds. As a part of its technical services to us, Phage entered into an agreement with MPI
Research, Inc., to study the wound healing capabilities of Cardio Vascu Grow. That study was completed in early November 2004 at a cost of approximately $14,000.



MPI Research, Inc. also conducted skin toxicity tests for us in February 2005 at a cost of approximately $51,000. The final study report was received in
April, 2005, indicating no toxicity when Cardio Vascu-Grow is applied to a wounded area of skin. This report 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.



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 $2,070,500. As 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



In March 2005, 332 convertible note holders elected to convert $10,341,000
of notes into 4,133,000 shares of our common stock. At March 31, 2005, all but three note holders with a total of $20,000 of convertible notes had notified us of their intention to convert their notes into common stock. These three notes are to be
paid in cash in the second quarter of 2005. During the period ended March 31, 2005, two convertible preferred shareholders elected to convert 2,500 of their preferred shares into 250,000 shares of common stock.



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 and others.



We account for
stock option and warrant grants issued to non-employees using the guidance of SFAS No. 123 an 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



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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 of selling our pharmaceutical products have not yet commenced. For the period from March 11, 1998 (inception) through March 31, 2005, we have accumulated
a deficit of $20,056,423. 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



Three Months Ended March 31, 2005 and 2004



Our activities during three month period ended March 31,
2005 consisted almost entirely of research and development and general corporate activities to support our FDA Phase l clinical trial. Research and development expenses decreased 8% from $453,401 to $412,716 for the Three months ended March 31, 2005
and 2004 respectively. In the three month period ended March 31, 2004, we incurred significant costs in the acquisition of patients for our FDA clinical trial. In the three month period ended March 31, 2005, we increased our pre-clinical activity in
exploring other applications for our drug candidate Cardio Vascu-grow.



General and administrative expenses increased 344% from $302,915 to $1,347,543 for the three months ended March 31, 2005 and 2004, respectively. The increase resulted from an increase in our administrative costs in building necessary
personnel and administrative infrastructure of $168,773. Marketing and travel increased $213,493 as we resumed our marketing activities, and $258,455 of expenses relating to our company sponsoring the International Association of Regenerative
Medicine Conference. We had severely curtailed these activities after the September 11, 2001 attack on the World Trade Center in New York City and did not resume these activities to the previous level until 2004. Additionally, we incurred $181,333
of public company expenses.



Interest income increased by
$47,412 from none for the three months ended March 31, 2005 and 2004, respectively. This is a result of a higher level of cash and marketable securities available for investment during the first three months of fiscal 2005.



Interest expense increased 445% to $1,552,319 from $284,328 for the three
months ended March 31, 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.



Liquidity and Capital Resources



Sources of Liquidity



Since our inception and through March 31, 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 March 31, 2005, we have received net proceeds of approximately $32,983,943 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 March 31, 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
|                                                                                       |  |              |          



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|                                                                                                                                                                                      |  |              |           
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----------
|Security                                                                                                                                                                              |  | Net Proceeds
|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
|                                                                                                                                                                                      |  |              |           
|Total net proceeds from financings through March 31, 2005                                                                                                                             |  | $            | 32,983,943
|                                                                                                                                                                                      |  |              |           



As of March 31, 2005,
we had $17,395,283 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 of our
convertible note holders of their intent to convert their notes into common stock, and subsequently converted those notes into common stock. The remaining liability of $20,000 will be paid in cash.



Income Taxes



As of March 31, 2005, we had net operating loss carry forwards for federal
income taxes of approximately $15,000,000. 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 March 31, 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



Three Months ended March 31, 2005 and 2004



For the three months ended March 31, 2005, our operating activities consumed
cash of $2,273,139, an increase of $1,637,466 over the three months ended March 31, 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 1 trial, add needed administrative capability and personnel, resume our marketing activities,
and move forward with the preparation of the company to be a public company.



Purchase of short term investments consumed $289 of cash combined with $2,339 of capital expenditures for property and equipment, resulting in $2,628 of cash consumed in investing activities for the period ended March
31, 2005, which was an increase of $4,428 over the three months ended March 31, 2004.



Financing activities generated $15,055,179 of cash during the year ended March 31, 2005, an increase of $9,535,345 over the three months ended March 31, 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 three months ended March 31, 3004 and 2003 respectively.



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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;
| | - |  | ---------------------------------------------



| |  |  | 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
March 31, 2005:



|                                |  |       |        |                 |   |          |  |          |  |                  |  |  
|------------------------------- |  | ----- | ------ | --------------- | - | -------- |  | -------- |  | ---------------- |  | -
|                                |  | Total |        | Less than1 Year |   | 1-3Years |  | 3-5Years |  | More than5 Years
|Long-term debt obligations (1)  |  | $     | 20,000 |                 | $ | 20,000   |  |         |  |                 |  | 
|Operating lease obligations (2) |  |       |       |                 |   |         |  |         |  |                 |  | 



---

|(1) | This represents our convertible notes payable at March 31, 2005. During March 2005, we received notification from $10,341,000 of our convertible note holders of their intent to
convert their notes into common stock, and subsequently converted those notes into common stock. The remaining liability is $20,000.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | On April 27, 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. We have two one-year options to renew the lease. On May 1, 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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Our major outstanding contractual obligations are summarized as follows:



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 price of Cardio
Vascu-Grow which Phage does not manufacture for
us. 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, L.L.C.
(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 three month periods ended March 31, 2005 and 2004 we expended approximately $250,000 and $156,200 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 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 expected
cost for the first prototype will be approximately $70,000. During the three month period ended March 31, 2005 we expended approximately $22,000 for these services.



Off-Balance Sheet Transactions



At March 31, 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.



Recently Issued Accounting Pronouncements



In November 2002, the FASB issued FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. In the course of business, we have a contractual guarantee of an operating lease. However, this guarantee is
limited and does not represent significant commitments or contingent liabilities of the indebtedness of others. This pronouncement is effective for financial statements issued after December 15, 2002 and is not expected to have a material impact on
our financial statements.



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



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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 Three months 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 Three 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.



SFAS No.
123(R) must be adopted by the Company by the third quarter of 2005. 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.



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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 $20,056,423 as of March 31, 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 March 31, 2005, we had
$17,395,283 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 three 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;
| | - |  | ----------------------------------------------------------



| |  |  | 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



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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.



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.
| | - |  | -------------------------------------------------------------------------------------------------



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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 March 31, 2005 we had one scientist employee, John W. Jacobs, Ph.D., and twelve scientists under month to month
contracts, including our Chief Clinical Officer, Thomas Stegmann, M.D. The loss of either of our lead scientists, Thomas Stegmann, M.D. and John W. Jacobs, Ph.D., could impede the achievement of our development objectives.



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 25.49% 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., including a cease and desist order entered by the SEC 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.



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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, including our Chief Executive Officer and our Chief Financial Officer, devote less than half of their 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 approximately 40% of their business time to us, 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 approximately 40% 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 or business. Notwithstanding the foregoing, nothing in our agreements precludes
Phage from participating in activities competitive to ours.



Daniel C. Montano owns beneficially approximately 25.49% 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 approximately 40% of his business time to our affairs, 40% to Phage 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 approximately 40% of his business time to our affairs and 40% to Phage and the balance to other
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 approximately 40% of his business time to our affairs, 40% to Phage and the balance to other 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



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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 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.



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 certified by the FDA 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 revenue.



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.



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



If our products are approved for marketing by
the FDA, their commercial success will depend upon the medical community and patients accepting our products as being safe and effective. The market acceptance of our products could be affected by a number of factors, 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 for 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. For our drug candidate, we use several of the
FGF-1 forms. 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.



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



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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 employed 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.



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.



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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 which 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 developed by us.



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 following 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:



| |  |  | 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;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | 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. Approximately 20,304,350
shares of our common stock (either outstanding or issuable upon conversion of our convertible notes and convertible preferred 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.



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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 82.75% 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.



We are governed by the provisions of Section 203 of the Delaware General
Corporate Law, 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.



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 three 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 due to the fact that 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. The right of rescission is essentially a moot issue for those few noteholders that did not elect to convert their notes to common stock (except to the extent that the interest due
as a part of a rescission might exceed the interest due on a payoff of a convertible note). 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 three 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 subsequently implemented by the Securities and Exchange Commission, 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, create additional board committees and adopt policies regarding
internal controls and disclosure controls and procedures. In addition, we will



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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.



|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
|------- | ---------------------------------------------------



None.



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



None.



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



The following exhibits are filed as part of this report:



|              |  |                                                                                                                                                                                      
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                              
|              | 
|31.1          |  | Certification of Principal Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), 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-14(a) and 15d-14(a), 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: May 10, 2005



CARDIOVASCULAR BIOTHERAPEUTICS, INC.By:

/S/    MICKAEL A.
FLAAMickael A. FlaaChief Financial Officer




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