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 June 30, 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 bioartificial 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

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 bioartificial 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.

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.

Warrants

As of June 30, 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; and 737,000 warrants with an exercise price of $1.50 per share exercisable into common stock until May 11, 2012. The Company's warrant purchase prices are subject to adjustment, including if the Company issues any shares of common stock or common stock equivalents for consideration less than the then market price at the date of issuance, subject to a 1% adjustment floor for the 737,000 warrants issued in May 2007. Accordingly, the May 2008 issuance of common stock resulted in a potential adjustment of the 737,000 warrant's exercise price to $1.46 if the warrants are exercised, with an offsetting share adjustment to 757,192 shares.

On July 8, 2009, we filed a registration statement to register the resale of the shares issuable upon the exercise of the Series C Warrants issued in connection with the private placement completed on May 23, 2008. The registration statement was declared effective as of July 17, 2009.

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.

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 expenses for the three and six months ended June
30, 2009 and 2008 are as follows:


                                                        Three Months Ended June 30,
                                                                            Increase
                                                2009           2008        (Decrease)    % Change

Expenses
  Salary and benefits                       $      87,214  $     310,667  $    (223,453)  (72%)
  Research and development                         45,769         81,742        (35,973)  (44%)
  Shareholder and investor relations               12,714        166,760       (154,046)  (92%)
  Administrative and general                       51,171         44,711          6,460    14%
  Professional fees- accounting and legal          57,203         66,260         (9,057)  (14%)
  Director, management and consulting fees         22,561           750          21,811   2908%
  Depreciation                                          -          2,607         (2,607)  (100%)
                                            $     276,632  $     673,497  $    (396,865)  (59%)

                                                            Six Months Ended June 30,
                                                2009           2008       Increase (Decrease) % Change

Expenses
  Salary and benefits                       $     287,262  $     642,750     $    (355,488)    (55%)
  Research and development                         96,844        209,205          (112,361)    (54%)
  Shareholder and investor relations               14,994        170,715          (155,721)    (91%)
  Administrative and general                      105,137         92,305            12,832      14%
  Professional fees- accounting and legal         161,457         88,805            72,652      82%
  Director, management and consulting fees         64,269          1,500            62,769     4185%
  Depreciation                                          -          5,214            (5,214)    (100%)
                                            $     729,963  $    1,210,494    $    (480,531)    (40%)

Salaries and benefits: We incurred salaries and benefits expense of $87,214 for the three-month period ended June 30, 2009 representing a decrease of $223,453 or 72% compared to the same period in 2008. The majority of the decrease, representing $144,871, is due to a decrease in stock compensation expense as certain option grants have been fully expensed. The remaining decrease of $78,582 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 and due to our closing of the corporate office in Vancouver, British Columbia on August 31, 2008 as we repositioned our strategic direction.

We incurred salaries and benefits expense of $287,262 for the six-month period ended June 30, 2009 representing a decrease of $355,488 or 55% compared to the same period in 2008. Approximately 55% of the decrease, or $193,992, 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 to our closing of the corporate office in Vancouver, British Columbia on August 31, 2008 as we repositioned our strategic direction. The remaining 45% of the decrease, or $161,496, is due to a decrease in stock compensation expense as certain option grants have been fully expensed.

Research and development: We incurred $45,769 in research and development expenses for the three month period ended June 30, 2009 representing a decrease of $35,973 or 44% compared to the same period in 2008. This decrease is due primarily to the cancellation of our purchased research and development program with the USDA as of October 2008. The expenses incurred during this period were for the development of HepaMate.

We incurred $96,844 in research and development expenses for the six month period ended June 30, 2009 representing a decrease of $112,361 or 54% compared to the same period in 2008. This decrease is due primarily to the cancellation of our purchased research and development program with the USDA effective October 2008 and the cancellation of our sponsored research agreement with Michigan State University (MSU) effective April 24, 2009. We cancelled both the USDA and MSU research programs as a result of repositioning our strategic direction.

Shareholder and investor relations: We incurred $12,714 of shareholder and investor relations expense for the three-month period ended June 30, 2009 representing a decrease of $154,046 or 92% compared to the same period in 2008. We incurred $14,994 of shareholder and investor relations expense for the six-month period ended June 30, 2009, which is $155,721 or 91% lower than the same period in 2008. Both of these decreases represent higher costs during 2008 due to completing a private placement funding in May 2008.

Administrative and general: We incurred $51,171 in administrative and general expenses for the three-month period ended June 30, 2009 representing an increase of $6,460 or 14% compared to the same period in 2008. The change is comprised of a decrease of $29,763 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 $36,223 for the first time incurrence of license maintenance fees and director and officer insurance.

We incurred $105,137 in administrative and general expenses for the six-month period ended June 30, 2009 representing an increase of $12,832 or 14% compared to the same period in 2008. The change is comprised of a decrease of $61,425 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 $74,257 for the first time incurrence of license maintenance fees and director and officer insurance.

We incurred a total of $161,457 in professional fees for the six month period ended June 30, 2009 for an increase of $72,652 or 82%, which is comprised of the following: an increase of $37,946 for external accounting fees as these services were primarily performed by the corporate office in Vancouver, British Columbia in 2008 and are now outsourced; an increase of $20,409 in legal fees due primarily to legal fees incurred relating to the sponsored research agreement with Michigan State University which was terminated April 24, 2009; and an increase of $14,297 in audit and other consulting services.

Director, management and consulting fees: We incurred a total of $22,561 in director, management and consulting expenses for the three month period ended June 30, 2009 for an increase of $21,811 compared to the same period in 2008. We incurred a total of $64,269 in director, management and consulting expense for the six month period ended June 30, 2009 for an increase of $62,769 compared to the same period in 2008. Both of these increases are attributable to an increase in the number of positions on the Board of Directors from three to five beginning in September 2008, increasing the Director's fees from $750 to $2,500 on a quarterly basis, and also to hiring a Chief Financial Officer, on a contract basis, in February 2009.

Depreciation: Depreciation expense was zero for the three and six month periods ended June 30, 2009 as all assets were retired compared to the same periods in 2008.

Other Income and (Expense)

   A summary of our other income and expense for the three and six months ended
June 30, 2009 and 2008 are as follows:

                                                                   Three Months Ended June 30,
                                                        2009            2008       Increase (Decrease) % Change
Other income and (expense)
  Interest income                                   $       9,036   $       8,569      $        467       5%
  Interest on promissory note                                   -         (18,685)          (18,685)    (100%)
  Interest, bank charges and foreign exchange loss          (362)               4               366     9150%
  Amortization of discount on notes                       (10,524)              -            10,524      100%
  Amortization of deferred financing costs                      -               -                 -       0%
  Change in fair value of warrant liability               378,206               -          (378,206)     100%
Other income and (expense)                          $     376,356   $     (10,112)    $    (386,468)   (3822%)

                                                                    Six Months Ended June 30,
                                                        2009            2008       Increase (Decrease) % Change
Other income and (expense)
  Interest income                                   $      19,576   $      11,466     $       8,110      71%
  Interest on promissory note                                   -         (41,615)          (41,615)    (100%)
  Interest, bank charges and foreign exchange loss          (952)          (9,173)           (8,221)    (90%)
  Amortization of discount on notes                       (12,873)       (468,343)         (455,470)    (97%)
  Amortization of deferred financing costs                      -        (210,728)         (210,728)    (100%)
  Change in fair value of warrant liability               (42,685)              -            42,685      100%
Other income and (expense)                          $     (36,934)  $    (718,393)    $    (681,459)    (95%)

Amortization of discount on notes and deferred financing costs: These accounts decreased due to the conversion of notes payable during the six-month period ended June 30, 2008.

We measure the warrant liability in accordance with SFAS 157. SFAS 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 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). At June 30, 2009, we valued the warrant liability using a Black-Scholes model (Level 3 inputs) containing the following assumptions: volatility 94.88% and 105.19%, risk-free rate 1.64% and 0.56%, and term of 2 years, 10.5 months and 11 months, respectively, for the Warrants and Series C Warrants. Due to this re-measurement, we recorded non-operating income of $378,206 for the three months ended June 30, 2009, which represents a net decrease in the fair value our warrant liability for this period, and non-operating expense of $42,685 for the six month period ended June 30, 2009, which represents a net increase in the fair value of our warrant liability for this period.

Liquidity and Capital Resources

We had cash and cash equivalents of $2,364,126 and $3,084,155 as of June 30, 2009 and December 31, 2008, respectively. We financed our operations from cash on hand during the six month period ending June 30, 2009.

Net cash flow used in operating activities was $520,410 for the six month period ending June 30, 2009, compared to net cash used of $1,104,629 for the same period in 2008.

Net cash used in financing activities was ($200,000) for the six month period ended June 30, 2009 compared to net cash provided from financing activities of $4,530,800 for the same period in 2008. During the six-month period ended June 30, 2009, we repaid contract commitments totaling $200,000. We completed a private placement funding of $4,530,000 for the same period ended June 2008.

We had no net cash provided from investing activities during the periods ended June 30, 2009 and 2008.

The accompanying financial statements have been prepared assuming we will continue as a going concern. We incurred cumulative losses of $18, 156,044 from inception through June 30, 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 December 2010. Our prospects after December 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 and six month periods ended June 30, 2009, we incurred $10,000 (2008: $750) and $20,000 (2008: $1,500), respectively, in board fees for our non-employee directors. In addition, for the three and six month periods ended June 30, 2009, we recorded $6,148 (2008: $820) and $12,656 (2008: $820), respectively, as stock compensation expense relating to stock options grants to directors (refer to Note 9). There are no management or consulting agreements in effect.

Legal Fees: During the three and six months ended June 30, 2009, we incurred $25,175 (2008: $31,375) and $61,163 (2008: $46,425), respectively, for legal services rendered by a law firm of which a non-employee director is a member.

We have no off-balance sheet arrangements.

Recent Accounting Pronouncements

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