Forward-Looking Statements

This Form 10-K, including the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements regarding our future performance. All forward-looking information is inherently uncertain and actual results may differ materially from assumptions, estimates or expectations reflected or contained in the forward-looking statements as a result of various factors, including those set forth in this annual report on Form 10-K for the year ended December 31, 2008. Forward-looking statements convey our current expectations or forecasts of future events. All statements contained in this Form 10-K other than statements of historical fact are forward-looking statements. Forward-looking statements include statements regarding our future financial position, business strategy, budgets, projected costs, plans and objectives of management for future operations. The words "may," "continue," "estimate," "intend," "plan," "will," "believe," "project," "expect," "anticipate" and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. With respect to the forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements speak only as of the date of this Form 10-K. Unless required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise.

We are a medical technology company that develops and manufactures an innovative device designed to administer high dose chemotherapy and other therapeutic agents directly to diseased organs or regions of the body. We are currently focusing on the development of a single product, the Delcath PHP System™, for the treatment of tumors of the liver. Based on human clinical data, we believe that the Delcath PHP System™ allows physicians to deliver significantly higher chemotherapy doses to the liver than could be administered by conventional intravenous delivery.

The Delcath PHP System™ is a disposable kit consisting of various catheters, filters, and a tubing circuit used during cancer treatment to isolate the liver from the patient's general circulatory system. Our system allows for ultra-high doses of chemotherapy agents to be directed at a patient's liver while at the same time limiting the exposure of healthy tissue and organs to the harmful effects of those chemotherapeutic agents. By providing higher dosing of chemotherapy agents than would otherwise be possible through conventional chemotherapy, we believe that treatment with the Delcath PHP System™ is more effective than conventional treatment at killing cancer cells and preventing new cancer cell formation.

In 2006 we began a Phase III clinical trial to support a pre-market approval application for use of the Delcath PHP System™ with melphalan, a chemotherapy agent, for the treatment of metastatic melanoma that has spread to the liver. The trial is being conducted under the Food and Drug Administration's ("FDA") Special Protocol Assessment ("SPA"). Patients enrolled in this study currently receive treatment at the National Cancer Institute, or NCI, which serves as the coordinating center for this multi-center trial or at one of the other participating centers. The trial is currently approved for expansion to a maximum of 15 centers. In April 2008, the Institutional Review Board of the University of Maryland Medical Center agreed to participate in our Phase III study. In June 2008, St. Luke's Cancer Center, the Albany Medical Center, the Atlantic Melanoma Center of Atlantic Health and the University of Texas Medical Branch joined this clinical trial. In the third quarter, Swedish Medical Center of Colorado, John Wayne Cancer Institute, Providence Health Systems, and Moffitt Cancer Center agreed to join the clinical trial. In the fourth quarter of 2008, University of Pittsburgh Medical Center agreed to join the trial which brings the total to eleven centers. Each of the center's Institutional Review Board ("IRB") has approved our treatment protocol. Critical to expediting completion of this trial, the Western International Review Board, or WIRB, has also approved our protocol. The WIRB, which provides review services for more than 100 institutions (academic centers, hospitals, networks and in-house biotech research) in all 50 states and internationally, will help accelerate the internal review process at a number of the hospitals currently participating in the study. As of December 31, 2008 we have enrolled a total of 47 patients of the expected 92-patient trial. We expect to complete patient enrollment in this study in 2009. Once the FDA grants approval, we plan to conduct additional pre-clinical and clinical trials on the use of the Delcath PHP System™ with other chemotherapy agents used to treat cancer in the liver and seek additional FDA pre-market approvals.

In 2004 we began a multi-arm Phase II clinical trial for the use of the Delcath PHP System™ with melphalan in the treatment of hepatocellular carcinomas as well as neuroendocrine and adenocarcenoma cancers that have spread to the liver. In 2007 an additional arm was added to the Phase II trial to treat patients with metastatic melanomas that have spread to the liver who have received prior surgical isolated hepatic perfusion. Based on promising initial clinical results, we plan to focus our efforts on enrolling patients for the treatment of metastatic neuroendocrine cancer. We have currently enrolled 23 of the 25 patients required for the neuroendocrine arm of the trial and we anticipate that we will complete patient enrollment in this arm of the study in 2009.

As indicated above, the Company is focusing on enrolling patients in the neuroendocrine arm of the Phase II study. The other two arms treating colorectal cancer and primary liver cancer will be refocused so as to optimize the progress of those arms of the trial. The Company has entered into a dialogue with the FDA concerning a clinical trial that will focus on the effectiveness of the Delcath PHP System™ in administering high-dose doxorubicin as compared with standard systemic treatment with sorafenib for the treatment of primary liver cancer. In September 2008, the Company received a conditional approval from the FDA to begin working on that trial.

The successful development of the Delcath PHP System™ is highly uncertain, and development costs and timelines can vary significantly and are difficult to accurately predict. Various statutes and regulations also impact the manufacturing, safety, labeling, storage, record keeping and marketing of our system. The lengthy process of completing clinical trials, seeking FDA approval and subsequent compliance with applicable statutes and regulations require the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals could materially, adversely affect our business. To date, we have not received approval for the sale of our system in any market and, therefore, have not generated any revenues. The Delcath PHP System™ has not yet been approved by the FDA and may not be marketed in the United States without FDA pre-market approval.

During the next twelve months we plan to hire additional personnel to support the development of the Delcath PHP System™. In June 2008 and July 2008 we hired two senior executives. We hired a Chief Medical Officer to oversee the expansion of clinical activity, moving us towards the conclusion of our first Phase III clinical trial. We also hired a Senior Vice President for Regulatory Affairs and Quality Systems, a position newly created to manage the extensive FDA process. Our expenses generally include costs for clinical studies, securing patents, regulatory activities, manufacturing, personnel, rent for our facilities, and general corporate and working capital, including general and administrative expenses. Because we have no FDA-approved product and no commercial sales, we will continue to be dependent upon existing cash, the sale of equity or debt securities, or establishing a strategic alliance with appropriate partners to fund future activities. We cannot be assured that the pace of patient enrollment will meet our projections, that we will obtain FDA approval for our Delcath PHP System™, that we will have, or could raise, sufficient financial resources to sustain our operations pending FDA approval, or that, if and when the required approvals are obtained, there will be a market for any of our products.

The Company's expenditures are highly variable and are dependent upon the number and pace of patients enrolled in our clinical trials. We expect that the amount of capital required for our trials will increase over the coming twelve months due to the increased number of patients enrolled at newly added clinical trial centers. We believe that we have sufficient capital for operations through 2009 and to substantially advance our ongoing Phase III trial.

We are a development stage company, and since our inception we have raised approximately $52.7 million (net of fundraising expenses). We have financed our operations primarily through public and private placements of equity securities. We have incurred net losses since we were founded and we expect to continue to incur significant and increasing net losses over the coming years.

Liquidity and Capital Resources

Our future results are subject to substantial risks and uncertainties. We have operated at a loss for our entire history and we anticipate that losses will continue over the coming years. There can be no assurance that we will ever generate significant revenues or achieve profitability. We expect to use cash, cash equivalents and investment proceeds to fund our operating activities. Our future liquidity and capital requirements will depend on numerous factors, including the progress of our research and product development programs, including our ongoing Phase II and Phase III clinical trials; the timing and costs of making various United States and foreign regulatory filings, obtaining approvals and complying with regulations; the timing and effectiveness of product commercialization activities, including marketing arrangements overseas; the timing and costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; and the effect of competing technological and market developments. We continue to move forward aggressively, most notably by adding new sites to our ongoing clinical trials and increasing our efforts to enroll additional patients in these trials. As we seek FDA approval and get our product to market we expect that our capital expenditures will increase significantly.

At December 31, 2008, cash and cash equivalents totaled $10,787,137, as compared to $7,886,937 at December 31, 2007. Nearly all of our available funds are currently invested in money market funds and certificates of deposit, which are reflected in our financial statements as cash and cash equivalents. At December 31, 2007, in addition to cash and cash equivalents totaling $7,886,937 we had $9,878,700 invested in treasury bills which were listed separately from cash and cash equivalents in our financial statements. At December 31, 2007, treasury bills plus cash and cash equivalents had a combined value of $17,765,637.

During the twelve months ended December 31, 2008, we used $6,723,277 of cash in our operating activities. This amount compares to $5,569,197 used in our operating activities during the comparable twelve month period ended December 31, 2007. The increase of $1,154,080, or 20.7%, is primarily due to accelerated clinical development costs relating to all facets of the Delcath PHP System™. We expect that our cash allocated to operating activities will increase significantly as we aggressively move toward the full enrollment and completion of our first Phase III clinical trial, and continue to navigate the extensive FDA approval process. We believe we have sufficient capital to fund our current clinical trials through 2009.

At December 31, 2008, the Company's accumulated deficit was approximately $47.3 million. Because our business does not generate any positive cash flow from operating activities, we will likely need to raise additional capital to develop our product beyond the current clinical trials or to fund development efforts relating to new products. We anticipate that we could raise additional capital in the event that we find it in our best interest to do so. We anticipate raising such additional capital by either borrowing money, selling shares of our capital stock, or entering into strategic alliances with appropriate partners. To the extent additional capital is not available when we need it, we may be forced to abandon some or all of our development and commercialization efforts, which would have a material adverse effect on the prospects of our business. Further, our assumptions relating to our cash requirements may differ materially from those planned because of a number of factors, including significant unforeseen delays in the regulatory approval process, changes in the focus and direction of our clinical trials and costs related to commercializing our product.

We have funded our operations through a combination of private placements of our securities and through the proceeds of our public offerings in 2000 and 2003 along with our registered direct offering in 2007. Please see the detailed discussion of our various sales of securities described in Note 3.

Contractual Obligations, Commercial Commitments and Off-Balance Sheet
Arrangements

We are obligated to make future payments under various contracts such as
long-term research and development agreement obligations and lease agreements.
The following table provides a summary of our significant contractual
obligations at December 31, 2008 (in millions):

                                          Payments Due by Period
                           Total     2009      2010      2011      2012     2013
   Operating Activities:
   Research Activities   $     3.0 $     1.0 $     1.0 $     1.0 $       - $     -
   Operating Leases            0.3       0.2       0.1         -         -       -

We have an operating lease for office space that will expire on July 30, 2010, with a rent obligation of $221,000 per annum.

Our five year CRADA for the development of the Delcath PHP System™ with the NCI expired on December 14, 2006 and has been extended for an additional five years to December 14, 2011. The principal goal of the CRADA is to continue the development of a novel form of regional cancer therapy by designing clinical protocols utilizing the Delcath PHP System™ to regionally deliver chemotherapeutics to patients with unresectable malignancies confined to an organ or region of the body. Under the five year extension, we will pay $1,000,000 per year for clinical support. These funds are payable in quarterly amounts of $250,000, and will be used for material support of the CRADA (including equipment, supplies, travel, and other related CRADA support), as well as for support of existing or new scientific or clinical staff to be hired by NCI who are to perform work under the CRADA.

Future Capital Needs; Additional Future Funding

Our future results are subject to substantial risks and uncertainties. We have operated at a loss for our entire history and there can be no assurance that we will ever achieve consistent profitability. We believe that our capital resources are adequate to fund operations for the next twelve months, but anticipate that we will require additional working capital to continue our operations after the year ended December 31, 2009. There can be no assurance that such working capital will be available on acceptable terms, if at all.

Results of Operations for the Year Ended December 31, 2008; Comparisons of Results of the Years Ended December 31, 2007 and 2006

We have operated at a loss for our entire history. We had a net loss for the twelve months ended December 31, 2008, of $6,864,885, which is $3,201,379, or 87.4%, more than the net loss from continuing operations for the same period in 2007. This increase is primarily due to increased research and development costs due to an acceleration of patient enrollment as discussed below. Additionally, the warrants issued in 2007 as part of our sale of common stock are considered to be derivatives and are subject to valuation and adjustment on a quarterly basis (see item 7A, below for a complete description). This mark-to-market adjustment of the warrant valuation resulted in the recording of $1,103,682 in derivative instrument income for the year ended December 31, 2008; a $1,613,318 decrease from the $2,717,000 of derivative instrument income recorded in the year ended December 31, 2007. This fluctuation accounts for approximately fifty percent of the difference in net loss between 2008 and 2007.

We had a net loss for the twelve months ended December 31, 2007, of $3,663,506, which is $7,288,099, or 66.6%, less than the net loss from continuing operations for the same period in 2006. This substantial decrease is primarily due to the resolution of various legal matters that had been instituted in 2006, and their related extraordinary costs which were incurred in 2006. There were, however, additional expenses relating to a five-year extension to the CRADA with the NCI that initially expired in December 2006. This extension was necessary for continuing and expanding the collaboration between the Company and the NCI, but will result in greater costs to the Company. The agreement with the NCI required that the annual payments to them be increased five-fold from the previous agreement. Additionally, the warrants that were issued in 2007 as part of the Company's sale of common stock and warrants are considered to be derivatives and are subject to valuation and adjustment on a quarterly basis. This resulted in the recording of derivative instrument income for the year of $2,717,000 which substantially reduced the net loss from continuing operations.

General and Administrative Expenses

General and administrative expenses increased by less than 1% from $2,671,782 during the twelve months ended December 31, 2007, to $2,687,688 for the twelve months ended December 31, 2008. An increase in fees paid to Board of Director members as well as an increase in insurance related costs during 2008 was offset primarily by a reduction of payroll related expenses charged to general and administrative which accounted for slight increase in the expense during fiscal year 2008.

General and administrative expenses decreased by 70.3% from $8,980,424 during the twelve months ended December 31, 2006, to $2,671,782 for the twelve months ended December 31, 2007. While legal fees incurred during 2007 were substantially less than those incurred in 2006 and would have resulted in a greater reduction in period-to-period expenses due to the resolution of various legal matters, additional charges to general and administrative expenses were incurred in 2007 by share-based compensation for options granted to new members of the Board of Directors, options granted to the President and Chief Executive Officer, and options granted to newly hired management employees. Further, the cashless exercise of options by outgoing members of the Board of Directors resulted in additional charges to general and administrative expenses during 2007.

Research and Development Expenses

During the twelve months ended December 31, 2008, we incurred $5,378,335 in research and development costs, which is a 26.8% increase as compared to $4,241,517 of research and development costs we incurred during 2007. This increase is primarily due to the acceleration of enrollment in our Phase III trial. With the addition of several trial sites throughout 2008, we have seen a marked increase in the rate of patient enrollment and treatment which has had a noticeable impact on our research and development expenses.

During the twelve months ended December 31, 2007, we incurred $4,241,517 in research and development costs, which is a 56% increase as compared to $2,718,084 of research and development costs during 2006. This change was primarily due to additional expenses with the NCI, as well as accelerated clinical development costs relating to all facets of the Delcath PHP System™ which required greater expense but will hasten the progress toward final approval. In addition, the Company allocated share-based compensation for stock and options awarded to personnel involved with research and development related initiatives.

Interest Income

Interest income generated during 2008 and 2007 is from our money market accounts and treasury bills. During the twelve months ended December 31, 2008, we had interest income of $299,956, as compared to interest income of $532,793 for the same period in 2007, a 43.7% change. This decrease is primarily due to a reduced cash position in 2008 from that in 2007, as well as the overall market conditions which yielded a lower percentage return on our investments.

During the twelve months ended December 31, 2007, we had interest income of $532,793, as compared to interest income of $620,403 for the same period in 2006, a 14% change. This decrease is primarily due to a reduced cash position in 2007 from that in 2006. The net proceeds from the sale of the Company's common stock and warrants in September 2007 were received on the last day of the third quarter of fiscal 2007 and therefore did not have a material impact on annual interest income.

Application of Critical Accounting Policies

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Certain accounting policies have a significant impact on amounts reported in the financial statements. The notes to financial statements included in Item 8 contain a summary of the significant accounting policies and methods used in the preparation of our financial statements. We are still in the development stage and have no revenues, trade receivables, inventories, or significant fixed or intangible assets, and therefore have very limited opportunities to choose among accounting policies or methods. In many cases, we must use an accounting policy or method because it is the only policy or method permitted under GAAP.

Additionally, we devote substantial resources to clinical trials and other research and development activities relating to obtaining FDA and other approvals for the Delcath PHP System™, the cost of which is required to be charged to expense as incurred. This further limits our choice of accounting policies and methods. Similarly, management believes there are very limited circumstances in which our financial statement estimates are significant or critical.

We consider the valuation allowance for the deferred tax assets to be a significant accounting estimate. In applying SFAS No. 109, "Accounting for Income Taxes," management estimates future taxable income from operations and tax planning strategies in determining if it is more likely than not that we will realize the benefits of our deferred tax assets. Management believes the Company does not have any uncertain tax positions as defined under FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109."

The Company has adopted the provisions of SFAS 123R. SFAS 123R establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS 123R, share-based compensation is measured at the grant date, based upon the fair value of the award, and is recognized as an expense over the option holders' requisite service period (generally the vesting period of the equity grant). Effective January 1, 2006, the Company adopted the modified prospective approach and, accordingly, prior period amounts have not been restated. Under this approach, the Company is required to record compensation cost for all share-based payments granted after the date of adoption based upon the grant date fair value, estimated in accordance with the provisions of SFAS 123R, and for the unvested portion of all share-based payments previously granted that remain outstanding based on the grant date fair value, estimated in accordance with the original provisions of SFAS 123. The Company has expensed its share-based compensation for share-based payments granted after January 1, 2006 under the ratable method, which treats each vesting tranche as if it were an individual grant.

On January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances. The adoption of SFAS No. 157 did not have a material effect on the carrying values of the Company's assets.

SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2 of the hierarchy)
and the reporting entity's own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability which are typically based on an entity's own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.