Cardiovascular Biotherapeutics 10Q 2008 Q2 Quarterly report

(Formerly CARDIOVASCULAR GENETIC ENGINEERING, INC.)

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

CONSOLIDATED BALANCE SHEETS

December 31, 2007 and June 30, 2008 (Unaudited)

	December 31, 2007			June 30, 2008
	(In thousands except for share data)
ASSETS
Current Assets:
Cash and cash equivalents	$	310		$	391
Restricted cash		60			60
Due from an affiliate		139			126
Prepaid and other current assets		543			43
Total current assets		1,052			620
Property and equipment, net of accumulated depreciation ($448 and $578, as of December 31, 2007 and June 30, 2008)		662			484
Deferred financing costs, net of amortization ($1,503 and $1,524 as of December 31, 2007 and June 30, 2008)		50			29
Other assets		81			24
Total Assets	$	1,845		$	1,157
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
Accrued interest payable	$	129		$	161
Due to affiliates		24			—
Accounts payable (including $120 and $295 due to officers, directors and related parties as of December 31, 2007 and June 30, 2008)		3,625			4,435
Demand notes, net of current portion and net of debt discount of $432 and $0 as of December 31, 2007 and June 30, 2008		1,068			1,600
Demand notes from officers		160			160
Accrued payroll and payroll taxes (including $238 and $474 due to related parties at December 31, 2007 and June 30, 2008)		519			883
Deferred rent		215			69
Total current liabilities		5,740			7,308
Long term notes, net of debt discount of $0 and $671 as of December 31, 2007 and June 30, 2008		—			379
Convertible notes payable and embedded derivatives		4,205			3,336
Warrants derivatives - other		4,118			4,459
Option derivatives - other		867			629
Total Liabilities		14,930			16,111
Non-controlling interest in variable interest entities		—			1,650
Commitments and contingencies
Stockholders’ Deficit:
Convertible preferred stock, $0.001 par value; 10,000,000 shares authorized; 52,850 shares issued; and no shares outstanding at December 31, 2007 and June 30, 2008, respectively.		—			—
Common stock, $0.001 par value, 400,000,000 shares authorized; 149,920,335 and 152,675,793 shares issued and outstanding at December 31, 2007 and June 30, 2008, respectively		150			153
Committed common stock		—			—
Additional paid in capital		57,499			60,922
Deficit accumulated during the development stage		(70,734	)		(77,679	)
Total stockholders’ deficit		(13,085	)		(16,604	)
Total Liabilities and Stockholders' Deficit	$	1,845		$	1,157

The accompanying notes are an integral part of these consolidated financial statements

Page 1 of 84

CARDIOVASCULAR BIOTHERAPEUTICS, INC.

(Formerly CARDIOVASCULAR GENETIC ENGINEERING, INC.)

(A Development Stage Company)

For the Six Month and Three Month Periods Ended June 30, 2007 and 2008 and

March 11, 1998 (Inception) to June 30, 2008

		For the Six Month Period Ended June 30,							For the Three Month Period Ended June 30,						For the Period from March 11, 1998 (Inception) to June 30,
		2007			2008				2007		2008				2008
	(In thousands)
Operating expenses
Research and development ^(a)		$	3,333		$	2,254		$	1,718			$	1,212		$	25,058
Selling, general and administrative ^(b)			8,167			3,406			4,638				1,696			44,213
Total operating expenses			11,500			5,660			6,356				2,908			69,271
Operating loss			(11,500	)		(5,660	)		(6,356	)			(2,908	)		(69,271)
Other income (expenses)
Interest income			127			—			26				—			1,196
Interest expense			(6,191	)		(1,638	)		(2,971	)			(477	)		(21,290)
Other expenses			—			—			—				—			(5)
Adjustments to fair value of derivatives			(10,084	)		(844	)		(7,958	)			2,285			(679)
Adjustments to fair value of derivatives - other option & warrant derivative			1,400			1,085			847				2,805			12,273
Gain on lease termination			—			112			—				—			112
Equity in loss of unconsolidated investee			—			—			—				—			(15)
Net other expenses			(14,748	)		(1,285	)		(10,056	)			4,613			(8,408)
Net income (loss) before Provision for Income Taxes			(26,248	)		(6,945	)		(16,412	)			1,705			(77,679)
Provision for income taxes			—			—			—				—			—
Net income (loss)		$	(26,248	)	$	(6,945	)	$	(16,412	)		$	1,705		$	(77,679)
Income (loss) per share
Basic income (loss) per share		$	(0.20	)	$	(0.05	)	$	(0.12	)		$	0.01
Diluted income (loss) per share		$	(0.20	)	$	(0.05	)	$	(0.12	)		$	0.01
Shares used to calculate earnings (loss) per share
Basic			129,170			135,892			134,382				152,279
Diluted			129,170			135,892			134,382				154,161
(a) Research and development with related parties (Notes 3 and 13)		$	927		$	677		$	384			$	353		$	6,184
(b) General and administrative with related parties (Notes 3 and 13)		$	26		$	7		$	5			$	3		$	1,204

The accompanying notes are an integral part of these consolidated financial statements

Page 2 of 84

(Formerly CARDIOVASCULAR GENETIC ENGINEERING, INC.)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (Unaudited)

For the Period from March 11, 1998 (Inception) to June 30, 2008


				Price Per Equity		Preferred Stock Series A, Convertible					Common Stock				Committed		Additional Paid-In			Accumulated
	Date			Unit		Shares			Amount		Shares		Amount		Stock		Capital			Deficit			Total
	(In thousands Except Price per Equity Unit Data)
Balance, March 11, 1998 (date of inception)							—		$	—		—	$	—		—	$	—		$	—		$	—
Issuance of common stock to founders		(1	)	$	.001		—			—		93,050		93		—		(92	)		—			1
Issuance of common stock for cash		7/9/1998			0.10		—			—		300		—		—		30			—			30
Issuance of preferred stock for cash		(1	)		9.85		53			—		—		—		—		520			—			520
Net loss							—			—		—		—		—		—			(568	)		(568	)
Balance, December 31, 1998							53		$	—		93,350	$	93		—	$	458		$	(568	)	$	(17	)
Issuance of common stock to founders		(2	)	$	0.001		—			—		4,580		5		—		(5	)		—			—
Issuance of common stock for cash		6/25/1999			0.30		—			—		67		—		—		20			—			20
Issuance of common stock for cash		6/25/1999			0.30		—			—		100		—		—		30			—			30
Issuance of common stock for cash		10/5/1999			0.30		—			—		340		—		—		102			—			102
Issuance of stock options for services							—			—		—		—		—		82			—			82
Net loss							—			—		—		—		—		—			(655	)		(655	)
Balance, December 31, 1999							53		$	—		98,437	$	98		—	$	687		$	(1,223	)	$	(438	)
Issuance of common stock to founders		(3	)	$	. 001		—			—		2,120		2		—		(2	)		—			—
Issuance of common stock for cash		12/21/2000			0.4117		—			—		8,750		9		—		3,593			—			3,602
Issuance of common stock for conversion of convertible preferred stock		(4	)		0.10		(2	)		—		150		—		—		—			—			—
Issuance of common stock for services		(5	)				—			—		583		1		—		(1	)		—			—
Issuance of stock options for services							—			—		—		—		—		74			—			74
Net loss							—			—		—		—		—		—			(2,233	)		(2,233	)
Balance, December 31, 2000							51		$	—		110,040	$	110		—	$	4,351		$	(3,455	)	$	1,005
Issuance of common stock for cash		8/10/2001			0.80		—			—		150		—		—		120			—			120
Net loss							—			—		—		—		—		—			(1,665	)		(1,665	)
Balance, December 31, 2001							51		$	—		110,190	$	110		—	$	4,471		$	(5,121	)	$	(540	)
Net loss							—			—		—		—		—		—			(1,328	)		(1,328	)
Balance, December 31, 2002							51		$	—		110,190	$	110		—	$	4,471		$	(6,449	)	$	1,868	)
Issuance of stock options for services							—			—		—		—		—		47			—			47
Issuance of warrants for services							—			—		—		—		—		120			—			120
Net loss							—			—		—		—		—		—			(2,329	)		(2,329	)
Balance, December 31, 2003							51		$	—		110,190	$	110		—	$	4,638		$	(8,778	)	$	(4,030	)
Issuance of common stock for conversion of convertible notes		(6	)				—			—		1,650		2		—		4,529			—			4,531
Conversion of convertible preferred stock		(7	)				(28	)		—		810		1		2		(3	)		—			—

The accompanying notes are an integral part of these consolidated financial statements

Page 3 of 84

Interest on benefit conversion feature			—			—	—		—		—			2,050			—			2,050
Issuance of stock options for services			—			—	—		—		—			79			—			79
Net loss			—			—	—		—		—			—			(8,013	)		(8,013	)
Balance, December 31, 2004			23		$	—	112,650	$	113		2		$	11,293		$	(16,791	)	$	(5,383	)
Issuance of common stock for cash	(8	)	—			—	1,725		2		—			14,709			—			14,711
Conversion of convertible notes	(6	)	—			—	4,228		4		—			10,327			—			10,331
Conversion of convertible preferred stock	(7	)	(23	)		—	4,325		4		(2	)		(2	)		—			—
Exercise of options	(10	)	—			—	123		—		—			83			—			83
Issuance of warrant for cash	(9	)	—			—	—		—		—			—			—			—
Issuance of stock options for services	(11	)	—			—	—		—		—			1,812			—			1,812
Warrants exercised	(12	)	—			—	848		1		—			(1	)		—			—
Net loss			—			—	—		—		—			—			(12,366	)		(12,366	)
Balance, December 31, 2005			—		$	—	123,899	$	124	$	—		$	38,221		$	(29,157	)	$	9,188
Warrants exercised	(12	)	—			—	89		—		—			—			—			—
Option and Warrant Derivative	(14	)	—			—	—		—		—			(12,278	)		—			(12,278	)
Reclassification of option derivative for option exercise	(16	)	—			—	—		—		—			1,318			—			1,318
Reclassification of conversion and interest conversion derivative on note conversion	(18	)	—			—	—		—		—			1,332			—			1,332
Reclassification of interest conversion derivative on actual interest paid	(17	)	—			—	—		—		—			482			—			482
Exercise of options	(10	)	—			—	465		—		—			230			—			230
Issuance of stock for services	(13	)	—			—	—		—		—			—			—			—
Conversion of convertible notes	(15	)	—			—	1,005		1		—			1,929			—			1,930
Stock based compensation	(11	)	—			—	—		—		—			479			—			479
Net loss			—			—	—		—		—			—			(5,571	)		(5,571	)
Balance, December 31, 2006			—		$	—	125,458	$	125	$	—		$	31,713		$	(34,728	)	$	(2,890	)
Exercise of options	(10	)	—			—	440		1		—			131			—			132
Issuance of stock for services as independent directors	(19	)	—			—	48		—		—			48			—			48
Options and Warrants Derivative	(14	)	—			—	—		—		—			(279	)		—			(279	)
Conversion of convertible notes	(15	)	—			—	19,151		19		—			14,203			—			14,222
Reclassification of conversion and interest conversion derivative on note conversion	(18	)	—			—	—		—		—			6,455			—			6,455
Reclassification of interest conversion derivative on actual interest paid	(17	)	—			—	—		—		—			585			—			585
Sale of common shares	(20	)	—			—	3,650		4		—			3,256			—			3,260
Stock based compensation	(11	)	—			—	—		—		—			574			—			574
Issuance of common stock for interest payments	(21	)	—			—	973		1		—			607			—			608
Issuance of warrant for cash	(22	)	—			—	—		—		—			6			—			6
Issuance of common shares for services	(23	)	—			—	200		—		—			200			—			200
Net loss (unaudited)			—			—	—		—		—			—			(36,006	)		(36,006	)
Balance, December 31, 2007			—		$	—	149,920	$	150	$	—		$	57,499		$	(70,734	)	$	(13,085	)
Exercise of options	(10	)	—			—	60		—		—			39			—			39
Stock based compensation	(11	)	—			—	—		—		—			145			—			145
Option and Warrant Derivative	(14	)	—			—	—		—		—			59			—			59
Conversion of convertible notes	(15	)	—			—	1,601		2		—			1,398			—			1,400
Reclassification of conversion and interest conversion derivative on note conversion	(18	)	—			—	—		—		—			809			—			809
Sale of common shares	(20	)	—			—	825		1		—			752			—			753
Issuance of common stock for interest payments	(21	)	—			—	269		—		—			221			—			221
Net loss (unaudited)			—			—	—		—		—			—			(6,945	)		(6,945	)
Balance, June 30, 2008			—		$	—	152,675		153	$	—		$	60,922		$	(77,679	)	$	(16,604	)

The accompanying notes are an integral part of these consolidated financial statements

Page 4 of 84

(Formerly CARDIOVASCULAR GENETIC ENGINEERING, INC.)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (Unaudited) - continued

For the Period from March 11, 1998 (Inception) to June 30, 2008

(1)

Multiple transactions valued at the per share price in the year ended December 31, 1998.

(2)

Multiple transactions valued at the per share price in the year ended December 31, 1999.

(3)

Multiple transactions valued at the per share price in the year ended December 31, 2000.

(4)

Preferred stock converted to common stock.

(5)

Offering costs.

(6)

Multiple transactions at $2.00 and $4.00 in the year ended December 31, 2004 and 2005.

(7)

Multiple transactions at 100:1 conversion rate in the year ended December 31, 2004 and 2005.

	(8)	Public offering of 1,725,000 common shares at $10.00 per share.

	(9)	Underwriter’s warrants sold with the public offering.

(10)

Multiple employee option exercises (exercise price range $0.30-$2.00).

(11)

Stock options and warrants issued for services.

(12)

Warrants exercised (exercise price $0.80).

(13)

Issuance of 20 commemorative shares to directors and executives.

(14)

Reclassification of option and warrant derivatives from equity to liability in accordance with EITF 00-19.

	(15)	Conversion of senior secured convertible notes and interest related to those notes at various prices. During the year ended December 31, 2007 and the six month period ended June 30, 2008, in addition to the period from March 11, 1998 (inception) to June 30, 2008, $14,222,486, $1,400,000, and $17,520,000 of senior secured convertible notes payable were converted into 19,150,903, 1,601,354 and 21,739,476 shares of uncommitted common stock, respectively. During the year ended December 31, 2007 and the six month period ended June 30, 2008, $607,811 and $221,060 of interest on senior secured convertible notes were paid with common stock.

	(16)	Reclassification of option derivative from liability to equity for options exercised.

(17)

Reclassification of interest conversion derivative from liability to equity on interest paid in cash.

(18)

Reclassification of adjustment to embedded derivatives, conversion and interest conversion feature, from liability to equity for conversion of notes and interest related to those notes to common stock.

(19)

Issuance of stock for services as independent directors.

(20)

Sale of common stock at $1.00 each.

(21)

Issuance of common stock for interest payments on senior secured notes.

(22)

Issuance of warrants for cash.

(23)

Issuance of shares to a vendor as per contract terms.

The accompanying notes are an integral part of these consolidated financial statements

Page 5 of 84

(Formerly CARDIOVASCULAR GENETIC ENGINEERING, INC.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Month Period Ended June 30, 2007 and 2008, and For

The Period from March 11, 1998 (Inception) to June 30, 2008 — (Unaudited)

	Six Month Period Ended June 30,						For the Period from March 11, 1998 (Inception) to June 30,
	2007			2008			2008
	(Dollars in thousands)
Cash flows from operating activities:
Net loss	$	(26,248	)	$	(6,945	)	$	(77,679	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		141			140			594
Gain on lease termination		—			40			40
Termination of financing cost		351			—			466
Amortization of beneficial conversion feature		—			—			2,050
Amortization of deferred financing costs		765			20			3,488
Interest paid in common stock		105			221			862
Issue of stock options in kind		—			—			200
Stock based compensation and other stock based payments		111			145			3,292
Stock issued for services rendered		48			—			48
Warrants issued for services rendered		401			159			4,706
Amortization of discount related to warrants derivatives		397			398			1,810
Amortization of discount related to conversion feature		2,300			59			4,481
Amortization of discount related to interest on conversion feature		1,827			47			3,558
Amortization of discount debts in connection with demand notes		—			841			916
Adjustments to fair value of derivatives		10,084			844			679
Adjustments to fair value of derivatives - options and warrant derivatives		(1,400	)		(1,085	)		(12,273	)
Equity in loss of unconsolidated investee		—			—			15
(Increase) decrease in:
Due from affiliate		24			13			(126	)
Prepaid and other current assets		512			500			(43	)
Other assets ⁽⁸⁾		—			57			(39	)
Increase (decrease) in:
Due to affiliate		(111	)		(24	)		—
Accounts payable ⁽⁸⁾		1,734			810			4,435
Accrued payroll and payroll taxes		(6	)		364			883
Accrued interest		(200	)		32			161
Deferred rent ⁽⁸⁾		7			(146	)		69
Net cash used in operating activities ^(a)	$	(9,158	)	$	(3,510	)	$	(57,407	)

The accompanying notes are an integral part of these consolidated financial statements

Page 6 of 84

(Formerly CARDIOVASCULAR GENETIC ENGINEERING, INC.)

CONSOLIDATED STATEMENTS OF CASH FLOWS - continued

For the Six Month Period Ended June 30, 2007 and 2008, and For

The Period from March 11, 1998 (Inception) to June 30, 2008 — (Unaudited)

	Six Month Period Ended June 30,						For the Period from March 11, 1998 (Inception) to June 30,
	2007			2008			2008
Cash flows from investing activities:	(Dollars in thousands)
Purchase of restricted cash	$	(3	)	$	—		$	(60	)
Purchase of property and equipment		(56	)		(2	)		(1,118	)
Net cash used in investing activities ^(b)		(59	)		(2	)		(1,178	)
Cash flows from financing activities:
Proceeds from sale of preferred stock - Pre IPO		—			—			520
Proceeds from sale of common stock - Pre IPO		—			—			3,904
Proceeds from issuance of notes payables - Pre IPO		—			—			14,092
Proceeds from notes payable issued under Reg D - Pre IPO		—			—			800
Payment of financing cost - private placements - Pre IPO		(31	)		—			(4,199	)
Proceeds from sale of common stock - IPO		—			—			15,548
Proceeds from notes payable issued under Reg D - Post IPO		—			—			20,000
Net proceeds from sale of common shares under Reg S		1,500			753			4,403
Financing cost for Reg S paid in cash		—			—			(176	)
Proceeds from the issuance of warrants		—			—			6
Proceeds from exercise of options and warrants		108			39			483
Proceeds from issuance of demand notes		—			270			2,155
Payment of demand notes		—			(170	)		(395	)
Proceeds from issuance of long term notes payable		—			1,051			1,051
Cash paid for deferred offering costs		—			—			(866	)
Non-controlling interest in variable interest entities		—			1,650			1,650
Net cash provided by financing activities ^(c)		1,577			3,593			58,976
Increase (decrease) in cash and cash equivalents		(7,640	)		81			391
Cash and cash equivalents at beginning of period		8,503			310			—
Cash and cash equivalents at end of period	$	863		$	391		$	391
Supplemental disclosure of cash flow information
Interest paid	$	992		$	20		$	3,873
California Franchise Tax paid	$	—		$	1		$	7

(a)

Including amount with related parties of $1,542,934, $1,344,611 and $17,560,880, respectively

(b)

Including amount with related parties of $0, $0 and $0, respectively

(c)

Including amount with related parties of $117,396, $112,134, and $3,874,018, respectively

The accompanying notes are an integral part of these consolidated financial statements

Page 7 of 84

(Formerly CARDIOVASCULAR GENETIC ENGINEERING, INC.)

CONSOLIDATED STATEMENTS OF CASH FLOWS - continued

For the Six Month Period Ended June 30, 2007 and 2008, and For

The Period from March 11, 1998 (Inception) to June 30, 2008 — (Unaudited)

Supplemental Disclosure of Non-Cash Financing Activities

(1)

In February 2007, 48,000 shares were issued to the independent directors for their services.

(2)

In 2007, the Company paid the interest on the convertible note in cash. The cash payment was valued using the Black-Scholes Model, resulting in a reclassification of $585,509 from liability to paid-in-capital.

(3)

In March 2006, 100,000 warrants, with an exercise price of $0.80, were exercised on a cashless basis in exchange for 89,116 shares of common stock. The remaining balance of $3.00 was paid in cash upon exercise of the warrants on a cashless basis.

(4)

In May 2006, 20 commemorative shares that had a total fair value of $122 were issued to the founders and the executives.

(5)

In December 2002, the Company disposed of fully depreciated assets with value of $6,026.

(6)

As of March 2008, 4,475,000 shares of common stock were sold at $1.00 per share.

(7)

In December 2007, 200,000 shares of common stock at $1.00 per share were issued to a vendor as per the consulting agreement for his consulting fees.

(8)

On March 11, 2008, the company terminated the lease in San Diego resulting in non cash “Gain on Lease Termination” of $112,046, in our Statement of Operations; which consists of a charge off for “Abandonment of Leasehold Improvements” of $39,919 in the “Statement of Cash Flows.” The other non-cash components of the “Gain on Lease Termination” include $141,137 of deferred rent, and forgiveness of $68,633 in accounts payable in exchange for the deposit amount of $57,805.

(9)

In 2008, the amount of converted notes was valued using the Black-Scholes Model resulting in $808,693 of the embedded derivatives being reclassified from liability to paid in capital.

(10)

During the period ended December 31, 2005, 2,000,000 shares of committed common stock relating to the conversion of preferred shares in fiscal 2004 were issued.

(11)

As of June 30, 2008, the company received gross proceeds of $825,000 in exchange for 825,000 shares of common stock towards the completion of the private placement. The stock issuance cost of $82,500 related to the private placement has been accrued and not paid as of June 30, 2008.

The accompanying notes are an integral part of these consolidated financial statements

Page 8 of 84

(Formerly CARDIOVASCULAR GENETIC ENGINEERING, INC.)

CONSOLIDATED STATEMENTS OF CASH FLOWS - continued

For the Six Month Period Ended June 30, 2007 and 2008, and For

The Period from March 11, 1998 (Inception) to June 30, 2008 — (Unaudited)

Supplemental Disclosure of Non-Cash Financing Activities		Six Month Period Ended				For the Period from March 11, 1998 to
		June 30, 2007		June 30, 2008		June 30, 2008
				(In thousands)
1) Number of shares of post-split adjusted common stock to founders		—		—		99,750
2) Number of shares of post-split adjusted common stock for services		—		—		583
3) Beneficial conversion feature in connection with issuance of convertible notes payable Series I, II, and IIa		—		—	$	2,050
4) Number of convertible preferred stock converted to common stock		—		—		53
5) Convertible preferred stock converted to common stock - See line 4 above		—		—		5,285
6) Convertible notes payable converted to common stock		—		—	$	14,862
7) Convertible notes payable converted to common stock - See line 6 above		—		—	$	5,878
8) Amount of senior secured convertible notes payable converted to uncommitted common stock	$	6,744	$	1,400	$	17,552
9) Senior secured convertible notes payable converted to uncommitted common stock - See line 8	$	7,111	$	1,601	$	22,037
10) Amount of senior secured convertible notes payable converted to committed common stock		—		—		—
11) Senior secured convertible notes payable converted to committed common stock- See line 10		—		—		—
12) Interest on Senior Secured notes paid in common stock		—	$	221		862
13) Fair Market Value of warrants issued in connection with demand notes.		—	$	1,255	$	1,255

The accompanying notes are an integral part of these consolidated financial statements

Page 9 of 84

CardioVascular BioTherapeutics, Inc. (formerly CardioVascular Genetic Engineering, Inc.) (“Cardio”, the “Company”, “we”, “our” or “us”) is a development stage biopharmaceutical company focused on developing and marketing protein drug candidates that are designed to be used in the treatment of cardiovascular disease. The Company was incorporated in Delaware on March 11, 1998 (“Inception”) as CardioVascular BioTherapeutics, Inc. Since inception, the Company has been engaged in research and development activities associated with bringing its products to market.

Note 1. Description of Business

During the quarter ended June 30, 2008 and as further discussed in footnote 9, the Company entered into one development agreement for research and development funded by another entity and two agreements with sponsors to form limited partnerships for the purpose of entering into development agreements with CVBT for research and development funded by another entity. These arrangements are being accounted for in accordance with FAS 68 Research and Development Arrangements (as amended). The Company identified the partnerships as possible Variable Interest Entities (VIE) and evaluated the accounting treatment pursuant to FIN 46 (R ) Consolidation of Variable Interest Entities and concluded that the Company was the primary beneficiary of the VIEs and accordingly, the VIEs should be consolidated with the accounts for of the Company for purposes of presentation in accordance with Generally Accepted Accounting Principles in the United States of America. Accordingly, the accompanying consolidated financial statements include the Company and the VIEs. The consolidated financial statements include amounts based on informed estimates and judgments of management for those transactions that are not yet complete. Such estimates and judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant intercompany transactions have been eliminated in consolidation.

The information contained in this report is unaudited. CardioVascular BioTherapeutics, Inc. believes it reflects all adjustments necessary to establish the financial position and results of operations for the interim periods, in addition to providing a fair presentation of our operations and cash flows. All such adjustments are of a normal recurring nature. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principals (GAAP) in the United States of America, have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

These consolidated financial statements should be read along with the financial statements and notes that go along with our audited financial statements, as well as other financial information for the fiscal year ended December 31, 2007 as presented in our Annual Report on Form 10-K filed with the SEC on May 6, 2008. Financial presentations for prior periods have been reclassified to conform to current period presentations. The consolidated results of operations for the six months ended June 30, 2008 and cash flows for the six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the full fiscal year ending December 31, 2008.

Note 2. Management’s Plan

The Company requires additional capital in order to continue its operations at the planned level. Here are selected information as of December 31, 2007 and June 30, 2008:

	As of
	December 31, 2007			June 30, 2008
	(In thousands)
Cash and cash equivalent		310			391
Restricted cash		60			60
Current liabilities		5,740			8,958
Stockholders’ deficit		(13,085	)		(16,604	)
Net Loss		(36,006	)		(6,945	)

Historically, the Company has obtained external financing through public offerings, private placements of equity and private placements of convertible debt. The Company plans to raise additional capital through a private placement of common stock.

Page 10 of 84

The Company is also taking actions to address both demand notes and long-term liquidity in the following ways:

	·	On June 10, 2008 the Company entered into a clinical development agreement with Karen Wenk-Jordan as sponsor and general partner to form Derma Life Clinical Partners LP (“Derma Life”) to fund a minimum of $1 million and up to $3 million of the clinical development for the Company’s wound healing candidate. (See footnote #9 for more detail.)

	·	On April 22, 2008 the Company entered into a clinical development agreement with Dr. H. Christopher Moore as the sponsor and general partner of ProDerm Limited Partnership (“PDLP”) which will fund a minimum of $1 million and up to $10 million of the clinical development for the Company’s wound healing candidate. (See footnote #9 for more detail.)

	·	On April 24, 2008 the Company entered into an agreement with Mr. Phillip Frey Jr. to form Cardio Derma Clinical Partners (CDCP), an R&D Partnership. Mr. Frey, as sponsor and general partner, will fund a minimum of $1,000,000 and up to $5,000,000 of the clinical development of the Company’s wound healing drug candidate. The Company is exploring other similar opportunities for partnerships and joint ventures for co-development, clinical trials, marketing and distribution. (See footnote #9 for more detail.)

In the period ended June 30, 2008 the Company sold $1,050,800 of long term notes that have an 18 month term (one note for $80,000 has a 5 year term). These notes were issued with 1,178,300 warrants which have a five year term and an exercise price of $1.00. These notes have an interest rate of 10%. Commissions earned by GHL, a related party, for the sale of these notes was $105,000.

On March 18, 2008, the Company began a Private Placement of debt and warrants in an effort to raise up to $15,000,000 in promissory notes that mature within 18 months from the date of issuance. The notes are unsecured and serve as consideration for the issuance of warrants issued in conjunction with the notes. As of May 31, 2008, the Company has received gross proceeds of $1,025,800.

On May 21, 2007, the Company entered into an agreement to sell 15,000,000 of the Company’s common stock at a purchase price of $1.00 per share in connection with a Private Placement to the investor and certain other subscribers pursuant to a subscription agreement. As of December 31, 2007, the Company issued 3,650,000 shares and received gross proceeds in the amount of $3,650,000. The agreement, as amended, provides for commissions of 10% of the amount placed in addition to warrants to purchase 3,700,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The investor paid $3,700 for the warrants. The agreement, as amended, expired November 9, 2007. The Company extended this agreement to January 31, 2008. The Company has received an additional $825,000 in the period ended June 30, 2008. This agreement expired and the offering is terminated.

In late 2007 and the first quarter of 2008, the Company sold $2,370,000 in demand notes of which $1,670,000 was outstanding at June 30, 2008. Starting in the second quarter and for the period ended June 30, 2008 the Company sold $1,050,800 of long term notes that have an 18-month term. These notes were issued with 1,178,300 detachable warrants, which have a five-year term and an exercise price of $1.00. These notes have an interest rate of 10%.

Developing additional sources of debt and equity financing to satisfy the Company’s current and future operating requirements.

Pursuing opportunities for licensing of drug indications for co-development, clinical trials, marketing and distribution.

There can be no assurance that sufficient funds required during the next year or thereafter will be generated from operations or that funds will be available from external sources such as debt or equity financing or other potential sources. The lack of additional capital resulting from the Company’s inability to generate cash flow from operations or to raise capital from external sources would force the Company to substantially curtail or cease operations and would, therefore, have a material adverse effect on the Company’s business. Furthermore, there can be no assurance that any such required funds, if available, will be available on attractive terms or that they will not have a significant dilutive effect on the Company’s existing stockholders.

Page 11 of 84

CARDIOVASCULAR BIOTHERAPEUTICS, INC.

(Unaudited)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008

Note 3. Transactions and Contractual Relationships with Affiliated Entities

The Company is a member of an affiliated group through common management that includes Phage Biotechnology Corporation (“Phage”), Cardio Phage International (“CPI”), Sribna Culya Biopharmaceuticals Inc. (“Sribna”), Proteomics Biopharmaceuticals Technologies Inc. (“Proteomics”), Zhittya Stem Cell Medical Research Company Inc. (“Zhittya”), Qure Biopharmaceuticals, Inc. (“Qure”), known collectively as the “affiliates”. The common management of the Company and Phage spend a sufficient amount of their time with the Company and Phage to satisfy the needs for the Company and Phage, and the remaining balance to other interests.

Daniel C. Montano, John W. Jacobs and Mickael A. Flaa are, respectively, President/Chairman of the Board/Chief Executive Officer, Chief Operating Officer/Chief Scientific Officer, and Chief Financial Officer of both the Company and Phage. Upon completion of the public offering, Mr. Flaa and Dr. Jacobs joined the Company’s Board of Directors. Daniel C. Montano is a principal stockholder in Cardio, Phage, Proteomics, Zhittya, and Qure. Daniel C. Montano, Dr. Thomas J. Stegmann and Dr. Jacobs are members of the Board of Directors of CPI. Mr. Grant Gordon, one of the Company’s current Board members, is a member of the Board of Directors of CPI and is CPI’s President. Mr. Flaa, one of the Company’s current Board members and the Company’s CFO, is CPI’s CFO.

The following are or were the business activities performed by each affiliate:

Active Affiliated Companies:

Phage is a developer of recombinant protein pharmaceuticals; certain of the Company’s officers and directors and the Company control percentages of the common stock of Phage;

Ownership in Phage		The Company's Directors and Officers %			Cardio %
Percentage of ownership in Phage			31.7	%		4.3

CPI is a distributor for the future products for both Cardio and Phage in locations throughout the world other than United States and Canada, Europe, Japan, and, with respect to Cardio only, the Republic of Korea, China, and Taiwan. Cardio and Phage each own approximately 43% of CPI and each has the right to appoint 45% of CPI’s directors.

Inactive Affiliated Companies:

Sribna was developing a treatment for cancer utilizing cancer cell apoptosis (currently inactive);

Proteomics was developing a non-injection method for medical protein (currently inactive);

Zhittya was researching adult stem cells (currently inactive); and

Qure was developing commercial medical applications (currently inactive); Qure owns less than 1% of the Company’s common stock.

During the period from 1999 through 2001, the Company entered into transactions with these entities affiliated with the Company’s CEO (Proteomics, Zhittya, Qure and Sribna). These companies paid expenses on behalf of the Company aggregating $187,600. That amount was repaid without interest. These entities are all currently inactive. Additionally, Qure owns 630,000 shares of common stock of the Company.

In 2006, the Company became a co-sponsor of the Regenerative Medicine Organization, a non-profit educational organization that focuses on providing information and education to the healthcare community and the public about regenerative medicine.

Page 12 of 84

Note 3. Transactions and Contractual Relationships with Affiliated Entities - (continued)

Joint Patent Agreement

The Company entered into a joint patent agreement with Phage as of February 28, 2007 (the “Joint Patent Agreement”). The Company plans to develop and commercialize therapeutic methods related to the induction of angiogenesis or wound healing by administration of Fibroblast Growth Factor (“FGF”); and, Phage plans to develop and commercialize recombinant DNA methods for producing peptides/proteins. The Company and Phage entered into a joint patent ownership and license agreement dated as of August 16, 2004, which was later amended and restated as of May 23, 2006 (the “Joint Ownership Agreement”), pursuant to which Phage granted the Company a 50% ownership interest in certain patents and patents applications listed in the Joint Ownership Agreement, as well as certain future patent rights, and the parties acknowledge that the Company would have exclusive rights within a defined field, while Phage would have exclusive rights outside that field. The Company and Phage superseded the Joint Ownership Agreement with the Joint Patent Agreement to specify those future patents and patent applications that are to be subject to joint ownership and to restate the licenses granted in the Joint Ownership Agreement. The Company and Phage acknowledge that the jointly owned and cross-licensed rights are vital to the parties’ respective plans for development and commercialization and further clarified the parties’ respective rights and provide for continued access to the necessary rights in the event of insolvency.

In consideration for the grant of the exclusive right to the patent rights in the field, the Company agreed to pay a 6% royalty to Phage on the net sales price of finished product to end customer or distributor. The rights and obligations set forth in the Joint Patent Agreement end upon the later of (a) the expiration of the last to expire jointly owned patent and (b) the abandonment of the last pending jointly owned patent application.

Currently it is the Company’s intention to contract with Phage for manufacturing of its drug candidates for the ongoing FDA trials and for further commercial production. However, the Company has the right to and may choose to use a third party for manufacturing and is exploring additional contract manufacturers for its drug candidates.

Phage has provided the Company with administrative support in Phage’s research facility and billed the Company for Phage’s actual costs incurred plus the Company’s pro-rata share (This is based on costs incurred for the Company as compared to total Phage overhead costs) of Phage’s overhead costs.

The Company paid Phage for technical development services and for manufacture of its drug candidates for clinical trials and some administrative services:

		Six Month Period Ended June 30,		For the Period from March 11, 1998 (Inception) to June 30,
		2007	2008	2008
			(In thousands)
Technical development services	$	927	677	6,184
Administrative support provided by Phage	$	26	7	1,204

Page 13 of 84

Note 3. Transactions and Contractual Relationships with Affiliated Entities - (continued)

Distribution Agreement

The Company and Phage have entered into a distribution agreement with CPI, a Bahamian company, to handle future distribution of the Company’s drugs and any other products licensed to CPI when available for commercial distribution. CPI’s territory is limited to areas other than the United States, Canada, Europe (defined as the Ural Mountains west including Iceland, excluding Turkey and Cyprus), Japan and with respect to the Company only, the Republic of Korea, the Republic of China and Taiwan. Phage and Cardio each own approximately 43% of the CPI outstanding stock and the companies have the right to each appoint 45% of the CPI board. The Company has made no payments to CPI and does not anticipate making any payments in the near future.

As of December 31, 2003, the Company accounted for its 43% interest in Cardio Phage International (CPI) under the equity method. As of December 31, 2004, the Company’s Statement of Operations includes a loss of $15,000, which represents the Company’s equity in loss on its investment in CPI. The loss reduced the Company’s investment in CPI to zero and, as a consequence, CPI’s ongoing operations will not negatively affect the Company’s future financial results. The Company has no obligation to fund future operating losses nor has any guarantees on any of CPI’s obligations. There is no material difference between the Company’s carrying value for CPI and underlying equity in CPI’s net assets. There is no quoted market price for CPI’s net assets. There is no quoted market price for CPI’s shares.

Royalty Agreement

The Company has entered into an agreement with Dr. Thomas J Stegmann, one of the Company’s directors and Chief Medical Officer, whereby the Company will pay Dr. Stegmann a royalty of one percent of the Company’s net revenue (as defined) from commercial sales of the Company’s drugs in exchange for rights granted to the Company to utilize the results of Dr. Stegmann’s German clinical trials. This agreement terminates on December 31, 2013. The Company has made no payments to Dr. Stegmann under this agreement.

Asia Exclusive Patent License and Distribution Agreement

On December 15, 2000, the Company entered into an agreement, which has been superseded by a new exclusive license agreement dated February 20, 2007, with Korea Biotechnology Development Co., Ltd. (“KBDC”) to commercialize its future products. The Company transferred to KBDC the rights to market its products for 99 years in all of the Republic of Korea, China, and Taiwan. The Company did this by exclusively licensing its patents to KBDC in Korea, China and Taiwan in the field of: any angiogenic or wound healing compositions and methods of use for which the Company has received marketing approval in the United States, Europe or Japan (including in particular, but without limitation, all FGF species, fragments, derivatives, and analogs thereof), and methods of making the approved angiogenic or wound healing compositions, including any nucleic acid sequences encoding said compositions and any vectors and/or host cells comprising said nucleic acid sequences. The agreement further provides that any improvements, in the form of modifications to methods, processes, compositions or products within the license field, are the property of the Company, but shall be within the license granted. The parties shall inform each other in writing of any such improvements.

In exchange, KBDC arranged for the subscription for 8,750,000 of the Company’s shares of Common Stock for $3,602,000 by Cardio Korea Co. Ltd. KBDC agreed to fund all of the regulatory approval process in the Republic of Korea for any of the Company’s products.

In addition, KBDC agreed to pay a royalty of 10% of net revenues to the Company. The royalties will be paid for the life of the Joint Patent Agreement, then 9% thereafter. The agreement contemplates the expiration or abandonment of the licensed rights, at which point the royalty paid by KBDC is adjusted. Either party may terminate the agreement for material breach that is uncured 30 days after receipt of written notice.

Daniel C. Montano, the Company’s chairman, owns 17% of KBDC and is a former member of the KBDC Board of Directors. KBDC invested $200,000 in each of Sribna, Proteonics and Zhittya and invested $60,000 in CPI.

Page 14 of 84

Note 3. Transactions and Contractual Relationships with Affiliated Entities - (continued)

Guaranty of Rental Agreements for Phage (Now Terminated)

On May 23, 2007, Canta Rana Ranch, L.P., a California limited partnership (“Canta Rana”), released CardioVascular BioTherapeutics, Inc. from its obligations under the Standard Lease Guaranty, executed by the Company on March 15, 2006, in connection with the Standard Industrial Net Lease, dated March 15, 2006, between Phage Biotechnology Corporation, a Delaware Corporation and Canta Rana. The Agreement Exchanging Lease Guaranties, executed by Canta Rana and the Company, among other parties, became effective on May 23, 2007 when the terms therein were satisfied and which effectiveness thereby terminated and superseded the Guaranty, which released the Company of any and all obligations of Phage under the Phage Lease. Also in relation to the termination of the Guaranty, the Indemnity and Reimbursement Agreement, dated March 15, 2006, between the Company and Phage that was executed in exchange for the Guaranty, automatically terminated on May 21, 2007, the effective date of the exchange of guaranties referenced in the Agreement.

The Company entered into a Standard Lease Guaranty (the “Lease Guaranty”) dated March 15, 2006 with Canta Rana Ranch, L.P; a California limited partnership and Phage (the “Lease Agreement”). Phage is an affiliated private biotechnology company that manufactures recombinant protein drugs and is the Company’s supplier of drug products. Pursuant to the Lease Guaranty, the Company guarantees full performance of all of Phage’s obligations under the Lease Agreement.

In exchange for the Company’s guarantee of the Lease Agreement, Phage entered into an Indemnity and Reimbursement Agreement dated as of March 15, 2006. Phage will pay the Company certain fees payable on the first day of each calendar month that will be the sum of the following amounts (collectively, “Guaranty Fees”): (a) one-tenth (1/10^th ) of one percent (1%) of the remaining aggregate amount of the Minimum Monthly Rent due under the Lease Agreement from the period from May 1, 2006 to the expiration date of the Lease Agreement; and (b) one-tenth (1/10^th ) of one percent (1%) of the remaining aggregate amount of Additional Rent due under the Lease Agreement following the payment of additional rent. Any amount of guaranty fees not paid by Phage on the first calendar day of each month shall accrue interest at the lesser of twelve percent (12%) per annum or the maximum rate allowable by law until paid.

If Phage defaulted on payment of the Minimum Monthly Rent or the Additional Rent, which monthly payments aggregate approximately $20,000, the Company was obligated pursuant to the Lease Guaranty to pay to the leasor the rents in default. Phage indemnified the Company for any amounts required to be paid by the Company pursuant to the Lease Guaranty in the Indemnity and Reimbursement Agreement dates as of March 15, 2006.

During August 2004, the Company guaranteed Phage’s obligations under a non-cancelable operating lease for laboratory and office space at the University of California Irvine Research Center. The lease was for 11,091 rentable square feet for the period March 1, 2004 through August 31, 2006 and provided for a monthly rent of approximately $35,500 plus shared building operating expenses. During 2004 and 2005, the Company subleased space from Phage for approximately $2,800 per month as part of the agreement for administrative services. The lease term expired September 30, 2006 without any event of default. The Company’s guarantee expired along with the expiration of the lease.

On March 15, 2006, the Company entered into a Standard Lease Guaranty (the “Lease Guaranty”) of the Standard Industrial Net Lease between Canta Rana Ranch, L.P., a California Limited Partnership and Phage (the “Lease Agreement”). Pursuant to the Lease Guaranty which was terminated on May 23, 2007. The Company guarantees full performance of all of Phage’s obligations under the Lease Agreement. (See note 14).

During August, 2006, the Company requested Phage conduct the pack-and-fill of the drug product for the PAD Phase I clinical trial. Phage obtained a third-party proposal as a benchmark for the pack-and-fill. The Company agreed to have Phage conduct the pack-and-fill provided Phage does not exceed the amount of the third-party proposal. Phage has completed the manufacturing run of a clinical lot of FGF-1 as of May 19, 2007. Phage has done the final fill of this product for the upcoming Phase I clinical trial in peripheral artery disease. Phage will continue to store the product at its facility until further instruction from Cardio. The Company has paid $396,000 to Phage for this project as of September 30, 2007.

Page 15 of 84

Note 3. Transactions and Contractual Relationships with Affiliated Entities - (continued)

The Company entered into an engagement agreement with GHL Financial Services, Ltd. (“GHL”) on August 18, 2007 (the “Engagement Agreement”). Under the Engagement Agreement, GHL shall act as lead placement agent in the proposed offering, issuance and sale of the Company’s securities, including the Securities issued and any future Securities issuances by the Company in connection with the Private Placement. In connection with its engagement, GHL will perform services which are normal and customary for a placement agent to perform in any transaction, including the Private Placement.

Any financing arranged by GHL will be as the Company’s non exclusive agent (on a best efforts basis) and not on an underwritten basis. The Company agrees to pay GHL 10% of aggregate gross proceeds received or to be received by the Company from the sale of the Company’s securities in any transaction during the term for its services pursuant to the Engagement Agreement. GHL is responsible for paying commissions to sub-placing, if any, agents. The President of GHL is Grant Gordon, a director on the Company’s Board of Directors since February 2005 and the son-in-law of Daniel C. Montano, the Chairman of the Board of Directors, President and Chief Executive Officer. Pursuant to the Engagement Agreement between the Company and GHL, GHL earned a commission of $82,500 (10% of the aggregate purchase price of the common stock sold to the investor and the subscribers) in connection with the Private Placement of common stock, for the six month period ended June 30, 2008.

In addition GHL earned $12,000 in connection with the sale of demand notes in 2007 and in the six month period ended June 30, 2008, and $105,000 in connection with the sale of the long term notes in the six month period ended June 30, 2008.

Guaranty from Daniel C. Montano

On March 20, 2006, Daniel C. Montano, the Company’s Chairman, President and CEO, entered into a Guaranty Agreement whereby he guaranteed any and all obligations of the Company resulting from the sale on March 20, 2006 of $20,000,000 of senior secured notes and warrants. The guaranty remains in effect until the first date on which the Company receives revenue from the sale of the drugs in which FGF-1 ₁₄₁ is the active pharmaceutical ingredient after such drug has been approved by the FDA provided that on such date the Company is not in default of any provisions of the obligations or triggering events contained in the agreements for the senior secured notes and warrants and such default is not continuing. However, the guaranty will terminate upon the payment in full of the notes including conversion of the notes into the Company’s common stock.

After the Company’s obligations contained in the agreements for the senior secured notes and warrants have been paid in full, if Daniel C. Montano was required to make any payments pursuant to this guaranty prior to the payment in full of our obligations, the Company will reimburse Daniel C. Montano for any such payments plus simple interest at 7% per annum from the date of the advance by Daniel C. Montano to the date reimbursed by the Company.

On March 18, 2008, the Company began a Private Placement of debt and warrants in an effort to raise up to $15,000,000 in promissory notes that mature within 18 months from the date of issuance. The notes are unsecured and serve as consideration for the issuance of warrants issued in conjunction with the notes. As of June 30, 2008, the Company has received gross proceeds of $1,050,800 for which Daniel C. Montano has guarantee repayment pursuant to the terms of five notes.

During the second quarter of fiscal year 2008, the Company entered into development and technology agreements with three clinical partnerships. In conjunction with the agreements, Daniel C. Montano has agreed to personally provide the individual partners of each partnership a "Put" to Mr. Montano equal to 200% of his/her investment, less distributions paid from the respective partnership commencing 36 months and ending 60 months after such investment.

Page 16 of 84

Note 3. Transactions and Contractual Relationships with Affiliated Entities - (continued)

Related Party Transactions

	Six Month Period Ended June 30,				For the Period from March 11, 1998 (Inception) to June 30,
Fees Paid to:	2007		2008		2008
	(In thousands)
Daniel C. Montano (Chairman of the Board, President and Chief Executive Office) ^(a)	$	—	$	—	$	200
Daniel C. Montano (Chairman of the Board, President and Chief Executive Office) ^(b)		240		238		2,537
Vizier Management Company ^(c)		—		—		116
GHL Financial Services Ltd. (“GHL”) ^(d)		70		148		2,538
Dr. Thomas Stegmann M.D. (the Company’s Co-founder and Chief Medical Officer ^(a)		240		245		2,235
C.K. Capital International and C&K Capital Corporation ^(f)		—		—		1,763
Dr. Wolfgang Priemer (the Company’s founder) ^(e)		40		30		392
Total	$	590	$	661	$	9,781

Consulting fees prior to becoming an employee of the Company.

Employment Services.

Vizier Management Company is controlled by Daniel C. Montano. The Company paid Vizier for consulting prior to his becoming an employee of the Company.

A director 4.12% of the Company and is a principal of an investment firm that has sold various Company securities to international investors.

Fees were paid for assisting the Company as chairman, of the European Compliance Committee which monitored the Company’s activities in Europe from the legal, regulatory and tax compliance perspectives. This committee was disbanded in May 2008.

C.K. Capital International and C&K Capital Corporation are controlled by Alex Montano, son of Daniel C. Montano.

Page 17 of 84

Note 4. Summary of Significant Accounting Policies

Development Stage Enterprise

The Company is a development stage company as defined in Statement of Financial Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by Development Stage Enterprises.” The Company is devoting substantially all of its present efforts to its formation, fundraising and product development and approval. Its planned principal operations of selling its pharmaceutical products have not yet commenced. For the period from March 11, 1998 (inception) through June 30, 2008 (unaudited), the Company has accumulated a deficit of approximately $77.7 million. There can be no assurance that the Company will; (a) have sufficient funds available to complete its research and development programs or (b) be able to commercially manufacture or market any products in the future, (c) be successful to attain significant future revenue, (d) or that any sales will be profitable. The Company expects operating losses to increase for at least the next several years due principally to the anticipated expenses associated with the proposed product development, clinical trials and various research and development activities.

Stock Split

In February 2004, the Board of Directors approved, with the approval of the shareholders, a 100-to-1 common stock split. The accompanying financial statements and notes to the financial statements have been retrospectively restated to reflect this split.

Use of Estimates

In preparing financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates relate to compensation expense for options, warrants and common stock issued for services.

Cash and Cash Equivalents

For purposes of the statements of cash flow, the Company considers all highly liquid investments purchased with original maturity of six months or less to be cash equivalents.

Restricted Cash

The restricted cash is required as collateral for the Company’s credit card facilities.

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation. Depreciation is computed by the straight-line method over the estimated useful life of the related asset, which management believes is 3 to 5 years. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments and renewals are capitalized.

Deferred Rent

The Company accounts for property leases with escalation provisions and tenant improvement allowances on a straight-line basis, resulting in a consistent charge to the Statement of Operations over the life of the lease. In the early years of the lease, the Company recognizes a liability for excess straight-line amounts over the actual rent paid. This liability begins to reduce in the later years of the lease.

Page 18 of 84

Note 4. Summary of Significant Accounting Policies - (continued)

Consolidation of Variable Interest Entities

The Company utilizes Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51 to account for variable interest entities. As required under FIN 46, the Company has consolidated certain partnerships which have entered into research and development agreements with the Company because the Company has determined that through a defacto agent relationship the Company is the primary beneficiary of the variable interest entities.

Income Taxes

The Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB” Statement No. 109 (“FIN 48) FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments. At the adoption date of January 1, 2007, we did not record any liabilities for uncertain tax position.

Fair Value of Financial Instruments

The Company measures its financial assets and liabilities in accordance with generally accepted accounting principles. For specific Company financial instruments, including cash and cash equivalents, accounts payable and accrued expenses, and accrued compensation, the carrying amounts approximate fair value due to their short maturities.

Valuation of Derivative Instruments

FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” requires bifurcation of embedded derivative instruments and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes Model. Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as an Adjustment to Fair Value of Derivatives. In addition, the fair values of freestanding derivative instruments such as warrants are valued using the Black-Scholes Model.

In September 2006, FASB Statement No. 157, “Fair Value Measurements,” was issued by the FASB. This new standard provides guidance for using fair value to measure assets and liabilities. The FASB believes the standard also responds to investors' requests for expanded information about the extent to which Companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. Statement 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, but does not expand the use of fair value in any new circumstances.

Currently, over 40 accounting standards within GAAP require (or permit) entities to measure assets and liabilities at fair value. Prior to Statement 157, the methods for measuring fair value were diverse and inconsistent, especially for items that are not actively traded. The standard clarifies that for items that are not actively traded, such as certain kinds of derivatives, fair value should reflect the price in a transaction with a market participant, including an adjustment for risk, not just the company's mark-to-model value. Statement 157 also requires expanded disclosure of the effect on earnings for items measured using unobservable data. Under Statement 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, Statement 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The Company has adopted SFAS No. 157 and does not believe SFAS No. 157 will have a significant impact on its financial position or results of operation.

Research and Development Costs

The Company accounts for research and development costs in accordance with SFAS No. 2, “Accounting for Research and Development Costs.” Research and development costs are charged to operations as incurred. Research and development costs consist of expenses incurred by third party consultants, contractors, clinical research organizations and suppliers in support of pre-clinical research and FDA clinical trials.

Research and Development Costs Funded by Other Entities

Research and development costs funded by other entities are charged to cost of sales as incurred. There were no costs associated with research and development funded by other entities from inception through June 30, 2008. During the quarter ended June 30, 2008 we entered into one development agreement for research and development funded by another entity and two agreements with sponsors to form limited partnerships for the purpose of entering into development agreements with CVBT for research and development funded by another entity. These arrangements are being accounted for in accordance with FAS 68 Research and Development Arrangements (as amended). The transactions are accounted for as a contract to perform research and development for others. The funded amount of the development contracts will be allocated between the fair value of the warrants issued in conjunction with the development agreement and the remaining amount which will be accounted for as a deferred charge, deferred revenue. Deferred revenue will be recognized as revenue as research and development costs are incurred. Research and development costs incurred for this project will be accounted for as cost of sales, as incurred.

Non-Monetary Transactions

Common stock issued for goods or services is recorded at estimated market value of the common stock issued or the services performed, whichever is more readily determinable.

Page 19 of 84

Note 4. Summary of Significant Accounting Policies - (continued)

Deferred Financing Costs

Costs incurred in connection with the issuance of debt instruments are capitalized as deferred financing costs. These costs primarily include commissions paid to the placement agent. Deferred financing costs are capitalized and amortized over the term of the related debt using the straight-line method and as redemptions occur the Company charges off a proportional amount of the original deferred financing costs to interest expense. This combined method of amortizing debt discount approximates the effective interest method.

	As of
	December 31, 2007			June 30, 2008
	(In thousands)
Deferred financing costs	$	1,553		$	1,553
Amortization of the deferred costs		(1,503	)		(1,524	)
Deferred financing cost, net of amortization	$	50		$	29

Concentrations of Credit Risk

The Company places its cash and cash equivalent with high quality financial institutions and at times they may exceed the Federal Deposit Insurance Corporation $100,000 insurance limit. As of December 31, 2007 and June 30, 2008, uninsured portion of cash is as follow:

	As of
	December 31, 2007		June 30, 2008
	(In thousands)
Uninsured Cash	$	207	$	288

Loss per Share

The Company calculates loss per share in accordance with SFAS No. 128, “Earnings per Share.” Basic loss per share is computed by dividing the loss available to common shareholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Due to the Company incurring net losses, basic and diluted loss per share are the same.

The following potential common shares have been excluded from the computation of diluted net loss per share for the six month period ended December 31, 2007 and June 30, 2008 since their effect would have been anti-dilutive:

	As of
	December 31, 2007		June 30, 2008
	(Shares in thousands)
Stock options		858		767
Warrants		—		—
Convertible notes payable		1,327		1,114

Page 20 of 84

CARDIOVASCULAR BIOTHERAPEUTICS, INC.

(Unaudited)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008

Note 4. Summary of Significant Accounting Policies - (continued)

Stock-Based Compensation

In December 2004, the FASB issued “Share Based Payment” SFAS 123 (R) and in March 2005 the SEC issued “Staff Accounting Bulletin” SAB No. 107. The Company has applied and adopted the provisions of these documents. The Company has used the Black-Scholes Model to estimate the fair value of stock options granted to employees and consultants since its inception and therefore, this method represents no significant change in the Company’s accounting for options and warrant issuances.

SFAS 123(R) requires companies to estimate the fair value of share based payment awards to employees and directors on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Statements of Operations. Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the method as allowed under SFAS No. 123, “Accounting for Stock-Based Compensation (SFAS 123)”.

The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006. Based on the terms of its plans, the Company did not have a cumulative effect related to its plans. The Company also elected to continue to estimate the fair value of stock options using the Black-Scholes Model. The Black-Scholes Model is a financial model in determining the fair value of a stock option using calculation based on a defined set of assumptions. Since the Company’s policy has always been to expense the issuance of options using the fair value based method using the Black-Scholes Model, there is no difference in the basic and diluted loss per share.

Stock-Based Compensation — Options and Warrants:

	Six Month Period Ended June 30,
	2007		2008
	(In thousands)
Research and development	$	68	$	77
General and administration		43		68
Total Stock-based compensation expense (options)		111		145
Stock-based compensation (warrants)		401		—
Stock-based compensation expense	$	512	$	145

The Company determined the fair value of share based payment awards to employees and directors on the date of grant using the Black-Scholes Model, which is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards. Prior to 2006, when valuing awards, the Company used the Award’s contractual term as a proxy for its expected terms. For new grants after December 31, 2005, the Company estimated an expected term using the “safe harbor” provisions provided in SAB 107. The Company used historical data to estimate forfeitures, of which the Company estimated to be none.

The Company has elected to adopt the detailed method provided in SFAS 123(R) for calculating the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation and to determine the subsequent impact on the APIC pool and Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R).

Page 21 of 84

Note 4. Summary of Significant Accounting Policies - (continued)

Recently Issued Accounting Pronouncements

In May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60 (“SFAS 163”). SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. SFAS 163 also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. SFAS 163 also requires expanded disclosures about financial guarantee insurance contracts. SFAS 163 is effective for fiscal years, and interim periods within those years beginning after December 15, 2008. As we are not involved in financial guarantee insurance (and reinsurance) contracts, we do not expect SFAS 163 to have a material impact on our consolidated financial position and results of operations.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles (GAAP) in the U.S. (the GAAP hierarchy). SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not expect SFAS 162 to have a material impact on our consolidated financial position and results of operations.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires enhanced disclosures about a company’s derivative and hedging activities. These enhanced disclosures must discuss (a) how and why a company uses derivative instruments (b) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133, Accounting forDerivative Instruments and Hedging Activities, and its related interpretations; and (c) how derivative instruments and related hedged items affect a company’s financial position, results of operations and cash flows. SFAS 161 is effective for fiscal years beginning on or after November 15, 2008, with earlier adoption allowed. We are currently evaluating the impact of adopting SFAS 161.

In January 2008, the SEC released SAB No. 110, which amends SAB No. 107 which provided a simplified approach for estimating the expected term of a “plain vanilla” option, which is required for application of the Black-Scholes-Model (and other models) for valuing share options. At the time, the Staff acknowledged that, for companies choosing not to rely on their own historical option exercise data (i.e., because such data did not provide a reasonable basis for estimating the term), information about exercise patterns with respect to plain vanilla options granted by other companies might not be available in the near term; accordingly, in SAB No. 107, the Staff permitted use of a simplified approach for estimating the term of plain vanilla options granted on or before December 31, 2007. The information concerning exercise behavior that the Staff contemplated would be available by such date has not materialized for many companies. Thus, in SAB No. 110, the Staff continues to allow use of the simplified rule for estimating the expected term of plain vanilla options until such time as the relevant data do become widely available. The Company has adopted SAB 110.

In December 2007, the FASB issued FASB Statement No 141(R) which replaces FASB Statement No. 141, Business Combinations. This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. Statement 141 did not define the acquirer, although it included guidance on identifying the acquirer, as does this Statement. This Statement’s scope is broader than that of Statement 141, which applied only to business combinations in which control was obtained by transferring consideration. By applying the same method of accounting — the acquisition method — to all transactions and other events in which one entity obtains control over one or more other businesses, this Statement improves the comparability of the information about business combinations provided in financial reports. The company does not believe SFAS No 141 will have a significant impact on its financial position or results of operations.

In December 2007, the FASB issued FASB Statement No 160 which mends ARB 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Before this Statement was issued, limited guidance existed for reporting non-controlling interests. This Statement requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent’s owners and the interests of the non-controlling owners of a subsidiary. Those expanded disclosures include a reconciliation of the beginning and ending balances of the equity attributable to the parent and the non-controlling owners and a schedule showing the effects of changes in a parent’s ownership interest in a subsidiary on the equity attributable to the parent. This Statement therefore improves the completeness, relevance, and transparency of the information provided in the consolidated financial statements. The company does not believe SFAS No 160 will have a significant impact on its financial position or results of operations.

In February 15, 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities was issued which included an Amendment of FASB Statement No. 115. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. This option is available to all entities, including not-for-profit organizations. Most of the provisions in Statement 159 are elective; however, the amendment to FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. Some requirements apply differently to entities that do not report net income. The FASB’s stated objective in issuing this standard is as follows: “to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.” The fair value option established by Statement 159 permits all entities to choose to measure eligible items at fair value at specified election dates.

Page 22 of 84

Note 4. Summary of Significant Accounting Policies - (continued)

A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. A not-for-profit organization will report unrealized gains and losses in its statement of activities or similar statement. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. The Company does not believe SFAS No. 159 will have an immediate significant impact on its financial position or results of operations.

Note 5. Cash, Cash Equivalent and Restricted Cash

Cash, cash equivalents and restricted cash consisted of the following at December 31, 2007 and June 30, 2008 (Unaudited):

	As of
	December 31, 2007		June 30, 2008
	(In thousands)
Cash in bank	$	310	$	391
Restricted cash		60		60
Total	$	370	$	451

Note 6. Prepaid and Other Current Assets

Prepaid assets consisted of the following at December 31, 2007 and June 30, 2008 (Unaudited):

	As of
	December 31, 2007		June 30, 2008
	(In thousands)
Prepaid clinical trial costs	$	184	$	—
Prepaid insurance		75		14
Prepaid professional and legal fees		10		10
Prepaid and current assets (other)		274		19
Total	$	543	$	43

Note 7. Property and Equipment

Property and equipment consisted of the following at December 31, 2007 and June 30, 2008 (Unaudited):

	As of
	December 31, 2007			June 30, 2008
	(In thousands)
Furniture, fixtures, computer software, and equipment	$	737		$	738
Scientific equipment		85			86
Leasehold improvements		288			238
Less accumulated depreciation		(448	)		(578	)
Property and equipment net of accumulated depreciation	$	662		$	484

Page 23 of 84

CARDIOVASCULAR BIOTHERAPEUTICS, INC.

(Unaudited)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008

Note 7. Property and Equipment - (continued)

Depreciation expense (in thousands) for the periods ended June 30, 2007, 2008, and the period from March 11, 1998 (inception) to June 30, 2008 were $141, $140 and $594 respectively.

Note 8. Due to and from Affiliates

Due to/from Affiliates at December 31, 2007 and June 30, 2008 consisted of the following:

	As of
	December 31, 2007			June 30, 2008
	(In thousands)
Due to Phage	$	(24	)	$	—
Due from Phage		139			126
Total	$	115		$	126

Note 9. Research and Development Costs Funded by Other Entities/Variable Interest Entities

During the quarter ended June 30, 2008, CardioVascular BioTherapeutics Inc. entered into one development agreement for research and development funded by another entity and two agreements with sponsors to form limited partnerships for the purpose of entering into development agreements with CardioVascular BioTherapeutics Inc. for research and development funded by another entity.

In each of these agreements, the amount funded by the partnerships for services by CVBT as provided for in the Development Agreement is non-refundable. The risk of loss associated with each of these agreements rests wholly with the partnerships. The Company has no obligation to repay any amount of the funded development costs. If the outcome of the research and development under these agreements results in sales or any other form of income from the exploitation of the intellectual property developed, the Company is obligated to make royalty payments as discussed in the following paragraphs. The Company is accounting for these agreements in accordance with FAS 68 Research and Development Arrangements (as amended). As such, the funded amount of the development contracts will be accounted for as deferred charge, deferred revenue. The deferred revenue will be recognized as revenue as research and development costs are incurred. Research and development costs incurred for this project will be accounted for as cost of sales, as incurred. Mr. Daniel C. Montano, the Company’s Chairman, CEO and President, has agreed to personally provide the individual limited partners of the partnerships a "Put" to Mr. Montano commencing 36 months and ending 60 months after their investment, in an amount equal to 200% of their investment, less distributions paid from the partnership.

As of June 30, 2008, the Company had received $1,650,000 from the partnerships and or the sponsors of the partnerships for funding of the Development Agreements. The Company has no equity or other interest in the partnerships. The Company identified the partnerships as VIE’s and concluded that due to the “Puts” by the partnerships to Mr. Montano, the Company’s Chairman and CEO, that the Company is the primary beneficiary of the VIE’s. FIN No. 46 requires that an enterprise consolidate a VIE if that enterprise has a variable interest that will absorb a majority of the entity’s expected losses if they occur. Accordingly, the Company consolidated the partnerships as VIEs, regardless of the Company not having an equity interest in the partnerships and the partnerships creditors having no recourse against the Company. The VIEs had no material operating costs as of June 30, 2008. Included in the Company’s consolidated balance sheet as of June 30, 2008 were the following net assets of the VIEs:

Deferred Expense for Development Agreements		$	1,650,000
Net Assets		$	1,650,000

On June 3, 2008, CardioVascular BioTherapeutics Inc. entered into Development and Technology Agreements with Derma Life Clinical Partners LP to fund a minimum of $1 million and up to $3 million of the clinical development for CardioVascular BioTherapeutics Inc.’s wound healing drug candidate. Through the development agreement, Derma Life will contract with CardioVascular BioTherapeutics Inc. to advance the wound healing clinical trial. If the development results in the creation of economic value, CardioVascular BioTherapeutics Inc. will pay a royalty to Derma Life of 10% of revenues or other moneys received from the commercialization or other exploitation of the drug candidate up to a maximum of ten times the funded amount of the development agreement. Additionally, CardioVascular BioTherapeutics Inc. has agreed to grant to the partnership a five year warrant to purchase 500,000 shares of CardioVascular BioTherapeutics Inc.’s common stock with an exercise price of $1.00 per share for the minimum funding of $1,000,000 and additional warrants to purchase 50,000 shares for each additional $100,000 funded in the development agreement. Daniel C. Montano has agreed to personally provide the individual partners of Derma Life a "Put" to Mr. Montano equal to 200% of their investment, less distribution paid from Derma Life commencing 36 months and ending 60 months after their investment. As of June 30, 2008, Derma Life Clinical Partners LP has funded $750,000 toward the development agreement which amount is included in non-controlling interest in variable interest entities in the accompanying balance sheet and CardioVascular BioTherapeutics Inc. has issued warrants for 350,000 shares.

Page 24 of 84

Note 9. Research and Development Costs Funded by Other Entities - continued

On April 22, 2008, CardioVascular BioTherapeutics Inc. entered into an agreement with the sponsor of a development and technology agreement through Cardio Derma Clinical Partners LP to fund a minimum of $1 million and up to $5 million of the clinical development for CardioVascular BioTherapeutics Inc.'s wound healing drug candidate. Through the development agreement, Cardio Derma Clinical Partners will contract with CardioVascular BioTherapeutics Inc. to advance the wound healing clinical trial. If the development results in the creation of economic value, CardioVascular BioTherapeutics Inc. will pay a royalty to Cardio Derma Clinical Partners of 10% of revenues or other moneys received from the commercialization or other exploitation of the drug candidate up to a maximum of ten times the funded amount of the development agreement. Additionally, CVBT has agreed to grant to the partnership a five year warrant to purchase 500,000 shares of CVBT’s common stock with an exercise price of $1.00 per share for the minimum funding of $1,000,000 and additional warrants to purchase 50,000 shares for each additional $100,000 funded in the development agreement. Daniel C. Montano has agreed to personally provide the individual partners of Cardio Derma Clinical Partners a "Put" to Mr. Montano equal to 200% of their investment, less distribution paid from Cardio Derma Clinical Partners commencing 36 months and ending 60 months after their investment. As of June 30, 2008, the sponsor for Cardio Derma Clinical Partners LP has funded $750,000 toward the sponsor’s agreement which amount is included in non-controlling interest in variable interest entities in the accompanying balance sheet. Additionally, as of June 30, 2008 no warrants have been issued to this partnership by the Company.

On April 22, 2008, CVBT entered into an agreement with the sponsor of a development and technology agreement through ProDerm Limited Partnership to fund a minimum of $1 million and up to $10 million of the clinical development for CVBT's wound healing drug candidate. Through the development agreement, ProDerm Limited Partnership will contract with CVBT to advance the wound healing clinical trial. If the development results in the creation of economic value, CVBT will pay a royalty to Cardio Derma Clinical Partners of 10% of revenues or other moneys received from the commercialization or other exploitation of the drug candidate up to a maximum of twenty times the funded amount of the development agreement. Additionally, CVBT has agreed to grant to the partnership a five year warrant to purchase 500,000 shares of CVBT’s common stock with an exercise price of $1.00 per share for the minimum funding of $1,000,000 and additional warrants to purchase 50,000 shares for each additional $100,000 funded in the development agreement. Daniel C. Montano has agreed to personally provide the individual partners of ProDerm Limited Partnership a "Put" to Mr. Montano equal to 200% of their investment, less distribution paid from ProDerm Limited Partnership commencing 36 months and ending 60 months after their investment. As of June 30, 2008, the sponsor for ProDerm Limited Partnership has funded $200,000 toward the sponsor’s agreement which amount is included in non-controlling interest in variable interest entities in the accompanying balance sheet. Additionally, as of June 30, 2008 no warrants have been issued to this partnership by the Company.

Note 10. Notes Payable

In the six month period ended June 30, 2008 the Company sold an additional $870,000 which includes $700,000 of notes issued in 2007 which were rolled over in 2008. The Company issued unsecured demand notes to investors during the year ended December 31, 2007 in exchange for gross proceeds of $1,575,000 and net proceeds of $1,533,000 in cash. Some of these notes were issued with warrants which have a five year term and an exercise price of $1.00. These demand notes have various interest rate terms ranging from 10% to 16%. At June 30, 2008, $81,173 of interest was accrued for these notes. These notes are due upon demand, and not due until demand is made. Commissions earned for the sale of these notes was $42,000, of which $12,000 was earned by a related party.

Page 25 of 84

The Company issued unsecured demand notes to principal officers during the year ended December 2007. At June 30, 2008, there were $160,000 of notes issued to principal officers which have no stated maturity and have an interest at a rate of 6% per annum. The interest accrued on these notes to the principal officers is $7,766.

Demand Notes	Demand Notes Issued		Warrants Issued		Fees Paid		Interest %			Repayment of the Demand Notes		Demand Notes Outstanding as of December 31, 2007		Demand Notes Outstanding as of June 30, 2008
Note issued without warrants in 2007		175,000		—		42,000		10 - 81	%		75,000	$	100,000	$	100,000
Note issued without warrants in 2008		70,000		—		—		29	%		70,000		—		—
Notes issued with warrants in 2007		1,400,000		1,400,000		—		10 - 16	%		—		1,400,000		1,400,000
Notes issued with detached warrants in 2008		800,000		500,000		—		10 - 16	%		700,000		—		100,000
Total		2,445,000		1,900,000		42,000					845,000	$	1,500,000	$	1,600,000
Accrued interest												$	57,315	$	81,173

Officer Notes	Demand Notes Issued		Warrants Issued		Fees Paid		Interest %			Repayment of the Demand Notes		Demand Notes Outstanding as of December 31, 2007		Demand Notes Outstanding as of June 30, 2008
Notes due to Officers	$	310,000		—		—		6	%	$	150,000	$	160,000	$	160,000
Accrued Interest													2,980		7,766

In the period ended June 30, 2008 the Company sold $1,050,800 of long term notes that have an 18 month term (one note for $80,000 has a 5 year term). These notes were issued with 1,178,800 warrants which have a five year term and an exercise price of $1.00. These notes have an interest rate of 20%. Commissions earned for the sale of these notes was $105,000 for a related party.

Long Term Notes	Notes Issued		Warrants Issued		Fees Paid		Interest %			Repayment of the Notes		Long Term Notes Outstanding as of December 31, 2007		Long Term Notes Outstanding as of June 30, 2008
Long Term Notes	$	1,050,800		1,178,300		105,000		20	%		—	$	—	$	1,050,800
Accrued Interest													—	$	13,056

Page 26 of 84

Debt Discount on Notes Payable

The debt discount is for the fair value of the warrants issued with the demand and the long term notes.

The debt discount for the demand notes is being amortized on a straight line basis over the life of the notes estimated to be 42 to 91 days. At June 30, 2008, the debt discount associated with these warrants was fully amortized. For the six month period ended June 30, 2008, the debt discount related to the demand notes of $400,302 was amortized to interest expense.

The debt discount for the long term notes is being amortized on a straight line basis over the life of the notes which is 18 months. At June 30, 2008, the debt discount associated with these warrants is $755,870. For the six month period ended June 30, 2008, the debt discount related to the long term notes was $110,285 was amortized to interest expense.

Derivative information for the Demand Notes:

The warrants are for the purchase of 1,900,000 shares of the Company’s common stock at $1.00 per share. The warrants have a term of five years and are exercisable upon issue. The Company allocated the fair value of the warrants against the amount of the Notes. The relative fair value of the warrants at issuance was determined to be approximately $755,870, which was determined using the Black-Scholes Model, was recorded as an Other Derivative and a reduction of the carrying value of the notes (see (a) below). The discount on debt is being amortized to interest expense over the initial term of the notes. The Black-Scholes Model calculation incorporated the following assumptions in the table summarized at June 30, 2008:

Year	Warrants Issued for Purchase of Common Stock		Estimated Fair Market Value at June 30		Exercise Price per Share ($)		Expected Life (Years)		Risk Free Interest %			Approximate Volatility %			Initial Term Days
	(In thousands)
2007	$	1,400	$	507		1		5		3.28 - 3.99	%		63.34 - 64.12	%		42 - 91
2008		500		420		1		5		2.80 - 3.18	%		96.16	%		42 - 91
Total	$	1,900	$	927

Page 27 of 84

The warrants associated with the notes were fair valued upon their issuance, December 31, 2007 and again on June 30, 2008. The following table explains these transactions and their subsequent net increase or decrease recorded through results of operations as income (loss) to adjustment to fair value of derivatives through June 30, 2008.

	December 31, 2007		June 30, 2008		For the Period from March 11, 1998 (Inception) to June 30, 2008
	(In thousands)
Amortization of debt discount on demand notes	$	75	$	841	$	916

Change Period	Fair Valued at Issuance to December 31, 2007		Fair Valued from Issuance to June 30, 2008		Net Change in Fair Value for the Six Month Period June 30, 2008
	(In thousands)
Total fair value of derivatives at respective periods	$	658	$	1,330	$	(672	)

The following table summarizes the assumptions used to measure the fair value of derivatives:

Derivatives	Dividend Yield %		Expected Volatility %		Risk-Free Interest %		Expected Life (Years)		CVBT Stock Price
Warrant derivative:
At Issuance		—		63.34 - 64.12		3.28 - 3.99		4.85 - 5.00	$	0.53 - 0.88
As of December 31, 2007		—		64.12		3.45		4.95	$	0.88
As of March 31, 2008		—		96.16		2.46 - 3.18		4.60 - 4.75	$	0.92
As of June 30, 2008		—		95.94		2.57 - 3.73		4.50 - 5.00	$	0.63

Page 28 of 84

The Company revalues the derivatives at the end of each quarter to determine if the values of these derivatives have changed from period to period, until the notes are redeemed or converted. An increase in value of these derivatives will result in the Company having to record an expense to the Adjustment to Fair Value of Derivatives on the Statement of Operations. Conversely, a decrease in the value of these derivatives will result in the Company having to record income to the Adjustment to Fair Value of Derivatives on the Statement of Operations.

In accordance with FAS 133, Accounting for Derivative Instruments and Hedging Activities, EITF 00-19, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock, and EITF 05-04, The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19, the amounts allocated to the warrant represent a derivative liability that has been recorded in the accompanying balance sheet at June 30, 2008.

Derivative information for the Long Term Notes:

The warrants are for the purchase of 1,178,000 shares of the Company’s common stock at $1.00 per share. The warrants have a term of five years and are exercisable upon issue. The Company allocated the fair value of the warrants against the amount of the Notes. The relative fair value of the warrants on issuance was $755,870, which was determined using the Black-Scholes Model, was recorded as an Other Derivative and a reduction of the carrying value of the notes (see (a) below). The discount on debt is being amortized to interest expense over the initial term of the notes.

Year	Warrants Issued for Purchase of Common Stock		Estimated Fair Value at issuance	Exercise Price per Share ($)	Expected Life (Years)	Risk Free Interest %		Approximate Volatility %		Initial Term Months		Amortization for the Six Months Ended June 30, 2007
2008	1,178,000	$	755,870	1	5	2.65 - 3.57	%	95.65 - 96.51	%	18	$	83,451
Total	1,178,000										$	83,451

		December 31, 2007		June 30, 2008		For the Period from March 11, 1998 (Inception) to June 30, 2008
	(In thousands)
Amortization of Debt discount on long term notes	$	—	$	83	$	83
Total	$	—	$	83	$	83

The warrants associated with the notes were fair valued upon their issuance, and again on June 30, 2008. The following table explains these transactions and their subsequent net increase or decrease recorded through results of operations as income (loss) to adjustment to fair value of derivatives through June 30, 2008.

Change Period	Fair Valued at Issuance to December 31, 2007			Fair Valued from Issuance to March 31, 2008		Fair Valued from Issuance to June 30, 2008		Net Change in Fair Value from issuance to June 30, 2008
	(In thousands)
Total fair value of derivatives at respective periods	$	—	$	—	$	491	$	(686	)

Page 29 of 84

The following table summarizes the assumptions used to measure the fair value of derivatives:

Derivatives	Dividend Yield %	Expected Volatility %	Risk-Free Interest %	Expected Life (Years)		CVBT Stock Price
Warrant derivative:
At Issuance	—	95.65 - 96.51	2.65 - 3.57	5.00	$	0.60 - 1.01
As of June 30, 2008	—	95.94	3.34	4.87	$	0.63

Note 11. Convertible Notes Payable

Convertible Senior Secured Notes

On March 20, 2006, the Company entered into a Securities Purchase Agreement with accredited investors for the issue of an aggregate of $20,000,000 principal amount of convertible notes with offering costs of $1,553,000 representing approximately 7.8% of the principal amount. In connection with the closing of the sale of the notes, the Company received net proceeds of $18,447,000. The fixed conversion price of the Senior Secured Notes, the number of shares and exercise price of the warrants are subject to an adjustment according to provisions in the Securities Purchase Agreement. On May 21, 2007, the Company entered into an agreement to sell 15,000,000 of the Company’s common stock at a purchase price of $1.00 per share in connection with a Private Placement to the investor and certain other subscribers pursuant to a subscription agreement. This transaction triggered the adjustment provisions in the Securities Purchase Agreement; and thus the fixed conversion price of $12.00 in the Senior Secured Notes and the exercise price of $8.50 for the warrants (“original terms”) were both reset to $1.00 per share as of May 21, 2007 (“re-pricing”), subject to anti-dilution and other customary adjustments. All other terms of the Senior Secured Notes remain unchanged.

As of June 30, 2008, the Company had $2,480,000 principal amount outstanding of such convertible notes, which was convertible at the option of the holders into 2,480,000 shares of common stock based on the re-set Fixed Conversion Price of $1.00 per share. However, the notes are convertible at 94% of the average of the preceding five days’ weighted average trading price, if the result is lower than $1 per share. Conversion of the senior secured notes into the Company’s common stock at other than the Fixed Conversion Price is limited to no more than 10% of the original $20,000,000 note balance per month. The notes mature in March 2009, and bear a resetting floating interest rate of three months LIBOR plus 7%. Substantially all of the Company’s assets secure the notes.

Page 30 of 84

The following table summarizes convertible notes discounts and derivative values outstanding at June 30, 2008:

	*(In thousands)*
Convertible notes at face value at March 20, 2006	$	20,000
Notes converted into common stock		(17,520	)
Convertible notes at face value at June 30, 2008		2,480
Discount on notes:
Embedded derivatives		(8,196	)
Warrant derivatives		(2,383	)
Net convertible notes on June 30, 2008		(8,099	)
Amortization of discount from derivatives		9,848
Convertible notes at June 30, 2008		1,749
Embedded derivatives at fair value at June 30, 2008		556
Warrant derivatives at fair value at June 30, 2008		1,031
Net convertible notes, embedded derivatives and warrant derivatives at June 30, 2008	$	3,336

In May 21, 2007, the convertible senior secured notes were fair valued according to the original terms of the agreement for the period starting April 1, 2007, through May 21, 2007. On May 21, 2007 the Convertible Notes were fair valued for the re-pricing. On June 30, 2007, the Senior Secured Notes were fair valued reflecting the re-pricing of the convertible notes. The following table explains these transactions and their subsequent net increase or decrease recorded through results of operations as income (loss) to adjustment to fair value of derivatives through June 30, 2008.

Period	Fair Valued at June 30, 2007		Fair Valued from June 30, 2007 to December 31, 2007		Fair Valued from Dec. 31, 2007 to June 30, 2008
	(In thousands)
Warrants	$	2,058	$	881	$	1,031
Convertibility Feature		3,998		631		531
Interest Convertibility Feature		414		47		25
Total fair value of derivatives at respective periods	$	6,470	$	1,559	$	1,587

Page 31 of 84

In connection with the Securities Purchase Agreement, the Company also issued warrants to purchase an aggregate of 705,882 shares of its common stock. On May 21, 2007, the aggregate number of shares acquirable upon exercise of such warrants increased to 5,999,997 due to a price reset. The term of the warrants is three years and they may be exercised at any time up to March 2009. The warrant exercise price was $8.50 per share, until the price was re-set as of May 21, 2007 to $1.00 per share.

Net Decrease (Increase) Recorded as Adjustment to Fair Value	For the Year Ended December 31, 2007			For the Period Ended June 30, 2008
	(In thousands)
Change between reporting periods	$	(968	)	$	(27	)
Reclass of derivatives from liability to equity due to actual interest paid		(586	)		—
Reclass of derivatives from liability to equity due to conversion		(6,455	)		(817	)
Total	$	(8,009	)	$	(844	)

Conversion of Senior Secured Notes:

Period

Amount of

Senior Secured

Notes Converted

Converted to

Number of

Shares

Average

Share Price

Interest Paid

During the

Period with

Common Stock

Total - 2006	$	1,897,514	987,219	$	2.28	$	33,028
Total - 2007		14,222,486	19,150,903		0.80		607,811
1^st quarter - 2008		800,000	800,000		1.00		124,890
2nd quarter - 2008		600,000	801,354		0.75		96,170
Total	$	17,520,000	21,739,476			$	861,899

Page 32 of 84

The Company may incur certain penalties if it fails to file and obtain and maintain the effectiveness of a registration statement covering the notes and warrants (collectively “the Securities”), such as cash payments to the note holders calculated under formulas based on the principal amount of the notes and aggregate exercise price of the warrants. The Company may also incur cash damages if the Company fails to issue and deliver certificates of its common stock in a timely manner upon receipt of a notice from a note holder to convert all or a portion of the note holder’s note. The Company may also be required to redeem all or a portion of the principal amount of a note in the event a conversion fails. Under certain triggering events, the Company may be required to redeem all or a portion of the principal amount of a note in the sum of 120% of the principal plus applicable interest. Examples of triggering events are: (i) delisting of the Company’s securities; (ii) failure of a registration statement to be filed; (iii) failure of a registration statement to become effective; (iv) other triggering events. Other terms and conditions that are material to the Company are: (i) after a triggering event the holder of a note has the option to require the Company to pay a redemption price at the option of a note holder; (ii) a redemption in the event of a change in control at the option of a note holder, (iii) certain events of default; and (iv) the acceleration of payment of a note upon the occurrence of an event of default. To satisfy the above requirements, the Company filed a registration statement on form S-1/A on June 26, 2007 that was declared effective by the SEC on June 28, 2007.

From March 20, 2006 until the first date on which there are no notes outstanding, the Company will have certain restrictions on the payment of dividends or distributions, whether in cash, stock, equity securities or property, in respect to any capital stock or split, combination or reclassification of any capital stock or issuance or authorization of the issuance of any other securities in respect of, in lieu of or in substitution for any capital stock, or set any record date with respect to any of the foregoing.

In connection with this financing, closing costs of: (i) $200,000 to purchasers of the notes for legal fees relating to transaction, (ii) an investment banking fee in the amount of $1,200,000 to CK Cooper & Company, and (iii) other expenses related to legal fees in the amount of $153,000. A total of $1,553,000 in transaction fees and expenses were paid by the Company such that the Company realized net proceeds in the amount of $18,447,000.

Page 33 of 84

The following table defines the derivatives related to the convertible notes:

Item #	Derivatives	Definition
1	Warrants Derivative	The Company sold warrants in connection with the sale of senior secured convertible notes on March 20, 2006. The warrants were fair valued at March 20, 2006 and subsequently are revalued at the end of each quarter.

2	Conversion Feature Embedded Derivative	As part of the sale of the senior secured convertible notes on March 20, 2006, the buyer has the right to convert up to 10% of the initial balance in to common stock each month starting August 20, 2006. The conversion feature derivatives were fair valued at March 20, 2006 and subsequently has been and is revalued at the end of each quarter.

3	Interest Conversion Embedded Derivative	As part of the sale of the senior secured convertible notes at March 20, 2006, the Company has the right to pay interest with its common stock upon the registration effective June 12, 2006. The interest conversion derivatives were fair valued at March 20, 2006 and subsequently has been and is revalued at the end of each quarter.

The following table summarizes the assumptions used to measure the fair value of our derivatives related to the convertible note:

Derivative Assumptions	Dividend Yield %		Expected Volatility %		Risk-Free Interest %		Expected Life (years)		CVBT Stock Price

As of December 31, 2007		—		45.35		3.34		1.25	$	1.00
As of June 30, 2008		—		121.12		2.36		0.75	$	0.63

Page 34 of 84

The following table summarizes the “Adjustments to Fair Value of Derivatives” for all derivatives:

Adjustments to Fair Value of Derivatives		Balance as of December 31, 2007		YTD Adjustment to Fair Value of Derivative			Net Additions/ Deletions for New Issuance Exercise		Adjustment to Paid in Capital for Conversion			Balance as of June 30, 2008
		(In thousands)
Embedded derivatives	(A)	$	677	$	695		$	—	$	(816	)	$	556
Warrant derivative - convertible note	(B)		882		149			—		—			1,031
Change in fair value	(C) = A+B		1,559		844			—		(816	)		1,587
Option derivative - non-employees*			867		(188	)		—		(66	)		629
Warrant derivative - non-employees*			4,118		(897	)		1,238		—			4,459
Change in fair value *	(D)		4,985		(1,085	)		1,238		(66	)		5,088
Total warrant and options derivative non-employees *	E = (C+D)		6,544		(241	)		1,238		(883	)		6,675

See footnote 12 for details

In accordance with FAS 133, “Accounting for Derivative Instruments and Hedging Activities,” EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock,” and EITF 05-04, “The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19,” the amounts allocated to the warrant represent a derivative liability that has been recorded in the accompanying balance sheet at June 30, 2008.

Page 35 of 84

The primary components of the “Change in Fair Value of Derivatives” calculations are the changes in the Company’s stock price during the reported period as well as assumptions regarding a number of complex and subjective variables used in the Black-Scholes Model. If the Company’s stock price decreases sufficiently, the Company may show “Other Income” conversely, if it increases the Company may show “Other Expense.” Additionally, if the volatility in the stock prices of comparable companies for calculations over 3 years in duration and the Company's for calculations under 3 years of duration used in the Black-Scholes Model increases sufficiently, the Company may show “Other Income.” Conversely, if it decreases the Company may show “Other Expense.” Since the issuance of the convertible notes to the period ended June 30, 2008, the Company’s stock price has decreased from $7.15 to $0.45 and was $0.63 at June 30, 2008. For the same period, the volatility in the stock price of comparable companies used in the Black-Scholes Model decreased from 44.56% to 130.87%. As of June 30, 2008, the Company shows $844,503 fair value of derivatives as Other Expense.

The convertible note agreements entered into on March 20, 2006 contain variable share settlement provisions. These provisions require the Company to include the “fair value” of issued and vested non-employee options and warrants in derivative liability accounts on the balance sheet in accordance with EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company’s Own Stock.” The reason for this classification is the possibility that the Company may not have enough authorized unissued common stock to meet all of its commitments in the delivery of the Company’s common stock to honor both the contracts related to the convertible notes and the issued and vested non-employee option and warrant contracts. In order to be in the situation of not having enough unissued shares to deliver to the non-employee option and warrant holders, the fair market value of the common stock of the Company would have to be lower than all of the exercise prices of all the option and warrant contracts. In such case, an option or warrant holder would have to exercise his/her options or warrants at a price that would require him/her to pay more than the fair market value of the common stock on the open market. Nonetheless, according to EITF 00-19 the fair value of these option and warrant contracts must be reclassified as a liability. In addition, the issued and vested non-employee options and warrants identified as derivative instruments require separate valuation under FAS 133 “Accounting for Derivative Instruments and Hedging Activities” at each balance sheet date and at the date of each exercise or grant of new non-employee options and warrants.

The Company filed an S-3, which became effective on June 12, 2006 upon which the Company could have chosen to pay the interest in-kind with registered common stock or in cash. Interest on the convertible note has been paid as follows:

Years	Interest Paid in Cash		Interest Paid with Stock		Total Interest		Shares Issued in Lieu of Cash Payment
2006	$	1,863	$	—	$	1,863		—
2007		628		404		1,032		693
2008		—		242		242		252

Page 36 of 84

See Related Party Transactions

Daniel C. Montano Guaranty

Pre IPO Debt

The Company issued convertible debt in the years ended December 31, 2002, 2003 and 2004, payable to various individuals, as summarized below. During the year ended December 31, 2005, the Series I, Series II and Series IIa convertible promissory notes were converted into 4,228,000 shares of common stock. Four note holders of convertible notes chose not to convert their notes into common stock and the Company paid these notes totaling $30,000 during the year ended December 31, 2005.

Convertible note holders were required to notify the Company regarding their intent to convert their convertible notes into common stock in the 30-day period following the completion of the Company’s IPO.

Convertible Promissory Notes Series I, II, IIa

These convertible promissory notes had a reset provision upon the completion of the IPO, the Company retested the convertible notes payable for the beneficial conversion feature. Where the Company has issued convertible notes payable with beneficial conversion feature, the difference between the conversion price and the fair value of the common stock, at the effective initial public offering date, will be recorded as a debt discount and will be amortized to interest expense over the redemption period of the convertible notes payable in accordance with EITF Issue No. 98-5, “Accounting for Securities with Beneficial Conversion Feature or Contingently Adjustable Conversion Ratio,” and EITF Issue No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments”. No additional Beneficial Conversion feature was required to be recovered.

	December 31, 2007		June 30, 2008		For the Period from March 11, 1998 (Inception) to June 30, 2008 (Inception)
	(In thousands)
Interest expense from the beneficial conversion feature	$	—	$	—	$	2,050
Total financing cost		—		—		2,136
Interest expense - Series I, II and IIa		—		—		1,303
Total	$	—	$	—	$	5,489

Page 37 of 84

The Series I Convertible Promissory Notes were payable in one installment on the earlier of (i) 36 months from the date of issuance or (ii) 30 days after the successful completion of the Company’s IPO. The notes were convertible at the option of the holder into the Company’s common stock. Interest at 7% per annum, compounded annually, was payable within 30 days of when the notes payable were due or converted into shares of the Company’s common stock. The conversion price for each share equaled $2 per share, provided however, if the purchase price of shares at the completion of the IPO was less than $4 per share, the conversion price would have been adjusted to equal 50% of the IPO price.

Series I Convertible Promissory Notes

Series II Convertible Promissory Notes

The Series II Convertible Promissory Notes were payable in one installment on the earlier of (i) 36 months from the date of issuance or (ii) 30 days after the successful completion of the Company’s IPO. The notes were convertible at the option of the holder into the Company’s common stock. Interest at 7% per annum, compounded annually, was payable within 30 days of when the notes payable were due or converted into shares of the Company’s common stock. The conversion price for each share equaled $4 per share, provided however, if the purchase price of shares at the completion of the initial public offering was less than $8 per share, the conversion price would have been adjusted to equal 50% of the initial public offering price.

These notes have been converted into common shares.

Series IIa Convertible Promissory Notes

In July 2004, the Company sold $800,000 of convertible notes payable Series IIa. The terms of the convertible notes payable Series IIa are identical to the terms of the convertible notes payable Series II, as discussed above.

The convertible promissory notes were payable in one installment on the earlier of (i) 36 months from the date of issuance or (ii) 30 days after the successful completion of the Company’s initial public offering. The notes were convertible at the option of the holder into the Company’s common stock. Interest at 7% per annum, compounded annually, was payable within 30 days of when the convertible notes payable were due or converted into shares of the Company’s common stock. The conversion price for each share equaled $4 per share, provided however, if the purchase price of shares at the completion of the initial public offering was less than $8 per share, the conversion price would have been adjusted to equal 50% of the IPO price.

During the year ended December 31, 2004, the Company issued Series II and Series IIa convertible promissory notes with an imbedded beneficial conversion feature. As such, in accordance with EITF Issue No. 98-5, “Accounting for Securities with Beneficial Conversion Feature or Contingently Adjustable Conversion Ratio,” and EITF Issue No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,” the difference between the conversion price and the Company’s estimated fair market value of its stock price on the commitment date of the notes was calculated to be $2,050,000. The Company’s estimate of fair market value resulting in a beneficial conversion feature was based on the “Letter of Intent” with the underwriters. This amount will be recognized in the statement of operations as interest expense during the period from the commitment date of the notes to the maturity dates of the notes.

Page 38 of 84

Note 12. Other Derivatives Related to Options and Warrants Issued to Non-Employees

Interest Expense:

	June 30, 2007		June 30, 2008		For the Period from March 11, 1998 (Inception) to June 30, 2008
	(In thousands)
Interest expense	$	899	$	274	$	4,461
Amortization of derivatives		4,527		504		9,071
Amortization of deferred financing cost		765		20		1,353
Amortization of debt discount on demand notes		—		840		915
Total	$	6,191	$	1,638	$	15,800

Upon the sale of the Company’s convertible notes on March 20, 2006, accounting practices require the previously and subsequently issued non-employee options and warrants to be classified as derivative liabilities in the application of certain accounting principles related to the issuance of the Company’s convertible note financing.

The convertible note agreements entered into on March 20, 2006 contain variable share settlement provisions. These provisions require the Company to classify, at “fair value,” previously and subsequently issued and options and warrants to non-employees from additional paid in capital to derivative liability accounts on the balance sheet in accordance with EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company’s Own Stock” (“EITF 00-19”). The reason for this reclassification is the possibility that the Company may not have enough authorized unissued common stock to meet all of its commitments in the delivery of the Company’s common stock to honor both the contracts related to the convertible notes and the previously issued and vested option and warrant contracts. In order to be in the situation of not having enough unissued shares to deliver to the option and warrant holders, the fair market value of the common stock of the Company would have to be lower than all of the exercise prices of all the option and warrant contracts. In such case, an option or warrant holder would have to exercise his or her options or warrants at a price that would require him or her to pay more than the fair market value of the common stock on the open market. Nonetheless, according to EITF 00-19 the previously recorded transactions must be reclassified from equity to liability. In addition, further analysis indicates the previously issued and vested options and warrants identified as derivative instruments require separate valuation under FAS 133 “Accounting for Derivative Instruments and Hedging Activities.”

Page 39 of 84

Note 12. Other Derivatives Related to Options and Warrants Issued to Non-Employees - continued

The impact of such accounting principles on previously and subsequently issued non-employee stock option and warrant transactions require all non employee option and warrants be classified as derivatives as follows:

1		Options issued to Non-employees		As part of the sale of the senior secured convertible notes at March 20, 2006, the Company was required to reclassify previously and subsequently issued options to non-employees as option derivatives, which are revalued at the end of each quarter.
2		Warrants issued to Non-employees		As part of the sale of the senior secured convertible notes at March 20, 2006, the Company was required to reclassify previously and subsequently issued warrants to non-employees as warrant derivatives, which are revalued at the end of each quarter.

The following table summarizes the assumptions used to measure the fair value of derivatives:

Derivative Information	Dividend Yield %		Expected Volatility %		Risk-Free Interest %		Expected Life (Years)		CVBT Stock Price
Options issued to non-employees derivative
As of December 31, 2007		—		47.61 - 67.22		3.05 - 4.04		1.58 - 9.90	$	0.88
As of June 30, 2008		—		95.4 - 135.39		1.55 - 3.99		1.08 - 9.41		0.63
Warrants issued to non-employees derivative
As of December 31, 2007		—		64.12		3.45		5	$	0.88
As of June 30, 2008		—		95.4 - 135.39		1.55 - 3.99		0.63 - 9.47		0.63

(a)

The range of the expected life and exercise prices are consistent with each individual instrument.

The following table summarizes the “Adjustments to Fair Value of Derivatives” for all derivatives:

Adjustments to Fair Value of Derivatives	Balance as of December 31, 2007		Adjustment to Fair Value of Derivative			Net Additions/ Deletions for New Issuance Exercise		Adjustment to Paid in Capital for Conversion			Balance as of June 30, 2008
	(In thousands)
Option derivative - non-employees	$	867	$	(188	)		—	$	(66	)	$	629
Warrant derivative - non-employees		4,118		(897	)	$	1,238		—			4,459
Change in fair value	$	4,985	$	(1,085	)	$	1,238	$	(66	)	$	5,088

Page 40 of 84

Note 12. Other Derivatives Related to Options and Warrants Issued to Non-Employees - (continued)

Options derivative transactions — Non-employees for options granted and transferred:

Period	Options Granted		Exercise Price - Non- Employees		Estimated Fair Value on the Date Options Granted or Transferred		Option Derivatives as of June 30, 2007		Transfer of Fully Vested Employee Stocks to Non-Employee
For the year ended December 31, 2006 ^(a)		150,000	$	1.00	$	228,000	$	14,243		—
For the year ended December 31, 2007 ^(b)(c)		310,000	$	0.30 - 1.00	$	560,840	$	3,702		—
For the six month period ended June 30, 2008^(c)		—		—		—		—		—

All options were issued for future services and will be expensed over the vesting period. The Black-Scholes Model is used to estimate the fair value of the options.

(a)

Expected life of years, volatility of 77%, risk free rate of interest of 4.58% to 4.67% and an expected dividend yield of zero.

(b)

Expected life of 10 years, volatility ranging from 67.22% to 71.22%, and risk free rate of interest ranging from 4.04% of 4.85% and an expected dividend yield of zero. Transaction is done as a function of law.

(c)

No new stock options were granted to non-employees during the six month period ended June 30, 2008.

Change in the fair value of options and warrant derivatives:

Adjustments to Fair Value of Derivatives - Options and Warrants		Total at December 31, 2007			At June 30, 2008
		(In thousands)
Adjustment to the fair value of option derivatives ^(a)	$	(818	)	$	(188	)
Adjustment to the fair value of warrant derivatives		20			(897	)
Total adjustments to fair value	$	(798	)	$	(1,085	)

See derivative information above for assumptions.

Page 41 of 84

Note 12. Other Derivatives Related to Options and Warrants Issued to Non-Employees - (continued)

Stock Option Transactions - Non-Employees	Number of Option Exercised		Dividend Yield %		Expected Volatility %		Risk Free Interest Rate %		Expected Remaining Life (Years)		Decrease In the Fair Value of Option Derivatives
Total - 2007		380,000		—		69.58 - 73.36		4.45 - 4.98		2.25 - 2.75	$	310,738
1^st Quarter - 2008		60,000		—		104.48		1.47 - 1.61		1.75		56,400
2^nd Quarter - 2008		70,000		—		107.35		2.58		1.08		30,021
Total		510,000									$	397,159

Non-employee option holders’ exercise will result in a reduction of the option derivative liability. A decrease in the fair value of the option derivative liability is recorded to additional paid in capital.

Warrant Transactions - Non Employee	Warrant Issued		Dividend Yield %		Expected Volatility %		Risk Free interest %		Expected Life (Years)		Fair Value on the Date of Warrants Granted		Exercise Price
a		250,000		0		79		5.125		10		1,602,500	$	10.00
b		550,000		0		67		3.83		10		223,987	$	1.00
c & c(i)		5,900,000		0		63 - 67		3.52 - 4.42		5 - 10		2,600,259	$	1.00
d		1,400,000		0		63 - 64		3.28 - 3.99		5		509,804	$	1.00
Total at December 31, 2007		8,100,000		0		63 - 79		3.28 - 5.125		5 - 10		4,936,550	$	1.00 - 10.00
(e)1^st Quarter 2008		500,000		0		96.16		2.46		5		335,000	$	1.00
(e) 2^nd Quarter 2008		1,178,300		0		96.36		3.34		5		755,870	$	1.00
(f) 2^nd Quarter 2008		350,000		0		96.36		3.34		5		122,500	$	1.00
Total		10,128,300

(a)

These warrants were issued for past services and were expensed over a one-year vesting period. The fair Value of the vested portion of these warrants for the three months ended March 31, 2007 was $400,643 and $1,602,500 in aggregate was reclassified as part of the warrant derivative.

(b)

These warrants were issued in connection with consulting services rendered. These warrants were fully vested on the date of the grant and have a ten year term. These warrants will expire in November 2012. The vested fair value of these warrants for the year ended December 31, 2007 was $223,987 and was reclassified as part of the warrant derivative.

(c)

These warrants were for future services. These warrants were fully vested on the date of grant have a five year term and expired in December 2012 and 2017.

(c)(i)

These warrants were for future services. These warrants were fully vested on the date of the grant and have a ten year term. These warrants will expire in December 2017.

Page 42 of 84

Note 12. Other Derivatives Related to Options and Warrants Issued to Non-Employees - (continued)

(d)

These warrants were issued in conjunction with the issuance of demand notes. These warrants were fully vested and $658,000 was recorded as warrant derivative at December 31, 2007. The debt discount of $507,000 is being amortized to interest expense over the term of the notes.

(e)

These warrants were issued in conjunction with the issuance of demand and long term notes. These warrants were fully vested and $694,866 was recorded as warrant derivatives at June 30, 2008. The debt discount of $325,000 for the demand notes and $755,870 for the long term notes is being amortized to interest expense over the term of the notes.

(f)

These warrants were issued in conjunction with the formation of a “Clinical Trial Partnership”. These warrants were fully vested and $122,500 was recorded as warrant derivatives at June 30, 2008.

The accounting for the notes and warrants resulted in deferred financing costs, discount for warrant derivatives and discount for embedded derivatives. These amounts, determined as of March 20, 2006 (close date), will be amortized on a straight-line basis into interest expense over the life of notes and warrants. The following table summarizes these amounts as of June 30, 2008:

Transactions from March 20, 2006 Through June 30, 2008		Deferred Finance Costs			Discount for Warrant Derivative			Discount for Embedded Derivatives			Addition to Interest Expense
		*(In thousands)*
Balance March 20, 2006 (close date)	$	1,553		$	2,383		$	8,196		$	—
Proration of derivatives at June 30, 2008 ^(a)		(939	)		—			—			(939	)
Amortization for the period March 20, 2006 (close date) through June 30, 2008 charged to interest expense		(585	)		(1,809	)		(8,039	)		(10,433	)
Remaining deferred costs and discount to be amortized	$	29		$	574		$	157		$	(11,372	)

(a)

The proration of derivatives is a reduction in the deferred financing cost due to the conversion of the convertible notes into common stock.

Note 13. Stockholders’ Deficit

Preferred Stock

On May 1, 1998, the Company sold 52,850 shares of the Company’s Non-Voting Convertible Preferred Stock, $0.001 par value (the “Preferred Stock”). Each share is convertible into 100 shares of the Company’s common stock, prior to the Company completing an Initial Public Offering. Once the Company completes an Initial Public Offering, the conversion price of the Preferred Stock shall be the lower of $0.10 per share or 50% of the initial offering price. The preferred stockholders shall not be entitled to dividends and shall have no voting rights. The aggregate of 52,850 preferred shares were sold at approximately $10 per share and the Company realized $520,400 in gross proceeds. Offering costs were paid to various consultants for their assistance in helping the Company issues these shares. For their assistance in completing these transactions the Company paid $52,040 to the consultants.

Page 43 of 84

On June 5, 2000, a holder of 1,500 shares of preferred stock converted their preferred stock to 150,000 shares of common stock.

During the year ended December 31, 2004, 11 convertible preferred shareholders elected to convert 28,100 of their convertible preferred shares into 2,810,000 shares of common stock. At December 31, 2004, 2,000,000 shares of common stock had not been issued, and were classified as committed common stock.

During the year ended December 31, 2005, nine convertible preferred shareholders elected to convert 23,250 of their preferred shares into 2,325,000 shares of common stock. The 2,000,000 shares of common stock, which as of December 31, 2004 had not been issued, but were classified as committed common stock, were issued during this period. At December 31, 2005 all issued preferred stock has been converted into common stock.

Common Stock

	For the Year Ended		Amount Converted to Common Stock		Number of Shareholders		Number of Preferred Stock		Converted to Common Stock
Convertible preferred shareholders ^(a)		December 31, 2004				11		28,100		2,810,000
Convertible Series I, II, IIa (notes)		December 31, 2004	$	4,531,200						1,649,550
Convertible notes payables ^(b)		December 31, 2005				9		23,250		2,325,000

At December 31, 2004, 2,000,000 shares of common stock were subsequently issued in 2005.

(b)

In addition, six stock option holders’ exercised options to purchase 123,466 shares of common stock during year ended 2005.

On May 21, 2007, the company entered into an agreement to sell 15,000,000 of the Company’s common stock at a purchase price of $1.00 per share in connection with a Private Placement to the investor and certain other subscribers pursuant to a subscription agreement. As of December 31, 2007, the Company issued 3,650,000 shares and received gross proceeds in the amount of $3,650,000 and net proceeds in the amount of $3,285,000 towards completion of the Private Placement. The agreement, as amended, provides for commissions of 10% of the amount placed in addition to warrants to purchase 3,700,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The investor paid $3,700 for the warrants. The Warrant is exercisable for a period commencing on October 12, 2007 and terminating on the fifth anniversary of the issuance of such warrant. The Warrant issued as of December 31, 2007, and any future Securities issuances, are exempt from registration pursuant to Regulation S set forth by the Securities and Exchange Commission pursuant to the Securities Act of 1933 (“Regulation S”). The agreement, as amended, expired November 9, 2007. The Company has extended this agreement from November 9, 2007 to January 31, 2008 and, in addition, the Company has received gross proceeds of $825,000 in the period June 30, 2008.

Page 44 of 84

In May 2006, 20 commemorative shares, which had a fair value of $122, were issued to the founders and the executives.

On February 11, 2005, the Company’s S-1 registration statement for the issuance of 1,500,000 new common shares was declared effective. On February 16, 2005, the Company’s Initial Public Offering (IPO) was closed. The Company received gross proceeds of $15,693,000 and incurred underwriting discounts, expenses and commissions of $1,681,875 and offering expenses payable by the Company of $655,500, resulting in net proceeds of $13,622,500.

On March 10, 2005, the underwriter exercised its option for the over-allotment and the Company issued 225,000 common shares for proceeds to the Company of $2,030,625.

At December 31, 2005, the convertible notes payable have been converted into common stock, except $30,000 for which holders elected to be repaid. All common stock to be issued resulting from the conversion has been issued.

Conversion of Senior Secured Notes:

See Footnote 11 for details.

Stock Option Transactions

Recent option and warrant transactions:


Date	Number of Option or Warrant Holders		Number of Options Exercised		Number of Warrants Exercised		Exchange for Shares of Common Stock
2007		1		440,000		—		440,000
1^st quarter - 2008		1		60,000		—		60,000
2^nd quarter - 2008		1		70,000		—		70,000
Total				570,000				570,000

The Company may issue stock options to both employees and non-employees outside of its formal stock option plan. It is Management’s intent to grant all options at exercise prices not less than 85% of the fair value of the Company’s common stock, as the Board of Directors determines on the date of grant. Options typically expire ten years from the date of grant. During the period from March 11, 1998 (inception) through December 31, 2007, the Company had granted options to both employees and consultants. The Company accounts for stock option transactions in accordance with SFAS 123(R) as discussed in Note 4.

Page 45 of 84

Stock option granted for 2006, 2007 and the first six month period ending June 30, 2008:


Stock Option Transactions	Options Granted		Exercise Price		Estimated Fair Value		Weighted Average Expected Life (years)		Approximate Volatility (%)
Total - 2006 ^(a)(b)		215,050	$	10.00	$	500,716		5 - 10		78.89
Total - 2007 ^(b)		686,050		1.00 -10.00		278,014		10		67 - 69
1^st quarter - 2008		—		—		—		—		—
2^nd quarter - 2008		—		—		—		—		—

All options were granted from the 2004 Stock Plan. The fair value was estimated using Black-Scholes Model with an expected dividend yield of zero.

50,000 of these options were issued for the past services and therefore expensed on the date of grant.

(b)

These options were issued for future services and will be expense over the vesting life of the options.

At June 30, 2008 the unexpended value for unvested options is approximately $185,784 with an average vesting period of 1.35 years.


Stock Option Transactions Non-Employees	Number of Options Exercised		Dividend Yield %		Expected Volatility %		Risk Free Interest Rate		Expected Remaining Life		Decrease in the FV of Option Derivatives
Total - 2007		380,000		—		69.58 - 73.36		4.55 - 4.98		2.25 - 2.75	$	310,738
1^st quarter - 2008		60,000		—		104.48		1.47 - 1.61		1.75		56,400
2^nd quarter - 2008		70,000		—		107.35		2.58		1.08		30,021
Total		510,000

Page 46 of 84

Except as noted above, no other compensation expense has been recognized in connection with grants of employee and non-employee stock options. Stock option activity as of December 31, 2007 and June 30, 2008 is as follows:

	Employees					Non-Employees					Total
	Shares			Exercise Price		Shares			Exercise Price		Shares			Exercise Price
Outstanding at December 31, 2006		1,185,550		$	0.30 - $10.00		1,725,500		$	0.30 - $10.00		2,911,050		$	0.30 - $10.00
Granted		376,050			10.00		310,000			—		686,050			10.00
Terminated		(2,000	)		10.00		—			—		(2,000	)		10.00
Reclassified		(440,000	)		0.30		440,000		$	0.30 - $0.50		—			0.30
Exercised		(60,000	)		0.30		(380,000	)		0.30		(440,000	)	$	0.30 - $0.50
Cancelled		(2,090	)		10.00		(150,000	)		10.00		(152,090	)		10.00
Outstanding at December 31, 2007		1,057,510		$	0.30 - $10.00		1,945,500		$	0.30 - $10.00		3,003,010		$	0.30 - $10.00
Granted		—			—		—			—		—			—
Terminated		—			—		—			—		—			—
Reclassified		—			—		—			—		—			—
Exercised		—			—		(130,000	)	$	0.30		(130,000	)	$	0.30
Cancelled		(21,500	)	$	1.00-$10.00		—			—		(21,500	)	$	1.00-$10.00
Outstanding at June 30, 2008		1,036,010		$	0.30-$10.00		1,815,500		$	0.30-$10.00		2,851,510		$	0.30-$10.00

Page 47 of 84

Weighted average exercise price of options granted, exercisable and the weighted average remaining contractual life for options outstanding as of December 31, 2006, 2007 and June 30, 2008 was as follows:


	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life Years		Intrinsic Value
As of December 31, 2006
Employees - Outstanding		1,185,550		1.80		3.86		1,180,000
Employees - Expected to Vest		229,758		1.80		3.86		—
Employees - Exercisable		955,792		1.80		3.86		1,180,000
Non-Employees - Outstanding		1,725,500		3.61		6.21		1,221,300
Non-Employees - Expected to Vest		112,500		10.00		9.75		—
Non Employees - Exercisable		1,613,000		3.61		6.21		1,221,300
As of December 31, 2007
Employees - Outstanding		1,057,510		2.23		5.83		290,000
Employees - Expected to Vest		285,078		1.02		9.57		—
Employees - Exercisable		772,432		2.13		5.83		290,000
Non-Employees - Outstanding		1,945,500		2.60		5.77		635,100
Non-Employees - Expected to Vest		145,291		4.37		9.41		—
Non Employees - Exercisable		1,800,209		2.53		5.77		635,100
As of June 30, 2008
Employees - Outstanding		1,045,063		2.40		5.11		165,000
Employees - Expected to Vest		205,003		0.80		9.12		—
Employees - Exercisable		840,060		2.21		5.11		165,000
Non-Employees - Outstanding		1,815,500		4.03		4.39		318,450
Non-Employees - Expected to Vest		108,223		2.94		8.91		—
Non Employees - Exercisable		1,707,277		2.76		4.39		318,450

During the first quarter of 2007, as a function of law, 440,000 existing fully vested employee stock options with an exercise price of $0.30 were reclassified to a non-employee. The Company estimated the fair value on the date of transfer of the options to be $435,600 using the Black-Scholes Model and has reclassified the estimated fair value from equity to option derivative liability. The Black-Scholes Model assumptions were as follows: Expected life of 10 years, volatility of 71.22%, risk free rate of interest of 4.85% and an expected dividend yield of zero.

Page 48 of 84

Warrants have only been issued to outside parties and have never been issued to employees:

Warrants


Warrants Granted	Warrants Issued for Purchase of Common Stock		Estimated Fair Market Value ($)		Exercise Price Per Share ($)		Expected Life (Years)		Risk Free Interest %		Approximate Volatility %		Expected Dividend Yield %
2000 ^(a)		933,330		115,475		0.40		3.5		5.02%		—		—
2001 ^(b)		100,000		—		0.80		5		4.89%		—		—
2003 ^(c)		200,000		119,744		2.00		5		0.94%		76		—
2005 ^(d)		75,000		—		—		—		—		—		—
2006 ^(e)(f)(g)(i)		6,249,997		3,660,455		1.00-10.00		3 - 10		4.89-5.12%		78 - 79		—
2007 ^{(g) (iii), (g) (ii), (h), (i)}		8,350,000		3,537,674		1.00		5 - 10		3.28-4.42%		63 - 66.54		—
2008 ^(g)(ii)		2,028,300		1,591,470		1.00		5		2.65-4.83%		95.65-96.36		—
Total		17,936,627

The warrants fully vested in December 2001 and were to expire in December 2005. However, prior to the expiration date in December 2005 the holder of the warrants elected to exercise 933,330 warrants in exchange for 848,482 shares of common stock. The exercise of these warrants was cashless.

(b)

The warrant was fully vested on the date of grant and was exercised in March 2006.

	(c)	The warrant issued to an individual in connection with consulting services rendered. The warrant fully vested on the date of grant and expires in June 2013.

	(d)	The Company sold warrants for 75,000 shares of common stock at 125% of the IPO price for $75.00 to the underwriter pursuant to the underwriting agreement. The warrants have a term of six months commencing on the effective date of the IPO, February 11, 2005.

(e)

These warrants were issued for past services and will be expensed over a one year vesting period. The fair value of the portion of these warrants that vested during 2007 of $400,643 and in aggregate $1,602,500 has been reclassified as part of the warrant derivative.

(f)

Warrants issued for past services and are expensed over a one year vesting period. The fair value of the portion of these warrants that vested during 2007 of $400,643 and in aggregate $1,602,500 has been reclassified as part of the warrant derivative.

(g)(i)

The warrants issued for future services. These warrants are fully vested on the date of the grant, have a five year term and expire in December 2012.

(g)(ii)

These warrants were issued along with demand notes; they are detachable, are fully vested on the date of the grant and have a five year term. The fair value of the vested warrants during the year ended December 31, 2007 of $507,000 was recorded as additional paid-in capital and the discount on debt is being amortized to interest expense over the term of the notes.

(g)(iii)

The warrants issued for future services. These warrants are fully vested on the date of the grant and have a ten (10) year term. The warrants will expire in December 2017.

(h)

These warrants were issued in connection with consulting services rendered. These warrants are fully vested on the date of the grant and have a ten year term. The warrants will expire in November 2017. The fair value of the fully vested warrants during the year ended December 31, 2007 of $223,987 has been reclassified as part of the warrant derivative.

Page 49 of 84

The warrants were issued to an employee in connection with the research and development services rendered. The warrants are fully vested on the date of the grant, have a ten year term and expire in November 2017.

(i)

Warrant activity for the years 2006, 2007 and the six month period June 30, 2008 is as follows:

	Warrants Outstanding			Weighted Average Exercise Price
Outstanding at December 31, 2006		1,230,882		$	7.88
Granted		8,350,000			1.00
Sold(a)		5,999,997			1.00
Exercised		—			—
Forfeited		(705,882	)		8.50
Outstanding at December 31, 2007		14,874,997		$	1.22
Granted		2,028,300			1.00
Sold/Reissued		—			—
Exercised		—			—
Forfeited/Cancelled		—			—
Outstanding at June 30, 2008		16,903,297		$	1.20
Warrants exercisable at December 31, 2006		1,168,382			7.88
Warrants exercisable at December 31, 2007		14,874,997			1.22
Warrants exercisable at June 30, 2008		16,903,297		$	1.20

The following table summarizes information about warrants outstanding at June 30, 2008 (unaudited):

Exercise Prices	Warrants Outstanding		Weighted Average Remaining Life (Years)		Weighted Average Exercise Price		Warrants Exercisable		Weighted Average Exercise Price
$ 1.00		5,999,997		0.72	$	1.00		5,999,997	$	1.00
1.00		8,350,000		4.44		1.00		8,350,000		1.00
1.00		2,028,300		4.56		1.00		2,028,300		1.00
2.00		200,000		4.98		2.00		200,000		2.00
10.00		250,000		7.79		10.00		250,000		10.00
12.50		75,000		0.63		12.50		75,000		12.50
Total		16,903,297						16,903,297

Authorized Shares

At the Company’s 2005 Annual Meeting of Stockholders held on May 23, 2005, the shareholders approved to amend the Certificate of Incorporation to increase the number of authorized shares of Common Stock to 400,000,000 shares.

Note 14. Income Taxes

The Company files income tax returns in the U.S. and various state jurisdictions.

Page 50 of 84

Note 14. Income Taxes - (continued)

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) on January 1, 2007. The Company assessed the potential liability for all uncertain tax positions as required by FIN 48 at December 31, 2007 and June 30, 2008. The Company concluded that it has no uncertain tax positions that might give rise to potential tax liabilities or to amend the accumulated net operating losses available to carry forward for application against future taxable income in each of the Company’s taxing jurisdictions. At December 31, 2007 the Company reduced its research and development credit carry forward to a more sustainable amount under federal or state examination. To date the Company has not benefited from this carry forward. Net operating losses were reduced as well and are detailed below.

No interest or penalty related to uncertain tax positions in income tax expense is required to be recognized for the six month period ended June 30, 2008. The Company is in the development stage and has incurred losses since its inception. All tax years from inception are subject to examination by the federal and state taxing authorities, respectively. There are no income tax examinations currently in progress. In some cases the statute of limitations for audit periods may or may not apply.

The adoption of FIN 48 created a reduction of the federal and state net operating loss carry forwards of approximately $982,000 respectively. A reduction of $295,000 in the federal research and development credit carry forward was also recognized in 2007. Typically under audit by federal taxing authorities these credits are reduced by thirty percent and as such the company has reflected this likelihood.

As the Company has significant net operating loss carry forwards, even if certain of the Company’s tax positions were disallowed, it is not foreseeable that the Company would have any income tax liabilities in the near future. Consequently, the Company does not calculate the impact of interest or penalties on amounts that might be disallowed.

Included in the Company’s net operating loss carry forward at June 30, 2008, are tax positions for which the ultimate deductibility is highly certain but for which there is some uncertainty about the timing of such deductibility. Due to the impact of deferred tax accounting, the disallowance of the shorter deductibility period would not affect the annual effective tax rate.


Net Operating Loss Carry Forward:	As of December 31, 2007		As of June 30, 2008
	(In thousands)
Federal income taxes	$	69,357	$	73,406
State income taxes (California)		59,792		63,841

These losses will expire through 2010 to 2018.

The utilization of net operating loss carry forwards may be limited due to the ownership change under the provisions of Internal Revenue Code Section 382 and similar state provisions. The Company is undergoing a study to determine how the increase in ownership by the public may affect the Company’s net operating loss carryover under Internal Revenue Code Section 382 and similar state provisions.

	As of June 30, 2008
	(In thousands)
Federal research and development credit carry forward	$	687

Accordingly, no deferred income tax benefit has been recognized in these financial statements since management does not believe the recoverability of the deferred tax assets during the foreseeable future is more likely than not.

Page 51 of 84

Note 15. Commitments and Contingencies

Leases

In April 2004, the Company entered into a non-cancelable operating lease agreement for office space that requires monthly payments of $5,882, which expired in October 2005. On May 2004, the Company gave a deposit of $5,900. The Company vacated this facility in October 2005 and subsequently the deposit was refunded. During 2004 and 2005, the Company sub-leased space from Phage for approximately $2,800 per month as part of the agreement for administrative services.

In November 2005, the Company entered into a five year operating lease for its corporate headquarters commencing on March 1, 2006. The lease provides for a renewal option for an additional five years. The lease provides for increases in annual rental payments of approximately 3%. Also, the agreement requires the Company to pay its share of certain common operating costs that are to be assessed annually. The Company entered into a Second Amendment dated September 8, 2006 (to be effective as of September 1, 2006) for the expansion space use of administrative offices in Las Vegas. The Second Amendment commences on August 29, 2006 and shall run coterminous with the term of that certain lease, dated November 1, 2005 for the space, consisting of 7,348 square feet of rentable space and expires on February 28, 2011. In total, including the annual base rent the Company will pay approximately $381,000 in base rent for the expansion space throughout the term of the lease.

The Company entered into a Lease Agreement dated August 7, 2006 with Nancy Ridge LLC, a Delaware Limited Liability Company, for the use of general office and laboratory space in San Diego, CA. The lease commences on September 1, 2006 and expires on May 13, 2013, at which time the Company will have the option of extending the lease by five years on the same terms and conditions of the lease. The Company has paid Nancy Ridge a fully refundable security deposit in the amount of $58,000, and further agrees to pay $15,000 per month for the term of the lease for the use of 6,768 square feet of general office and laboratory space. The security deposit is refundable thirty days upon termination of the lease.

The Company concluded that it would be more cost effective to continue outsourcing certain research and development activities than to increase its business activities in the San Diego laboratory facility. Accordingly, on March 14, 2008 the Company terminated its lease of the facility in San Diego in exchange for the amount of the security deposit of $57,805. There is no future liability after this date.

On May 23, 2007, Canta Rana Ranch, L.P., a California Limited Partnership (“Canta Rana”), released CardioVascular BioTherapeutics, Inc. (the “Company”) from its obligations under the Standard Lease Guaranty, executed by the Company on March 15, 2006 (the “Guaranty”), in connection with the Standard Industrial Net Lease (the “Phage Lease”), dated March 15, 2006, between Phage Biotechnology Corporation, a Delaware Corporation (“Phage”) and Canta Rana. The Agreement Exchanging Lease Guaranties (the “Agreement”), executed by Canta Rana and the Company, among other parties, became effective on May 23, 2007 when the terms therein were satisfied and which effectiveness thereby terminated and superseded the Guaranty, which released the Company of any and all obligations of Phage under the Phage Lease. Also in relation to the termination of the Guaranty, the Indemnity and Reimbursement Agreement, dated March 15, 2006, between the Company and Phage that was executed in exchange for the Guaranty, automatically terminated on May 21, 2007, the effective date of the exchange of guaranties referenced in the Agreement.

Page 52 of 84

Note 15. Commitments and Contingencies - (continued)

Paid Rent:	December 31, 2007		June 30, 2008
	(In thousands)
Total rent paid ^(a)	$	465	$	167

Rent paid for the corporate office in Las Vegas and the San Diego lab facility.

Service Agreements

The Company has entered several service agreements listed below. These service fees for the obligations below were determined through a process of competitive bids and negotiation.

The major outstanding contractual obligations are as follows:

Item #	Contract	Agreement Name	Start	End Date
1	Phage Biotechnology	Joint patent agreement	Feb. 28, 2007	March 1, 2020

2	Cardio Phage International (“CPI”)	Distribution agreement	Aug. 16, 2004	Aug. 16, 2013

3	Korea Bio-Development Corporation	Manufacturing and distribution agreement	Dec. 15, 2000	Dec. 15, 2099

4	Hesperion, Inc. (TouchStone, formerly “Clinical CardioVascular Research, LLC”)	Clinical development of investigational drugs and devices for Cardiovascular indications	Oct. 24, 2001	Ongoing

5	CVBT Founder	Royalty agreement	Aug. 16, 2004	Dec. 31, 2013

6	Catheter and Disposables Technologies, Inc	Product development	June 1, 2004	Dec. 31, 2006

Page 53 of 84

Note 15. Commitments and Contingencies - (continued)

(1)

The Company entered into a joint patent agreement with Phage as of February 28, 2007. The Company plans to develop and commercialize therapeutic methods related to the induction of angiogenesis or wound healing by administration of Fibroblast Growth Factor (“FGF”); and, Phage plans to develop and commercialize recombinant DNA methods for producing peptides/proteins. The Company and Phage entered into a joint patent ownership and license agreement dated as of August 16, 2004, which was later amended and restated as of May 23, 2006 (the “Joint Ownership Agreement”), for consideration the sufficiency of which was acknowledged in each agreement, pursuant to which Phage granted Cardio a 50% ownership interest in certain patents and patent applications listed in the Joint Ownership Agreement, as well as certain future patent rights, and the parties acknowledge that the Company would have exclusive rights within a defined field, while Phage would have exclusive rights outside that field. Cardio and Phage entered a new agreement as of February 28, 2007 superseding the Joint Ownership Agreement so as to specify those future patents and patent applications that are to be subject to joint ownership and so as to restate the licenses granted in the Joint Ownership Agreement. Cardio and Phage acknowledged that the jointly owned and cross-licensed rights are vital to the parties’ respective plans for development and commercialization and further clarified the parties’ respective rights and provided for continued access to the necessary rights in the event of insolvency. In consideration for the grant of the exclusive right to the patent rights in the field, the Company shall pay a 6% royalty to Phage on the net sales price of finished product to end customer or distributor. The rights and obligations set forth in this agreement shall commence as of the effective date of this agreement and end upon the later of (a) the expiration of the last to expire Jointly Owned Patent and (b) the abandonment of the last pending Jointly Patent Application.

(2)

CPI will act as distributor for the products of both Phage and the Company in locations throughout the world other than United States, Canada, Europe, Japan, China, and the Republic of Korea. CPI is obligated to pay the Company an amount equal to 50% of CPI’s gross revenue from sales of the Company’s products less CPI’s direct and indirect costs.

(3)

As part of this agreement, KBDC arranged the purchase of 8,750,000 shares of the Company’s common stock for $3,602,000 by Cardio Korea, Ltd. KBDC agreed to fund all of the regulatory approval process in Korea for any of the Company’s products. In addition, KBDC agreed to pay the Company a royalty of ten percent net revenue from sales in its Asian territories.

(4)

Hesperian will assist the Company with the FDA approval process for drug.

(5)

The Company’s royalty agreement with its Founder will provide him with a one percent royalty on net revenue from the sale of the Company’s drug candidates, if any, measured quarterly and payable 90 days after quarter end.

(6)

Catheter and Disposables Technologies, Inc. will design, develop, and fabricate two different prototype catheter products that will facilitate the administration of CVBT-141A by catheter delivery.

Page 54 of 84

Note 15. Commitments and Contingencies - (continued)

These service fees for the obligations below were determined through a process of competitive bids and negotiation. Our major outstanding contractual obligations are summarized below (continued):


Item #	Contract	Agreement Name	Start	End Date
7	bioRASI, LLC	CRO agreement	Aug. 8, 2005	Aug. 20, 2007

8	Phage Biotechnology Corporation	Lease Guarantee - San Diego	Mar. 15, 2006	March 16, 2008

9	Promethean	Convertible Notes	Mar. 20, 2006	March 19, 2009

10	Chief Executive Officer	Guarantee agreement	Mar. 20, 2006	First date of generating revenue on repayment of notes.

11	Chief Executive Officer	Guarantee reimbursement agreement	Mar. 20, 2006	First date of generating revenue on repayment of notes.

12	Kendle (formerly Charles River Laboratories)	CRO agreement	Aug. 8, 2006	Completion of Phase II Severe Coronary Heart Disease

13	The Bruckner Group	Feasibility Study	Aug. 4, 2006	Upon completion of study

14	Investment Banking	Investment Banker	June 6, 2006	Ongoing

15	Public Accounting Firm	Professional Services	July 1, 2006	Ongoing

(7)

This agreement is for the purpose of assisting in the Company’s clinical trials in Russia. bioRASI is the strategic initiative of the Russian Academy of Sciences (RAS) and is responsible for commercializing RAS’ bio-sciences and clinical resources. bioRASI is a contract research organization (CRO) providing services for its collaborative R&D clients in the areas of drug development, biologicals, and medical devices. This contract is now terminated.

(8)

Lease guarantee terminated on March 16, 2008.

(9)

The Company entered into a Securities Purchase Agreement with certain Investors to place $20,000,000 of senior secured notes together with warrants to purchase 705,882 shares of the Company’s common stock. On May 21, 2007, the aggregate number of shares acquirable upon exercise of such warrants increased to 5,999,997. The notes are convertible into shares of the Company’s common stock at any time at $12 per share until the price re-set as of May 21, 2007 at $1.00 per share (the “Fixed Conversion Price”). In addition, the notes are convertible after five months from the closing date at 94% of the average of the preceding five days weighted average trading price, if the result is lower than $12 per share. Conversion of the senior secured notes into the Company’s common stock at other than the Fixed Conversion Price is limited to no more than 10% of the original $20,000,000 note balance per calendar month. The notes mature in March 2009, and bear a resetting floating interest rate of three month LIBOR plus 7%. The warrants may be exercised anytime up to March 2009. The warrant exercise price is $8.50 per share until the price was re-set as of May 21, 2007 at $1.00 per share. Substantially all of the Company’s assets secure the notes.

Page 55 of 84

Note 15. Commitments and Contingencies - (continued)

(10)

Daniel C. Montano, Chairman, President and CEO of the Company, entered into a Guaranty Agreement whereby he guaranteed any and all of the Company’s obligations resulting from the sale on March 20, 2006 of $20,000,000 of senior secured notes and warrants. The guaranty remains in effect until the first date on which the Company receives revenue from the sale of drugs with FGF-1 ₁₄₁ as API after such drug has been approved by the FDA, provided that on such date the Company is not in default of any provisions of the obligations or triggering events contained in the agreements for the senior secured notes and warrants and such default is not continuing. However, the guaranty will terminate upon the payment in full of the notes including conversion of the notes into common stock.

(11)

After the Company’s obligations contained in the agreements for the senior secured notes and warrants have been paid in full, if Daniel C. Montano was required to make any payments pursuant to this guaranty prior to the payment in full of the Company’s obligations, the Company will reimburse Daniel C. Montano for any such payments plus simple interest at 7% per annum from the date of the advance by Daniel C. Montano to the date reimbursed by the Company.

(12)

Kendle (formerly Charles River Laboratories Clinical Services International Ltd. or “Charles River Laboratories”) will support the Company in its Phase II Severe Coronary Heart Disease clinical trial ensuring that the protocol and study adhere to FDA regulatory requirements.

(13)

The Bruckner Group Incorporated has been assisting the Company in exploring the potential economic consequences of applying FGF-1 ₁₄₁ to a variety of clinical scenarios and patent types. There are three distinct components in this project that will be performed simultaneously by the Bruckner Group. This project has an approximate total cost of $450,000.

(14)

The purpose of this agreement is to act as advisor for listing on the London Stock Exchange’s Alternative Investment Market (“AIM”). The Company paid 100,000 GBP before admission to AIM and another 50,000 GBP in January 2007.

(15)

A provider of accountancy and business services to audit and review the Company’s financial reports for listing on the London Stock Exchange’s Alternative Investment Market, or AIM.

	As of June 30,				For the Period from March 11, 1998 (Inception) to June 30,
Service Fees Paid for Major Contractual Obligations:	2007		2008		2008
	(Dollars in thousands)
The Bruckner Group	$	617	$	—	$	1,068
Touchstone Research (C2R)(Hesperion)		293		14		4,896
Kendle (Charles River)		328		154		1,877
Total	$	1,238	$	168	$	7,841

Page 56 of 84

Note 15. Commitments and Contingencies - (continued)

Securities Act Compliance

Commencing in 2001 and ending in August 2004, the Company sold two series of convertible notes to investors who, with a few exceptions, were not residents or citizens of the United States. The Company made these sales in reliance on the fact that either the sales occurred outside the United States and were thus not subject to the jurisdiction of the Securities Act or were made to accredited investors pursuant to an exemption from registration provided by the Securities Act. The Company’s counsel has advised that the availability of those exemptions cannot be determined with legal certainty and that it is possible that the sale of some of the series of convertible notes may have violated the registration requirements of the Securities Act. As to most of those sales, a right of rescission may exist on which the statute of limitation has run out as of August 2007.

For those note holders that elected to convert to common stock and who have not sold that stock, the Company may have a contingent liability arising from the original purchase of the convertible notes that such note holders converted. That liability would extend for up to six years after the date of the sale of the applicable convertible note that was converted to common stock. The notes were converted at either $2.00 per share or $4.00 per share. All of the notes have been either converted into common stock or repaid in full.

The Company is unable to accurately estimate the likelihood or amount of potential liability that, if any, may arise for this contingency.

Government Regulation

Regulation by government authorities in the United States and foreign countries is a significant factor in the development, manufacture and marketing of drug products and in our ongoing research and product development activities. Drug candidates will require regulatory approval by government agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous pre-clinical studies and clinical trials and other approval procedures of the FDA and similar regulatory authorities in foreign countries. Various federal and state statutes and regulations also govern or influence testing, manufacturing, safety, labeling, storage and record keeping related to such products and their marketing. The process of obtaining these approvals and the subsequent substantial compliance with appropriate federal and state statutes and regulations require the expenditure of substantial time and financial resources.

Pre-clinical studies are generally conducted in laboratory animals to evaluate the potential safety and the efficacy of a product. Drug developers submit the results of pre-clinical studies to the FDA as a part of an investigational new drug application, which must be approved before clinical trials in humans may begin. Typically, clinical development of a new drug candidate involves three phases of clinical trials that are costly and time consuming. These Phases include:

Phase I

Clinical trials are conducted with a small number of subjects to determine the early safety profile, maximum tolerated dose and pharmacokinetics of the product in human volunteers.

Phase II

Clinical trials are conducted with groups of patients afflicted with a specific disease in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety.

Phase III

Large scale, multi-center, comparative trials are conducted with patients afflicted with a target disease in order to provide enough data to demonstrate with substantial evidence the efficacy and safety the FDA requires.

The FDA closely monitors the progress of clinical trials that are conducted in the United States and may, at its discretion, reevaluate, alter, suspend or terminate the testing based upon the data accumulated to that point and the FDA’s assessment of the risk/benefit ratio to the patient.

Page 57 of 84

For the six month period ended June 30, 2008, general and administrative expenses decreased approximately $4,761,000 or 58% in comparison to the same period in 2007. This increase includes:

Litigation

The Company may become involved in various legal proceedings and claims which arise in the ordinary course of its business. The Company is not involved in any litigation at this time that is material to its business and is unaware of any material claims that may be filed against it.

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

FORWARD LOOKING STATEMENTS

This Form 10-Q, including but not limited to this section, may contain forward-looking statements. These statements relate to future events or the Company’s future financial performance and involve known and unknown risks, uncertainties and other factors that may cause the Company or it’s industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. These risks and other factors include those listed under “Risk Factors” and elsewhere in this Form 10-Q. The Company believes that the section entitled “Risk Factors” includes all material risks that could harm its business. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

The Company believes it is important to communicate its future expectations to the Company’s investors. However, there may be events in the future that the Company may not able to accurately predict or control and that may cause the Company’s actual results to differ materially from the expectations it describes in the forward-looking statements. Stockholders are cautioned that all forward-looking statements involve risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors, including those factors described in the “Risk Factors” section of this Form 10-Q. Stockholders should not place undue reliance on the Company’s forward-looking statements.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. You should read the following discussion and analysis of the Company’s financial condition and results of operations together with the financial statements and the related notes appearing in Item 1. of this Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q, including information with respect to the plans and strategy for the Company’s business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” set forth below in this section of this Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Page 59 of 84

BUSINESS

1. Overview

CardioVascular BioTherapeutics, Inc. (formerly CardioVascular Genetic Engineering, Inc.), (“CVBT”), (“Cardio”) or (the “Company”) is a biopharmaceutical company focused on developing drugs to stimulate the growth of new blood vessels for the treatment of cardiovascular diseases. The active pharmaceutical ingredient (“API”) in the Company’s drug candidates is acidic human fibroblast growth factor-1, FGF-1 ₁₄₁ (formerly called Cardio Vascu-Grow ^TM ) and it facilitates the growth of new blood vessels in the heart tissues and organs with an impaired vascular system. This process is referred to as “angiogenesis” in the scientific community.

CardioVascular BioTherapeutics, Inc. was established in 1998, as a Delaware corporation, to commercialize the results of the clinical research in cardiovascular disease treatment for Severe Coronary Heart Disease (formerly known as No-Option Heart Patients) that Dr. Thomas J Stegmann, co-founder of the company, performed in the mid-1990s. The Company entered into an agreement with Dr. Stegmann, dated March 11, 1998, which is superseded by an agreement dated August 16, 2004, whereby Dr. Stegmann granted the Company a non-revocable exclusive perpetual right to use, modify, add to, practice and sell the results of his clinical trials. Dr. Stegmann will receive a one percent royalty on all sales of drugs formulated with FGF-1 ₁₄₁ through December 31, 2013. The grant of rights is perpetual and therefore cannot be terminated by Dr. Stegmann. To date the Company has made no royalty payments under this Agreement. Dr. Stegmann serves the Company as a director and as Chief Medical Officer. From October 12, 2006 to June 1, 2008 he also served as Co-President. He now focuses his time as an Officer on the duties of Chief Medical Officer.

CardioVascular BioTherapeutics, Inc. has not generated revenues to date and expects to incur substantial and increasing losses for at least the next several years. The Company does not expect to generate revenues until the United States Food and Drug Administration (“FDA”) approves one of its drug candidates, and the Company begins marketing it. The Company expects to continue to invest significant amounts on the development of its drug candidates. The Company expects to incur significant commercialization costs when it recruits a domestic sales force. The Company also plans to continue to invest in research and development for additional applications of FGF-1 ₁₄₁ and to develop new drug delivery technologies. Accordingly, the Company will need to generate significant revenues to achieve and then maintain profitability.

Most of the Company’s expenditures have been for research and development activities and general and administrative expenses. The Company conducts research to identify and evaluate medical indications that may benefit from its drug candidates and potential new drug candidates that can graduate from research to development. The Company classifies its research and development into two major classifications: pre-clinical and clinical. Pre-clinical activities include product analysis and development, primarily animal efficacy and animal toxicity studies. Clinical activities include FDA (or other countries’ equivalent regulatory agencies) Investigational New Drug (“IND”) submissions, FDA-authorized trials and the FDA approval process for commercialization. Research and development expenses represent costs incurred for pre-clinical and clinical activities. The Company outsources its clinical trials and its manufacturing and development activities to third parties to maximize efficiency and minimize the Company’s internal overhead. Manufacturing is outsourced to an affiliated entity. The Company expenses its research and development costs as they are incurred.

These expenses are subject to the risks and uncertainties associated with clinical trials and the FDA review and approval process. As a result, these additional expenses could exceed the Company’s estimated amounts, possibly materially. The Company is uncertain as to what it expects to incur in future research and development costs for its pre-clinical activities as these amounts are subject to the outcome of current pre-clinical activities, Management is continuing its assessment of the economics of each individual research and development project and the internal competition for project funding.

General and administrative expenses have focused primarily on the activities of administrative support, marketing, intellectual property rights and corporate compliance. The Company anticipates that general and administrative expenses will increase as a result of the expected expansion of its operations, facilities and other activities associated with the planned expansion of the business, together with the additional costs associated with operating as a public company. The Company will incur sales and marketing expenses as it builds its sales force and marketing capabilities for its drug candidates, subject to receiving required regulatory approvals. The Company expects these expenses to be material.

Page 60 of 84

2. Results of Operations

Six Months Ended June 30, 2007 and 2008

During the six month period ended June 30, 2008, the Company spent approximately $2,254,000 in research and development to support its FDA clinical trials. Research and development expenses decreased slightly in comparison to the same period last year.

Our research and development consist of $497,000 clinical trial costs and $677,000 paid to an affiliate for contract clinical research.

Clinical trial expenditures decreased from $1,485,000 to $497,000 due to the completion of earlier trials in 2007 while our newer trials are still in the planning, ramp-up, and site selection process for our Phase II CHD and Phase II Wound Healing trials. We also reduced our expenditures with our affiliate, Phage Biotechnology Corporation, due to the majority of production of the drugs required for our upcoming trials.

	For the Six Month Period Ended June 30,
	2007		2008		$ Change			% Change
	(Dollars in thousands)
Research and development	$	3,333	$	2,254	$	(1,079	)		(32.37	)%
Clinical trials	$	1,485	$	497	$	(988	)		(66.53	)%
Phage Biotechnology Corporation (affiliate)	$	927	$	677	$	(250	)		(26.97	)%

Our research and development costs are associated with the following clinical and pre-clinical trials as of June 30, 2008:

FDA Authorized Clinical Trials:

Drug Candidate		Indication
• CVBT-141A		Severe Coronary Heart Disease (“CHD”) — surgical delivery
• CVBT-141B		Dermal Ulcers (Wound Healing)
• CVBT-141C		Peripheral Arterial Disease (“PAD”)
• CVBT-141H		Severe Coronary Heart Disease (“CHD”) — injection catheter delivery

Proof of Concept Clinical Trials:

Drug Candidate		Indication
• CVBT-141D		Disc Ischemia — proof of concept

Pre-Clinical Research and Development:

Drug Candidate		Indication
• CVBT-141E		Stroke
• CVBT-141F		Bone Repair

Clinical Development

The Company remains dedicated to moving its three FDA authorized clinical trials forward. Below is a summary of the Company’s progress over the past year for each trial.

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Clinical Development

i) Severe Coronary Heart Disease — Drug Candidate CVBT 141-A — Surgical delivery: We completed the enrollment and treatment of all patients specified in Phase I clinical trial protocol. A total of 21 patients were treated at six participating U.S. medical centers, which were managed by contract clinical research organization. A full report of this trial will be submitted to the FDA. The Company has completed collecting the final safety data on 12 month follow-up visits of patients who were treated in Phase I clinical trial. We filed a report with the FDA listing all adverse events or other safety issues observed in this trial up to and including the 12-week follow-up visit of all patients who participated in this trial. Of note, the Data and Safety Monitoring Committee, an independent group of three external physicians, reviewed all safety data from trial and concluded that there were no serious, unexpected adverse events attributable to drug candidate in this Phase I trial, and recommended we proceed onto a Phase II clinical trial Based on written comments received back from the U.S. FDA, a major change in the clinical Protocol for the Phase II clinical trial was recommended and now authorized by the FDA dealing with the manner in which the API, FGF-1, will be delivered to the heart by a catheter injection system described below.

ii) Severe Coronary Heart Disease — Drug Candidate CVBT 141-H — Injection catheter delivery: CVBT is now proceeding with its Phase II clinical trial in patients with severe coronary heart disease. In collaboration with Cordis Corporation, the drug candidate will be delivered to the heart using their proprietary catheter injection system, the MyoStar® injection catheter. Before and after treatment with the drug candidate, each patient’s heart will be screened and ischemic regions of the heart identified utilizing Cordis Corporation’s NOGA® electromagnetic mapping system, in addition to other techniques provided for in the protocol. A placebo group has been added as an additional control group to the Phase II study. This will significantly improve the statistical analysis of efficacy results we obtain from this trial.

The Phase II trial will be an international trial conducted in an expanded patient population in both U.S. and foreign clinical trial sites. We have chosen Kendle, an international clinical research organization to oversee and manage Phase II trial. Kendle is working closely with the Cordis Corporation to identify clinical trial sites that have prior experience with the MyoStar® and NOGA® catheter systems. We are currently recruiting investigators and clinical sites as well as working with them to gain institutional review board approval for our trials.

iii) Wound Healing — Drug Candidate CVBT-141B: On October 2, 2007, we announced the successful completion of Phase I trial with no serious adverse events. In this trial we tested wound healing drug candidate CVBT-141B in eight patients with diabetic foot ulcers or venous stasis leg wounds. The patients received either a low or high dose application of wound healing drug candidate and no adverse events were observed in any of the patients receiving the drug candidate. A Phase Ib/II clinical protocol to continue development of this drug candidate is now being finalized for submission to the FDA. In this trial, both safety and efficacy of the drug candidate will be tested.

Previously, we completed animal studies that demonstrated that CVBT-141B was a safe and efficacious agent in healing wounds in diabetic mice. In addition, it was demonstrated that little, if any, of wound healing drug candidate was absorbed into the blood stream after topical application to the wound surface. Similar absorption studies are being conducted in patients in Phase I clinical trial. After completion of this Phase I trial, a Phase Ib/II Clinical Protocol has been drafted where the drug candidate, will be tested over a longer period to increase wound closure rates in a similar patient population.

iv) Peripheral Arterial Disease — Drug Candidate CVBT-141C: The FDA has authorized a Phase I clinical trial for the treatment of intermittent claudication associated with PAD. We are in the process of identifying clinical trial sites. Colorado Prevention Center will be the contracted clinical research organization that will manage this trial and they have identified six U.S. medical centers that will be contracted to perform this trial.

v) Lumbar Ischemia — Drug Candidate CVBT-141E: In 2007, four patients have been dosed in the low dose group with no adverse events reported. Due to extremely slow enrollment into this trial, the company has decided to halt this study and focus on the Disc Ischemia medical indication detailed below.

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vi) Disc Ischemia — We have initiated a population study in all age groups to ascertain the degree that perfusion abnormalities of the lumbar vertebral bodies are associated with lumbar degenerative disc disease connected to low back pain and/or vertebral bone repair. We have contracted with the Orthopaedic Education and Research Institute (OrthoERI) of Southern California to perform a preliminary clinical study on approximately 50 volunteers. Dr. Vance Gardner, a noted orthopaedic spine surgeon and executive director of OrthoERI, has agreed to consult with CVBT regarding his scientific and market research. The study received institutional review board (IRB) approval and to date approximately 41 volunteers have entered this proof-of-concept clinical study. The technique employed uses a unique and proprietary, contrast enhanced, high field strength MRI scanning technique that identifies blocked blood vessels and/or perfusion abnormalities of the lumbar vertebral bodies. The goal for the study is the identification of abnormalities that can be improved with angiogenic treatment. These abnormalities may include; “diminished nutrition” etiology of degenerative disc disease or an ischemic mechanism of vertebral bone degeneration. To date, we are observing differences in the perfusion of vertebrae in younger volunteers as compared to those in the ages that are more associated with degenerative disc disease and bone degeneration. Once an adequate population study has been completed and diagnostic criteria developed, we will investigate the clinical use of drug candidate CVBT-141D, which contains FGF-1 ₁₄₁ , to improve a diagnosed ischemic state.

Pre-Clinical Development

i) Bone Repair: Data from a second animal model of bone growth indicated a robust effect of FGF-1 on the growth of new bone after a local injection to skull bones. The effect was significant and substantial. On July 17, 2007, CVBT announced that it has successfully completed work on a new medical indication for, FGF-1, in an animal model of bone growth. This research project, conducted in collaboration with Tufts University Medical School, will continue with future efforts to explore larger animals of bone growth that more closely resemble bone growth in humans.

ii) Stroke: We are continuing research with experimental animal models of both acute and chronic stroke, and we are examining the potential improvement in neurological deficits caused by stroke after treatment with FGF-1. On July 12, 2007, we announced the completion of a pre-clinical research program to assess the effects of the protein-based drug candidate, CVBT-141F, in reducing brain damage due to stroke. The results from three independent animal studies demonstrated that CVBT 141F significantly reduced the stroke-affected area in the brain.

General and Administrative

	For the Six Month Period Ended June 30,
	2007		2008		$ Change			% Change
	(Dollars in thousands)
General and administrative	$	8,167	$	3,406	$	(4,761	)		(58.30	)%
Phage Biotechnology Corporation (affiliate)	$	26	$	7	$	(19	)		(73.08	)%

Page 63 of 84

	$ Amount in thousands
These are our primary reductions in expenses:
Write-off of deferred costs related to listing on the Alternative Investment Market of the London Stock Exchange.	$	1,625
Professional expenses related to listing on the Alternative Investment Market of the London Stock Exchange, SOX Audit and Restatement of a full year of financial statements		1,127
Officer compensation, related to the issuance of warrants in April 2005		404
Computer expenses reflecting the reduction in new project initiatives		367
Travel expenses		292
Investor relations		295
Outside services primarily related to printing and distribution of financial reports		187
Marketing		144
D&O Insurance		86
Reduction in payroll and other human resources costs		84
Net decrease in all other expenses		150
Total decrease in expenses	$	4,761

Interest Income


	For the Six Month Period Ended June 30,
	2007		2008		$ Change			% Change
	(Dollars in thousands)
Interest income	$	127	$	—	$	(127	)		(100	)%

Interest income decreased from $127,000 to approximately $0 for the period ended June 30, 2007 and 2008, respectively; as the result of a lower level of cash and marketable securities available for investment.

Interest Expense

	For the Six Month Period Ended June 30,
	2007		2008		$ Change			% Change
	(Dollars in thousands)
Interest expense	$	6,191	$	1,638	$	(4,553	)		(74%)

During the six month period ended June 30, 2008, interest expense decreased from approximately $6,191,000, to $1,638,000 the same period in 2007.


	For the Six Month Period Ended June 30,
Components of Interest Expense:	2007		2008
Interest from senior notes and demand notes	$	794	$	260
Cashless interest from senior notes		105		14
Amortization of deferred financing cost		765		20
Amortization of derivatives		4,527		504
Amortization of debt discount		—		840
Total interest expense	$	6,191	$	1,638

Page 64 of 84


	For the Six Months Period Ended June 30,
	2007			2008
	(Dollars in thousands)
Adjustment to fair value of derivatives	$	(10,084	)	$	(844	)
Adjustment to fair value of derivatives - other		1,400			1,085

Adjustment to fair value of derivatives decreased from approximately ($10,084,000) to ($844,000) and adjustments to the fair value of derivatives-expense other increased from $1,400,000 to $1,085,000 for the period ended June 30, 2007 and 2008. In addition to the decrease in the outstanding balance of the Convertible Notes and the increase in the number of vested outstanding non-employee option and warrants, the primary components of the “Change in Fair Value of Derivatives” calculations are the changes in stock price during the reported period and the volatility in the stock prices of comparable companies used in the Black-Scholes Model. If stock price decreases sufficiently, we may show “Other Income”; conversely, if it increases we may show “Other Expense.” Additionally, if the volatility in the stock prices of comparable companies used in the Black-Scholes Model increases sufficiently, we may show “Other Expense”, conversely, if it decreases, we may show “Other Income.” Since the issuance of the Convertible Notes on March 20, 2006 to the period ended June 30, 2008 the Company’s stock price has decreased from $7.15 to $0.45 and was $0.63 at June 30, 2008. For the same period, the volatility in the stock price of comparable companies used in the Black-Scholes Model ranged from 44.56% to 130.87%. Since inception to June 30, 2008 the Company has shown $11,594,000 of adjustments to the fair value of derivatives as Other Expense.

Three Months Ended June 30, 2007 and 2008

During the three month period ended June 30, 2008, the Company spent approximately $1,212,000 in research and development to support its FDA clinical trials. Research and development expenses decreased slightly in comparison to the same period last year.

Our research and development consist of $221,000 clinical trial costs and $353,000 paid to an affiliate for contract clinical research.

Clinical trial expenditures decreased from $875,000 to $221,000 due to the completion of earlier trials in 2007 while our newer trials are still in the planning, ramp-up, and site selection process for our Phase II CHD and Phase II Wound Healing trials. We also reduced our expenditures with our affiliate, Phage Biotechnology Corporation, due to the majority of production of the drugs required for our upcoming trials in 2008.

	For the Three Month Period Ended June 30,
	2007		2008		$ Change			% Change
	(Dollars in thousands)
Research and development	$	1,718	$	1,212	$	(506	)		(29	)%
Clinical trials	$	875	$	221	$	(654	)		(75	)%
Phage Biotechnology Corporation (affiliate)	$	384	$	353	$	(31	)		(8	)%

General and Administrative

	For the Three Month Period Ended June 30,
	2007		2008		$ Change			% Change
	(Dollars in thousands)
General and administrative	$	4,638	$	1,696	$	(2,942	)		(63	)%
Phage Biotechnology Corporation (affiliate)	$	5	$	3	$	(2	)		(40	)%

Page 65 of 84

For the three month period ended June 30, 2008, general and administrative expenses decreased approximately $2,942,000 or 63% in comparison to the same period in 2007. This increase includes:

	$ Amount in Thousands
These are our primary reductions in expenses:
Write-off of deferred costs related to listing on the Alternative Investment Market of the London Stock Exchange.	$	1,625
Professional expenses related to listing on the Alternative Investment Market of the London Stock Exchange, SOX audit and restatement of a full year of financial statements		511
Officer compensation, related to the issuance of warrants in April 2005		—
Computer expenses reflecting the reduction in new project initiatives		153
Travel expenses		88
Investor relations		140
Outside services primarily related to printing and distribution of financial reports		177
Marketing		98
D&O Insurance		58
Reduction in payroll and other human resources costs		80
Net increase in all other expenses		11
Total decrease in expenses	$	2,942

Interest Income


	For the Three Month Period Ended June 30,
	2007		2008		$ Change			% Change
	(Dollars in thousands)
Interest income	$	26	$	—	$	(26	)		(100	)%

Interest income decreased from $26,000 to approximately $0 for the period ended June 30, 2007 and 2008, respectively; as the result of a lower level of cash and marketable securities available for investment.

	For the Three Month Period Ended June 30,
	2007			2008			$ Change			% Change
	(Dollars in thousands)
Interest expense	$	(2,971	)	$	(477	)	$	(2,494	)		(84%)

During the three month period ended June 30, 2008, interest expense decreased from approximately $2,971,000, to $477,000 the same period in 2008.


	For the Three Month Period Ended June 30,
Components of Interest Expense:	2007		2008
Interest from senior notes and demand notes	$	351	$	121
Cashless interest from senior notes		33		7
Amortization of deferred financing cost		640		10
Amortization of derivatives		1,947		251
Amortization of debt discount		—		88
Total interest expense	$	2,971	$	477

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	For the Three Month Period Ended June 30,
	2007			2008
	(Dollars in thousands)
Adjustment to fair value of derivatives	$	(7,958	)	$	2,285
Adjustment to fair value of derivatives - other		847			2,805

Adjustment to fair value of derivatives decreased from approximately ($7,958,000) to $2,285,000 and adjustments to the fair value of derivatives-expense other increased from $847,000 to $2,805,000 for the period ended June 30, 2007 and 2008. In addition to the decrease in the outstanding balance of the Convertible Notes and the increase in the number of vested outstanding non-employee option and warrants, the primary components of the “Change in Fair Value of Derivatives” calculations are the changes in stock price during the reported period and the volatility in the stock prices of comparable companies used in the Black-Scholes Model. If stock price decreases sufficiently, we may show “Other Income”; conversely, if it increases we may show “Other Expense.” Additionally, if the volatility in the stock prices of comparable companies used in the Black-Scholes Model increases sufficiently, we may show “Other Expense”, conversely, if it decreases, we may show “Other Income.”

3. Liquidity and Capital Resources

Sources of Liquidity

Since inception and through June 30, 2008, we have financed operations through the initial public offering of common stock, the private sale of capital stock and convertible notes and the private placement of senior secured convertible notes.

The table below summarizes the net proceeds we have received of approximately $62,391,000 from the issuance of shares of common stock, convertible preferred stock and convertible notes payable and the private placement of senior secured convertible notes through June 30, 2008:


Source of Funds	Net Proceeds
	(Dollars in thousands)
Pre USA IPO
Convertible preferred stock converts to common stock at 100/1, non-voting, no dividend	$	520
Common stock		3,904
Total net proceeds for issuance of our pre-IPO convertible notes payable		14,892
Post USA IPO
Proceeds from the IPO, 1,725,000 shares of common stock sold at $1.00 per share net of the options exercised		15,548
Exercise of 2,026,064 stock option and warrants		483
Proceeds from private placement of senior secured convertible notes together with warrants to purchase 705,882 shares of Company’s common stock. On May 21, 2007, the aggregate number of shares acquirable upon exercise of such warrants increased to 5,999,997 due to price re-set from $12.00 to $1.00 per share. ^(b)		20,000
Proceeds from private placement under Reg S ^(a)		4,227
Proceeds from the issuance of demand notes		1,760
Proceeds from the issuance of Long Term Notes		1,051
Proceeds from issuance of warrants at $0.001 par value		6
Total proceeds from financing through June 30, 2008	$	62,391
Financing costs		(5,065	)
Net proceeds per statement of cash flow	$	57,326

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(a)

On May 21, 2007, we entered into an agreement to sell 15,000,000 of common stock at a purchase price of $1.00 per share in connection with the Private Placement on March 31, 2008, we issued 4,475,000 shares. We received gross proceeds in the amount of $4,475,000 and net proceeds in the amount of $4,325,000 towards completion of the Private Placement. The agreement, as amended, provides for commissions of 10% of the amount placed in addition to warrants to purchase 3,700,000 shares of our common stock at an exercise price of $1.00 per share. The investor paid $3,700 for the warrants. The agreement, as amended, expired November 9, 2007. We decided not to sell common stock below $1.00 per share through November 9, 2007. We are in discussions to extend the agreement, but there can be no assurance that the agreement will be extended, nor that the remaining funds will be raised.

(b)

On March 20, 2006, we completed the private placement of $20,000,000 of senior secured notes together with warrants to purchase 705,882 shares of our common stock which was increased to 5,999,997 due to price re-set from $8.50 to $1.00. We will incur certain penalties if it fails to file, obtain and maintain the effectiveness of a registration statement covering the Securities, such as cash payments to the note holders calculated under formulas based on the principal amount of the notes and aggregate exercise price of the warrants. A total of $1,553,000 in transaction fees and expenses have been paid by us, such that we realized net proceeds in the amount of $18,447,000.

4. Cash Flow

Six Months Ended June 30, 2007 and 2008

Cash consumed in our operating activities decreased by 80% for the six months ended June 30, 2008 compared to the same period in 2007. We are progressing in our “Severe Coronary Heart Disease Phase II, Wound Healing Phase II,” clinical trials as discussed in the result of operation. The Company announced its FDA approval to proceed Phase II of its Coronary Heart Disease in July 2007.The Company has also significantly reduced it’s general and administrative expenses.

Cash consumed in our investing activities decreased by 97% due to a reduction in capital expenditures for property and equipment, resulting in approximately $57,000 less of cash consumption in investing activities for the six month period ended June 30, 2008.

	Six Month Period Ended June 30,
	2007			2008			$ Change		% Change
	(Dollars in thousands)
Cash flow used in operating activities	$	(9,158	)	$	(3,510	)	$	5,648		(52	)%
Cash flow used in investing activities		(59	)		(2	)		57		(97	)%
Cash flow provided from financing activities ^(a)		1,577			3,593			2,016		127	%

(a)

On May 21, 2007 we entered into an agreement to sell 15,000,000 of common stock at a purchase price of $1.00 per share in connection with Private Placement to the investor and certain other subscribers pursuant to a subscription agreement. During the six month period ended June 30, 2008, we issued 825,000 shares in exchange for gross proceeds of $825,000 and net proceeds of $742,000 towards completion of the Private Placement.

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5. Funding Requirements

We do not expect to generate significant additional funds unless and until we obtain marketing approval for and begins selling, one of its new drug candidates. The Company believes that the key factors that will affect its internal and external sources of cash are:

our ability to successfully obtain marketing approval for and to commercially launch one of our new drug candidates;

the success of our other pre-clinical and clinical development programs; and

the receptivity of the capital markets to financing by biotechnology companies.

our revenues, if any, from successful development and commercialization of our potential products.

Based on historical as well as budgeted expenditures, we believe we will need to raise additional external funds in the future through the sale of additional equity or debt securities to continue to develop our drug candidates at our current rate of expenditure. The sale of additional equity securities will result in additional dilution to our stockholders. Additional financing may not be available in amounts or on terms acceptable to us or at all. If we are unable to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of its planned research, development and commercialization activities, which could harm the financial condition and operating results.

6. Contractual Obligations and Commercial Commitments

The following table summarizes our long-term contractual obligations as of June 30, 2008:

	Total		Less than 1 Year		1 - 3 Years		3 - 5 Years		More than 5 Years
	(In thousands)
Long-term debt obligations ^(a)	$	3,531	$	2,480	$	1,051	$	—	$	—
Operating lease obligations ^(b)(c)		941		342		598		—		—
Total	$	4,472	$	2,822	$	1,649	$	—	$	—

(a)

We sold $20,000,000 of notes that have a floating interest rate of 3 month LIBOR plus 7%. We have the option to pay the interest with registered common stock. During the three months ended March 31, 2007, note holders converted $3,493,266 of the convertible senior secured notes to $3,653,980 shares of common stock for an average price of $0.96. During the six months ended June 30, 2008, convertible note holders elected to convert $800,000 of their notes receivable to 800,000 shares of common stock for an average price of $1.00. Should interest rates remain constant and the lenders do not convert anymore debt into common stock, and if we choose to make payments in cash, we would have a liability of approximately $360,360.

(b)

In November 2005, we entered into an operating lease agreement for office space in Las Vegas, Nevada, which requires monthly payments of approximately $17,900. We have one five-year option to renew the lease. Building operating expenses are reconciled annually, and any increase over the base year is billed pro rata among the building’s tenants. We occupied this property in March 2006. We entered into a second amendment on September 8, 2006, for the expansion space use of administrative offices in Las Vegas. The five-year lease obligation is approximately $1,161,393 including approximately $409,028 in base rent for the expanded space throughout the term of the lease.

(c)

We entered into a Lease Agreement dated August 7, 2006 with Nancy Ridge LLC, a Delaware Limited Liability company, for the use of general office and laboratory space in San Diego, CA. The lease commences on September 1, 2006 and expires on May 13, 2013, at which time we will have the option of extending the lease by five years on the same terms and conditions of the lease. The lease was terminated on March 14, 2008 in exchange for the amount of security deposit of $57,805. There is no future liability after this date.

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These service fees for the obligations below were determined through a process of competitive bids and negotiation. Our major outstanding contractual obligations are summarized below:

The major outstanding contractual obligations are as follows:


Item #	Contract	Agreement Name	Start	End Date
1	Phage Biotechnology	Joint patent agreement	Feb. 28, 2007	March 1, 2020

2	Cardio Phage International (“CPI”)	Distribution agreement	Aug. 16, 2004	Aug. 16, 2013

3	Korea Bio-Development Corporation	Manufacturing and distribution agreement	Dec. 15, 2000	Dec. 15, 2099

4	Hesperion, Inc. (TouchStone, formerly “Clinical CardioVascular Research, LLC”)	Clinical development of investigational drugs and devices for Cardiovascular indications	Oct. 24, 2001	Ongoing

5	CVBT Founder	Royalty agreement	Aug. 16, 2004	Dec. 31, 2013

6	Catheter and Disposables Technologies, Inc	Product development	June 1, 2004	Dec. 31, 2006

	Item

	(1)	The Company entered into a joint patent agreement with Phage as of February 28, 2007. The Company plans to develop and commercialize therapeutic methods related to the induction of angiogenesis or wound healing by administration of Fibroblast Growth Factor (“FGF”); and, Phage plans to develop and commercialize recombinant DNA methods for producing peptides/proteins. The Company and Phage entered into a joint patent ownership and license agreement dated as of August 16, 2004, which was later amended and restated as of May 23, 2006 (the “Joint Ownership Agreement”), for consideration the sufficiency of which was acknowledged in each agreement, pursuant to which Phage granted Cardio a 50% ownership interest in certain patents and patent applications listed in the Joint Ownership Agreement, as well as certain future patent rights, and the parties acknowledge that the Company would have exclusive rights within a defined field, while Phage would have exclusive rights outside that field. Cardio and Phage entered a new agreement as of February 28, 2007 superseding the Joint Ownership Agreement so as to specify those future patents and patent applications that are to be subject to joint ownership and so as to restate the licenses granted in the Joint Ownership Agreement. Cardio and Phage acknowledged that the jointly owned and cross-licensed rights are vital to the parties’ respective plans for development and commercialization and further clarified the parties’ respective rights and provided for continued access to the necessary rights in the event of insolvency. In consideration for the grant of the exclusive right to the patent rights in the field, the Company shall pay a 6% royalty to Phage on the net sales price of finished product to end customer or distributor. The rights and obligations set forth in this agreement shall commence as of the effective date of this agreement and end upon the later of (a) the expiration of the last to expire Jointly Owned Patent and (b) the abandonment of the last pending Jointly Patent Application.

(2)

(3)

(4)

Hesperian will assist the Company with the FDA approval process for drug.

(5)

(6)

Catheter and Disposables Technologies, Inc. will design, develop, and fabricate two different prototype catheter products that will facilitate the administration of CVBT-141A by catheter delivery.

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These service fees for the obligations below were determined through a process of competitive bids and negotiation. Our major outstanding contractual obligations are summarized below (continued):


Item #	Contract	Agreement Name	Start	End Date
7	bioRASI, LLC	CRO agreement	Aug. 8, 2005	Aug. 20, 2007

8	Phage Biotechnology Corporation	Lease Guarantee - San Diego	March 15, 2006	Aug. 15, 2013

9	Promethean	Convertible Notes	March 20, 2006	March 19, 2009

10	Chief Executive Officer	Guarantee agreement	March 20, 2006	First date of generating revenue on repayment of notes.

11	Chief Executive Officer	Guarantee reimbursement agreement	March 20, 2006	First date of generating revenue on repayment of notes.

12	Kendle (formerly Charles River Laboratories)	CRO agreement	Aug. 8, 2006	Completion of Phase II Severe Coronary Heart Disease

13	The Bruckner Group	Feasibility Study	Aug. 4, 2006	Upon completion of study

14	Investment Banking	Investment Banker	June 6, 2006	Ongoing

15	Public Accounting Firm	Professional Services	July 1, 2006	Ongoing

(7)

(8)

This agreement is for a new manufacturing facility in San Diego, CA. The lease provides for minimum monthly rent and additional rent for shared costs, which aggregate approximately $20,000 per month.

(9)

(10)

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(11)

After the Company’s obligations contained in the agreements for the senior secured notes and warrants have been paid in full, if Daniel C. Montano was required to make any payments pursuant to this guaranty prior to the payment in full of the Company’s obligations, the Company will reimburse Daniel C. Montano for any such payments plus simple interest at 7% per annum from the date of the advance by Daniel C. Montano to the date reimbursed by the Company.

(12)

(13)

(14)

(15)

A provider of accountancy and business services to audit and review the Company’s financial reports for listing on the London Stock Exchange’s Alternative Investment Market, or AIM.

Service Fees Paid for Major Contractual Obligations:


	As of June 30,				For the Period from March 1, 1998 (Inception) to June 30,
	2007		2008		2008
	(Unaudited; Dollars in thousands)
The Bruckner Group	$	617	$	—	$	1,068
Touchstone Research (C2R)(Hesperion)		293		14		4,896
Kendle (Charles River)		328		154		1,877
Total	$	1,238	$	168	$	7,841

7. Off-Balance Sheet Transactions

At June 30, 2008, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

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8. Recently Issued Accounting Pronouncements

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

The Company sold floating rate convertible debt securities. At the six month period ended June 30, 2008, there was $2.5 million of floating rate debt outstanding which is subject to interest rate risk. Interest rate on the Company’s convertible notes payable was 9.68% for the quarter ended June 30, 2008. Each 100 basis points increase in interest rates relative to these borrowings would impact annual pre-tax earnings approximately $25,000 and the Company’s cash flow should the Company choose to pay this interest in cash in lieu of paying in-kind.

Foreign Currency Risk

Most of the Company’s transactions are conducted in United States dollars, although the Company does have some development and commercialization agreements with vendors located outside the United States. Transactions under certain of these agreements are conducted in United States dollars. If the exchange rate changed by ten percent, the Company does not believe that it would have a material impact on the results of operations or cash flows.

Derivative Securities Risk

The Company sold floating rate convertible debt securities which have several derivative features. Whereas the value of the derivative features effect the Company’s “Statement of Operations” and “Balance Sheet,” there is no effect on the Company’s cash flow.

The value of these derivatives fluctuate change from period to period, until the notes are redeemed or converted. An increase in value of these derivatives will result in the Company having to record an expense to the Adjustment to Fair Value of Derivatives on the Statement of Operations. Conversely, a decrease in the value of these derivatives will result in the Company having to record income to the Adjustment to Fair Value of Derivatives on the Statement of Operations.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC and that such information is accumulated and communicated to management, including our chief executive officer (CEO) and chief financial officer (CFO), as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Management, with participation by our CEO and CFO, has designed the Company’s disclosure controls and procedures to provide reasonable assurance of achieving the desired objectives. As required by SEC Rule 13a-15(e), in connection with filing this Quarterly Report on Form 10-Q, management conducted an evaluation, with the participation of our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as of June 30, 2008, the end of the period covered by this report.

Based upon the evaluation conducted by management in connection with the audit of the Company’s financial statements for the year ended December 31, 2007, we identified a material weakness in our internal control over financial reporting with respect to accounting for derivatives. A material weakness is “a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected by us in a timely manner.” As a result of this material weakness, our CEO and CFO concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of December 31, 2007 with respect to accounting for derivatives, and this condition continued as of June 30, 2008.

In light of this material weakness, we performed additional analyses and procedures in order to conclude that our financial statements for the six months and three months ended June 30, 2008 included in this Quarterly Report on Form 10-Q were fairly stated in accordance with US GAAP. Accordingly, management believes that despite our material weakness, our financial statements for the six months and three months ended June 30, 2008 are fairly stated, in all material respects, in accordance with US GAAP.

Plan for Remediation of Material Weaknesses

We plan to refine our internal control over financial reporting for derivatives to meet the internal control reporting requirements included in Section 404 of the Sarbanes-Oxley Act (SOX 404) to have effective internal controls by December 31, 2008. The effectiveness of the measures we implement in this regard will be subject to ongoing management review supported by confirmation and testing as part of our SOX 404 compliance process, as well as audit committee oversight. As a result, we expect that additional changes could be made to our internal control over financial reporting and disclosure controls and procedures.

During 2008, we intend to take the following remediation efforts:

Re-evaluate the qualifications of the third party expert;

Re-evaluate the processes surrounding the utilization of the third party expert, including;

Identification of how the error in identification of derivatives occurred;

Identification of how once the error occurred that review procedures did not disclose the error.