Forward-Looking Statements

Except for the historical information presented in this document, the matters discussed in this Form 10-Q for the three months ending March 31, 2009, this report contains forward-looking statements. Such forward-looking statements include statements regarding, among other things, (a) our projected sales and profitability, (b) our growth strategies, (c) anticipated trends in our industry, (d) our future financing plans, and (e) our anticipated needs for working capital. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend," or "project" or the negative of these words or other variations on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business," "Properties," as well as in this report generally.

The following discussion and analysis is based upon our interim unaudited consolidated financial statements, which have been prepared in accordance with Form 10-Q instructions and accounting principles generally accepted in the United States of America, and should be read in conjunction with those financial statements and related notes. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Overview

We are a development stage biotechnology company focusing on the development of a cell-based bioartficial liver system, HepaMate™, as a potentially lifesaving treatment for liver failure patients. The technology has previously been successfully tested in a clinical phase I study. As an extracorporeal cell-based bioartificial liver system, HepaMate™ is designed to combine blood detoxification with liver cell therapy to provide whole liver function in patients with the most severe forms of liver failure.

On October 3, 2008, in order to enhance and strengthen our pre-existing bioartificial liver development program, we acquired HepatAssist Related Assets from Arbios Systems, Inc. ("Arbios"), which assets included over 12 patents and patent licenses; miscellaneous scientific equipment; FDA Investigative New Drug (IND) application, including orphan drug and fast track designation; Phase I and Phase II/III clinical protocols and clinical data; and standard operating procedures for manufacturing and quality control. The acquired assets relate to a bioartificial liver device formerly known as "HepatAssist." HepatAssist passed clinical Phase I studies and was evaluated in the largest-ever Phase II/III clinical study (prospective, randomized, multicenter, controlled trial involving over 170 patients) to test the safety and efficacy of a bioartificial liver assist device. The clinical data was published in 2004 and demonstrated a significant survival advantage for bioartificial liver device treated patients in fulminant and sub-fulminant hepatic failure compared with the patient control group receiving standard-of-care treatment.

We are working towards optimizing the former HepatAssist bioartificial liver device for utilization in a new, clinical Phase II/III study followed, if warranted, by commercialization upon final regulatory approval.

Previously we focused our research, development and commercialization efforts on the development of a porcine stem cell line, and subclones thereof, which we refer to as the "PICM-19 cell line" for use in a bioartificial liver and in-vitro toxicology testing, and on the commercialization of a chicken cell line, and subclones thereof, which we refer to as the "PBS-1 cell line." The PBS-1 cell line was developed for potential use in cell-based vaccine production and was exclusively licensed from Michigan State University in June 2006. In January 2009, we provided written notice to MSU terminating the license agreement effective April 24, 2009.

The PICM-19 cell line was developed for potential use in a bioartificial liver device and in-vitro toxicology platforms and was exclusively licensed from USDA Agricultural Research Service on November 2007. In September 2008 the license was amended for the expanded field-of-use as in-vitro infection host systems for viral and protozoan agents such as malaria.

On May 23, 2008, we completed a private placement of securities for an aggregate purchase price of $4,530,800. Simultaneously with the completion of the private placement, we converted our outstanding note payable of $877,800 into equity and the note holder agreed to accept $150,000 in full payment and satisfaction of the accrued and unpaid interest on the loan in the amount of $249,945.

Asset Purchase Agreement

On October 3, 2008, we entered into and consummated the transactions contemplated by a purchase agreement with Arbios (the "Asset Purchase Agreement"). In order to enhance and strengthen our current PICM-19 porcine liver cell line based bioartifical liver technology, we purchased certain specified assets of Arbios relating to the pig cell based liver device technology that was being developed by Arbios.

The purchase price of the acquired assets consisted of: $450,000 in cash, of which $250,000 was paid at the closing and $200,000 has been deferred for up to 18 months; a Series D Stock Purchase Warrant to purchase up to 750,000 shares of our common stock at an exercise price of $0.35 per share for a period of 5 years (the "Series D Warrant"). The deferred $200,000 payment ("Deferred Cash Purchase Price") is due and payable on the earlier of (i) the date on which we consummate one or more debt or equity financings in which the gross proceeds received in the aggregate equal or exceed $4,000,000, or (ii) the eighteen month anniversary of the closing date.

The issuance of the Series D Warrant was deemed to be exempt from registration under the Securities Act of 1933, as amended (the "Securities Act") in reliance on Section 4(2) of the Securities Act in that the issuance did not involve a public offering. We granted Arbios certain registration rights, as more fully set forth in the Registration Rights Agreement dated October 3, 2008 between us and Arbios, with respect to the shares of our common stock issuable upon exercise of the Series D warrant. Pursuant to the Registration Rights Agreement, if we have not filed with, and have declared effective by, the Securities and Exchange Commission, a registration statement within nine months of October 3, 2008, Arbios, to the extent applicable, will be entitled to utilize the cashless exercise provisions of the Series D Warrant. Because of our subsequent repurchase of the Series D Warrant, our obligation to register the underlying shares has terminated. Please refer to "Warrant Repurchase Agreement" below.

Warrants

As of March 31, 2009, the following warrants were outstanding: 12,989,830 Series C warrants with an exercise price of $0.34 per share exercisable into common stock until May 23, 2010; 750,000 Series D warrants with an exercise price of $0.35 per share exercisable into common stock until October 3, 2013; and 737,000 warrants with an exercise price of $1.50 per share exercisable into common stock until May 11, 2012.

Warrant Repurchase Agreement

On April 22, 2009, we consummated the transactions contemplated by a Warrant Repurchase Agreement between us and Arbios.

Pursuant to the Repurchase Agreement, we repurchased the Series D stock purchase warrants previously issued to Arbios as partial consideration pursuant to the Asset Purchase Agreement. In consideration thereof we accelerated payment of the Deferred Cash Purchase Price to April 22, 2009. The Series D Warrants entitled the holder to purchase up to 750,000 shares of our common stock at a price of $0.35 per share.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosures. We review our estimates on an ongoing basis.

We consider an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made; and changes in the estimate or different estimates that could have been made could have a material impact on our results of operations or financial condition. While our significant accounting policies are described in more detail in the notes to our financial statements included in our annual Form 10-K filed with the Securities and Exchange Commission, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements:

Research and Development Expenses

Research and development expenses represent costs incurred to develop our technology, as well as purchased in-process research and development programs. Until October 2008, the majority of costs incurred were pursuant to our CRADA with the USDA's Agricultural Research Service and pursuant to our sponsored research agreement with MSU. Third-party costs paid by us relating to these agreements include salaries and benefits for research and development personnel, allocated overhead and facility occupancy costs, contract services and other applicable costs. In addition, costs may include third party laboratory work. We charge all research and development expenses to operations as they are incurred, including internal costs, costs paid to sponsoring organizations, and purchased in-process research and development programs. We do not track research and development expenses by project.

General and Administrative Expenses

Our general and administrative expenses consist primarily of personnel related costs, legal costs, including intellectual property that is expensed when incurred, investor relations costs, stock based compensation costs, accounting costs, and other professional and administrative costs.

Stock-Based Compensation Expense

On January 1, 2006, we adopted Statement of Financial Accounting Standards No.
123 (revised 2004), "Share-Based Payment," (SFAS 123R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. Our consolidated financial statements reflect the impact of SFAS 123(R) from the date of adoption.

Results of Operations

Operating Expenses

A summary of our operating expense for the three months ended March 31, 2009 and
2008 is as follows:

                                             Three Months Ended
                                                  March 31,             Increase        Percentage
                                             2009          2008        (Decrease)         Change
Expenses
Salary and benefits                        $ 200,048     $ 332,083     $  (132,035 )          (39.8 %)
Research and development                      51,075       127,463         (76,388 )          (59.9 %)
Shareholder and investor relations             2,280         3,955          (1,675 )          (42.4 %)
Administrative and general                    53,966        47,594           6,372             13.4 %
Professional fees- accounting and legal      104,254        22,545          81,709            362.4 %
Director, management and consulting fees      41,708           750          40,958           5461.1 %
Depreciation                                       -         2,607          (2,607 )         (100.0 %)
Total operating expense                    $ 453,331     $ 536,997     $   (83,666 )          (15.6 %)

Salaries and benefits: We incurred salaries and benefits expense of $200,048 for the three-month period ended March 31, 2009, representing a decrease of approximately 40% or $132,035 from the same period in 2008. The majority of the decrease, $115,411, is due to fewer employees as we terminated our research scientists effective November 30, 2008 as a result of the Arbios Systems, Inc. asset acquisition in October 2008 and due our closing of the corporate office in Vancouver British Columbia on August 31, 2008, as we repositioned our strategic direction. The remaining $16,624 decrease is due to a decrease in stock compensation expense as large option grants have been fully expensed.

Research and development: We incurred $51,075 in research and development expenses representing a decrease of $76,388 or 60% primarily due to the cancellation of our purchased research and development program with the USDA effective October 2008. As of March 31, 2009, 29%, or $15,000 of research costs relates to the sponsored research agreement with Michigan State University (MSU), which was cancelled effective April 24, 2009. We had not incurred expenses on this contract since 2007. We cancelled both the USDA and MSU research programs as a result of repositioning our strategic direction as noted. The remaining 71% of research and development expenses for the period ended March 31, 2009 were expenditures for the development of HepaMate.

Shareholder and investor relations: We incurred $2,280 of shareholder and investor relations expense which is $1,675 lower than for the same period in 2008. The decrease represents higher costs during 2008 due to completing a private placement funding in May 2008.

Administrative and general: We incurred $53,966 in administrative and general expenses, which is a net increase of $6,372 or 13% compared to the same period in 2008. The change is comprised of a decrease of $31,662 in facilities and travel expenses due to closing of the corporate office in Vancouver British Columbia on August 31, 2008, offset by an increase of $38,034 for the first time incurrence of license maintenance fees and director and officer insurance.

Professional fees: We incurred a total of $104,254 in professional fees for an increase of $81,709 or 362%, which is comprised of the following: an increase of $25,126 for external accounting fees as these services were primarily performed by the corporate office in Vancouver British Columbia in 2008; an increase of $38,793 in legal fees due additional services needed to support operations and the MSU sponsored research agreement; and a $17,790 increase due to audit and other consulting services.

Director, management and consulting fees: We incurred $41,708 in director, management and consulting expenses versus $750 in the same period last year due to increasing the number of positions on the Board of Directors from three to five beginning in September 2008; increasing the independent Director's fees from $750 to $2,500 on a quarterly basis; and also hiring a Chief Financial Officer, on a contract basis, in February 2009.

Depreciation: Depreciation expense was zero for the period ended March 31, 2009 as all assets were retired compared to the same period in 2008.

Other Income and (expense)

A summary of our other income and expense for the three months ended March 31,
2009 and 2008 is as follows:

                                              Three Months Ended
                                                  March 31,              Increase         Percentage
                                             2009           2008        (Decrease)          Change
Other income and (expenses)
Interest on promissory note                $       -     $  (22,930 )   $   (22,930 )          (100.0 %)
Interest, bank charges and foreign
exchange loss                                   (590 )       (9,177 )        (8,587 )           (93.6 %)
Interest income                               10,540          2,897           7,643             263.8 %
Amortization of discount on notes             (2,349 )     (468,343 )      (465,994 )           (99.5 %)
Amortization of deferred financing costs           -       (210,728 )      (210,728 )          (100.0 %)
Total other expense                        $   7,601     $ (708,281 )   $  (715,882 )          (101.1 %)

Other income and expense decreased due to the conversion of notes payable.

Liquidity and Capital Resources

We had cash and cash equivalents of $2,771,661 and $3,084,155 as of March 31, 2009 and December 31, 2008, respectively. We financed our operations from cash on hand during the three month period ending March 31, 2009.

Net cash flow used in operating activities was $306,875 for the three months ended March 31, 2009, compared to net cash used of $385,979 for the same period in 2008.

We had no net cash provided from financing and investing activities during the periods ended March 31, 2009 and 2008.

The accompanying financial statements have been prepared assuming we will continue as a going concern. We incurred cumulative losses of $19,767,346 from inception through March 31, 2009. Additionally, we have expended a significant amount of cash in developing our technology and operating as a public entity. We expect to continue to incur losses from business operations and we believe our cash and cash equivalents balances, anticipated cash flows from operations, and other external sources of credit will be sufficient to meet our cash requirements through March 2010. Our prospects after March 2010 will depend in large part on our ability to successfully raise capital from external sources to pay for planned expenditures and to fund operations.

At this time, we have no agreements or understandings with any third party regarding any financings.

Related Party Transactions

Director and Management Fees: For the three months ended March 31, 2009, we incurred $10,000 in board fees for our non-employee directors. In addition, we recorded $6,508 as stock compensation expense during this period relating to stock options grants to directors during 2008. There are no management or consulting agreements in effect.

Legal Fees: During the three months ended March 31, 2009, we incurred $35,988 for legal services rendered by a law firm of which one of our non-employee directors is a member.

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Recent Accounting Pronouncements

See Note 2 to the Consolidated Unaudited Interim Financial Statements in this Form 10-Q.