Forward-Looking Statements

Except for the historical information presented in this document, the matters discussed in this Form 10-Q for the three and nine months ending September 30, 2009 contain 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 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

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 September 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.

On October 21, 2009, the Company entered into a Warrant Exercise or Exchange Agreement with the holders of the Series C Warrants. In accordance with this agreement, each holder agreed to either: (i) exchange all Series C Warrants for shares of the Company's common stock, on the basis of one share of common stock for every two shares of Series C Warrants; or (ii) exercise all Series C Warrants to purchase the Company's common stock at a reduced exercise price of $0.10 per warrant share. The consummation of the transactions is expected to occur on or before October 31, 2009 and is further conditioned upon all of the holders electing either the securities exchange option or warrant exercise option. A total of nine of the fifteen holders have elected to exercise an aggregate of 6,004,824 Series C warrant shares for a total cash payment of $600,482. The remaining holders elected to exchange a total of 6,985,006 Series C warrant shares for an aggregate 3,492,505 shares of the Company's common stock.

Change in Management

On September 30, 2009, the Company and Mr. Frank Menzler entered into a restated employment agreement providing for, among other things, the payment to Mr. Menzler of a signing bonus of $35,000, severance payment of up to six-months salary and benefits upon resignation for any reason other than cause, cancelation of all stock option grants, and the resignation of Mr. Menzler as a Director and Chairman of the Company's Board of Directors.

On October 13, 2009, Mr. Menzler resigned his position as Chief Executive Officer and President. Pursuant to the terms of the restated employment agreement, Mr. Menzler was appointed Special Technical Advisor and continues as an employee of the Company. Simultaneously, the Company entered into an Interim Executive Services Agreement with Mr. Amit Dang in which Mr. Dang has been appointed as the Company's Interim Chief Executive Officer, President and Secretary. This agreement may be terminated at any time by the Company and upon 90 days prior written notice by Mr. Dang. It is not expected that Mr. Dang will devote his full time and attention to the Company's operations.

On October 6, 2009, Mr. Roland Schomer resigned as a Director of the Company. Mr. Schomer did not resign as a result of any disagreement between himself and the Company.

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 of America. 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 FASB guidance which is now part of ASC 718, Compensation - Stock Compensation, (formerly Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment,"), 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 this guidance from the date of adoption.

Results of Operations

Operating Expenses

A summary of our operating expenses for the three and nine-months ended September 30, 2009 and 2008 are as follows:

Three Months Ended September 30,

                       2009             2008       Increase (Decrease)     % Change

Expenses
  Salary and             $186,689         $343,747        $  (157,058)            (46%)
benefits
  Research and             67,764           84,803            (17,039)            (20%)
development
  Shareholder              12,700          173,090           (160,390)            (93%)
and investor
relations
  Administrative           50,442           87,784            (37,342)            (43%)
and general
  Professional            107,137           60,783              46,354              76%
fees- accounting
and legal
  Director,                40,780            6,593              34,187             519%
management and
consulting fees
  Depreciation                  -            2,607             (2,607)           (100%)
                         $465,512         $759,407        $  (293,895)            (39%)

Nine Months Ended September 30,

                       2009             2008       Increase (Decrease)     % Change

Expenses
  Salary and          $   473,951      $   986,497        $  (512,546)            (52%)
benefits
  Research and            164,608          294,008           (129,400)            (44%)
development
  Shareholder              27,694          343,805           (316,111)            (92%)
and investor
relations
  Administrative          155,579          180,090            (24,511)            (14%)
and general
  Professional            268,594          149,588             119,006              80%
fees- accounting
and legal
  Director,               105,049            8,093              96,956            1198%
management and
consulting fees
  Depreciation                  -            7,820             (7,820)           (100%)
                     $  1,195,475     $  1,969,901        $  (774,426)            (39%)

Salaries and benefits: We incurred salaries and benefits expense of $186,689 for the three-month period ended September 30, 2009 representing a decrease of $157,058 or 46% compared to the same period in 2008. The majority of the decrease, representing $117,254, is due to a decrease in stock compensation expense as certain option grants have been fully expensed. The remaining decrease of $39,804 is due to combination of lower compensation expense in the amount of $74,804 from 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 closing our corporate office in Vancouver, British Columbia on August 31, 2008 as we repositioned our strategic direction; which is partially offset by an increase in compensation expense of $35,000 due to a signing bonus recorded in the third quarter of 2009 under the restated employment agreement.

We incurred salaries and benefits expense of $473,951 for the nine-month period ended September 30, 2009, representing a decrease of $512,546 or 52% compared to the same period in 2008. Approximately 54% of the decrease, or $278,250, is due to a decrease in stock compensation expense as certain option grants have been fully expensed. The remaining 46% of the decrease, or $234,296, is due to fewer employees as we terminated our research scientists and closed our corporate office in Vancouver, British Columbia as noted above.

Research and development: We incurred $67,764 in research and development expenses for the three-month period ended September 30, 2009 representing a decrease of $17,039 or 20% 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

We incurred $164,608 in research and development expenses for the nine-month period ended September 30, 2009 representing a decrease of $129,400 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 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 $12,700 of shareholder and investor relations expense for the three-month period ended September 30, 2009 representing a decrease of $160,390 or 93% compared to the same period in 2008. We incurred $27,694 of shareholder and investor relations expense for the nine-month period ended September 30, 2009, which is $316,111 or 92% 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 $50,442 in administrative and general expenses for the three-month period ended September 30, 2009 representing a decrease of $37,342 or 43% compared to the same period in 2008. The change is comprised of a decrease of $56,092 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 $18,750 for the first time incurrence of license maintenance fees.

We incurred $155,579 in administrative and general expenses for the nine-month period ended September 30, 2009 representing a decrease of $24,511 or 14% compared to the same period in 2008. The change is comprised of a decrease of $116,411 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 $91,900 for the first time incurrence of license maintenance fees and director and officer insurance.

Professional fees: We incurred a total of $107,137 in professional fees for the three-month period ended September 30, 2009 for a increase of $46,354 or 76% which is comprised of the following: an increase of $15,177 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 $27,684 in legal fees; and a $3,493 increase in audit and other consulting services.

We incurred a total of $268,594 in professional fees for the nine-month period ended September 30, 2009 for an increase of $119,006 or 80%, which is comprised of the following: an increase of $36,428 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 $48,092 in legal fees; and an increase of $34,486 in audit and other consulting services.

Director, management and consulting fees: We incurred a total of $40,780 in director, management and consulting expenses for the three-month period ended September 30, 2009 for an increase of $34,187 compared to the same period in 2008. We incurred a total of $105,049 in director, management and consulting expense for the nine-month period ended September 30, 2009 for an increase of $96,956 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 nine-month periods ended September 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 nine months ended September 30, 2009 and 2008 are as follows:

                                          Three Months Ended September 30,
                                                                    Increase
                                          2009         2008        (Decrease)  % Change
Other income and (expense)
   Interest income                   $     4,716  $     14,498  $     (9,782)     (67%)
   Interest on promissory note                 -             -              -         -
   Interest, bank charges and
foreign exchange loss                        289         (786)        (1,075)      137%
   Loss on disposal of fixed assets            -       (3,060)        (3,060)      100%
   Change in fair value of warrant
liability                               (43,409)             -         43,409      100%
Other income and (expense)           $  (38,404)  $     10,652  $      49,056    (461%)

                                           Nine Months Ended September 30,
                                                                    Increase
                                          2009         2008        (Decrease)  % Change
Other income and (expense)
   Interest income                   $    24,292  $     25,964  $     (1,672)      (6%)
   Interest on promissory note                 -      (41,615)       (41,615)    (100%)
   Interest, bank charges and
foreign exchange loss                      (663)       (9,959)        (9,296)     (93%)
   Loss on disposal of fixed assets            -       (3,060)        (3,060)    (100%)
   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                               (86,094)             -         86,094      100%
Other income and (expense)           $  (75,338)  $  (707,741)  $   (632,403)     (89%)

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

Change in fair value of warrant liability: During 2009, we began to accounts for the Warrants and Series C Warrants as derivatives. We determined that our Warrants issued in May 2007 and the Series C Warrants issued in May 2008 contain a dilutive issuance provision that may result in an adjustment to the exercise price and number of underlying shares of common stock. As a result, we reclassified 737,000 Warrant shares from equity to noncurrent warrant liability and 12,989,830 Series C Warrants from equity to a current warrant liability and recorded a cumulative effect of the change in accounting principle adjustment that reduced our accumulated deficit as of January 1, 2009 by $1,932,469.

We measure the warrant liability at fair value in accordance with ASC 820 Fair Value Measurement and Disclosure which 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, ASC 820 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 September 30, 2009, we valued the warrant liability using a Black-Scholes model (Level 3 inputs) containing the following assumptions:
volatility 98.05% and 102.48%, risk-free rate 0.29% and 0.18%, and term 2 years, 7.5 months and of 8.25 months, respectively, for the Warrants and Series C Warrants. Due to this re-measurement, we recorded non-operating expense of $43,409 for the three months ended September 30, 2009, which represents a net increase in the fair value our warrant liability for this period, and non-operating expense of $86,094 for the nine-month period ended September 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 $2,035,993 and $3,084,155 as of September . . .