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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 September 30, 2005



OR



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



For the transition period from
                 to                 .



Commission file number: 0-51172



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CARDIOVASCULAR BIOTHERAPEUTICS, INC.

(Exact name of registrant as specified
in its charter)



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



7251 W Lake Mead
Blvd, Suite 300

Las Vegas, Nevada

(Address of principal executive offices)



89128

(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



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes ̈No  x



As of November 4, 2005, 123,051,116 shares of the Registrants
common stock were outstanding.



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##### Table of Contents

CARDIOVASCULAR BIOTHERAPEUTICS, INC.



FORM 10-Q



FOR THE QUARTER ENDED SEPTEMBER
30, 2005



INDEX



|         |  |                                                                                                                                                                             |  |     
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                                                                             |  | Page
|PART I.  |  | FINANCIAL INFORMATION                                                                                                                                                       |  |     
|         |  |                                                                                                                                                                            
|Item 1.  |  | Financial Statements                                                                                                                                                        |  | 3   
|         |  |                                                                                                                                                                            
|         |  | Unaudited Balance Sheets at September 30, 2005 and December 31, 2004                                                                                                        |  | 3   
|         |  |                                                                                                                                                                            
|         |  | Unaudited Statements of Operations for the Nine and Three Months Ended September 30, 2004 and 2005 and for the period from March 11, 1998 (inception) to September 30, 2005 |  | 4   
|         |  |                                                                                                                                                                            
|         |  | Unaudited Statements of Stockholders Equity (Deficit) for the period from March 11, 1998 (inception) to September 30, 2005                                                 |  | 5   
|         |  |                                                                                                                                                                            
|         |  | Unaudited Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2005 and for the period from March 11, 1998 (inception) to September 30, 2005           |  | 7   
|         |  |                                                                                                                                                                            
|         |  | Notes to Unaudited Financial Statements                                                                                                                                     |  | 9   
|         |  |                                                                                                                                                                            
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                       |  | 20  
|         |  |                                                                                                                                                                            
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                                                  |  | 36  
|         |  |                                                                                                                                                                            
|Item 4.  |  | Controls and Procedures                                                                                                                                                     |  | 36  
|         |  |                                                                                                                                                                            
|PART II. |  | OTHER INFORMATION                                                                                                                                                           |  |     
|         |  |                                                                                                                                                                            
|Item 1.  |  | Legal Proceedings                                                                                                                                                           |  | 37  
|         |  |                                                                                                                                                                            
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                 |  | 37  
|         |  |                                                                                                                                                                            
|Item 3.  |  | Defaults Upon Senior Securities                                                                                                                                             |  | 37  
|         |  |                                                                                                                                                                            
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                                                                                         |  | 37  
|         |  |                                                                                                                                                                            
|Item 5.  |  | Other Information                                                                                                                                                           |  | 37  
|         |  |                                                                                                                                                                            
|Item 6.  |  | Exhibits                                                                                                                                                                    |  | 37  



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
SEPTEMBER 30, 2005 (UNAUDITED)



|                                                                                                                                                                                                         |  |                  |             |   |                   |   |             |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                                                                                                                                                                         |  | December 31,2004 |             |   | September 30,2005 |  
|ASSETS                                                                                                                                                                                                   |  |                  |             |   |                   |   |             |  
|Current Assets:                                                                                                                                                                                          |  |                  |             |   |                   |   |             |  
|Cash and cash equivalents                                                                                                                                                                                |  | $                | 4,530,221   |   |                   | $ | 10,345,034  |  
|Short-term investments                                                                                                                                                                                   |  |                  | 85,362      |   |                   |   | 126,596     |  
|Due from affiliate                                                                                                                                                                                       |  |                  |            |   |                   |   | 25,634      |  
|Prepaid assets                                                                                                                                                                                           |  |                  | 479,500     |   |                   |   | 761,208     |  
|                                                                                                                                                                                                         |  |                  |             |   |                   |   |             |  
|Total current assets                                                                                                                                                                                     |  |                  | 5,095,083   |   |                   |   | 11,285,472  |  
|                                                                                                                                                                                                         |  |                 
|Property and equipment, net                                                                                                                                                                              |  |                  | 30,119      |   |                   |   | 89,684      |  
|Deferred offering costs                                                                                                                                                                                  |  |                  | 866,512     |   |                   |   |            |  
|Deferred debt financing costs, net                                                                                                                                                                       |  |                  | 712,664     |   |                   |   |            |  
|Other assets                                                                                                                                                                                             |  |                  | 5,900       |   |                   |   | 5,900       |  
|                                                                                                                                                                                                         |  |                  |             |   |                   |   |             |  
|Total assets                                                                                                                                                                                             |  | $                | 6,710,278   |   |                   | $ | 11,354,056  |  
|                                                                                                                                                                                                         |  |                  |             |   |                   |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY DEFICIT                                                                                                                                                             |  |                  |             |   |                   |   |             |  
|Current Liabilities:                                                                                                                                                                                     |  |                  |             |   |                   |   |             |  
|Current portion of convertible notes payable                                                                                                                                                             |  | $                | 1,035,000   |   |                   | $ |            |  
|Accrued interest payable                                                                                                                                                                                 |  |                  | 1,187,870   |   |                   |   |            |  
|Due to Affiliates                                                                                                                                                                                        |  |                  | 522,719     |   |                   |   |            |  
|Accounts payable                                                                                                                                                                                         |  |                  | 713,280     |   |                   |   | 80,650      |  
|Accrued payroll and payroll taxes                                                                                                                                                                        |  |                  | 18,075      |   |                   |   | 22,414      |  
|                                                                                                                                                                                                         |  |                  |             |   |                   |   |             |  
|Total current liabilities                                                                                                                                                                                |  |                  | 3,476,944   |   |                   |   | 103,064     |  
|                                                                                                                                                                                                         |  |                  |             |   |                   |   |             |  
|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  |   |                   |   | 103,064     |  
|                                                                                                                                                                                                         |  |                  |             |   |                   |   |             |  
|Commitments and contingencies                                                                                                                                                                            |  |                  |             |   |                   |   |             |  
|Stockholders Equity (deficit):                                                                                                                                                                          |  |                  |             |   |                   |   |             |  
|Convertible preferred stock, $0.001 par value; 10,000,000 shares authorized; 52,850 shares issued; 23,250 shares and no shares outstanding at
December 31, 2004 and September 30, 2005, respectively     |  |                  | 23          |   |                   |   |            |  
|Common stock, $0.001 par value; 400,000,000 shares authorized; 112,649,650 shares issued and outstanding at December 31, 2004 and
123,026,116 issued and outstanding at September 30, 2005, respectively |  |                  | 112,650     |   |                   |   | 123,026     |  
|Committed common stock                                                                                                                                                                                   |  |                  | 2,000       |   |                   |   | 25          |  
|Additional paid-in capital                                                                                                                                                                               |  |                  | 11,293,919  |   |                   |   | 38,143,701  |  
|Deficit accumulated during the development stage                                                                                                                                                         |  |                  | (16,791,257 | ) |                   |   | (27,015,760 | )
|                                                                                                                                                                                                         |  |                  |             |   |                   |   |             |  
|Total stockholders equity (deficit)                                                                                                                                                                     |  |                  | (5,382,665  | ) |                   |   | 11,250,992  |  
|                                                                                                                                                                                                         |  |                  |             |   |                   |   |             |  
|Total liabilities and stockholders equity (deficit)                                                                                                                                                     |  | $                | 6,710,278   |   |                   | $ | 11,354,056  |  
|                                                                                                                                                                                                         |  |                  |             |   |                   |   |             |  



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
NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2005 AND FOR

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

(UNAUDITED)



|                                                                               |  |                                 |             |   |                                  |   |             |                                                                  |  |   |             |   |  |   |             |   |  |   |             |  
|------------------------------------------------------------------------------ |  | ------------------------------- | ----------- | - | -------------------------------- | - | ----------- | ---------------------------------------------------------------- |  | - | ----------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                                               |  | Nine Months Ended September 30, |             |   | Three Months Ended September 30, |   |             | For the Periodfrom March 11,1998 (inception)to September 30,2005 | 
|                                                                               |  | 2004                            |             |   | 2005                             |   |             | 2004                                                             |  |   | 2005        |   | 
|Operating expenses:                                                            |  |                                 |             |   |                                  |   |             |                                                                  |  |   |             |   |  |   |             |   |  |   |             |  
|Research and development (a)                                                   |  | $                               | 1,745,463   |   |                                  | $ | 2,266,631   |                                                                  |  | $ | 1,010,451   |   |  | $ | 1,071,517   |   |  | $ | 8,653,519   |  
|Selling, general and administrative (b)                                        |  |                                 | 1,551,459   |   |                                  |   | 6,577,642   |                                                                  |  |   | 709,902     |   |  |   | 3,363,393   |   |  |   | 13,128,273  |  
|                                                                               |  |                                 |             |   |                                  |   |             |                                                                  |  |   |             |   |  |   |             |   |  |   |             |  
|Total operating expenses                                                       |  |                                 | 3,296,922   |   |                                  |   | 8,844,273   |                                                                  |  |   | 1,720,353   |   |  |   | 4,434,910   |   |  |   | 21,781,792  |  
|                                                                               |  |                                 |             |   |                                  |   |             |                                                                  |  |   |             |   |  |   |             |   |  |   |             |  
|Operating (Loss)                                                               |  |                                 | (3,296,922  | ) |                                  |   | (8,844,273  | )                                                                |  |   | (1,720,353  | ) |  |   | (4,434,910  | ) |  |   | (21,781,792 | )
|Other income (expenses)                                                        |  |                                 |             |   |                                  |   |             |                                                                  |  |   |             |   |  |   |             |   |  |   |             |  
|Interest income                                                                |  |                                 | 15,735      |   |                                  |   | 209,255     |                                                                  |  |   | 8,036       |   |  |   | 86,001      |   |  |   | 271,629     |  
|Interest expense                                                               |  |                                 | (1,188,985  | ) |                                  |   | (1,589,485  | )                                                                |  |   | (629,720    | ) |  |   | (37,539     | ) |  |   | (5,485,343  | )
|Other expenses                                                                 |  |                                 |            |   |                                  |   |            |                                                                  |  |   |            |   |  |   |            |   |  |   | (5,254      | )
|Equity loss in unconsolidated investee                                         |  |                                 |            |   |                                  |   |            |                                                                  |  |   |            |   |  |   |            |   |  |   | (15,000     | )
|                                                                               |  |                                 |             |   |                                  |   |             |                                                                  |  |   |             |   |  |   |             |   |  |   |             |  
|Net other income (expenses)                                                    |  |                                 | (1,173,250  | ) |                                  |   | (1,380,230  | )                                                                |  |   | (621,684    | ) |  |   | 48,462      |   |  |   | (5,233,968  | )
|                                                                               |  |                                 |             |   |                                 
|Net (Loss)                                                                     |  | $                               | (4,470,172  | ) |                                  | $ | (10,224,503 | )                                                                |  | $ | (2,342,037  | ) |  | $ | (4,386,448  | ) |  | $ | (27,015,760 | )
|                                                                               |  |                                 |             |   |                                  |   |             |                                                                  |  |   |             |   |  |   |             |   |  |   |             |  
|(Loss) per share                                                               |  |                                 |             |   |                                  |   |             |                                                                  |  |   |             |   |  |   |             |   |  |   |             |  
|Basic loss per share                                                           |  | $                               | (0.04       | ) |                                  | $ | (0.09       | )                                                                |  | $ | (0.02       | ) |  | $ | (0.04       | ) |  |   |             |  
|Diluted loss per share                                                         |  |                                 | (0.04       | ) |                                  |   | (0.09       | )                                                                |  |   | (0.02       | ) |  |   | (0.04       | ) |  |   |             |  
|                                                                               |  |                                 |             |   |                                  |   |             |                                                                  |  |   |             |   |  |   |             |   |  |   |             |  
|Shares used to calculate loss per share                                        |  |                                 |             |   |                                  |   |             |                                                                  |  |   |             |   |  |   |             |   |  |   |             |  
|Basic                                                                          |  |                                 | 110,190,100 |   |                                  |   | 119,526,639 |                                                                  |  |   | 110,190,100 |   |  |   | 122,664,860 |   |  |   |             |  
|                                                                               |  |                                 |             |   |                                  |   |             |                                                                  |  |   |             |   |  |   |             |   |  |   |             |  
|Diluted                                                                        |  |                                 | 110,190,100 |   |                                  |   | 119,526,639 |                                                                  |  |   | 110,190,100 |   |  |   | 122,664,860 |   |  |   |             |  
|                                                                               |  |                                 |             |   |                                  |   |             |                                                                  |  |   |             |   |  |   |             |   |  |   |             |  
|(a)    Research &
Development with Related Parties (Notes 4 and
9)             |  | $                               | 336,582     |   |                                  | $ | 480,276     |                                                                  |  | $ | 313,541     |   |  | $ | 200,991     |   |  | $ | 5,147,417   |  
|(b)    Selling General and Administration with Related Parties (Notes 4 and 9) |  | $                               | 1,322,677   |   |                                  | $ | 716,587     |                                                                  |  | $ | 1,287,536   |   |  | $ | 348,106     |   |  | $ | 2,619,813   |  



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



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##### Table of Contents

CARDIOVASCULAR BIOTHERAPEUTICS, INC.

(formerly CARDIOVASCULAR GENETIC ENGINEERING, INC.)

(A Development Stage Company)



STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

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



|                                                                       |  |            |  |                      |        |                                      |        |   |              |        |                |        |  |                          |  |   |                    |  |   |       |   |  |   |           |   |  |   |            |   |  |   |            |  
|---------------------------------------------------------------------- |  | ---------- |  | -------------------- | ------ | ------------------------------------ | ------ | - | ------------ | ------ | -------------- | ------ |  | ------------------------ |  | - | ------------------ |  | - | ----- | - |  | - | --------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                                                       |  | Date       |  | Price PerEquity Unit |        | Preferred StockSeries A, Convertible |        |   | Common Stock |        | CommittedStock |        |  | 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      | ) |  |   |            |   |  |   | 0          |  
|Issuance of common stock for services                                  |  | (5)        |  |                      |        |                                      |        |   |              |        |                |        |  | 583,300                  |  |   | 583                |  |   |       |   |  |   | (583      | ) |  |   |            |   |  |   | 0          |  
|Issuance of stock options for services                                 |  |            |  |                      |        |                                      |        |   |              |        |                |        |  |                          |  |   |                    |  |   |       |   |  |   | 73,660    |   |  |   |            |   |  |   | 73,660     |  
|Net loss                                                               |  |            |  |                      |        |                                      |        |   |              |        |                |        |  |                          |  |   |                    |  |   |       |   |  |   |           |   |  |   | (2,232,877 | ) |  |   | (2,232,877 | )
|                                                                       |  |            |  |                      |        |                                      |        |   |              |        |                |        |  |                          |  |   |                    |  |   |       |   |  |   |           |   |  |   |            |   |  |   |            |  
|Balance, December 31, 2000                                             |  |            |  |                      |        |                                      | 51,350 |   |              |        | 51             |        |  | 110,040,100              |  |   | 110,040            |  |   |      |   |  |   | 4,351,260 |   |  |   | (3,455,616 | ) |  |   | 1,005,735  |  
|                                                                       |  |            |  |                      |        |                                      |        |   |              |        |                |        |  |                          |  |   |                    |  |   |       |   |  |   |           |   |  |   |            |   |  |   |            |  
|Issuance of common stock for cash                                      |  | 8/10/2001  |  |                      | 0.80   |                                      |        |   |              |        |                |        |  | 150,000                  |  |   | 150                |  |   |      |   |  |   | 119,850   |   |  |   |            |   |  |   | 120,000    |  
|Net loss                                                               |  |            |  |                      |        |                                      |        |   |              |        |                |        |  |                          |  |   |                    |  |   |       |   |  |   |           |   |  |   | (1,664,954 | ) |  |   | (1,664,954 | )
|                                                                       |  |            |  |                      |        |                                      |        |   |              |        |                |        |  |                          |  |   |                    |  |   |       |   |  |   |           |   |  |   |            |   |  |   |            |  
|Balance, December 31, 2001                                             |  |            |  |                      |        |                                      | 51,350 |   |              |        | 51             |        |  | 110,190,100              |  |   | 110,190            |  |   |      |   |  |   | 4,471,110 |   |  |   | (5,120,570 | ) |  |   | (539,219   | )
|                                                                       |  |            |  |                      |        |                                      |        |   |              |        |                |        |  |                          |  |   |                    |  |   |       |   |  |   |           |   |  |   |            |   |  |   |            |  
|Net loss                                                               |  |            |  |                      |        |                                      |        |   |              |        |                |        |  |                          |  |   |                    |  |   |       |   |  |   |           |   |  |   | (1,328,460 | ) |  |   | (1,328,460 | )
|                                                                       |  |            |  |                      |        |                                      |        |   |              |        |                |        |  |                          |  |   |                    |  |   |       |   |  |   |           |   |  |   |            |   |  |   |            |  
|Balance, December 31, 2002                                             |  |            |  |                      |        |                                      | 51,350 |   |              |        | 51             |        |  | 110,190,100              |  |   | 110,190            |  |   |      |   |  |   | 4,471,110 |   |  |   | (6,449,030 | ) |  |   | (1,867,679 | )
|                                                                       |  |            |  |                      |        |                                      |        |   |              |        |                |        |  |                          |  |   |                    |  |   |       |   |  |   |           |   |  |   |            |   |  |   |            |  
|Issuance of stock options for services                                 |  |            |  |                      |        |                                      |        |   |              |        |                |        |  |                          |  |   |                    |  |   |       |   |  |   | 47,120    |   |  |   |            |   |  |   | 47,120     |  
|Issuance of warrants for services                                      |  |            |  |                      |        |                                      |        |   |              |        |                |        |  |                          |  |   |                    |  |   |       |   |  |   | 119,744   |   |  |   |            |   |  |   | 119,744    |  



5



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##### Table of Contents

|                                                             |  |      |  |                      |  |                                      |        |  |              |        |                |        |             |                          |   |         |                    |   |        |       |  |   |            |   |  |   |             |   |  |   |             |  
|------------------------------------------------------------ |  | ---- |  | -------------------- |  | ------------------------------------ | ------ |  | ------------ | ------ | -------------- | ------ | ----------- | ------------------------ | - | ------- | ------------------ | - | ------ | ----- |  | - | ---------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                             |  | Date |  | Price PerEquity Unit |  | Preferred StockSeries A, Convertible |        |  | Common Stock |        | CommittedStock |        |             | AdditionalPaid-InCapital |   |         | AccumulatedDeficit |   |        | Total | 
|                                                             |  |      |  | Shares               |  |                                      | Amount |  |              | Shares |                | Amount |             |                          |   |        
|Net loss                                                     |  |      |  |                      |  |                                      |        |  |              |        |                |        |             |                          |   |         |                    |   |        |       |  |   |            |   |  |   | (2,328,748  | ) |  |   | (2,328,748  | )
|                                                             |  |      |  |                      |  |                                      |        |  |              |        |                |        |             |                          |   |         |                    |   |        |       |  |   |            |   |  |   |             |   |  |   |             |  
|Balance, December 31, 2003                                   |  |      |  |                      |  | 51,350                               |        |  |              | 51     |                |        | 110,190,100 |                          |   | 110,190 |                    |   |       |       |  |   | 4,637,974  |   |  |   | (8,777,778  | ) |  |   | (4,029,563  | )
|                                                             |  |      |  |                      |  |                                      |        |  |              |        |                |        |             |                          |   |         |                    |   |        |       |  |   |            |   |  |   |             |   |  |   |             |  
|Issuance of common stock for conversion of convertible notes |  | (6)  |  |                      |  |                                      |        |  |              |        |                |        | 1,649,550   |                          |   | 1,650   |                    |   |        |       |  |   | 4,529,550  |   |  |   |             |   |  |   | 4,531,200   |  
|conversion of convertible preferred stock                    |  | (7)  |  |                      |  | (28,100                              | )      |  |              | (28    | )              |        | 810,000     |                          |   | 810     |                    |   | 2,000  |       |  |   | (2,782     | ) |  |   |             |   |  |   |            |  
|Interest on benefit conversion feature                       |  |      |  |                      |  |                                      |        |  |              |        |                |        |             |                          |   |         |                    |   |        |       |  |   | 2,050,000  |   |  |   |             |   |  |   | 2,050,000   |  
|Issuance of stock options for services                       |  |      |  |                      |  |                                      |        |  |              |        |                |        |             |                          |   |         |                    |   |        |       |  |   | 79,177     |   |  |   |             |   |  |   | 79,177      |  
|Net loss                                                     |  |      |  |                      |  |                                      |        |  |              |        |                |        |             |                          |   |         |                    |   |        |       |  |   |            |   |  |   | (8,013,479  | ) |  |   | (8,013,479  | )
|                                                             |  |      |  |                      |  |                                      |        |  |              |        |                |        |             |                          |   |         |                    |   |        |       |  |   |            |   |  |   |             |   |  |   |             |  
|Balance, December 31, 2004                                   |  |      |  |                      |  | 23,250                               |        |  |              | 23     |                |        | 112,649,650 |                          |   | 112,650 |                    |   | 2,000  |       |  |   | 11,293,919 |   |  |   | (16,791,257 | ) |  |   | (5,382,665  | )
|                                                             |  |      |  |                      |  |                                      |        |  |              |        |                |        |             |                          |   |         |                    |   |        |       |  |   |            |   |  |   |             |   |  |   |             |  
|Issuance of common stock for cash                            |  | (8)  |  |                      |  |                                      |        |  |              |        |                |        | 1,725,000   |                          |   | 1,725   |                    |   |        |       |  |   | 14,709,660 |   |  |   |             |   |  |   | 14,711,385  |  
|conversion of convertible notes                              |  | (6)  |  |                      |  |                                      |        |  |              |        |                |        | 4,203,000   |                          |   | 4,203   |                    |   | 25     |       |  |   | 10,326,773 |   |  |   |             |   |  |   | 10,331,001  |  
|conversion of convertible preferred stock                    |  | (7)  |  |                      |  | (23,250                              | )      |  |              | (23    | )              |        | 4,325,000   |                          |   | 4,325   |                    |   | (2,000 | )     |  |   | (2,302     | ) |  |   |             |   |  |   | 1           |  
|exercise of options                                          |  | (10) |  |                      |  |                                      |        |  |              |        |                |        | 123,466     |                          |   | 123     |                    |   |        |       |  |   | 82,878     |   |  |   |             |   |  |   | 83,001      |  
|Issuance of warrant for cash                                 |  | (9)  |  |                      |  |                                      |        |  |              |        |                |        |             |                          |   |         |                    |   |        |       |  |   | 75         |   |  |   |             |   |  |   | 75          |  
|Stock-based compensation                                     |  |      |  |                      |  |                                      |        |  |              |        |                |        |             |                          |   |         |                    |   |        |       |  |   | 1,732,698  |   |  |   |             |   |  |   | 1,732,698   |  
|Net loss (unaudited)                                         |  |      |  |                      |  |                                      |        |  |              |        |                |        |             |                          |   |         |                    |   |        |       |  |   |           |   |  |   | (10,224,503 | ) |  |   | (10,224,503 | )
|                                                             |  |      |  |                      |  |                                      |        |  |              |        |                |        |             |                          |   |         |                    |   |        |       |  |   |            |   |  |   |             |   |  |   |             |  
|Balance, September 30, 2005 (unaudited)                      |  |      |  |                      |  |                                     |        |  | $            | 0      |                |        | 123,026,116 |                          | $ | 123,026 |                    | $ | 25     |       |  | $ | 38,143,701 |   |  | $ | (27,015,760 | ) |  | $ | 11,250,992  |  
|                                                             |  |      |  |                      |  |                                      |        |  |              |        |                |        |             |                          |   |         |                    |   |        |       |  |   |            |   |  |   |             |   |  |   |             |  

---

|(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 nine month period ended September 30, 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------



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



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



|(9) | Underwriters warrants sold with the public offering.
|--- | ----------------------------------------------------



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



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



6



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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
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2005 AND FOR

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

(UNAUDITED)



|                                                                            |  |     |  |                                               |            |   |                                                                 |   |             |   |  |   |             |  
|--------------------------------------------------------------------------- |  | --- |  | --------------------------------------------- | ---------- | - | --------------------------------------------------------------- | - | ----------- | - |  | - | ----------- | -
|                                                                            |  |     |  | For the Nine Month PeriodsEnded September 30, |            |   | For the Periodfrom March 11,1998(inception) toSeptember 30,2005 |  
|                                                                            |  |     |  | 2004                                          |            |   | 2005                                                            |   |            
|Cash flows from operating activities:                                       |  |     |  |                                               |            |   |                                                                 |   |             |   |  |   |             |  
|Net loss                                                                    |  | (a) |  | $                                             | (4,470,172 | ) |                                                                 | $ | (10,224,503 | ) |  | $ | (27,015,760 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |     |  |                                               |            |   |                                                                 |   |             |   |  |   |             |  
|Depreciation                                                                |  |     |  |                                               | 1,409      |   |                                                                 |   | 8,937       |   |  |   | 17,262      |  
|Amortization of beneficial conversion feature                               |  |     |  |                                               | 195,833    |   |                                                                 |   | 710,001     |   |  |   | 2,050,000   |  
|Amortization of deferred debt financing costs                               |  |     |  |                                               | 440,255    |   |                                                                 |   | 712,664     |   |  |   | 2,135,715   |  
|Options issued for services rendered                                        |  |     |  |                                               | 79,176     |   |                                                                 |   |            |   |  |   | 282,250     |  
|Stock based compensation                                                    |  |     |  |                                               |           |   |                                                                 |   | 1,732,698   |   |  |   | 1,732,698   |  
|Warrants issued for services rendered                                       |  |     |  |                                               |           |   |                                                                 |   |            |   |  |   | 119,744     |  
|Equity in loss of unconsolidated investee                                   |  |     |  |                                               |           |   |                                                                 |   |            |   |  |   | 15,000      |  
|(Increase) decrease in:                                                     |  |     |  |                                               |            |   |                                                                 |   |             |   |  |   |             |  
|Prepaid expenses                                                            |  |     |  |                                               | (234,129   | ) |                                                                 |   | (307,342    | ) |  |   | (786,842    | )
|Other assets                                                                |  |     |  |                                               | (5,900     | ) |                                                                 |   |            |   |  |   | (20,900     | )
|(Increase) decrease in:                                                     |  |     |  |                                               |           |   |                                                                 |   |            |   |  |   |            |  
|Accounts payable                                                            |  |     |  |                                               | 287,795    |   |                                                                 |   | (632,630    | ) |  |   | 81,646      |  
|Accrued payroll and payroll taxes                                           |  |     |  |                                               | 19,695     |   |                                                                 |   | 4,337       |   |  |   | 22,412      |  
|Accrued interest                                                            |  |     |  |                                               | 534,119    |   |                                                                 |   | (1,187,870  | ) |  |   |            |  
|                                                                            |  |     |  |                                               |            |   |                                                                 |   |             |   |  |   |             |  
|Net cash used in operating activities                                       |  | (a) |  |                                               | (3,151,919 | ) |                                                                 |   | (9,183,708  | ) |  |   | (21,366,775 | )
|                                                                            |  |     |  |                                               |            |   |                                                                 |   |             |   |  |   |             |  
|Cash flows from investing activities:                                       |  |     |  |                                               |            |   |                                                                 |   |             |   |  |   |             |  
|Purchase of short term investments                                          |  |     |  |                                               | (75,000    | ) |                                                                 |   | (41,234     | ) |  |   | (126,596    | )
|Proceeds from sale of short term investments                                |  |     |  |                                               |           |   |                                                                 |   |            |   |  |   | (6,026      | )
|Purchase of property and equipment                                          |  |     |  |                                               | (31,847    | ) |                                                                 |   | (68,501     | ) |  |   | (100,919    | )
|                                                                            |  |     |  |                                               |            |   |                                                                 |   |             |   |  |   |             |  
|Net cash used in investing activities:                                      |  | (b) |  |                                               | (106,847   | ) |                                                                 |   | (109,735    | ) |  |   | (233,541    | )
|                                                                            |  |     |  |                                               |            |   |                                                                 |   |             |   |  |   |             |  
|Cash flows from financing activities:                                       |  |     |  |                                               |            |   |                                                                 |   |             |   |  |   |             |  
|Net proceeds from sale of common stock                                      |  |     |  |                                               |           |   |                                                                 |   | 15,547,972  |   |  |   | 19,451,972  |  
|Proceeds from the exercise of options                                       |  |     |  |                                               |           |   |                                                                 |   | 83,003      |   |  |   | 83,003      |  
|Proceeds from sale of preferred stock                                       |  |     |  |                                               |           |   |                                                                 |   |            |   |  |   | 520,400     |  
|Proceeds from issuance of notes payables                                    |  |     |  |                                               | 5,831,200  |   |                                                                 |   |            |   |  |   | 14,092,200  |  
|Deferred debt financing cost                                                |  |     |  |                                               | (980,130   | ) |                                                                 |   |            |   |  |   | (2,135,713  | )
|Proceeds from notes payable issued under Regulation D                       |  |     |  |                                               | 800,000    |   |                                                                 |   |            |   |  |   | 800,000     |  
|Cash paid for deferred offering costs                                       |  |     |  |                                               | (305,190   | ) |                                                                 |   |            |   |  |   | (866,512    | )
|Net increase (decrease) in amounts due to affiliates                        |  |     |  |                                               | 182,348    |   |                                                                 |   | (522,719    | ) |  |   |            |  
|Subscription receivable                                                     |  |     |  |                                               | 2,042,099  |   |                                                                 |   |            |   |  |   |            |  
|                                                                            |  |     |  |                                               |            |   |                                                                 |   |             |   |  |   |             |  
|Net cash provided by financing activities                                   |  | (c) |  |                                               | 7,570,327  |   |                                                                 |   | 15,108,254  |   |  |   | 31,945,350  |  
|                                                                            |  |     |  |                                               |            |   |                                                                 |   |             |   |  |   |             |  
|Increase in cash and cash equivalents                                       |  |     |  |                                               | 4,311,561  |   |                                                                 |   | 5,814,813   |   |  |   | 10,345,034  |  
|Cash and cash equivalents at beginning of period                            |  |     |  |                                               | 1,634,327  |   |                                                                 |   | 4,530,221   |   |  |   |            |  
|                                                                            |  |     |  |                                               |            |   |                                                                 |   |             |   |  |   |             |  
|Cash and cash equivalents at end of period                                  |  |     |  | $                                             | 5,945,888  |   |                                                                 | $ | 10,345,034  |   |  | $ | 10,345,034  |  
|                                                                            |  |     |  |                                               |            |   |                                                                 |   |             |   |  |   |             |  
|Supplemental disclosure of cash flow information:                           |  |     |  |                                               |            |   |                                                                 |   |             |   |  |   |             |  
|Interest paid                                                               |  |     |  | $                                             | 0          |   |                                                                 | $ | 1,345,070   |   |  | $ | 1,349,420   |  
|                                                                            |  |     |  |                                               |            |   |                                                                 |   |             |   |  |   |             |  
|Income taxes paid                                                           |  |     |  | $                                             | 800        |   |                                                                 | $ | 600         |   |  | $ | 5,800       |  
|                                                                            |  |     |  |                                               |            |   |                                                                 |   |             |   |  |   |             |  

---

|(a) | Including amount with related parties of $1,659,259, $1,196,863 and $7,767,230, respectively.
|--- | ---------------------------------------------------------------------------------------------



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



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



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



7



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##### Table of Contents

Supplemental Disclosure of Non-Cash Financing Activities



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



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



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



During the nine months periods ended September 30, 2004 and 2005 and the period from March 11, 1998 (inception) to
September 30, 2005, 0, 23,250 and 52,850 shares of convertible preferred stock were converted into 0, 2,325,000 and 5,285,000 shares of common stock, respectively. During the period ended September 30, 2005, 2,000,000 shares of committed
common stock relating to the conversion of preferred shares in fiscal 2004 were issued.



During the nine months periods ended September 30, 2004 and 2005 and the period from March 11, 1998 (inception) to September 30, 2005, $0, $10,331,000 and $14,862,200 of convertible notes payable were converted into 0,
4,090,000 and 5,739,550 shares of common stock, respectively, and 25,000 shares of committed common stock.



8



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##### Table of Contents

CARDIOVASCULAR BIOTHERAPEUTICS, INC.



NOTES TO FINANCIAL STATEMENTS



SEPTEMBER 30,
2005



1. BASIS OF PRESENTATION



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



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



2. DESCRIPTION OF BUSINESS



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



3. INITIAL PUBLIC OFFERING AND OVER ALLOTMENT



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



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



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



4. TRANSACTIONS AND CONTRACTUAL RELATIONSHIPS WITH
AFFILIATED ENTITIES



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



Daniel C. Montano, John W. Jacobs and Mickael A. Flaa are, respectively, Chairman of the Board/Chief Executive Officer, Chief Operating Officer/Chief Scientific Officer,
and Chief Financial Officer of both Cardio and Phage. Upon completion of the public offering, Mr. Flaa and Mr. Jacobs joined Cardios board of directors. In addition, Alexander G. Montano, one of the Companys current board
members and the son of Daniel C. Montano, is also a board member of Phage. Daniel C. Montano is a principal stockholder in Cardio, Phage, Proteomics, Zhittya, and Qure.



The following are the business activities performed by each affiliate:



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



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



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



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



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



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



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



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License Agreement



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



Currently it is the Companys intention to contract with Phage for manufacturing of Cardio Vascu-Growfor the ongoing FDA trials and for further commercial production. However, Cardio has the right to and may choose to use a third party for manufacturing.
As of September 30, 2005, Cardio had cash and cash equivalents of $10,345,034 indicating that the Company has sufficient funds to be a viable entity on an ongoing basis should it choose to use a third party manufacturer.



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



Furthermore, Cardio paid Phage for technical development services and for
manufacture of Cardio Vascu-Growfor clinical trials, which Phage provided to Cardio at cost. For the nine
months September 30, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998 (inception) to September 30, 2005 (unaudited) payments to Phage relating to such services were $101,582, $415,337 and $1,400,290,
respectively.



Administrative Support



For the nine months September 30, 2004 (unaudited) and 2005 (unaudited) and the period
from March 11, 1998 (inception) to September 30, 2005 (unaudited) Phage provided Cardio with administrative support in Phages research facility and billed Cardio for Phages actual costs incurred plus Cardios pro-rata
share (based on costs incurred for Cardio as compared to total Phage overhead costs) of Phages overhead costs. Payments to Phage for such support the nine months ended September 30, 2004 (unaudited) and 2005 (unaudited) and the period
from March 11, 1998 (inception) to September 30, 2005 (unaudited) were $137,162, $148,507 and $900,043, respectively.



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 September 30, 2005 (unaudited), the Company has accumulated a deficit of $27,015,760. 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.



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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.



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 September 30, 2005 (unaudited), the short term investments were $85,362 and $126,596, 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 TouchStone Research (Note 13).
Such amount is included in prepaid expenses in the accompanying balance sheet. This amount will be offset against the final invoices from TouchStone Research 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 and are amortized over the term of the convertible notes payable. At
December 31, 2004, there were $712,664 of these costs and none at September 30, 2005.



Concentrations of Credit Risk



The
Company places its cash and cash equivalent with high quality financial institutions, and at times it may exceed the Federal Deposit Insurance Corporation $100,000 insurance limit. As of December 31, 2004 and September 30, 2005
(unaudited), uninsured portions of cash amounted to $4,310,222 and $10,619,170, respectively.



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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 September 30, 2005 (unaudited) since their effect would have been anti-dilutive:



|                            |  |                   |  |                   
|--------------------------- |  | ----------------- |  | ------------------
|                            |  | December 31, 2004 |  | September 30, 2005
|Convertible preferred stock |  | 2,325,000         |  |                  
|Stock options               |  | 2,755,000         |  | 3,182,034         
|Warrants                    |  | 1,233,330         |  | 1,308,330         
|Convertible notes payable   |  | 4,143,000         |  |                  



Deferred Offering Costs



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



Stock-Based Compensation



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



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



Recently Issued Accounting Pronouncements



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



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



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



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



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



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



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



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



6. CASH AND CASH EQUIVALENTS



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



|                               |  |                  |           |                   |   |           
|------------------------------ |  | ---------------- | --------- | ----------------- | - | ----------
|                               |  | December 31,2004 |           | September 30,2005
|Cash in bank                   |  | $                | 4,530,221 |                   | $ | 10,345,034
|Cash in short term investments |  |                  | 85,362    |                   |   | 126,596   
|                               |  |                  |           |                   |   |           
|Total                          |  | $                | 4,615,583 |                   | $ | 10,471,630
|                               |  |                  |           |                   |   |           



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7. PREPAID AND OTHER CURRENT ASSETS



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



|                                    |  |                   |         |                    |   |        
|----------------------------------- |  | ----------------- | ------- | ------------------ | - | -------
|                                    |  | December 31, 2004 |         | September 30, 2005
|Prepaid clinical trial expenses (a) |  | $                 | 400,000 |                    | $ | 400,000
|Prepaid insurance                   |  |                   |        |                    |   | 135,726
|Prepaid legal fees                  |  |                   | 62,500  |                    |   | 61,172 
|Prepaid travel and trade shows      |  |                   |        |                    |   | 60,050 
|Prepaid other (b)                   |  |                   | 17,000  |                    |   | 104,260
|                                    |  |                   |         |                    |   |        
|                                    |  | $                 | 479,500 |                    | $ | 761,208
|                                    |  |                   |         |                    |   |        

---

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



|(b) | Prepaid other includes payments for uninstalled computer equipment and software, which will be installed in the fourth quarter.
|--- | -------------------------------------------------------------------------------------------------------------------------------



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.



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



Series I Convertible Promissory Notes



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



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



Series II Convertible Promissory Notes



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



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



Series IIa Convertible Promissory Notes



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



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



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



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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 $195,833, $710,001 and $2,050,000, respectively, for the nine months ended September 30, 2004 (unaudited) and 2005 (unaudited) and the period
from March 11, 1998 (inception) to September 30, 2005 (unaudited).



Since the convertible promissory notes have a reset provision upon the completion of the initial public offering, the Company retested the convertible notes payable for the beneficial conversion feature. Where the Company has issued
convertible notes payable with beneficial conversion feature, the difference between the conversion price and the fair value of the common stock, at the effective initial public offering date, will be recorded as a debt discount and will be
amortized to interest expense over the redemption period of the convertible notes payable in accordance with EITF Issue No. 98-5, Accounting for Securities with Beneficial Conversion Feature or Contingently Adjustable Conversion
Ratio and EITF Issue No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments. No additional Beneficial Conversion feature was required to be recovered.



In connection with these convertible notes payable, the Company incurred total financing
costs of $2,135,715. These costs had been capitalized and were being amortized over the term of the convertible notes payable. During the nine month periods ended September 30, 2004 (unaudited) and 2005 (unaudited) and the period from
March 11, 1998 (inception) to September 30, 2005 (unaudited), total financing costs of $440,255, $712,664 and $2,135,715, respectively, were charged to interest expense.



For the nine month periods ended September 30, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998
(inception) to September 30, 2005, the interest expense on the Series I, II and IIa convertible notes was $839,681, $166,820 and $1,354,690, respectively.



Outstanding balances of convertible notes payable were as follows:



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



9. DUE TO AND FROM AFFILIATES



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



|                   |  |                  |         |                   |   |       
|------------------ |  | ---------------- | ------- | ----------------- | - | ------
|                   |  | December 31,2004 |         | September 30,2005
|Due to Phage (a)   |  | $                | 522,719 |                   |   |       
|Due from Phage (b) |  |                  |         |                   | $ | 25,634
|                   |  |                  |         |                   |   |       
|Total              |  | $                | 522,719 |                   | $ | 25,63b
|                   |  |                  |         |                   |   |       

---

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



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



At December 31, 2004 and September 30, 2005 (unaudited), the Company incurred
technical development costs from 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 for these technical development services. The balances due from
Phage at September 30, 2005 (unaudited) is for travel related expenses. This amount was subsequently paid in October 2005.



Interest expense related to Affiliates for the nine month periods ended September 30, 2004 (unaudited) and 2005 (unaudited), and the period from March 11, 1998



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(inception) to September 30, 2005 (unaudited), were, $18,778, $8,953 and $112,307, respectively.



10. STOCKHOLDERS EQUITY



Preferred Stock



During the nine month periods ended September 30, 2005, nine convertible preferred shareholders elected to convert 23,250 of their
preferred shares into 2,325,000 shares of common stock. The 2,000,000 shares of common stock, which as of December 31, 2004 had not been issued but were classified as committed common stock, were issued during this period. At September 30,
2005 all issued preferred stock has been converted into common stock.



Common Stock



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



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



As of September 30, 2005 all convertible notes payable have been converted into common stock except $30,000 for which holders elected to be repaid. All common stock to be issued resulting from the conversion has been issued except
25,000 shares that are to be issued, and which are classified as committed common stock in the accompanying balance sheet.



During the period ended September 30, 2005, nine convertible preferred shareholders elected to convert 23,250 of their preferred shares into 2,325,000 shares of
common stock. In addition, six stock option holders exercised options to purchase 123,466 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 and were subsequently issued in 2005.



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



Stock Option Transactions



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



In July 2004, the Company established the Cardiovascular BioTherapeutics, Inc.
2004 Stock Plan (the Stock Plan) permitting the awards of (a) incentive stock options within the meaning of section 422 of the Code, (b) non-qualified stock options, (c) stock appreciation rights, and (c) restricted
stock to directors, officers, employees and consultants. The Company reserved 5,000,000 shares for the Plan and limited the maximum number of shares to be granted to any one individual in one year to 500,000.



During the nine month period ended September 30, 2005, nine stock option holders
executed their options to purchase 123,466 shares of common stock. The company received total proceeds of $83,001 for the stock options exercised



During the nine month period ended September 30, 2005 the Company issued 550,500 options with an exercise price of $10.00 to employees and directors from the 2004
Stock Plan.



Warrants



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



Authorized Shares



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



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11. RELATED PARTY TRANSACTIONS



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



During the nine month periods ended September 30, 2004 (unaudited) and 2005 (unaudited)
and the period from March 11, 1998 (inception) to September 30, 2005 (unaudited), Cardio paid Daniel C. Montano, Chairman of the Board, President and Chief Executive Officer, for employment services in the amount of $205,285, $321,769 and
$1,226,379, respectively.



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



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



Cardio paid consulting fees to Dr. Thomas
Stegmann M.D., the Companys co-founder, to assist in the development process of its products. During the nine month periods ended September 30, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998 (inception) to
September 30, 2005 (unaudited), Cardio paid Dr. Stegmann $210,000, $259,250 and $661,368, 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
nine month periods ended September 30, 2004 (unaudited) and 2005 (unaudited) and the period from March 11, 1998 (inception) to September 30, 2005 (unaudited). Consulting fees Cardio incurred were $0, $5,000 and $530,240, respectively.



During the nine month periods ended September 30, 2004 (unaudited) and
2005 (unaudited) and the period from March 11, 1998 (inception) to September 30, 2005 (unaudited), Cardio paid Dr. Wolfgang Priemer, the Companys co-founder, to assist in the development process of its products. Cardio paid
Dr. Priemer $25,000, $42,000 and $188,055, respectively.



In August 2004,
the Company guaranteed Phages obligations under a non-cancelable operating lease. (See note 13)



12. INCOME TAXES



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



|                           |  |                   |     |                   |   |    
|-------------------------- |  | ----------------- | --- | ----------------- | - | ---
|                           |  | September 30,2004 |     | September 30,2005
|Current                    |  |                   |     |                   |   |    
|Federal                    |  | $                 |    |                   | $ |   
|State                      |  |                   | 600 |                   |   | 600
|Deferred                   |  |                   |     |                   |   |    
|Federal                    |  |                   |    |                   |   |   
|State                      |  |                   |    |                   |   |   
|                           |  |                   |     |                   |   |    
|Provision for income taxes |  | $                 | 600 |                   | $ | 600
|                           |  |                   |     |                   |   |    



The Company had net operating loss
carry forwards for federal and state income tax purposes of approximately $19,596,000 and $21,500,000, which expire through 2020. The utilization of net operating loss carry forwards may be limited due to the ownership change under the provisions of
Internal Revenue Code Section 382 and similar state provisions.



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



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13. COMMITMENTS AND CONTINGENCIES



Leases



In April 2004, the Company entered into a non-cancelable operating lease agreement for office space that requires monthly payments of $5,882 and expired in October 2005.
On May 2004, the Company gave a deposit of $5,900. Building operating expenses are reconciled annually and any increase over the base year is billed prorata to the Company. In October 2005, upon the lease expiration we vacated the property and moved
into temporary office space while waiting for the completion of construction of our long-term office facilities for our corporate headquarters in Las Vegas, Nevada.



In October 2005, the company committed to a five-year operating lease for its corporate headquarters in Las Vegas, Nevada. The commencement
date is contingent upon the completion of the tenant improvements. We anticipate occupying the property in February 2006. The five year lease obligation is approximately $1,076,000.



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



Employment Agreements



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



In July 2004, the Company entered into an employment agreement with a non-executive 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 $149,700, $330,580 and
$1,049,882, for the nine month periods ended September 30, 2004 (unaudited), 2005 (unaudited) and the period from March 11, 1998 (inception) to September 30, 2005 (unaudited), respectively.



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



Service
Agreements



On August 8, 2005, the Company entered into a service
agreement with bioRASI, LLC. for the purpose of assisting in our human clinical trials in Russia. bioRASI is the strategic initiative of the Russian Academy of Sciences (RAS) and is responsible for commercializing RAS bio-sciences and clinical
resources. bioRASI is a contract research organization (CRO) providing services for its collaborative R&D clients in the areas of drug development, biologicals, and medical devices. Service fees for the period ended September 30, 2005 was
$104,082.



On October 24, 2001, the Company entered into a service
agreement with TouchStone Research, Inc., (formerly Clinical Cardiovascular Research, L.L.C.). TouchStone Research is dedicated to the clinical development of investigational drugs and devices for cardiovascular indications. TouchStone
Research assists Cardio with the FDA approval process for its drug. Service fees for the nine month periods ended September 30, 2004 (unaudited), 2005 (unaudited) and the period from March 11, 1998 (inception) to September 30, 2005
(unaudited), were $688,409, $822,307 and $2,635,875, respectively. The agreement is still ongoing as of September 30, 2005.



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



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



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Securities Act Compliance



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



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



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



The Company also has received notification from the FDA that they may proceed in clinical
testing of Cardio Vascu-Grow in a second medical
indication, diabetic wound healing. A Phase I study has been authorized which will test the safety of Cardio Vascu-Grow after topical administration to diabetic ulcers and venous stasis wounds.



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



Litigation



The Company may become involved in various legal proceedings and claims which arise in the
ordinary course of its business. The Company is not involved in any litigation at this time.



14. SUBSEQUENT EVENTS



In October 2005,
the company committed to a five-year operating lease for its corporate headquarters in Las Vegas, Nevada. The commencement date is contingent upon the completion of the tenant improvements. We anticipate occupying the property in February 2006. The
five year lease obligation is approximately $1,076,000.



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



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



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



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



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



Overview



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



Since inception, we have generated significant losses. As of
September 30, 2005, we had an accumulated deficit of $27,015,760. We expect to incur substantial and increasing losses for at least the next several years. We do not expect to generate revenues unless and until the FDA approves Cardio
Vascu-Grow and we begin marketing it. We expect
to continue to spend significant amounts on the development of Cardio Vascu-Grow. We expect to incur significant commercialization costs when we recruit a domestic sales force. We also plan to continue to invest in research and development for additional applications of Cardio Vascu-Grow and to develop new drug delivery technologies.
Accordingly, we will need to generate significant revenues to achieve and then maintain profitability.



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



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



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



Our research and development expenses incurred through September 30, 2005 were expenses related primarily to the development of Cardio
Vascu-Grow for the no-option patient
population. We expect to incur additional research and development expenses of approximately $8,450,000 at various stages relating to Cardio Vascu-Grow for the no-option patient population prior to its anticipated commercial launch in the United States.



The first clinical trial for the wound healing medical indication is a Phase
I safety trial where eight patients will receive one of two doses of Cardio Vascu-Grow as a topical application on their leg or foot open wounds. In addition, we expect to incur additional research and development expenses of approximately $20,000,000 relating to the anticipated commercial
launch of Cardio Vascu-Grow for wound healing
applications 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.



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



We have not generated taxable income to date. At September 30, 2005, net
operating losses available to offset future taxable income for federal and state income tax purposes of approximately $19,596,000 and $21,500,000. If not utilized, federal net operating loss carry forwards will expire through 2020. To date, we have
not recognized the potential tax benefit of our net operating losses on our balance sheets or statements of operations. The future utilization of our net operating loss carry forwards may be limited based upon changes in ownership pursuant to
regulations promulgated under the Internal Revenue Code. We will incur changes in ownership from both our initial public offering and from the conversion of our convertible preferred stock and convertible notes payable, which may result in
limitations to our net operating loss carry forwards.



SUMMARY OVERVIEW OF
THE THIRD FISCAL QUARTER ENDED SEPTEMBER 30, 2005



Clinical
Research & Development



No Option Heart
Patients. During the nine month period ended September 30, 2005, we added one additional medical institution, University of Alabama Medical Center, Birmingham, Alabama, for a total of six facilities now conducting human studies that
TouchStone Research is managing for our FDA clinical trials. We added seven more patients, for a total now of 19 patients in our current trial who have been administered Cardio Vascu-Grow. To date we have received no reports of adverse effects due to the injections of our
drug. It should be stressed that no-option heart patients are very sick patients with an average life expectancy of 2 years or less. It is common to see deaths in clinical trials involving this group of patients because of their underlying disease.
Although to date we have seen no adverse events in our trial, as the number of our treated patients increases, it is possible some patients may succumb to their underlying, severe heart disease before the trial is completed.



Eight additional patients will be enrolled in this study. Four of the eight
patients in the final Phase I dosing group have been administered our drug candidate as of November 3, 2005. We anticipate that the final results from this FDA authorized Phase I clinical trial will be similar to the human results achieved in
Dr. Stegmanns first two human clinical trials in Germany in the late 1990s. At the conclusion of this trial, we will file a report with the FDA listing any adverse events or other safety issues observed with Cardio Vascu-Grow and then we plan to commence a Phase II study in an
expanded patient population with additional clinical trial sites added. Given that the FDA will ultimately determine the course, and therefore the timing, of our clinical trials, we estimate the injections into patients for our Phase II and pivotal
Phase III clinical trials should be completed in 2007.



Pre-Clinical
Research & Development



Wound Healing.
During the nine month period ended September 30, 2005, an investigational new drug (IND) application was submitted to the FDA to begin clinical testing of Cardio Vascu-Grow in patients with diabetic foot ulcers or venus stasis leg wounds a Phase I study in which eight patients will receive
either a low or high dose applications of Cardio Vascu-Grow has been authorized by the FDA, and the trial will be conducted at a single site at the University of Pittsburg medical Center. Previously we completed three animal trials that demonstrated that Cardio Vascu-Grow was a safe and efficacious agent in healing wounds in
diabetic mice. In addition it was demonstrated that little, if any, Cardio Vascu-Grow was absorbed into the blood stream after topical application to the wound surface.



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



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



Stroke. According to the American Heart Association 2005 Update, stroke is the third leading cause of death in the United States behind heart disease and cancer. Those who survive almost always live with some
diminished capacity. Animal studies conducted by J.L. Ellsworth and associated persons, reported in the 2003 edition ofJournal 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 nine month period ended September 30, 2005, two animal studies for stroke were performed by Neurological Testing Inc., Charleston South
Carolina, at a cost of $84,000. These studies indicated and confirmed that Cardio Vascu-Grow could significantly reduce the volume of stroke in the animals.



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



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



Initial Public Offering and Over Allotment



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



Conversion of Promissory Notes and Preferred Stock



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



During the period ended
September 30, 2005, nine convertible preferred shareholders elected to convert 23,250 of their preferred shares into 2,325,000 shares of common stock.



At September 30, 2005, all issued preferred stock had been converted into common shares.



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 the nine month period ended September 30, 2005 recorded expense
associated with the issuance of the options of $57,792 as Options Issued for Services Rendered and $1,732,698, as Stock-Based Compensation respectively. We anticipate granting options in the future to attract and retain
independent board members, employees and others.



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



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



Development Stage
Enterprise. We are a development stage company as defined in Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises. We are devoting substantially all of
our present efforts to our formation, fundraising, and product development and approval. Our planned principal operations of selling our pharmaceutical products have not yet commenced. For the period from March 11, 1998 (inception) through
September 30, 2005, we have accumulated a deficit of $27,015,760. 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.



22



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##### Table of Contents

Results of Operations



Nine Months Ended September 30, 2005 and 2004



Our activities during the nine month period ended September 30, 2005 consisted almost entirely of research and development and general corporate
activities to support our FDA Phase l clinical trial. Research and development expenses increased 30% from $1,745,463 to $2,266,631 for the nine months ended September 30, 2004 and 2005 respectively. We began our Phase l FDA clinical trial with
our first patient in December 2003. The trial has continued through 2005. In addition, we increased our pre-clinical activity in exploring other applications for our drug candidate Cardio Vascu-Growth in the areas of stroke recovery, wound healing,
Peripheral Vascular Disease, chronic back pain, and intestinal ischemia. Our total increase in pre-clinical and clinical trial costs for the nine months ended September 30, 2005 was $610,000. We also increased the size of our scientific staff
and increased our commitment to our FDA regulatory consultants resulting in increased personnel costs of $332,000.



|                             |  |                                 |           |      |   |           |  |         |         |  |    |  
|---------------------------- |  | ------------------------------- | --------- | ---- | - | --------- |  | ------- | ------- |  | -- | -
|                             |  | Nine Months Ended September 30, |          
|                             |  | 2004                            |           | 2005 |   | $ Change  |  | %Change |        
|Research and development (a) |  | $                               | 1,745,463 |      | $ | 2,266,631 |  | $       | 521,168 |  | 30 | %
|                             |  |                                 |           |      |   |           |  |         |         |  |    |  

---

|(a) | Includes $101,582 and $415,337 paid to Phage Biotechnology Corporation
|--- | ----------------------------------------------------------------------



General and administrative expenses increased 324% from $1,551,459 to $6,577,642 for the nine months ended September 30, 2004 and 2005, respectively.
The increase resulted from an increase in our administrative costs in building necessary personnel and administrative infrastructure of $642,000. Marketing increased $1,308,000 and travel increased $200,000 as we became more active in our marketing
and corporate development activities, and $258,000 of expenses relating to our company co-sponsoring the International Association of Regenerative Medicine Conference. Additionally, we incurred $2,035,000 of expenses related to being a public
company and insurance $128,000.



During the period ended
September 30, 2005 the company expensed $1,732,698 of stock options issued to directors and employees.



|                               |  |                                 |           |      |   |           |  |         |           |  |     |  
|------------------------------ |  | ------------------------------- | --------- | ---- | - | --------- |  | ------- | --------- |  | --- | -
|                               |  | Nine Months Ended September 30, |          
|                               |  | 2004                            |           | 2005 |   | $ Change  |  | %Change |          
|General and administrative (b) |  | $                               | 1,551,459 |      | $ | 6,577,642 |  | $       | 5,026,183 |  | 324 | %
|                               |  |                                 |           |      |   |           |  |         |           |  |     |  

---

|(b) | Includes $137,162 and $145,507 paid to Phage Biotechnology Corporation
|--- | ----------------------------------------------------------------------



Interest income increased to $209,255 from $15,735 for the nine months ended September 30, 2005 and 2004, respectively. This is a result of a higher
level of cash and marketable securities available for investment during the first nine months of fiscal 2005.



|                |  |                                 |        |      |   |          |  |         |         |  |       |  
|--------------- |  | ------------------------------- | ------ | ---- | - | -------- |  | ------- | ------- |  | ----- | -
|                |  | Nine Months Ended September 30, |       
|                |  | 2004                            |        | 2005 |   | $ Change |  | %Change |        
|Interest income |  | $                               | 15,735 |      | $ | 209,255  |  | $       | 193,520 |  | 1,230 | %
|                |  |                                 |        |      |   |          |  |         |         |  |       |  



23



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##### Table of Contents

Interest expense increased 34% to $1,589,485 from $1,188,985 for the nine months ended September 30,
2005 and 2004, respectively. Of this amount, $712,461 was related to charging off the entire amount of unamortized deferred debt financing costs and $710,001 of unamortized debt discount, both of which were non-cash expenses.



|                 |  |                                 |           |      |   |           |  |         |         |  |    |  
|---------------- |  | ------------------------------- | --------- | ---- | - | --------- |  | ------- | ------- |  | -- | -
|                 |  | Nine Months Ended September 30, |          
|                 |  | 2004                            |           | 2005 |   | $ Change  |  | %Change |        
|Interest expense |  | $                               | 1,188,985 |      | $ | 1,589,485 |  | $       | 400,500 |  | 34 | %
|                 |  |                                 |           |      |   |           |  |         |         |  |    |  



Three Months Ended
September 30, 2005 and 2004



Our activities
during the three month period ended September 30, 2005 consisted almost entirely of research and development and general corporate activities to support our FDA Phase l clinical trial. Research and development expenses increased 6% from
$1,010,451 to $1,071,517 for the three months ended September 30, 2004 and 2005 respectively. We have increased our pre-clinical activity in exploring other applications for our drug candidate Cardio Vascu-Growth in the areas of stroke
recovery, wound healing, Peripheral Vascular Disease, chronic back pain, and intestinal ischemia.



|                             |  |                                  |           |      |   |           |  |         |        |  |   |  
|---------------------------- |  | -------------------------------- | --------- | ---- | - | --------- |  | ------- | ------ |  | - | -
|                             |  | Three Months Ended September 30, |          
|                             |  | 2004                             |           | 2005 |   | $ Change  |  | %Change |       
|Research and development (c) |  | $                                | 1,010,451 |      | $ | 1,071,517 |  | $       | 61,066 |  | 6 | %
|                             |  |                                  |           |      |   |           |  |         |        |  |   |  

---

|(c) | Includes $78,541 and $191,106 paid to Phage Biotechnology Corporation
|--- | ---------------------------------------------------------------------



General and administrative expenses increased 374% from $709,902 to $3,363,393 for the three months ended September 30, 2005 and 2004, respectively.
The increase resulted from an increase in our administrative costs in building necessary personnel and administrative infrastructure of $198,000. Marketing increased $500,000 and insurance $50,000 as we became more active in our marketing and
corporate development activities. Additionally, we incurred $1,683,000 of expenses related to being a public company.



During the period ended September 30, 2005 the company expensed $1,732,698 of stock options issued to directors and employees.



|                               |  |                                  |         |      |   |           |  |         |           |  |     |  
|------------------------------ |  | -------------------------------- | ------- | ---- | - | --------- |  | ------- | --------- |  | --- | -
|                               |  | Three Months Ended September 30, |        
|                               |  | 2004                             |         | 2005 |   | $ Change  |  | %Change |          
|General and administrative (d) |  | $                                | 709,902 |      | $ | 3,363,393 |  | $       | 2,653,491 |  | 374 | %
|                               |  |                                  |         |      |   |           |  |         |           |  |     |  

---

|(d) | Includes $102,021 and $70,760 paid to Phage Biotechnology Corporation
|--- | ---------------------------------------------------------------------



Interest income increased from $8,036 to $86,001 for the three months ended September 30, 2004 and 2005, respectively. This is a result of a higher
level of cash and marketable securities available for investment during the comparative periods.



|                |  |                                  |       |      |   |          |  |         |        |  |     |  
|--------------- |  | -------------------------------- | ----- | ---- | - | -------- |  | ------- | ------ |  | --- | -
|                |  | Three Months Ended September 30, |      
|                |  | 2004                             |       | 2005 |   | $ Change |  | %Change |       
|Interest income |  | $                                | 8,036 |      | $ | 86,001   |  | $       | 77,965 |  | 970 | %
|                |  |                                  |       |      |   |          |  |         |        |  |     |  



24



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##### Table of Contents

Interest expense decreased 94% for the three months ended September 30, 2005 and 2004, respectively,
due to the conversion of all the convertible notes in March 2005.



|                 |  |                                  |         |      |   |          |  |   |          |   |  |     |  
|---------------- |  | -------------------------------- | ------- | ---- | - | -------- |  | - | -------- | - |  | --- | -
|                 |  | Three Months Ended September 30, |        
|                 |  | 2004                             |         | 2005 |   | $ Change |  |   | %Change  |  
|Interest expense |  | $                                | 629,720 |      | $ | 37,539   |  | $ | (592,181 | ) |  | -94 | %
|                 |  |                                  |         |      |   |          |  |   |          |   |  |     |  



Liquidity and Capital Resources



Sources of Liquidity



Since our inception and through September 30, 2005, we have financed
our operations through the initial public offering of our common stock and the private sale of our capital stock and our convertible notes. Through September 30, 2005, we have received net proceeds of approximately $33,036,946 from the issuance
of shares of common stock, convertible preferred stock and convertible notes payable. The table below summarizes our sales of equity securities and convertible notes through September 30, 2005.



|                                                                                                                                                                       |  |              |           
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----------
|Security                                                                                                                                                               |  | Net Proceeds
|Convertible Preferred Stock converts to common stock at 100/1, non-voting, no dividend                                                                                 |  | $            | 520,400   
|Common Stock                                                                                                                                                           |  |              | 3,904,000 
|                                                                                                                                                                       |  |              |           
|Total net proceeds from stock issuances                                                                                                                                |  |              | 4,424,400 
|                                                                                                                                                                       |  |              |           
|Convertible NotesSeries I                                                                                                                                             |  |              |           
|7% notes payable convertible into common stock at $2 per share or after an initial public offering (IPO) at $2 per share or 50% of
the IPO Price, whichever is lower |  |              | 7,138,793 
|Convertible NotesSeries II                                                                                                                                            |  |              |           
|7% notes payable convertible into common stock at $4 per share or after an IPO at $4 per share or 50% of the IPO Price, whichever is
lower                             |  |              | 4,973,958 
|Convertible NotesSeries IIa                                                                                                                                           |  |              |           
|7% notes payable convertible into common stock at $4 per share or after an IPO at $4 per share or 50% of the IPO Price, whichever is
lower                             |  |              | 753,667   
|                                                                                                                                                                       |  |              |           
|Total net proceeds for issuance of our convertible notes payable                                                                                                       |  |              | 12,836,418
|                                                                                                                                                                       |  |              |           
|Net proceeds from the Initial Public Offering                                                                                                                          |  |              |           
|1,725,000 shares of common stock sold at $10.00 per share net of the Underwriters discount of 7% and non-accountable expenses of
2.75%                                |  |              | 15,693,125
|                                                                                                                                                                       |  |              |           
|Option exercises                                                                                                                                                       |  |              |           
|123,466 stock option exercised                                                                                                                                         |  |              | 83,001    
|                                                                                                                                                                       |  |              |           
|Total net proceeds from financings through September 30, 2005                                                                                                          |  | $            | 33,066,944
|                                                                                                                                                                       |  |              |           



As of
September 30, 2005, we had $10,471,630 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 received notification from $10,341,000 worth of our
convertible note holders of their intent to convert their notes into common stock, and they subsequently converted those notes into common stock. The remaining liability of $20,000 was paid in cash. In May 2005, one of these converted note holders
elected to receive $10,000 cash in lieu of the 5,000 shares issued to him.



25



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##### Table of Contents

Income Taxes



As of September 30, 2005, we had net operating loss carry forwards for federal and state income tax purposes of approximately $19,596,000 and
$21,500,000, which expire through 2020. 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 September 30, 2005, we
had deferred tax assets representing primarily the benefit of net operating loss carry forwards. We did not record a benefit for the deferred tax asset because realization of the benefit was uncertain and, accordingly, a valuation allowance is
provided to offset the deferred tax asset.



Cash Flow



Nine Months ended September 30, 2005 and 2004



For the nine months ended September 30, 2005, our operating activities
consumed cash of $9,183,708, an increase of $6,031,789 over the nine months ended September 30, 2004. Our activity level in 2005 increased dramatically over the level of activity in 2004 in both our research and development activities and our
general and administrative activities because we were able to raise cash through the sale of our common stock. This liquidity allowed us to proceed with the FDA Phase l trial, add needed administrative capability and personnel, resume our marketing
activities, and move forward with preparing the company to be a public company.



Purchase of short term investments consumed $41,234 of cash combined with $68,501 of capital expenditures for property and equipment, resulting in $109,735 of cash consumed in investing activities for the period ended
September 30, 2005, which was a increase of $2,888 over the nine months ended September 30, 2004.



Financing activities generated $15,108,254 of cash during the year ended September 30, 2005, an increase of $7,537,927 over the nine months ended
September 30, 2004. This increase is primarily related to completion of our Initial Public Offering exceeding the proceeds from the sale of convertible notes payable during the nine months ended September 30, 3004 and 2003 respectively.



Funding Requirements



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



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



| |  |  | 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 from operations 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 for selling, general and administrative expenses, and do not expect to need to raise additional funds in the near future for selling, general and administrative expenses. 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. We will need to raise additional funds for our preclinical and clinical activities and our level of
preclinical and clinical activity will be dependent upon the amount of additional funds raised. 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.



26



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##### Table of Contents

Contractual Obligations and Commercial Commitments



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



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



Our major outstanding
contractual obligations are summarized as follows:



In April 2004, we assumed the remainder of a non-cancelable operating lease agreement for office space in Henderson, Nevada, that requires monthly payments of $5,882. The lease expired in October 2005. In May 2004, we paid a deposit of
$5,900. Building operating expenses are reconciled annually and any increase over the base year is billed pro rata among the buildings tenants. In October 2005, upon the lease expiration we vacated the property and moved into temporary office
space while waiting for the completion of construction of our long-term office facilities for our corporate headquarters in Las Vegas, Nevada.



In October 2005, the company committed to a five-year lease for its corporate headquarters in Las Vegas, Nevada. The commencement date is
contingent upon the completion of the tenant improvements. We anticipate occupying the property in February 2006. The five year lease obligation is approximately $1,076,000.



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



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



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



On October 24, 2001, we entered into a service
agreement with a clinical research organization, TouchStone Research, Inc. (TouchStone, formerly Clinical Cardiovascular Research, L.L.C.). TouchStone is dedicated to the clinical development of investigational drugs and
devices for cardiovascular indications. TouchStone will assist us with the FDA approval process for its drug. TouchStones fees are based on negotiated rates for services plus expenses. During the nine month periods ended September 30,
2005 and 2004 we expended approximately $688,409 and $822,307 for these services, respectively.



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



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



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



On May 4, 2005, the Company entered into a marketing agreement with JDM Consulting to implement a wide-ranging marketing and
shareholder awareness program. Service for the nine months period ended September 30, 2004 (unaudited), 2005 (unaudited) and the period from March 11, 1998 (inception) to September 30, 2005 (unaudited), were $0, $1,133,000 and
$1,113,,000 respectively. As of September 30, 2005 the agreement is still ongoing.



On August 8, 2005, the Company entered into a service agreement with bioRASI, LLC. for the purpose of assisting in our human clinical
trials in Russia. bioRASI is the strategic initiative of the Russian Academy of Sciences (RAS) and is responsible for commercializing RAS bio-sciences and clinical resources. bioRASI is a contract research organization (CRO) providing services
for its collaborative R&D clients in the areas of drug development, biologicals, and medical devices. Service fees for the period ended September 30, 2005 was $104,082.



27



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##### Table of Contents

Off-Balance Sheet Transactions



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



Recently Issued Accounting Pronouncements



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



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



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



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



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



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



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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 $27,015,760 as of September 30, 2005. We are not currently profitable. Even if we succeed in developing and commercializing Cardio
Vascu-Grow, we expect to incur substantial losses
for the foreseeable future and may never become profitable. We also expect to incur significant capital expenditures and anticipate that our expenses will increase substantially in the foreseeable future as we:



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



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



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



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



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



At September 30, 2005, we
had $10,471,630 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 2006 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 two 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; and
| | - |  | -------------------------------------------------------------------------------



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



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



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



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



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



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



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, and as a wound healing agent, 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. A second Phase I trial has been authorized by the FDA for diabetic wound healing. 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.



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



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



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 24.90% of the voting control of our company, was engaged
in the securities, investment banking and venture capital business for approximately 30 years ending in 1998. During that time, Mr. Montano or the firms he controlled were the subject of arbitrations, fines, disciplinary actions and sanctions
imposed by the SEC and the National Association of Securities Dealers, Inc. (NASD), including a cease and desist order the SEC entered in 1992. The order required that Mr. Montano permanently cease and desist from continuing and causing any
further material misrepresentations and/or omitting to state material facts in the offer or sale of a security. All administrative action was concluded on those matters over five years ago based on events occurring several years before.



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



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



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



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



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



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



We have a number of relationships with Phage, an affiliated company, which may create conflicts of interest. Pursuant to a joint ownership and license agreement with Phage, subject to certain contractual commitments,
we own a one-half undivided interest in the U.S. and foreign patents and patent applications necessary to develop and commercialize Cardio Vascu-Grow. We entered this agreement to protect our ability to obtain patent protection on processes developed in conjunction with Phage which processes might be useful to Phage in other unrelated products.
Pursuant to that agreement, we also have an exclusive license to develop and commercialize Cardio Vascu-Grow.
Phage provides technical development services to us, and currently is our sole supplier of Cardio Vascu-Grow.
In addition to Cardio Vascu-Grow, Phage is currently in the process of developing other drug products that are
not expected to have any relation to our proposed product or business. Notwithstanding the foregoing, nothing in our agreements precludes Phage from participating in activities competitive to ours.



Daniel C. Montano owns beneficially approximately 24.90% of our outstanding
voting stock. Mr. Montano also owns 19.53% of the outstanding voting stock of Phage. He is the Chairman of the Board and Chief Executive Officer of both companies. In addition, we own 4.56% of Phages outstanding common stock.
Additionally, certain of our officers and directors (including Daniel C. Montano, Alexander G. Montano, Grant Gordon, Joong Ki Baik and Thomas Ingram) own or hold voting control over an aggregate of 41.20% of Phages outstanding common stock;
however, they have no agreement to vote together.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Sales of a substantial number of shares of our common stock in the public market could harm the market price of our common stock. A significant number of
shares in excess of 10,000,000 shares of our common stock are available for resale under Rule 144. In addition, there will be approximately 69,498,300 and 30,630,000 additional shares of common stock eligible for sale beginning February 11,
2006 and August 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 81.36% of our outstanding common stock. These stockholders have signed an agreement to act together, and will be able to control our management and affairs in all matters requiring stockholder
approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of our
common stock. This concentration of ownership may not be in the best interest of our other stockholders.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Evaluation of Disclosure Controls and Procedures



Management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of our 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 our 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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##### Table of Contents

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:



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



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SIGNATURES



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



Date: November 4,
2005



CARDIOVASCULAR BIOTHERAPEUTICS, INC.By:

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




38