Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

These unaudited condensed consolidated financial statements and management's discussion should be read in conjunction with the audited consolidated financial statements of the Company and the notes thereto as of and for the year ended December 31, 2011 as included in the Company's Form 10-K filed with the Securities and Exchange Commission (the "Commission") on March 30, 2012.

Forward-looking statements

Statements contained in this Quarterly Report on Form 10-Q, other than the historical financial information, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements involve known and unknown risks, uncertainties or other factors which may cause actual results, performance or achievement of the Company to be materially different from any future results, performance or achievement expressed or implied by such forward-looking statements. Primary risk factors include, but are not limited to: ability to successfully develop commercial operations; the ability to obtain adequate financing in the future when needed; dependence on key personnel; acceptance of the Company's medical devices in the marketplace; obtaining government approvals, including required FDA approvals; compliance with governmental regulations; reliance on research and testing facilities of various universities and institutions; product liability risks; limited manufacturing experience; limited marketing, sales and distribution experience; market acceptance of the Company's products; competition; unexpected changes in technologies and technological advances; and other factors detailed in the Company's Annual Report on Form 10-K filed with the Commission on March 30, 2012.

Overview and Plan of Operations

CytoSorbents is a development stage critical care focused company using blood purification to treat disease. In March 2011, we received European Union (E.U.) regulatory approval under the CE Mark and Medical Devices Directive for our flagship product, CytoSorb®, as an extracorporeal cytokine filter to be used in clinical situations where cytokines are elevated. CytoSorbents has started the process of commercializing its operations with the commencement of initial sales of its CytoSorb®device in the E.U. In mid-September we started to exhibit the CytoSorb®device at conferences in Germany as part of our product marketing under a controlled-market release in select geographic territories in Germany. In late June 2012, we completed the controlled-market release and began the commercial launch of CytoSorb® in Germany with the hiring of Dr. Christian Steiner as Vice President of Sales and Marketing and three additional sales people, one of whom started immediately and the other two expected to start by August 2012. Because of this timing, the third quarter of 2012 is expected to be a transitional quarter in terms of revenues as the sales force increases its training and sales activities, particularly in Germany.

In 2011 as part of the CE Mark approval process we completed our European Sepsis clinical trial with enrollment of one hundred (100) patients with sepsis and respiratory failure with the participation of fourteen trial sites. The purpose of the trial was to demonstrate safety and the broad, and statistically significant reduction of key cytokines such as IL-6 in these patients. CytoSorb® treatment was well tolerated with no serious device related adverse events reported in over 300 human treatments. In the study CytoSorb®demonstrated its clinical effectiveness in reducing cytokine storm by approximately 30-50% in critically-ill patients. CytoSorb® treatment was linked with survival in patients at high risk of death, including patients with high cytokine levels and patients older than age 65, who generally make up two-thirds of patients hospitalized for sepsis.

Our CE Mark enables CytoSorb® to be sold in the European Union for clinical use. Potential uses include many critical care conditions where cytokines are elevated such as sepsis, trauma, ARDS, severe burn injury and acute pancreatitis. CytoSorbents has also achieved ISO 13485:2003 Full Quality Systems certification, an internationally recognized quality standard designed to ensure that medical device manufacturers have the necessary comprehensive management systems in place to safely design, develop, manufacture and distribute medical devices in the European Union. We intend to continue to research and seek the necessary regulatory approvals to sell our other proposed products, as well as potential label extensions of our current CE Mark.

We are focusing our efforts on the commercialization of CytoSorb®and have now concluded a controlled-market release program in select territories in Germany that we initiated in late 2011. The purpose of this program was to prepare the Company for commercialization of CytoSorb in Germany in terms of manufacturing, logistics, infrastructure, marketing, contacts, and other key issues. Following the establishment of our European subsidiary, CytoSorbents Europe GmbH, we commenced a direct sales effort in Germany at the end of the second quarter of 2012 with the hiring of a four person direct sales force including a Vice President of Sales and Marketing, two of which started immediately, and two that began at the beginning of August. We are also evaluating potential distributor networks in other major countries where we are approved to market the device.

The initial major market focus for CytoSorb® is the adjunctive treatment of sepsis, a systemic inflammatory response to a serious infection. CytoSorb®has been designed to prevent or reduce the accumulation of high concentrations of cytokines in the bloodstream associated with sepsis and is intended for short-term use with standard of care therapy that includes antibiotics. We believe that current state of the art blood purification technology (such as dialysis) is incapable of effectively clearing the toxins intended to be absorbed by our CytoSorb® device.

In addition to the sepsis indication, we intend to continue to foster research in other critical care illnesses where CytoSorb® could be used, such as ARDS, trauma, severe burn injury and acute pancreatitis, or in other acute conditions that have demonstrated potential in preliminary studies to prevent or reduce the accumulation of cytokines in the bloodstream. These other conditions include the prevention of post-operative complications of cardiac surgery (cardiopulmonary bypass surgery) and damage to organs donated for transplant prior to organ harvest. We are also exploring the potential benefits our technology may have in removing drugs and other substances from blood and physiologic fluids.

The Company is currently manufacturing CytoSorb® under ISO 13485 Full Quality Systems certification for sale in the E.U. and for additional clinical studies. Concurrent with its commercialization plans, the Company intends to conduct or support additional clinical studies in sepsis and other critical care diseases to generate additional clinical data to expand the scope of clinical experience for marketing purposes, to increase the number of treated patients, and to support potential future publications. Assuming availability of adequate and timely funding, and continued positive results from our clinical studies, the Company intends to continue commercializing its product in Europe.

The clinical protocol for our European Sepsis Trial was designed to allow us to gather information to support future U.S. studies. In the event we are able to successfully commercialize our products in the European market, we will review our plans for the United States to determine whether to conduct clinical trials in support of 510(k) or PMA registration. No assurance can be given that our CytoSorb® product will work as intended or that we will be able to obtain FDA approval to sell CytoSorb®in the United States. Even though we have obtained CE Mark approval, there is no guarantee or assurance that we will be successful in obtaining FDA approval in the United States or approval in any other country or jurisdiction.

Because of the limited studies we have conducted, we are subject to substantial risk that our technology will have little or no effect on the treatment of any indications that we have targeted.

At the end of the second quarter, Mr. David Lamadrid, the Company's Chief Financial Officer, gave notice of his resignation, effective July 13, 2012, due to personal reasons. Mr. Ronald Berger, a certified public accountant and the Company's controller for the past eight years, was appointed by the Board of Directors as Interim Chief Financial Officer and has assumed Mr. Lamadrid's duties as of July 16, 2012.

Results of Operations

CytoSorbents generated revenues of $49,935 and $-0- and $33,042 and $-0- for the six and three month periods ended June 30, 2012 and 2011 respectively. Revenues in the current six month period were part of an initial test market phase of CytoSorb with the company exploring direct sales to hospitals in Germany (without a dedicated sales force in place) and sales to distributor networks in other parts of Europe. The device was not available or approved for sale during the first six months of 2011.

Our research and development costs were, $1,309,031 and $1,613,984, for the six months ended June 30, 2012 and 2011 respectively and $665,750 and $854,827 for the three months ended June 30, 2012 and 2011 respectively. This represents a decrease of approximately 18.9% or $305,000 for the six months ended June 30, 2012 compared to the same time period in 2011. This decrease is primarily due to net decreases in expenditures related to our completed sepsis study and clinical and research programs of approximately $320,000 and non-cash stock option expense of approximately $77,000, that were partially offset by increases in patent related expenses of approximately $76,000 and salaries of approximately $110,000, plus the receipt of approximately $83,000 in grant income from a US Army Phase I SBIR grant, which is presented in the financial statements as a reduction in research and development costs.

Our legal, financial and other consulting costs were, $234,827 and $166,772, for the six months ended June 30, 2012 and 2011 respectively. This represents an increase of approximately 40.8%, or approximately $68,000 for the six months ended June 30, 2012 compared to the same time period in 2011. This is primarily comprised of an increase in legal fees of approximately $50,000 associated with patent review related costs, and approximately $15,000 in accounting fees which were associated with annual audit and S-1 registration related fees.

Our general and administrative costs were, $562,646 and $461,894, for the six months ended June 30, 2012 and 2011 respectively. This represents an increase of approximately 21.8%, or approximately $100,000 for the six months ended June 30, 2012 compared to the same time period in 2011. This is primarily due to a decrease in non-cash stock option expense of approximately $95,000 which was primarily offset by increases in sales and marketing expenses of approximately $162,000, and insurance related costs of approximately $20,000.

Our net interest expenses were $397,177 and $313,116 for the six months ended June 30, 2012 and 2011 respectively. This represents an increase of approximately 26.85% or $84,000 for the six months ended June 30, 2012 compared to the same time period in 2011. The increase is primarily due to an increase of approximately $84,000 in non-cash related charges associated with the amortization of debt discount, which is presented in the net interest expenses category of our statement of operations.

We have experienced substantial operating losses since inception. As of June 30, 2012, we had a deficit accumulated during the development stage of $96,272,569, which included losses of $1,047,310 and $2,473,906 for the three and six month periods ended June 30, 2012. In comparison, we had losses of $1,341,182 and $2,555,766 for the three and six month periods ended June 30, 2011. Historically, our losses have resulted principally from costs incurred in the research and development of our polymer technology, and general and administrative expenses, which together were $958,930 and $1,871,677 for the three and six month periods ended June 30, 2012 and $1,046,629 and $2,075,878 for the three and six month periods ended June 30, 2011.

Liquidity and Capital Resources

Since inception, our operations have been financed through the private placement of our debt and equity securities. At December 31, 2011 we had cash of $1,186,653 and current liabilities of $1,527,949. As of June 30, 2012 we had cash on hand of $1,741,839 and current liabilities of $2,304,334.

We believe that we have sufficient cash to fund our operations into the fourth quarter of 2012, following which we will need additional funding before we can complete additional clinical studies and commercialize our products. The SEC approved a registration statement for common stock filed for the funding agreement with Lincoln Park Capital Fund LLC. Subject to minimum pricing restrictions per the terms of the funding agreement, Management believes that the Company will be able to receive ongoing funding per the terms of this purchase agreement (See Note 9 to the Company's Annual Report on Form 10-K filed with the Commission on March 30, 2012). The agreement with Lincoln Park has the potential to significantly extend the time that we may be able to fund our operations, provided that our share price remains at or above $0.10. During the six months ended June 30, 2012 we received approximately $83,000 from the US Department of Defense for our progress under a $100,000 US Army Phase I SBIR grant that the Company was awarded in December 2011. The Company is exploring potential eligibility in several other government sponsored grant programs which could, if approved, represent a substantial source of non-dilutive funds for our research programs. We will also continue to seek other funding sources for the long term needs of the Company. There can be no assurance that financing will be available on acceptable terms or at all. If adequate funds are unavailable, we may have to suspend, delay or eliminate one or more of our research and development programs or product launches or marketing efforts or cease operations.

Off-balance Sheet Arrangements

We have no off-balance sheet arrangements.

Going Concern

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has experienced negative cash flows from operations since inception and has a deficit accumulated during the development stage at June 30, 2012 of $96,272,569. The Company is not currently generating significant revenue and is dependent on the proceeds of present and future financings to fund its research, development and commercialization program. These matters raise substantial doubt about the Company's ability to continue as a going concern. The Company is continuing its fund-raising efforts. Although the Company has historically been successful in raising additional capital through equity and debt financings, there can be no assurance that the Company will be successful in raising additional capital in the future or that it will be on favorable terms. Furthermore, if the Company is successful in raising the additional financing, there can be no assurance that the amount will be sufficient to complete the Company's plans. These consolidated financial statements do not include any adjustments related to the outcome of this uncertainty.