e10vq

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SO044cjqubpggzetT6B1rqUB3GE9X6vG4jwKNpXoaem1aJ9b4PXO9w0XWFOoHck6 TSc9tzliPwurD7ERKOt/0Q== 0000950137-08-010515.txt : 20080811 0000950137-08-010515.hdr.sgml : 20080811 20080811161002 ACCESSION NUMBER: 0000950137-08-010515 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20080630 FILED AS OF DATE: 20080811 DATE AS OF CHANGE: 20080811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CytoCore Inc CENTRAL INDEX KEY: 0000075439 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 364296006 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-00935 FILM NUMBER: 081006355 BUSINESS ADDRESS: STREET 1: 414 NORTH ORLEANS STREET STREET 2: SUITE 502 CITY: CHICAGO STATE: IL ZIP: 60610 BUSINESS PHONE: 4078490290 MAIL ADDRESS: STREET 1: 414 NORTH ORLEANS STREET STREET 2: SUITE 502 CITY: CHICAGO STATE: IL ZIP: 60610 FORMER COMPANY: FORMER CONFORMED NAME: MOLECULAR DIAGNOSTICS INC DATE OF NAME CHANGE: 20011009 FORMER COMPANY: FORMER CONFORMED NAME: AMPERSAND MEDICAL CORP DATE OF NAME CHANGE: 19990527 FORMER COMPANY: FORMER CONFORMED NAME: BELL NATIONAL CORP DATE OF NAME CHANGE: 19920703 10-Q 1 c34773e10vq.htm FORM 10-Q e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File number 0-935

CYTOCORE, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		36-4296006

(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

414 North Orleans Street, Suite 510
Chicago, IL 60654

(Address of Principal Executive Offices)

(312) 222-9550

(Registrant’s Telephone Number, including Area Code)

414 North Orleans, Suite 510 Chicago, Il 60610

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

COMMON STOCK, $0.001 PAR VALUE, AT JULY 24, 2008: 40,953,497

CYTOCORE, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


	Page
PART I. — FINANCIAL INFORMATION

Item 1. Financial Statements		2

a) Condensed Consolidated Balance Sheets — June 30, 2008 (unaudited) and December 31, 2007		2

b) Condensed Consolidated Statements of Operations — Three and Six months ended June 30, 2008 and June 30, 2007 (unaudited)		3

c) Condensed Consolidated Statements of Cash Flows — Six months ended June 30, 2008 and June 30, 2007 (unaudited)		4

d) Notes to Unaudited Condensed Consolidated Financial Statements		5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13

Item 3. Quantitative and Qualitative Disclosures about Market Risk		18

Item 4. Controls and Procedures		18

PART II. — OTHER INFORMATION

Item 1. Legal Proceedings		19

Item 1A. Risk Factors		19

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		19

Item 3. Defaults upon Senior Securities		21

Item 4. Submission of Matters to a Vote of Security Holders		21

Item 5. Other Information		21

Item 6. Exhibits		21

SIGNATURES		22

EXHIBIT INDEX		23

Exhibit 10.1 Agreement with Quantrx Biomedical Corporation, dated May 19, 2008
Exhibit 31 Section 302 Certification
Exhibit 32 Section 906 Certification
Exhibit 10.1
Exhibit 31
Exhibit 32

PART I. — FINANCIAL INFORMATION

Item 1. Financial Statements

CYTOCORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)


	June 30,			December 31,
	2008			2007
	(Unaudited)
Assets
Current Assets:
Cash and cash equivalents	$	3,407		$	316
Accounts receivable		40			15
Inventories		505			14
Prepaid expenses and other current assets		79			216

Total current assets		4,031			561
Fixed assets, net		1,588			532
Licenses, patents and technology, net of amortization		126			20

Total assets	$	5,745		$	1,113


Liabilities and Stockholders’ Equity (Deficit)

Current Liabilities:
Accounts payable	$	1,332		$	1,778
Accrued payroll costs		280			589
Accrued expenses		1,136			1,912
Notes payable		70			70

Total current liabilities		2,818			4,349


Stockholders’ Equity (Deficit):
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 373,560 and 403,272 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively (Liquidation value of all classes of preferred stock $2,875 at June 30, 2008)		1,491			1,628
Common stock, $0.001 par value; 500,000,000 shares authorized; 40,953,497 and 35,866,156 shares issued and 40,934,288 and 35,846,947 shares outstanding at June 30, 2008 and December 31, 2007, respectively		41			36
Additional paid-in-capital		90,857			80,917
Treasury stock: 19,209 shares at June 30, 2008 and December 31, 2007		(327	)		(327	)
Accumulated deficit		(89,058	)		(85,413	)
Accumulated comprehensive loss—
Cumulative translation adjustment		(77	)		(77	)

Total stockholders’ equity (deficit)		2,927			(3,236	)

Total liabilities and stockholders’ equity (deficit)	$	5,745		$	1,113

See accompanying notes to these condensed consolidated financial statements.

CYTOCORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)


	Six months ended						Three months ended
	June 30,						June 30,
	2008			2007			2008			2007
	(Unaudited)						(Unaudited)
Net revenues	$	82		$	40		$	36		$	18

Operating expenses

Cost of revenues		143			—			66			—

Research and development (net of settlement of trade debt of $67 for the three and six months ended June 30, 2007)		1,317			1,213			508			817

Selling, general and administrative (net of interest settlement of $85 for the six months ended June 30, 2007)		2,108			2,150			1,094			566
Selling, general and administrative — related parties		139			158			93			35


Total operating expenses		3,707			3,521			1,761			1,418


Operating loss		(3,625	)		(3,481	)		(1,725	)		(1,400	)

Other income
Unrealized gain on convertible securities		—			7			—			386
Interest income		38			2			23			2

Total other income		38			9			23			388


Net loss		(3,587	)		(3,472	)		(1,702	)		(1,012	)

Preferred stock dividend		(58	)		(313	)		(54	)		—


Net loss applicable to common stockholders	$	(3,645	)	$	(3,785	)	$	(1,756	)	$	(1,012	)


Basic and diluted net loss per common share⁽¹⁾	$	(0.10	)	$	(0.11	)	$	(0.04	)	$	(0.03	)


Basic and diluted weighted average number of common shares outstanding⁽¹⁾		38,090,968			33,205,218			40,851,212			34,443,253


(1)		June 30, 2007 has been restated to reflect the one-for-ten reverse stock split that was effective November 27, 2007.

See accompanying notes to these condensed consolidated financial statements.

CYTOCORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)


	Six Months Ended
	June 30,
	2008			2007
	(Unaudited)
Operating Activities:
Net loss	$	(3,587	)	$	(3,472	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		75			11
Gain on settlements of indebtedness		(19	)		(152	)
Unrealized gain on convertible securities		—			(7	)
Warrants issued to non-employees for services		45			337
Stock and warrants issued in settlement of debt		—			467
Non-cash compensation expense		82			492
Non-cash interest related to warrant modification		—			182
Changes in assets and liabilities:
Accounts receivable		(26	)		12
Inventories		(492	)		—
Prepaid expenses and other current assets		137			52
Accounts payable		(427	)		(239	)
Accrued expenses		(480	)		(707	)


Net cash used in operating activities		(4,692	)		(3,024	)


Investing activities:
Purchase of license		(105	)		—
Purchases of fixed assets		(1,130	)		(231	)


Net cash used in investing activities		(1,235	)		(231	)

Financing activities:
Proceeds from issuance of common stock		9,381			3,335
Financing costs in connection with private placement of stock		(405	)		(207	)
Proceeds from exercise of warrants		42			2,189
Proceeds from exercise of options		—			50
Payment of notes payable		—			(355	)


Net cash provided by financing activities		9,018			5,012


Net increase in cash and cash equivalents		3,091			1,757

Cash and cash equivalents at the beginning of period		316			874


Cash and cash equivalents at end of period	$	3,407		$	2,631


Supplemental disclosure of cash flow information:

Cash paid during the period for:
Interest	$	—		$	51

Non-cash transactions during the period for:
Preferred stock and cumulative dividends converted into common stock	$	136		$	1,087
Convertible securities	$	—		$	560
Payment of accrued bonuses with common stock	$	604		$	—

See accompanying notes to these condensed consolidated financial statements.

CYTOCORE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular data in thousands, except per share amounts)
(Unaudited)

Note 1. Organization

CytoCore, Inc. (“CCI” or the “Company”) was incorporated in Delaware in December 1998. Except where the context otherwise requires, “CCI,” the “Company,” “we” and “our” refers to CytoCore, Inc. and our subsidiaries and predecessors.

CCI is a clinical diagnostics company engaged in the design, development and commercialization of cost-effective screening and diagnostic products, as well as therapeutic-delivery products, in women’s healthcare. CCI is currently focused on the production and sale of its SoftPAP™ cervical collection device and the design and development of its screening systems for cervical, endometrial, and various precancerous and cancerous conditions through the CytoCore Solutions™ System. The CytoCore Solutions™ System will utilize the Company’s Automated Image Proteomic System or AIPS™ image analysis-based screening system that provides for automated slide screening of genetic biomarkers from cytological and histological specimens. The CytoCore Solutions™ System and its components are intended to screen for cancer and eventually treat cancer through the administration of a Food and Drug Administration-approved therapeutic agent from CCI’s drug delivery system. We believe the CytoCore Solutions™ System or its components may be used in a laboratory, clinic or doctor’s office.

The Company has incurred significant operating losses since its inception. Management expects that significant on-going operating expenditures will be necessary to successfully implement CCI’s business plan and develop, manufacture and market its products. These circumstances raise substantial doubt about CCI’s ability to continue as a going concern. Implementation of the Company’s plans and its ability to continue as a going concern will depend upon the Company’s ability to increase sales of its products, develop new products, and raise additional capital. At June 30, 2008, the Company had $3.4 million in cash. In the first six months of 2008, the Company received net proceeds of $9.0 million through the sale of unregistered, restricted common stock in the form of units, each unit consisting of two common shares and a warrant to purchase one common share. If the Company is unable to obtain adequate additional financing or generate sufficient sales revenues, it may be unable to continue its product development efforts and other activities and may be forced to curtail or cease operations. The consolidated financial statements presented herein do not include any adjustments that might result from the outcome of this uncertainty.

Note 2. Basis of Presentation

The consolidated financial statements included herein are unaudited. Such consolidated financial statements reflect, in the opinion of management, all adjustments necessary to present fairly the Company’s financial position and results of operations as of and for the periods indicated. All such adjustments are of a normal recurring nature. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2008 or for any other period. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 2007, as filed with the SEC.

The basic and diluted weighted average number of common shares outstanding and the basic and diluted loss per common share for the period ended June 30, 2007 have been restated to reflect the one-for-ten reverse stock split effected by the Company on November 27, 2007.

Certain items for the six months ended June 30, 2007 have been reclassified in order to conform to the current financial statement presentation.

Inventory consists of raw materials and finished goods. Inventory is stated at the lower of cost or market, with cost determined using the average cost method. At June 30, 2008 and December 31, 2007, inventory consisted primarily of finished goods.

On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”), for financial assets and financial liabilities. SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. The Company does not believe that the partial adoption of SFAS 157 has had or will have a material impact on the Company’s financial statements. In February 2008, the FASB issued a FASB Staff Position (“FSP”), FSP SFAS 157-2, Effective Date of FASB Statement No. 157 , to defer the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The FSP defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008. The Company does not expect the adoption of FSP SFAS 157-2 to have a significant impact on the financial statements.

There was no other comprehensive income or loss in the periods presented.

Note 3. Fixed Assets

Fixed assets consist of the following:


	June 30, December 31,
	2008			2007
	(unaudited)
Furniture and fixtures	$	47		$	124
Laboratory equipment		508			622
Computer and communications equipment		256			343
Design and tooling		915			486
Machinery and equipment		680			—
Leasehold improvements		—			28

		2,406			1,603
Less accumulated depreciation and amortization		(818	)		(1,071	)

Total	$	1,588		$	532

Note 4. Licenses, Patents and Technology

During the second quarter of 2008, the Company purchased a license agreement for certain technology for a total of $300,000, of which $100,000 was paid upon signing the license agreement, and the balance of which is due in 18 equal monthly installments of $5,556. There were 17 payments remaining as of June 30, 2008.

Note 5 Accrued Expenses

Accrued expenses include the following:


	June 30,		December 31,
	2008		2007
	(unaudited)
Accrued interest	$	353	$	350
Accrued franchise and other taxes		60		707
Accrued compensation		383		637
Other accrued expenses		340		218

Total	$	1,136	$	1,912

Note 6. Notes Payable

Notes payable to unrelated parties consist of:


	June 30,		December 31,
	2008		2007
	(unaudited)
Robert Shaw, $25,000 Promissory Note issued September 20, 2001; interest rate 9% per annum, due December 20, 2001	$	15	$	15


	June 30,		December 31,
	2008		2007
	(unaudited)
Ventana Medical Systems, Inc. $62,946 Promissory Note issued November 30, 2003; due December 31, 2003; interest rate 8% per annum payable after December 31, 2003		21		21

Xillix Technologies Corporation $361,000 Promissory Note issued June 26, 1998; Interest rate Canadian Prime plus 6% per annum, due December 27, 1999; represents a debt of AccuMed		34		34

	$	70	$	70

Defaults. The Company has failed to make principal and interest payments when due and is in breach of certain warranties and representations under certain of the notes included above. Such notes require the holder to notify CCI in writing of a declaration of default at which time a cure period, as specified in each individual note, would commence. CCI has not received any written declarations of default from holders of its remaining outstanding notes payable.

Note 7. Stockholders’ Equity (Deficit)

Loss per share

A reconciliation of the numerator and the denominator used in the calculation of loss per share is as follows:


	Six months ended						Three months ended
	June 30, 2008			June 30, 2007			June 30, 2008			June 30, 2007
	(Unaudited)						(Unaudited)
Basic and Diluted:
Net loss applicable to common stockholder	$	(3,645	)	$	(3,785	)	$	(1,756	)	$	(1,012	)
Weighted average common shares outstanding		38,090,968			33,205,218			40,851,212			34,443,253
Net loss per common share	$	(0.10	)	$	(0.11	)	$	(0.04	)	$	(0.03	)

Stock options and warrants to purchase 5,967,914 and 3,282,147 common shares and preferred stock convertible into 485,605 and 484,078 common shares were not included in the computation of diluted loss per share applicable to common stockholders as they are anti-dilutive as a result of net losses for the periods ended June 30, 2008 and June 30, 2007, respectively.

As of June 30, 2008 and 2007, the Company had cumulative preferred undeclared and unpaid dividends. In accordance with SFAS No. 128, “Earnings per Share”, these dividends were added to the net loss in the net loss per share. After taking these undeclared and unpaid preferred dividends into account for the period, the net loss applicable to common stockholders for the three and six months ended June 30, 2008 was $1,823,000 and $3,782,000, respectively, and for the three and six months ended June 30, 2007 was $1,084,000 and $3,927,000, respectively.

Preferred Stock

A summary of the Company’s preferred stock is as follows:


	June 30,		December 31,
	2008		2007
	Shares Issued &		Shares Issued &
	Outstanding		Outstanding
Offering	(unaudited)
Series A convertible		47,250		47,250
Series B convertible, 10% cumulative dividend		93,750		122,486
Series C convertible, 10% cumulative dividend		38,333		38,333
Series D convertible, 10% cumulative dividend		175,000		175,000
Series E convertible, 10% cumulative dividend		19,227		20,203

Total Preferred Stock		373,560		403,272

Summary of Preferred Stock Terms


*Series A Convertible Preferred Stock*

Liquidation Value:		$4.50 per share
Conversion Price:		$103.034 per share
Conversion Rate:		0.04367—Liquidation Value divided by Conversion Price ($4.50/$103.034)
Voting Rights:		None
Dividends:		None
Conversion Period:		Any time

*Series B Convertible Preferred Stock*

Liquidation Value:		$4.00 per share
Conversion Price:		$10.00 per share
Conversion Rate:		0.40—Liquidation Value divided by Conversion Price ($4.00/$10.00)
Voting Rights:		None
Dividends:		10%—Quarterly—Commencing March 31, 2001
Conversion Period:		Any time
Cumulative and undeclared dividends in arrears at June 30, 2008 were $276,000

*Series C Convertible Preferred Stock*

Liquidation Value:		$3.00 per share
Conversion Price:		$6.00 per share
Conversion Rate:		0.50—Liquidation Value divided by Conversion Price ($3.00/$6.00)
Voting Rights:		None
Dividends:		10%—Quarterly—Commencing March 31, 2002
Conversion Period:		Any time
Cumulative and undeclared dividends in arrears at June 30, 2008 were $77,000

*Series D Convertible Preferred Stock*

Liquidation Value:		$10.00 per share
Conversion Price:		$10.00 per share
Conversion Rate:		1.00—Liquidation Value divided by Conversion Price ($10.00/$10.00)
Voting Rights:		None
Dividends:		10%—Quarterly—Commencing April 30, 2002
Conversion Period:		Any time
Cumulative and undeclared dividends in arrears at June 30, 2008 were $1,167,000

*Series E Convertible Preferred Stock*

Liquidation Value:		$22.00 per share
Conversion Price:		$8.00 per share
Conversion Rate:		2.75—Liquidation Value divided by Conversion Price ($22.00/$8.00)
Voting Rights:		Equal in all respects to holders of common shares
Dividends:		10%—Quarterly—Commencing May 31, 2002
Conversion Period:		Any time
Cumulative and undeclared dividends in arrears at June 30, 2008 were $285,000

Conversion of Preferred Shares for Common Shares

During the second quarter of 2008, a holder of 28,736 shares of Series B Convertible Preferred Stock elected to convert its preferred shares and accrued and unpaid dividends into 19,786 unregistered shares of the Company’s common stock. Dividends paid in common stock on these preferred shares were $54,000.

During the three months ended March 31, 2008, holders of an aggregate 976 shares of Series E Convertible Preferred Stock of CCI elected to convert such preferred shares and accrued and unpaid dividends thereon into an aggregate 4,305 unregistered shares of the Company’s common stock. Dividends paid in common stock on these preferred shares were $4,000.

Issuance of Common Shares and Warrants for Cash

During the quarter ended March 31, 2008, the Company offered units to purchase shares of unregistered, restricted common stock to accredited investors in exchange for cash. Each unit consisted of two shares of common stock and a warrant to purchase one share of common stock at an exercise price of $2.00 per share. These warrants are for a term of three years and are exercisable immediately. Each unit was priced at $4.00.

During the quarter ended June 30, 2008, the Company received proceeds of $271,000 for previously subscribed units, net of expenses of $10,000, for the sale of 70,250 units. CCI issued 140,500 shares of common stock and warrants to purchase an aggregate 70,250 shares of common stock at $2.00 per share. These warrants are for a term of three years and are exercisable immediately. For the six months ended June 30, 2008, CCI received proceeds totaling $8,976,000, net of expenses of $405,000 from the sale of an aggregate 2,345,250 units. The Company issued a total of 4,690,500 shares of common stock and warrants to purchase an aggregate 2,345,250 shares of common stock.

In addition, as part of this offering, the Company issued warrants to purchase an aggregate 311,500 shares of common stock to the placement agent that assisted the Company with the unit offering. The warrants have an exercise price of $2.25 per share and are exercisable for three years. The Company valued the warrants at $352,000 using the Black-Scholes method.

The Company also received gross proceeds of $22,000 from the exercise of warrants for 21,875 shares of unregistered, restricted common stock during the quarter ending June 30, 2008. For the six months ended June 30, 2008, CCI received proceeds totaling $42,000 from the exercise of warrants to purchase an aggregate 32,750 shares of unregistered, restricted common stock.

Issuance of Common Stock and Warrants as Payment for Services

During the quarter ended March 31, 2008, CCI issued an aggregate 140,000 shares of restricted, unregistered common stock valued at $1.78 per share to its non-employee directors as payment for services rendered in 2007. The Company previously recorded the value of the common stock at $249,000 as non-cash compensation in 2007.

During the quarter ended June 30, 2008, the Company issued warrants to a company affiliated with the Chairman of the Board of Directors under the terms of a consulting agreement. The warrants, which are exercisable immediately, entitle the recipient to purchase 10,000 shares of common stock at $2.06 per share and have a term of three years. CCI valued the warrants at $16,000 using the Black-Scholes valuation model and recorded the amount as a selling, general and administrative expense. In addition, CCI issued warrants to non-affiliated consultants to purchase an aggregate 12,143 shares of common stock with exercise prices ranging from $2.06 to $3.50 per share. CCI valued these warrants at $24,000 and recorded the amount as a selling, general and administrative expense for the three months ended June 30, 2008. All of the warrants issued to consultants during the quarter are for a term of three years and are exercisable immediately.

During the six months ended June 30, 2008, the Company issued warrants to purchase an aggregate 23,571 shares of common stock with exercise prices ranging from $2.06 to $3.50 per share. The warrants are for a term of three years and are exercisable immediately. CCI valued the warrants at $45,000.

Issuance of Stock and Warrants as Payment for Employee Compensation

During the quarter ended June 30, 2008, the Company issued warrants to purchase 10,000 shares of common stock with an exercise price of $2.06 per share to its Chief Executive Officer under the terms of his employment agreement. CCI valued the warrants at $16,000 using the Black-Scholes valuation model and recorded the amount as non-cash compensation expense. In addition, the Company issued warrants to purchase 14,000 shares of common stock with exercise prices ranging from $1.45 to $1.90 per share to a non-executive employee. CCI valued these warrants at $23,000 using the Black-Scholes valuation model and recorded the amount as non-cash compensation expense for the three months ended June 30, 2008. All of the warrants issued to employees during the quarter have a term of three years and are immediately exercisable.

During the six months ended June 30, 2008, the Company issued warrants to purchase an aggregate 51,000 shares of common stock with exercise prices ranging from $1.33 to $2.06 per share to employees. CCI valued the warrants at $82,000 using the Black-Scholes valuation model and recorded the amount as non-cash compensation expense for the six months ended June 30, 2008. As noted above, the employee warrants have a term of three years and are immediately exercisable.

Application of Black-Scholes Valuation Model

In applying the Black-Scholes valuation model, the Company used the following assumptions for the six months ended June 30, 2008 and 2007:


	2008			2007
Expected volatility		125%–132	%		120%–130	%
Expected term (years)		1.5			1.5
Risk-free interest rate		2.50–4.25	%		4.25	%
Expected dividend yield		0	%		0	%
Forfeiture rate		0	%		0	%
Resulting weighted average grant date fair value	$	1.58–$1.72		$	2.60–$3.20

Registration Rights

In connection with our private placement of common stock, for which a final closing was held on April 15, 2008, we entered into a registration rights agreement with the selling stockholders. Pursuant to the registration rights agreement, we agreed to file with the SEC, as soon as possible and in no event later than 120 days after the final closing, a registration statement registering all of the shares of common stock issuable upon exercise of the warrants issued to such selling stockholders in the Company’s private placement of units. The Company must cause such registration statement to be declared effective under the Securities Act as soon as possible after it is filed, and shall use its reasonable best efforts to keep the registration statement continuously effective under the Securities Act until the date which is the earlier of (i) four years after its effective date, (ii) such time as all of the “registrable securities” covered by such registration statement have been publicly sold by the holders, or (iii) such time as all of the registrable securities covered by such registration statement may be sold by the holders pursuant to Rule 144(k) as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company’s transfer agent and the affected Holders.

If a registration statement is not filed on or prior to its filing date (or if the Company files a registration statement without affording the holders the opportunity to review and comment on the same as required by the registration rights agreement), and/or if the Company fails to use its reasonable best efforts to cause the registration statement to be declared effective as soon as possible after it is filed, then in addition to any other rights the holders may have, the Company shall issue to the holders of the registrable securities, as liquidated damages and not as a penalty, additional warrants. The number of additional warrants that shall be issued to a holder is equivalent to two additional warrants for every four warrants owned by such holder. The additional warrants will have a per share exercise price equal to $2.00 per share, exercisable for three years, and will be in the same form as the warrants issued as part of the units in the offering.

Convertible Securities

As of December 31, 2006, the Company had an aggregate number of shares of common stock issued as well as instruments convertible or exercisable into common shares that exceeded the number of the Company’s total authorized common shares by 189,177 shares. The Company determined that the excess shares were related to warrants issued at the end of 2006. Based upon EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, the Company determined the fair value of these excess shares using the Black-Scholes valuation model. As a result, as of December 31, 2006 the Company reported a liability of $567,000. As of March 31, 2007, the Company remeasured this liability, in accordance with EITF 00-19, and recorded an unrealized loss of $379,000. During the quarter ended June 30, 2007, the Company issued more securities and a number of warrants expired. On June 21, 2007, the shareholders of the Company authorized an increase in the number of authorized common shares of the Company from 375,000,000 to 500,000,000 shares. As a result of the increase in authorized common shares, the Company did not have equity instruments issued or exercisable in excess of its authorized capital and therefore no liability existed at June 30, 2007. The Company remeasured the liability up until the day the shareholders authorized the increase in shares and determined the Company had an unrealized gain of $7,000 for the year ended December 31, 2007.

Note 8. Equity Incentive Plan and Employee Stock Purchase Plan and other Share-Based Employee Payments

The Company has a shareholder-approved stock incentive plan for employees and directors, the 1999 Equity Incentive Plan, which provides for the issuance of up to 2 million shares under various forms of equity awards. For the six months ended June 30, 2008, the Company did not grant any options under this plan or otherwise to its employees. However, CCI did grant to each of its Chief Executive Officer and its President an award of 100,000 shares of restricted, unregistered common stock for services rendered in 2007. CCI valued the common stock at $1.78 per share for an aggregate total of $355,000 using the fair value method and recorded such value as a non-cash compensation expense in 2007.

During the second quarter ended June 30, 2008, the Company issued to its Chief Executive Office and an affiliate of a Chairman of the Board of Directors under their agreements with the Company warrants to purchase 10,000 shares of common stock each at an exercise price of $2.06 per share. CCI valued the warrants at a total of $32,000 using the Black-Scholes valuation model. Also the Company issued warrants to purchase an aggregate 14,000 shares of common stock with exercise prices ranging from $1.45 to $1.90 per share to a non-executive

employee. CCI valued the warrants at $23,000 using the Black-Scholes valuation model and recorded the amount as non-cash compensation expense in selling, general and administrative expense for the three months ended June 30, 2008.

During the six months ended June 30, 2008, the Company issued warrants to purchase an aggregate 51,000 shares of common stock with exercise prices ranging from $1.33 to $2.06 per share to employees. CCI valued the warrants at $82,000 using the Black-Scholes valuation model and recorded the amount as non-cash compensation expense for the six months ended June 30, 2008. All of the warrants issued during the six months ended June 30, 2008 have a term of three years and are immediately exercisable.

Stockholders also approved the 1999 Employee Stock Purchase Plan, which offers employees the opportunity to purchase shares of CCI common stock through a payroll deduction at 85% of the fair market value of such shares at specified dates. There was no activity under the purchase plan during the first six months of the 2008 fiscal year.

Note 9. Legal Proceedings

The Company is a party to a number of legal proceedings which are described in the Company’s Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 2007, as filed with the SEC. The following includes all material proceedings, including any that were initiated, resolved or had material developments since the date of the Company’s Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 2007. A summary of pending cases is as follows:

Attorney General of Illinois. In the third quarter of 2006, the Attorney General of the State of Illinois brought an action in the Circuit Court of Cook County, Illinois (Case No. 2006-L-003353) against the Company with regard to the Company’s alleged failure to pay back wages in the amount of $282,833 to certain of CCI’s former employees. The Company believed that it had settled the former employees’ claims and supplied the State with substantiation that all such back wages had been paid. As of May 9, 2007, the Circuit Court dismissed all the claims except for one remaining claim amounting to approximately $10,000.

NeoMed Innovation III L.P. In October 2007, NeoMed Innovation III L.P. (“NeoMed”) filed suit against the Company in the United State District Court, Eastern District of Illinois (Case No. 07C 5721). NeoMed alleges that the Company has breached a contract with NeoMed. The alleged contract provided among other things that the Company would exchange two existing notes for a new note in the principal amount of $1,110,000 with an interest rate of 12%, payable on July 31, 2003 at the option of the holder in the form of common stock valued at $1.50 per share (adjusted for stock splits and equity raised at lower valuations). In 2006, the Company paid to NeoMed $1,060,000 and accrued interest calculated at 7% totaling $318,913. Despite accepting this payment, NeoMed is demanding that the Company honor the alleged contract. CCI believes its payment of principal and accrued interest to NeoMed satisfied all of CCI’s obligations owed to NeoMed.

Diamics, Inc. In August of 2006, Diamics, Inc. brought an action against Dr. Reid Jilek and CCI in the Superior Court of Marin County, California (Case No. CV063475) to declare that Diamics had fully performed its payment obligations under a promissory note (“the Note”) which Diamics had previously issued to Dr. Jilek and for attorneys fees. The Note entitled Dr. Jilek to a non-dilutable 10% ownership interest in Diamics if the company’s payment of the loan installments under the note to Dr. Jilek were not timely made. Dr. Jilek has asserted that Diamics defaulted under the Note and that he is entitled to the non-dilutable 10% equity ownership in Diamics. Dr. Jilek has assigned his rights under the Note to the Company. The case has been transferred to the Superior Court of San Diego. CCI believes the assigned ownership rights to 10% of Diamics are valid and enforceable. As such, the Company has not recorded any value for this ownership, pending the outcome of this litigation.

Daniel McMahon. In June 2008, Daniel McMahon, a former employee, filed suit against CCI in the Circuit Court of Cook County, Illinois, Law Division (Case No. 2008L005847) alleging that the Company has breached a contract with Mr. McMahon. Mr. McMahon alleges that the Company has failed to fully pay the amount required under the severance provision of the contract, and that CCI owes Mr.McMahon $87,546 net of $9,654 in payments made. CCI believes that it has made adequate provision for any amounts due under this contract.

Other claims

The Company is a party to a number of other proceedings, informal demands, or debts for services which were described in the Company’s Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 2007 under “Other Creditors; Wage and Related Claims.” To the Company’s knowledge, there have been no new claims or demands made by or against the Company, nor any such matters resolved or with respect to which material developments have occurred, since the date of the Company’s Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 2007 as filed with the SEC.

Note 10. Commitments and Contingencies

During the quarter ended June 30, 2008, the Company amended its current facilities lease. CCI moved its administrative and sales operations to Suite 510 from Suite 502 in the same location thereby increasing the existing space by approximately 3,100 square feet to 5,627 square feet. The amended lease is for a term of five years terminating on October 31, 2013, with one option to terminate the lease with nine months notice on October 31, 2011. The amended lease provides for an initial annual payment of approximately $85,000, increasing each year to reach $99,000 in the final year of the lease.

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

Forward-Looking Statements

Certain statements contained in this discussion and analysis that are not related to historical results are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are predictive, that depend upon or refer to future events or conditions, or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “hopes,” or similar expressions constitute forward-looking statements. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, or possible future actions by us are also forward-looking statements.

These forward-looking statements are based on beliefs of our management as well as current expectations, projections and information currently available to the Company and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated or implied by such forward-looking statements. These risks are described more fully in our most recent Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 2007 under the caption “Risk Factors”, and include our ability to raise capital; our ability to retain key employees; economic conditions; technological advances in the medical field; demand and market acceptance risks for new and existing products, technologies, and healthcare services; the impact of competitive products and pricing; manufacturing capacity; U.S. and international regulatory, trade, and tax policies; product development risks, including technological difficulties; ability to enforce patents; and foreseeable and unforeseeable foreign regulatory and commercialization factors.

Should one or more of such risks or uncertainties materialize or should underlying expectations, projections or assumptions prove incorrect, actual results may vary materially from those described or implied. Those events and uncertainties are difficult to predict accurately and many are beyond our control. We believe that our expectations with regard to forward-looking statements are based upon reasonable assumptions within the bounds of our current business and operational knowledge, but we cannot be sure that our actual results or performance will conform to any future results or performance expressed or implied by any forward-looking statements. We assume no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date of these statements except as specifically required by law. Accordingly, past results and trends should not be used to anticipate future results or trends.

Overview of CytoCore, Inc.

CCI is a clinical diagnostics company engaged in the design, development and commercialization of cost-effective screening systems to assist in the early detection and treatment of cancer. CCI is currently focused on the production and sale of the SoftPAP™ cervical collection device and the design and development of its AIPS™ image analysis-based screening system for cervical, endometrial, bladder and other cancers. The AIPS™ system provides for automated slide screening of biomarkers from cytological and histological specimens. The CytoCore

Solutions™ System and its components are intended to screen for cancer and eventually treat cancer through the administration of an FDA approved therapeutic agent from CCI’s drug delivery system. We believe the CytoCore Solutions™ System or its components may be used in a laboratory, clinic or doctor’s office.

The science of medical diagnostics has advanced significantly during the past decade. Much of this advance has come as a result of new knowledge of the human genome and related proteins, which form the foundation of cell biology and the functioning of the human body. Our goal is to utilize this research as a base to develop screening and diagnostic testing products for cancer and cancer-related diseases. Biological markers, in conjunction with the AIPS™ system, are being tested in screening assays for various cancers. We believe that the success of these products will improve patient care through more accurate test performance, wider product availability and more cost-effective service delivery. We are currently selling our FDA approved sample collection device, SoftPAP™, and are developing and testing the cocktail assay markers for use with the AIPS system to screen for various cancers. We expect to begin the product development of the drug delivery system in late 2009 or 2010 for the therapeutic treatment of various cancers with FDA-approved agents.

Our strategy is to develop products through internal development processes, strategic partnerships, licenses and acquisitions. This strategy has required and will continue to require additional capital. As a result, we will incur substantial operating losses until we are able to successfully market some, or all, of our products.

Management expects that significant on-going operating expenditures will be necessary to successfully implement the Company’s business plan and develop, manufacture and market its products. Implementation of the Company’s plans and its ability to continue as a going concern depend upon its ability to increase sales of its products, develop new products and raise additional capital. During the first six months of 2008, CCI raised net proceeds of $9.0 million through the private sale of unregistered, restricted common stock and warrants. If the Company is unable to obtain adequate additional financing or generate sufficient sales revenues, it may be unable to continue its product development efforts and other activities and may be forced to curtail or cease operations. The consolidated financial statements presented herein do not include any adjustments that might result from the outcome of this uncertainty.

Critical Accounting Policies and Changes to Accounting Policies

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that 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 periods. Actual results could differ from those estimates.

There have been no material changes in our critical accounting policies or critical accounting estimates since December 31, 2007, nor have we adopted any accounting policy that has or will have a material impact on our consolidated financial statements. For further discussion of our accounting policies see our Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 2007, including the notes to our consolidated financial statements included therewith, as filed with the SEC.

Results of Operations

The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements presented in Part I, Item 1 of this Quarterly Report and the notes thereto, and our audited consolidated financial statements and notes thereto, as well as our Management’s Discussion and Analysis, contained in our Annual Report on Form 10-KSB/A for the year ended December 31, 2007 as filed with the SEC.

Three Months Ended June 30, 2008 as compared to Three Months Ended June 30, 2007

Revenue

Revenues for the three months ended June 30, 2008 as compared with the three months ended June 30, 2007 increased $18,000, or 100%, from $18,000 to $36,000. This increase was the result of sales of the SoftPAP™ cervical

collection device totaling $16,000 and an increase in revenue of $3,000 from service fees for repairs on our slide-based systems during the quarter ended June 30, 2008, offset by a reduction in revenue totaling $1,000 from the licensing fees for our slide-based installed systems.

Costs and Expenses

Cost of Revenues

Cost of revenues increased by $66,000 for the quarter ended June 30, 2008.There was no cost of revenues for the three months ended June 30, 2007. Cost of revenues consisted of the cost of the SoftPAP™ device, depreciation of the tooling and molds used to manufacture the product, and freight costs.

Research and Development

For the three months ended June 30, 2008, our research and development (“R&D”) expenses were $508,000, a $309,000 or 38% decrease over our R&D expenses of $817,000 for the same period in 2007. Of this $309,000 decrease, $235,000 relates to the termination of a the research portion of a contract with an outside party, $129,000 represents a reduction in fees paid to medical consultants, and $62,000 represents a reduction in costs for the clinical trials of the SoftPAP™ cervical collection device. This decrease was partially offset by an increase of $69,000 relating to costs incurred for the ongoing improvement of the SoftPAP™ cervical collection device, $27,000 for the development of the AIPS™ system and $18,000 for the addition of one person to our research staff.

Research and development expenses primarily consist of costs related to specific development programs with scientists and researchers and expenses incurred by engineers and researchers at CCI’s Chicago office. Expenses include industrial design and engineering covering the disposable and instrument components of our products, payments to medical and engineering consultants for advice related to the design and development of our products and their potential uses in the medical technology marketplace, and payroll-related costs for in-house engineering, scientific, laboratory, software development, and research management staff.

Selling, General and Administrative

For the three months ended June 30, 2008, selling, general and administrative expenses (“SG&A”) were $1,187,000, an increase of $586,000 or 98%, over SG&A expenses of $601,000 for the same period in 2007. Of this $586,000 increase, $384,000 results from a credit to interest expense in 2007 related to a gain on warrant modification expense, $125,000 relates to increased professional fees for legal and accounting services, $32,000 relates to an increase in marketing expense, $35,000 relates to an increase in director fees, and $18,000 relates to an increase in outside consulting expense, all of which were partially offset by reductions in other expenses.

Other Income (Expense)

Interest income was $23,000 for the three months ended June 30, 2008, an increase of $21,000 over interest income of $2,000 for the same period in 2007.

For the three months ended June 30, 2007, a non-cash credit of $386,000 was recorded upon shareholders increasing the authorized share capital and the Company then eliminating its accounting liability in the amount of $386,000 which represented its potential obligation to provide more shares of the Company’s common stock than were previously authorized to be issued.

Net Loss

The net loss for the three-month period ended June 30, 2008, before preferred dividends, totaled $1,702,000, as compared with $1,012,000 for the same period in 2007, an increase of $690,000 or 68%. Of this increase, $386,000 resulted from a non-cash credit in 2007 related to convertible securities, $384,000 represents a non-cash interest credit in 2007 related to warrant modifications, and $125,000 related to increased fees for professional services. This increase was partially offset by decreases in R&D expenses due to the Company reducing the services under a research contract during the three months ended June 30, 2008.

The net loss applicable to common stockholders increased to $1,756,000 for the period ended June 30, 2008 from $1,012,000 for the same period in 2007, an increase of $744,000 or 74%. In addition to the changes reported above, cumulative dividends on the Company’s outstanding Series B convertible preferred stock converted into common stock totaled $54,000 for the three months ended June 30, 2008. There were no dividends paid during the three month ended June 30, 2007. The net loss per common share for each of the three month periods ended June 30, 2008 and June 30, 2007 was $0.04 and $0.03 per share on 40,851,212 and 34,443,253 weighted average common shares outstanding, respectively.

Six Months Ended June 30, 2008 as compared to Six Months Ended June 30, 2007

Revenue

Revenues for the six months ended June 30, 2008 as compared with the six months ended June 30, 2007 increased $42,000, or 105%, from $40,000 to $82,000. This increase was the result of sales of the SoftPAP™ cervical collection device totaling $44,000 and an increase in revenue of $3,000 from service fees for repairs on our slide-based systems during period, partially offset by a reduction in revenue totaling $7,000 from the licensing fees for our slide-based installed systems.

Costs and Expenses

Cost of Revenues

Cost of revenues increased by $143,000 for the six months ended June 30, 2008. There was no cost of revenues for the six months ended June 30, 2007. Cost of revenues consisted of the cost of the SoftPAP™ device, depreciation of the tooling and molds used to manufacture the product, and freight costs.

Research and Development

For the six months ended June 30, 2008, our R&D expenses were $1,317,000, a $104,000 or 9% increase over our R&D expenses of $1,213,000 (net of settlements of debt totaling $67,000) for the same period in 2007. Of this $104,000 increase, $273,000 relates to cost incurred for the ongoing improvement of the SoftPAP™ cervical collection device, $186,000 relates to the clinical trials of the SoftPAP™ cervical collection device and $113,000 relates to the addition of two full time employees. These increases were offset by a decrease of $292,000 resulting from the termination of the research portion of a contract with a third party and a $176,000 reduction in fees paid to medical consultants.

Selling, General and Administrative

For the six months ended June 30, 2008, SG&A expenses were $2,247,000 a decrease of $61,000 or 3%, over SG&A expenses of $2,308,000 for the same period in 2007. Of this $61,000 decrease, $152,000 resulted from a reduction in salary expense for a non-cash charge of $492,000 in 2007 for warrants issued as compensation, partially offset by additional compensation expense totaling $301,000 resulting from the hiring of six additional sales and administrative staff. Other decreases included $98,000 in interest expense, $83,000 in investor and public relations fees, $68,000 in employee recruitment fees and $65,000 in outside consultant fees. These decreases were partially offset by an increase totaling $211,000 in professional fees for legal and accounting services, $96,000 relates to an increase in marketing expense, $33,000 relates to an increase in franchise taxes, $22,000 for transfer agent fees and $30,000 increase in temporary help costs.

Other Income (Expense)

Interest income was $38,000 for the six months ended June 30, 2008, an increase of $36,000 over interest income of $2,000 for the same period in 2007.

For the six months ended June 30, 2007, the non-cash credit of $7,000 for gain on convertible securities resulted from the Company having an aggregate amount of shares of common stock issued or issuable, as well as instruments convertible or exercisable into common shares, that exceeded the number of the Company’s total authorized common shares.

Net Loss

The net loss for the six month period ended June 30, 2008, before preferred dividends, totaled $3,587,000, as compared with $3,472,000 for the same period in 2007, an increase of $115,000 or 3%. Of this increase, $61,000 resulted from the cost of revenues exceeding net revenues and $104,000 related to increases in R&D expenses. This increase was partially offset by decreases in SG&A expenses as discussed above.

The net loss applicable to common stockholders decreased to $3,645,000 for the six month period ended June 30, 2008 from $3,785,000 for the same period in 2007, a decrease of $140,000 or 4%. In addition to the changes reported above, cumulative dividends on the Company’s outstanding Series B and Series E convertible preferred stock converted into common stock totaled $58,000 for the six months ended June 30, 2008 compared with $313,000 for the same period in 2007. The net loss per common share for each of the six month periods ended June 30, 2008 and June 30, 2007 was $0.10 per share on 38,090,968 and 33,205,218 weighted average common shares outstanding, respectively.

Liquidity and Capital Resources

To date, the Company’s capital resources and liquidity have been generated primarily from external individual and institutional investors.

Research and development, clinical trials and other studies of the components of our CytoCore Solutions System, conversions from designs and prototypes into products and product manufacturing, sales and marketing efforts, medical consultants and advisors, and research, administrative and executive personnel are and will continue to be the principal basis for our cash requirements. CCI has provided operating funds for the business since its inception through private offerings of debt and equity securities to U.S. accredited and foreign investors. The Company will be required to make additional offerings in the future to support the operations of the business until some or all of our products are successfully marketed. We used $4,692,000 for the six months ended June 30, 2008 in operating activities. During the six months ended June 30, 2008, approximately $1,317,000 was spent on R&D and approximately $2,247,000 was spent on SG&A functions. The Company used $3,024,000 in operations during the first six months of 2007. This primarily consisted of $1,213,000 for R&D and $2,308,000 for SG&A for the six months ended June 30, 2007.

During the six months ended June 30, 2008, CCI invested $1,130,000 in fixed assets including $680,000 for the manufacture of two presses for the production of our products. The Company is obligated to pay an additional $97,000 when the final press is delivered, which is expected to occur during the third quarter of 2008. The Company has no other material commitments at this time for capital expenditures during the remainder of the 2008 fiscal year. CCI also invested $105,000 for a license agreement for certain technology.

We were able to raise gross proceeds of $9.4 million through the sale of common stock and warrants, and the exercise of warrants during the six months ended June 30, 2008, compared to $5.6 million for the same period in 2007. The proceeds of the common stock offerings were used to develop and manufacture our products and satisfy certain present and past obligations. At June 30, 2008, the Company had $3.4 million in cash as compared to $0.3 million cash on hand as of December 31, 2007. The Company believes that its cash on hand as of June 30, 2008 will be sufficient to continue operations through December 31, 2008.

During the last quarter of the 2007 fiscal year the Company completed its first commercial shipment of the SoftPAP device to its distributor in Italy. In the first six months of 2008, the Company generated modest revenues from the sale of its SoftPAP collection device

to its distributors, and the Company anticipates that it will generate additional revenues from the sale of our products during the remainder of 2008, although the Company does not anticipate products sales in an amount sufficient to fund operations during the period.

We have incurred significant operating losses since inception of the business. We expect that on-going operating expenditures will be necessary to successfully implement our business plan and develop, manufacture and market our products. Our operations have been, and will continue to be until we are able to generate significant product revenues, dependent upon management’s ability to raise funds from the sale of our securities. There can be no assurance that we will be able to obtain additional capital to meet our current operating needs or to complete pending or contemplated licenses or acquisitions of technologies. If we are unable to raise sufficient adequate additional capital or generate profitable sales revenues, we may be forced to substantially curtail product research, development and other activities, and may be forced to cease operations.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures about Market Risks

The Company is exposed to market risk in the normal course of its business operations, including the risk of loss arising from adverse changes in interest rates and foreign exchange rates. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes, or engage in any hedging activities.

We are headquartered in the United States where we conduct the majority of our business activities, although we do have distribution agreements with several distributors in Europe. We have not to date had any material exposure to foreign currency rate fluctuations. Nevertheless, because a portion of the Company’s revenues may be generated outside of the United States in currencies other than the United States dollar, the Company’s operations may be subject to changes in foreign exchange rates and changes in the value of the United States dollar against other currencies, which changes could affect the Company’s net earnings.

As of June 30, 2008, we had total debt of $70,000, of which $36,000 bears interest at fixed interest rates and $34,000 bears interest at a variable rate. As of June 30, 2008, we had cash, cash equivalents and short-term investments of $3.4 million, all of which was held as cash and cash equivalents in an interest-bearing money market account. Due to the nature of our short-term investments, our lack of material long-term debt and our ability to use currently available sources of funds to finance our operations and anticipated capital expenditures, we do not believe that we currently face any material interest risk exposure.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our chief executive officer, who is also the Company’s chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, the “Exchange Act”) as of the end of the period covered by this report. Based on that evaluation, our chief executive and chief financial officer has concluded that our current disclosure controls and procedures are effective to ensure that such officer is provided with information related to the Company to allow timely decisions regarding information required to be disclosed in the reports filed or submitted by CCI under the Exchange Act and that such information is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

The Company is a party to a number of legal proceedings which are described in the Company’s Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 2007, as filed with the SEC, and in Note 9 to the condensed consolidated financial statement included herewith.. To the Company’s knowledge, there was one new case initiated against the Company during the quarter ended June 30, 2008, as discussed below. There has not been any resolution or any material developments with respect to any other pending case since the date of the Company’s last quarterly report as filed with the SEC.

Daniel McMahon. In June 2008, Daniel McMahon, a former employee, filed suit against CCI in the Circuit Court of Cook County, Illinois, Law Division (Case No. 2008L005847) alleging that the Company has breached a contract with Mr. McMahon. Mr. McMahon alleges that the Company has failed to fully pay the amount required under the severance provision of the contract, and that CCI owes Mr. McMahon $87,546 net of $9,654 in payments made. CCI believes that it has made adequate provision for any amounts due under this contract.

Other claims

Item 1A. Risk Factors.

During the first six months of 2008, there were no material changes to the Company’s risk factors as described in the Company’s Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 2007, as filed with the SEC. The discussion of the risks facing the Company appears at the end of the description of the Company’s business in Item 1 under the caption “Risk Factors.”

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

Issuance of Common Stock and Warrants for Cash.

During the quarter ended June 30, 2008, the Company received proceeds of $271,000 for previously subscribed units, net of expenses of $10,000, for the sale of 70,250 units. CCI issued 140,500 shares of common stock and warrants to purchase an aggregate 70,250 shares of common stock at $2.00 per share. These warrants are for a term of three years and are exercisable immediately. For the six months ended June 30, 2008, CCI received proceeds totaling $8,976,000, net of expenses of $405,000, from the sale of an aggregate 2,345,250 units. The Company issued a total of 4,690,500 shares of common stock and warrants to purchase an aggregate 2,345,250 shares of common stock at $2.00 per share.

In addition, as part of this offering, the Company issued warrants to purchase an aggregate 311,500 shares of common stock to the placement agent who assisted with its offering at $2.25 per share.

The Company also received gross proceeds of $22,000 from the exercise of warrants for 21,875 shares of unregistered, restricted common stock during the three months ended June 30, 2008. For the six months ended June 30, 2008, CCI received proceeds totaling $42,000 from the exercise of warrants to purchase an aggregate 32,750 shares of unregistered, restricted common stock.

Issuance of Common Stock and Warrants as Payment for Services

Issuance of Stock and Warrants as Payment for Employee Compensation

In the first quarter of the 2008 fiscal year, the Company issued to two of its executive officers 100,000 shares each of restricted, unregistered common stock valued at $1.78 per share as compensation for services rendered in 2007.

During the quarter ended June 30, 2008, the Company issued warrants to purchase 10,000 shares of common stock with an exercise price $2.06 per share to its Chief Executive Officer under the terms of his employment agreement. In addition, the Company issued warrants to purchase 14,000 shares of common stock with exercise prices ranging from $1.45 to $1.90 per share to a non-executive employee. All the warrants issued to employees have a term of three years and are immediately exercisable.

Conversion of Certain Preferred Shares for Common Shares

ExemptionsWarrant Terms

CCI issues securities in reliance on the safe harbor and exemptions from registration provided under Rule 506 of Regulation D, Regulation S and/or Section 4(2) of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales or issuances were made to a limited number of persons, and transfer was restricted by the Company in accordance with the requirements of applicable law. In addition to representations by the above-referenced persons, the Company has made independent

determinations that investors were accredited or sophisticated, that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, these investors were provided with access to CCI’s SEC filings.

Warrant terms

Warrants issued by the Company during the first six months of 2008 expire three years from the date of issuance and are exercisable immediately. None of the warrants are subject to any vesting schedules or conditions other than those imposed by applicable securities laws. The exercise price and number of shares issuable upon exercise of such warrants are subject to anti-dilution protection in the event the Company effects a subdivision or combination of its common stock or declares or pays a dividend or distribution in common stock; the warrants also provide for adjustments in the event the Company declares or pays a dividend or other distribution in other securities or property of the Company or is a party to a reorganization, reclassification, merger or similar event.

Company Repurchases of Securities

During the six months ended June 30, 2008, neither the Company nor any affiliated purchaser of the Company purchased equity securities of CCI.

Item 3. Defaults upon Senior Securities

As of June 30, 2008, CCI had failed to make the required principal and interest payments, constituting events of default, on the $21,000 Ventana Medical Systems, Inc. promissory note.

The note requires the holder to notify CCI in writing of a declaration of default at which time a cure period, as specified in each individual note, would commence. There is no guarantee that CCI would be able to cure any event of default if, or when, the holder provides the required written notice. CCI did not receive any written declarations of default from holders of remaining outstanding notes payable during the six months ended June 30, 2008.

Item 4. Submission of Matters to Vote of Security Holders

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

See Exhibit Index.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	CytoCore, Inc.
	/s/ Robert F. McCullough, Jr.
	Robert F. McCullough, Jr.
	Chief Executive Officer and Chief Financial Officer

Date: August 11, 2008

EXHIBIT INDEX


Exhibit
Number		Description

10.1		Agreement with Quantrx Biomedical Corporation, dated May 19. 2008.

31		Section 302 certification.

32		Section 906 certification.

EX-10.1 2 c34773exv10w1.htm EXHIBIT 10.1 exv10w1

Exhibit 10.1

SUPPLY AGREEMENT


BETWEEN:		QUANTRX BIOMEDICAL CORPORATION, a Nevada corporation (“QuantRx”);

AND:		CYTOCORE, INC., a Delaware corporation (“CytoCore”).

DATED:		May 19, 2008.

R E C I T A L S:

A. QuantRx® has developed and/or owns the rights to certain technology relating to the collection, transfer and use for diagnostics of vaginal fluids, including all biological materials contained in same, which QuantRx® has branded “PadKit®”. CytoCore is engaged in the business of developing and commercializing products for the screening and/or diagnosis of cancers and other diseases of the female reproductive system.

B. CytoCore desires to pursue the development of a diagnostic product utilizing QuantRx’ “PadKit®” technology for specific uses, and to utilize QuantRx® for manufacturing of one or more products employing QuantRx’s “PadKit®” technology, all subject to and on the
terms and conditions set forth below.

A G R E E M E N T:

In consideration of the foregoing Recitals, which are by this reference incorporated in this Development and Supply Agreement (this “Agreement”), and in consideration of the mutual promises, representations, warranties and covenants set forth below, the parties agree as follows:

1. DEFINITIONS. When used in this Agreement, the following terms have the meanings set forth below.

1.1 “Pad” means the untreated QuantRx PadKit® miniform interlabial pad as specified in Schedule B (the “Specifications”). Without limiting the other provisions of this Section, the Pad specifically does not include PadChek™, where the pad comprises or contains the diagnostic method.

1.2 “Product” means an assembly or kit as specified in Schedule B comprising one or more Pads plus one or more ancillary components packaged together.

1.3 “Technology” means the detection, identification, diagnosis, staging, evaluation and/or classification of reactive, dysplastic and malignant changes in human cervical, endometrial, ovarian and other cells as contained in samples collected using and/or recovered from the Pad.

Page 1 – SUPPLY AGREEMENT

1.3.1 For the purposes of this agreement, the “Technology” shall also include the ability to use samples collected using or recovered from the Pad with any method for detecting and identifying or typing Human Papilloma Virus, herein “HPV”.

1.4 “Data” means descriptive; clinical, scientific; manufacturing and other information related to the Pad, the Product and the Technology as described in 1.1 - 1.3 above that has been, is being, and/or will be collected or developed by QuantRx, including any such information that is required in order to obtain and/or maintain regulatory approvals.

1.5 “Distribution Channels” means: (a) sales to physicians; (b) sales to hospitals for their own use on their premises; (c) sales to laboratories; and (d) sales to distributors for use in (a) and (b) above.

1.6 “Territory” means all countries of the world.

2. LICENSE FEES. CytoCore agrees to pay the following fees to QuantRx:

2.1 Upon mutual execution of this Agreement, CytoCore will pay to QuantRx a fully earned, nonrefundable license fee for use of the Data of $100,000.00 (the “License Fee”). CytoCore shall additionally pay to QuantRx a milestone payment of $50,000 upon or before Regulatory approval of the first CytoCore product utilizing the Technology; and a milestone payment of $50,000 upon or before the sale of $1,000,000 of CytoCore products which utilize the Technology. In addition, CytoCore will pay to QuantRx a fee of $5,556 per month for eighteen (18) months, starting the 1^st day of the month following the Effective date provided that this Agreement is not previously terminated by either Party. CytoCore reserves the right to prepay without penalty any amounts due QuantRx under this Section.

2.2 CytoCore shall purchase such number of units of Product per year as set forth in Section 7, at such prices as are set forth on Schedule D.

2.3 All fees payable pursuant to this Section 2 shall be made by wire transfer, cashier’s check or other good funds payment. Any undisputed fee not paid within five days of its due date shall bear interest at 12.0% per annum from its due date until paid in full.

2.4 In the event any undisputed fee payable pursuant to this Section 2 is not paid within 10 days after written demand from QuantRx for payment, including any accrued interest thereon, QuantRx may terminate this Agreement with respect to the items attributable to the unpaid portion. In such event, the rights and duties of the parties shall be as set forth in Section 18 below, except that any fully paid license shall survive termination or expiration for any reason.

3.0 GRANT. QuantRx grants to CytoCore an exclusive right to use, market, sell, have sold, and distribute the Product and Technology in the Distribution Channels in the Territory, whether directly or contractually through independent agents or distributors. The foregoing Grant and rights are subject to all terms and conditions set forth in this Agreement. The Grant does not act to relinquish QuantRx’ rights to the Technology nor to the Product in other Distribution Channels and does not grant, by implication or otherwise, any other rights to CytoCore of any other technologies owned, invented or discovered by QuantRx, whether past, present or future. Upon

Page 2 – SUPPLY AGREEMENT

payment of the license fees set forth above, QuantRx further grants to CytoCore a perpetual, irrevocable worldwide right and license to use the Data as needed, at CytoCore’s discretion, to obtain regulatory approval for marketing CytoCore’s products and services.

CytoCore shall have the right to sub-license portions or all of its rights under this Agreement in those countries where CytoCore’s ability to enter the market directly is limited or precluded by local content and/or local ownership laws and/or regulations assign to the JV.

4.0 REGULATORY CLEARANCE. CytoCore shall be solely responsible, during the term of this Agreement for pursuing, obtaining and maintaining each regulatory clearance required for CytoCore’s sale of the Products to be distributed and sold in the Distribution Channels within the Territory, and for fulfilling the obligations as the holder of such clearances.

4.1

Without limiting the foregoing, CytoCore shall be responsible for the payment of all costs and expenses for all submissions and clinical trials required to obtain such clearance, except that CytoCore may use Data as set forth above. CytoCore shall also be responsible for compliance with the medical device reporting (“MDR”) requirements of the FDA, as specified in 21 CFR Part 803 and foreign counterparts thereto, and corrections or removal requirements, as specified in 21 CFR Part 806 and foreign counterparts thereto, and to notify QuantRx of all MDR and corrections or removal filings. CytoCore agrees to immediately notify QuantRx in writing of recalls, and corrections or removal actions.

5. SUPPLY OBLIGATIONS. During the term of this Agreement and provided the Products remain compliant with the Specifications therefore and subject to permitted terminations as set forth in Section 14.4, CytoCore shall only purchase Products from QuantRx and no others.

5.1

During the term of this Agreement, QuantRx will exclusively manufacture and supply to CytoCore such quantities of the Products as CytoCore shall require from time to time in accordance with this Agreement.

5.1.1		Notwithstanding the foregoing, if QuantRx or its designee is unable to supply the quantities of Product required by CytoCore or if within a market the ability of QuantRx or its designee to supply Product or Product components is restricted or precluded by law or regulation, CytoCore shall be granted a license to have made and sell Product, and to procure Product or components thereof from suitable parties other than QuantRx, provided that CytoCore pays QuantRx for such right a royalty of 8% of the price, net of shipping, taxes, and duties paid to such a party for Pads.

5.2		No QuantRx Right to Distribute and Market. No right to market, sell or distribute any Product, as defined herein, in any Distribution Channel is granted by CytoCore to QuantRx under this Agreement. Additionally, QuantRx has no right to the use of CytoCore trademarks, copyrights or similar property, except as required and approved by CytoCore for the marking of packages and other manufacturing operations, intended for the exclusive use by CytoCore. QuantRx will mark the Products, packaging and packaging inserts with patent markings appropriate to reflect the Patents and as otherwise directed by CytoCore.

5.3

Shipping. CytoCore will issue Purchase Orders for the Products to QuantRx, and QuantRx will ship such orders to CytoCore or to such location or recipient as directed by CytoCore

Page 3 – SUPPLY AGREEMENT

		after receipt of the order from CytoCore, and in accordance with shipping instructions on purchase orders received by QuantRx from CytoCore. Shipping and handling charges will be charged on the invoices, or be collect to CytoCore as agreed upon by the Parties. Shipping times will be mutually and reasonably agreed upon by the Parties, and based on the size of the order and type of shipping. Notwithstanding the foregoing, all orders will be shipped within 60 days of receipt of purchase order, unless otherwise agreed.

5.4		Regulatory. QuantRx shall be solely responsible, during the term of this Agreement and prior to its first commercial order for Product from QuantRx, to pursue, obtain and maintain all records, filings, approvals, and materials necessary to comply with manufacturing the Product in full compliance with US FDA, European EC, and other agency requirements. without limiting the foregoing, QuantRx shall maintain current establishment registration and device listings, as specified in 21 CFR Part 807 and as required by the country in which manufacture of Product is performed.

5.5		Samples. QuantRx shall supply to CytoCore such amounts of product samples as mutually agreed to be necessary to generate customers or potential customers for the Products and for the purpose of clinical trials of Product at a price equal to its direct cost plus 35%.

5.6		Force Majeure. QuantRx will use its best efforts to fill accepted orders as promptly as practicable, subject to unanticipated delays caused by governmental orders, actions or requirements, transportation conditions, inclement weather, labor or material shortage, strike, riot, terrorist act, fire, natural disaster or other cause beyond QuantRx’ control. In all cases, QuantRx will use its best efforts to advise CytoCore in advance of any inability to make full and timely delivery of Products to CytoCore. Each party shall not be liable for failure to perform hereunder due to governmental orders, actions or requirements, transportation conditions, inclement weather, labor or material shortage, strike, riot, terrorist act, fire, natural disaster or other causes beyond such non-performing party’s reasonable control.

5.7		Forecasting. CytoCore will provide to QuantRx every month a written nonbinding 3-month rolling forecast of CytoCore’s proposed requirements for the Products, including Product samples by SKU. QuantRx agrees to maintain the capacity to supply up to 15.0% over such monthly forecast.

5.8		Failure of Supply. If QuantRx is unable to timely supply ordered Product within 10 days after request to cure same from CytoCore, then CytoCore may pursue manufacturing of the Product by a qualified third party. However all other terms and conditions of this Agreement will remain in effect.

6.0		MINIMUM QUANTITIES.

6.1		Amounts. CytoCore agrees to purchase from QuantRx the following minimum quantities of Product in each of the following annual periods, beginning with the date of first commercial order. Quantities will be determined after unit pricing has been agreed to. CytoCore Inc. agrees to purchase a minimum of $25,000 the first year rising $15,000 each subsequent year to $40,000 year 2, $65,000 year 3, $80,000 year 4 and $95,000 year 5.

Page 4 – SUPPLY AGREEMENT

		The parties will negotiate in good faith commercially reasonable amounts for subsequent annual periods and years. Any excess purchases above the agreed minimum in one annual period shall not be carried over to the following annual period. In the event the parties cannot agree on minimum volumes after the third annual period, such disagreement shall be legitimate basis for termination without cause of this Agreement by one party under Section 18 below, upon not fewer than 90 days’ prior written notice.

6.2		Cure by CytoCore. In the event that at the end of any annual period, CytoCore has not met the agreed minimum purchase requirement for such period, CytoCore shall, within 45 days after the end of such annual period, in its sole discretion, either (a) pay the difference between the units actually purchased and the minimum purchase requirement; or (b) purchase such additional units in order to meet the minimum purchase requirement for such prior period.

7.0		MANUFACTURING.

7.1		Manufacturing Obligations. QuantRx shall manufacture the Products in compliance with the Specifications, which may be changed by prior written agreement of the parties, and in compliance with Quality System Regulation (“QSR”) requirements set forth in 21 CFR Part 820 and in conformance with the requirements of ISO 13485.

7.2		Quality Control. QuantRx shall, at its cost, perform all quality control tests required by regulatory authorities and reasonably required by CytoCore. In addition, prior to the shipment of each order to CytoCore, for each manufacturing lot included in said shipment, QuantRx shall deliver to CytoCore lot qualification samples in accordance with a mutually agreed upon sampling plan. CytoCore shall perform acceptance testing on such samples from each lot and shall in a timely manner notify QuantRx whether each lot satisfies the mutually agreed upon acceptance criteria. Acceptance of a manufacturing lot of Product by CytoCore constitutes approval for QuantRx to ship the balance of said lot to CytoCore in accordance with Section 5.3 above. Lot qualification samples will not be considered to be part of the Amounts listed in Section 7.1 above.

7.3		Changes to Product. QuantRx shall notify CytoCore in writing at least 90 days prior to any proposed changes in its manufacturing procedures, materials, equipment or processes which affect Product design, form or function. As and to the extent reasonably agreed in writing by the parties and as permitted by applicable law. QuantRx may change a Product and any Specifications related to it. QuantRx agrees that no such changes will cause CytoCore to lose regulatory approvals for the Products, and shall pay the cost of any resubmissions to regulatory agencies required as a result of such changes.

7.4		Non-Conformity and Defective Products. If CytoCore notifies QuantRx that any Products supplied by QuantRx do not conform to the Specifications or are otherwise defective (including notification of why CytoCore believes the Products to be defective), then QuantRx shall, at its cost, replace such defective quantity of the Products and at QuantRx’ cost ship the replacement Products as reasonably directed by CytoCore to CytoCore or CytoCore’s customer at the location of such defective quantity of the Products, to be shipped within 30 working days after the receipt of the defective Product. QuantRx shall

Page 5 –SUPPLY AGREEMENT

		keep and maintain adequate records of all quality control testing, instrumentation validation and stability studies and, upon CytoCore’s reasonable request, shall provide CytoCore with access to such records and the results of any testing. At its sole discretion and cost, QuantRx may instruct CytoCore to return some or all of the non-conforming and/or defective Product to QuantRx or to destroy such product.

7.5		Recalls, Corrections and Removals. QuantRx and CytoCore agree that if either party should discover or become aware of any fact, condition, circumstance or event (whether actual or potential) concerning or related to the Products which may reasonably require recall, correction or removal, such party shall promptly communicate such fact, condition, circumstance or event to the other party within 24 hours. In the event any governmental entity or regulatory body requests that a Product be recalled, or the parties agree, after consultation with each other, that a Product should be recalled or removed, the parties shall take all appropriate remedial actions with respect to such recall or withdrawal of the Product.

7.6		Audit. CytoCore reserves the right to audit QuantRx’ (and its subcontractors’ and designees’) facilities, at CytoCore’s sole expense, as reasonably necessary to verify compliance by QuantRx with the terms and conditions of this Agreement. Exercise by CytoCore of such right shall be subject to the following conditions: (a) with good cause (for example, QuantRx’ failure to remedy problems) as needed to verify that the cause has been successfully resolved in accordance with all applicable regulatory requirements; (b) without good cause shown, CytoCore shall be entitled to conduct up to two audits per 12-month period; (c) CytoCore audits shall be conducted only after at least five days’ advance written notice of the audit is provided by CytoCore to QuantRx; and (d) all information gathered and data reviewed during any such audit shall be “Confidential Information” subject to the provisions of Section 16 below. QuantRx shall at all times maintain complete and accurate books and records pertaining to performance of its manufacturing and other obligations set forth in this Agreement. QuantRx shall provide commercially reasonable cooperation to CytoCore in the performance of audits by or on behalf of CytoCore, including without limitation, providing reasonable access to documents relevant to the manufacture of Products sold to CytoCore, subject to the provisions of Section 16.

8. CUSTOMER SERVICE AND COMPLAINTS. CytoCore shall, at its cost, furnish all technical service, assistance and support required by its customers or users of the Products and arising out of sales of Products made by or on behalf of CytoCore. CytoCore will provide QuantRx with copies of all inquiries, complaints and requests pertaining to the Products in a timely manner. QuantRx shall be solely responsible for investigation of any Product complaints, such investigations being carried out in accordance with the requirements of 21CFR820 and the results of such investigations being provided to CytoCore in a timely manner.

9. LIMITED WARRANTY OF MANUFACTURER. CytoCore’s sole remedies for defective Products are set forth in Section 7.4 above. Except as expressly provided above, Manufacturer shall not be liable for any damages, costs, expenses or claims (whether based on contract, tort or otherwise), or for breach of any warranty, express or implied, or for any other obligation or liability on account of the Products covered by this Agreement, including special, punitive or consequential damages, even if advised of the possibility thereof. EXCEPT AS REQUIRED BY

Page 6 – SUPPLY AGREEMENT

APPLICABLE LAW, AND EXCEPT AS EXPRESSLY PROVIDED ABOVE, QUANTRX DISCLAIMS ALL WARRANTIES WITH RESPECT TO THE PRODUCTS, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY AND OF FITNESS FOR A PARTICULAR PURPOSE.

10. PACKAGING.

10.1		Packaging. CytoCore will procure and provide to QuantRx, all required artwork, in any or all appropriate languages, for bulk or individual unit packaging, labeling and package insertions (collectively, “Packaging”) to be used by QuantRx for the Products to be shipped to CytoCore. CytoCore shall also provide any necessary EAN codes. All Products shall be packaged in lots as set forth in the Specifications. All Packaging shall include the brand name of the Product as designated by CytoCore.

10.2		Packaging Ownership Rights. CytoCore is and shall be the copyright owner or licensee of all designs and artwork used in connection with packaging for the Product. To the extent third-party trademarks or other rights are necessary for certain customers, CytoCore represents that it has or will have obtained the right from such third parties for CytoCore the right to use such trademarks or other rights solely for such purpose.

10.3		Product Inserts. All Product Inserts must be pre-approved by CytoCore and be in full compliance with all labeling laws in each jurisdiction in which Products are distributed.

10.4		Advertising. All advertising and contents thereof shall the sole responsibility of CytoCore.

11. PRODUCT PRICING AND PAYMENT.

11.1		Purchase Price. QuantRx shall charge CytoCore, and CytoCore shall pay for the quantities of Product delivered by QuantRx pursuant to this Agreement, at the purchase prices set forth in the attached Schedule C to be completed in good faith and initialed by the parties. If the parties are unable to agree on the purchase prices (each, a “Purchase Price”) by the date of receipt by CytoCore of the 510k clearance for the Product to be manufactured by QuantRx, then the provisions of Section 19.3 below shall be utilized by the parties to establish same, with all costs and expenses to be borne 50/50 by QuantRx and CytoCore. Each Purchase Price is and shall be CIF/POE. Duties, fees, and local transportation shall the responsibility of CytoCore.

11.2		Price Adjustment. No adjustment in a Purchase Price shall be permitted during the initial annual period following CytoCore’s first order. Thereafter, but not more than once during any calendar year. QuantRx may adjust a Purchase Price according to the formula provided in Schedule C (QuantRx direct cost plus 35%, direct costs being verifiable by audit) upon at least 90 days’ advance written notice to CytoCore. Adjusted Purchase Prices shall apply to Product orders quoted by CytoCore after the effective date of said notice. In no event shall any annual increase in the Purchase Price exceed the previous year’s Purchase Price by greater than 10.0%, unless approved, in writing, by both parties hereto. QuantRx shall use best efforts to achieve price reductions each year through volume discounts and manufacturing efficiencies 11.3 Payment. CytoCore agrees to pay each undisputed invoice of QuantRx within 30 days after CytoCore’s receipt of the Products that are the subject of

Page 7 – SUPPLY AGREEMENT

		the invoice. If CytoCore reasonably disputes any invoice for good cause and in good faith, CytoCore will notify QuantRx within 10 days of invoice receipt, stating the specific reason(s) for the dispute.

11.4		Late Payment. Unpaid amounts will bear interest at 12.0% per annum from the due date until paid in full, calculated on a non-compounding daily basis, in addition to QuantRx’ other rights and remedies set forth in Section 18 below.

11.5		Title; Risk of Loss. Title to ordered Products will pass to CytoCore upon the later of tender of delivery or payment. Risk of loss will pass to CytoCore upon tender of delivery.

12. INTELLECTUAL PROPERTY. QuantRx will retain full ownership of the Intellectual Property which underlies the Technology and Product(s).

13. TERM AND TERMINATION.

13.1

This Agreement shall become effective when fully executed by both parties and the License Fee is paid. This Agreement shall have an initial term of five years (beginning on its execution), with automatic renewals of five years each, unless (a) terminated by either party, (b) one party gives notice of termination at least 90 days prior to the end of the initial or any renewal term, or (c) terminated as set forth below.

13.2		CytoCore may terminate this agreement by providing thirty (30) day advance written notification of such termination to QuantRx at any time within 18 months of the effective date or providing ninety (90) day advance written notice thereafter. In the event of such termination, CytoCore shall be responsible for the payment of any milestone payments and/or fees earned by QuantRx prior to the termination date and for payment for any Product ordered, but not yet paid for, during this period.

13.3		QuantRx may either terminate this agreement 24 months from the Execution Date, or accept $100,000 to delay this option for an additional 12 months, should CytoCore not achieve the milestones found in Section 2.1 herein.

13.3.1

Should the milestones shown in 2.1 herein not be met within 36 months from the Execution Date hereon, the agreement shall be deemed to be terminated.

13.4

CytoCore may terminate this Agreement for cause upon notice and failure to cure within 10 days of notice under the following conditions:

	13.4.1		Defective Products are received more than twice in any year

	13.4.2		QuantRx fails to timely supply Products in the amounts ordered by CytoCore; or

	13.4.3		QuantRx’s supply of the Products are enjoined by reason of alleged infringement or found to be infringing and a non-infringing substitute is not timely provided.

13.5

Termination of this Agreement for any reason by either party shall not relieve the parties of any obligations accrued prior to the effective date of the termination.

Page 8 – SUPPLY AGREEMENT

13.6		If a party should fail to perform under this Agreement or should violate any term of this Agreement, then the other party may give written notice of the default and, if the defaulting party fails to fully correct the default within 60 days, then the other party shall have the right to terminate this Agreement

13.7		Upon termination of this Agreement:

(a) All rights, licenses and privileges granted to CytoCore under this Agreement shall immediately cease and terminate, but any such termination will not affect the rights and obligations of the parties respecting remedies for breach of this Agreement;

(b) All obligations arising out of events prior to the effective termination date, including without limitation orders previously accepted and obligations to pay for delivered Products, shall be performed in accordance with the terms and conditions of this Agreement;

(c) If terminated by QuantRx, CytoCore shall have the right to fulfill any contract obligations for the sale of Products that it may have upon its books when termination notice was received by CytoCore. If, at the time of termination, CytoCore does not have sufficient Product in inventory to meet these contract obligations, QuantRx shall supply CytoCore with sufficient product to meet these obligations under the then existing terms and conditions. In addition, CytoCore has the right to sell unsold Product in its inventory for a period of six months after termination; and

(d) All sublicenses shall also be terminated by CytoCore unless otherwise extended by QuantRx.

14. INDEMNITY AND LIMITATION OF LIABILITY.

14.1

Indemnification by CytoCore. CytoCore shall indemnify, defend and hold QuantRx and its Affiliates and the officers, directors, employees, agents and independent contractors of each of them harmless from and against any and all claims, demands, actions, suits, losses, damages, liabilities, settlement amounts, costs or expenses (including reasonable attorneys’ fees and costs) (collectively, “Claims”) arising out of or relating to: (a) CytoCore’s breach of this Agreement; or (b) CytoCore’s gross negligence or willful misconduct or (c) any products liability claims relating to CytoCore products excluding the Products provided by QuantRx hereunder.

14.2		Indemnification by QuantRx. QuantRx shall indemnify, defend and hold CytoCore, its Affiliates and the officers, directors, employees, agents and independent contractors of each of them harmless from and against any and all Claims arising out of or relating to: (a) QuantRx’ breach of this Agreement; or (b) QuantRx’ gross negligence or willful misconduct; or (c) any products liability claims relating to use the Products.

14.3		Indemnification Procedure. The party seeking indemnification (the “Indemnified Party”) will give prompt written notice of any Claim of which the Indemnified Party is aware to the other party (the “Indemnifying Party”); provided, however, that the failure by an Indemnified Party to give such notice will not relieve the Indemnifying Party of its

Page 9 –SUPPLY AGREEMENT

obligations under this Section 15, except to the extent that the failure results in the failure of actual notice and the Indemnifying Party is damaged as a result. The Indemnified Party will allow the Indemnifying Party to direct the defense and settlement of any such Claim, with counsel of the Indemnifying Party’s choosing, and will provide the Indemnifying Party, at the Indemnifying Party’s expense, with information and assistance reasonably necessary for the defense and settlement of the Claim. In the event that the Indemnifying Party fails to assume the defense or settlement of any such Claim within 30 days after receipt of notice of same from the Indemnified Party, the Indemnified Party shall have the right to undertake the defense, appeal or settlement of such Claim at the expense of and for the account of the Indemnifying Party. An Indemnifying Party will not be liable for any settlement of a Claim affected without its reasonable written consent, nor will an Indemnifying Party settle any such Claim without the reasonable written consent of the Indemnified Party. No Indemnifying Party will consent to the entry of any judgment or enter into any settlement that does not include as an unconditional term the giving by the claimant or plaintiff to the Indemnified Party a release from all liability with respect to the Claim.

14.4

Limitation of Liability. EXCEPT AS RELATED TO INDEMNIFICATION OBLIGATIONS HEREUNDER, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR CONSEQUENTIAL, INCIDENTAL, INDIRECT, SPECIAL, EXEMPLARY, OR PUNITIVE DAMAGES. EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

15.0 REPRESENTATIONS AND WARRANTIES.

15.1

No Conflicts. Each of QuantRx and CytoCore represents and warrants to the other that it is not a party to any agreement or covenant with any other person, and knows of no statute, law, ordinance, regulations, rule, order or decree of a governmental authority, which prohibits or restricts it from entering into and performing pursuant to this Agreement.

15.2

Compliance with Law. QuantRx and CytoCore each represents and warrants that it is, and will remain, in compliance with all applicable international, federal, provincial, state and local laws, regulations and orders related to its respective business and duties under this Agreement. QuantRx specifically represents and warrants that the Product shall, as of the date of shipment to CytoCore or its customers, not be adulterated or misbranded within the meaning of the U.S. Food, Drug, and Cosmetic Act, and any similar provisions of state and local laws, regulations and orders, and shall comply with GMP requirements for such products including but not limited to ISO 13485 and foreign equivalents. CytoCore specifically represents and warrants that it will maintain the 510(k) clearance(s) for the manufacture of the Products from the FDA, including for any Product modification requiring 510(k) clearance, and shall maintain such rights throughout the term of this Agreement.

15.3

Authorization – OuantRx. QuantRx represents and warrants that: (a) QuantRx has the right to enter into this Agreement; (b) all necessary actions, corporate and otherwise, have been taken to authorize QuantRx’ execution and delivery of this Agreement and the same is the valid and binding obligation of QuantRx; (c) all licenses, consents and approvals necessary for QuantRx to cany out all of the transactions contemplated in this Agreement have been

Page 10 – SUPPLY AGREEMENT

obtained and (d) QuantRx has the experience and technical and physical capacity to fulfill its obligations under this Agreement.

15.4		Authorization – CytoCore. CytoCore represents and warrants that: (a) CytoCore has the right to enter into this Agreement; (b) all necessary actions, corporate and otherwise, have been taken to authorize CytoCore’s execution and delivery of this Agreement and the same is the valid and binding obligation of CytoCore; (c) all licenses, consents and approvals necessary for CytoCore to carry out all of the transactions contemplated in this Agreement have been obtained; and (d) CytoCore has the experience and technical and physical capacity to fulfill its obligations under this Agreement.

15.5		QuantRx represents and warrants that the Products will comply to the specifications therefore and that such Products do not infringe any proprietary right of any third party.

15.6

Insurance. Each party shall, during the term of this Agreement, at its sole cost and expense, obtain and keep in force a policy of comprehensive general liability insurance with bodily injury, death and property damage limits of at least $2,000,000 per occurrence and $2,000,000 aggregate, including product liability coverage. On execution of this Agreement, and on each anniversary of same, each party shall furnish a certificate of insurance, in form reasonably acceptable to the other party, evidencing such insurance and providing for 30 days’ prior written notice to the other party of any cancellation, nonrenewal or change of such insurance coverage.

16. CONFIDENTIALITY.

16.1

Confidential Information. The term “Confidential Information” means: (a) the terms and conditions of this Agreement; and (b) a party’s information, data, knowledge and know-how (in whatever form and however communicated) relating directly or indirectly to the disclosing party (or to its Affiliates or contractors), as to its or their respective businesses, employees, operations, methods, processes, trade secrets, plans, properties, products, markets or financial positions) that is delivered or disclosed by such party, its Affiliate or any of their respective officers, directors, partners, members, employees, contractors, agents or shareholders to the other party in writing, electronically, orally or through visual means, or that such party learns or obtains aurally, through observation or analyses, interpretations, compilations, studies or evaluations of such information, data, knowledge or know-how, and (c) any information that would be reasonably deemed to be confidential when considering the nature of such information and the circumstances surrounding its disclosure. Without limiting the foregoing, CytoCore acknowledges and agrees that the proprietary information and technology comprising the components, design and makeup of the Products are proprietary and trade secrets of QuantRx and constitute Confidential Information. Without limiting the foregoing, QuantRx acknowledges and agrees that all information submitted by CytoCore in support of regulatory approvals, excluding such Data as are licensed hereunder, are the Confidential Information of CytoCore. Each party will limit access to Confidential Information to only those of its employees, agents and consultants having a need-to-know in connection with this Agreement and will take reasonable steps to ensure no unauthorized person has access to the Confidential Information. Each party will advise in writing its employees, agents and consultants to whom disclosure of Confidential Information is made

Page 11 – SUPPLY AGREEMENT

of the obligations under this Agreement to protect the Confidential Information. Each party will be liable for the unauthorized disclosure of Confidential Information by its employees, agents and consultants.

16.2		Loss of Status. Confidential Information shall not include information, data, knowledge and know-how that, as shown by written records: (a) is known to the receiving party prior to disclosure to or receipt by such party without breach of an obligation of confidentiality; (b) is in the public domain prior to disclosure to a party; (c) enters the public domain through no violation of this Agreement after disclosure to such party; or (d) is independently developed by a party without reliance in any way on Confidential Information.

16.3		Use and Disclosure. Each party shall keep the Confidential Information communicated to it by the other party confidential and shall not either itself use or disclose such information or provisions to any third person without the prior written approval of the other party in each instance, except that either party may disclose such provisions to the extent required by law or other demand under lawful process, provided the receiving party gives the disclosing party prompt notice prior to such disclosure to allow the disclosing party to make a reasonable effort to obtain a protective order or otherwise protect the confidentiality of such information. Subject to the requirements of applicable securities laws and regulations of applicable stock exchanges, neither CytoCore nor QuantRx shall make any news releases or any other public disclosure with respect to the transactions contemplated by this Agreement without the prior written consent of the other party, which consent may be withheld by such other party in its sole discretion; provided, however, that the foregoing shall not prohibit the disclosure of this Agreement, subject to customary written confidentiality restrictions, to persons with whom either party intends to enter into a sale, merger, capital raising or other similar strategic transaction.

16.4

Injunction. Either party aggrieved by breach or threatened breach of this Section 21 shall be entitled to bring an action to prevent, stop or otherwise obtain redress, including specific performance, injunctive relief or other available equitable remedy, without having to post bond or other undertaking therefor, and without necessity of providing 60 days’ notice pursuant to Section 17.3 above.

17. SUBCONTRACTING AND ASSIGNMENT.

17.1

Assignment. Except as provided in this Agreement, CytoCore may not assign or transfer this Agreement or any rights or duties under it, voluntarily or by operation of law, without the prior written consent of QuantRx. Any attempted assignment or transfer not in compliance with this Agreement shall be void and of no force or effect. A reorganization or merger with another corporation or other person shall not itself, however, constitute a prohibited assignment.

17.2

Sale or Sale of Division. Notwithstanding Section 17.1 above, either party hereto may sell and transfer its entire rights and obligations under this Agreement to a third person at any time without prior written consent of the other Party.

Page 12 – SUPPLY AGREEMENT

17.3

Subcontracting. Either Party may subcontract its obligations hereunder provided that each Party is responsible for the actions of its subcontractors.

18. NOTICES. Any notice, under this Agreement shall be in writing and be deemed given upon written receipt of delivery, delivered via overnight courier in each case addressed to the following addresses:


		If to QuantRx:		QuantRx Biomedical Corporation
				Attn: CFO
				100 South Main Street, Ste. 300
				Doylestown, PA 18901
				Fax (267) 880-1596

		If to CytoCore:		CytoCore, Inc.
				Attn: legal counsel
				414 North Orleans St., Ste. 510
				Chicago, IL 60610
				Fax (312) 222-9580

or to such other address as a party may provide by notice given in the same manner.

19. MISCELLANEOUS.

19.1		Definition of Affiliate. The term “Affiliate” means any person controlled by, under common control with or which controls a party to this Agreement, control being defined as either having ownership of a majority of the equity of such party generally eligible to elect a majority of the governing body of such party, or the right by agreement or otherwise to direct the actions of such party (including, without limitation as a general partner of a partnership or as a managing member of a limited liability company).

19.2		Applicable Law. This Agreement shall be governed by and construed in accordance with the laws and decisions of the state of Deleware, without regard to the conflicts of law rules of such state.

19.3		Mediation. In the event of a dispute between the parties, which cannot be resolved in the course of ordinary business, either party may submit a written request for a meeting of senior executives to resolve such dispute. In the event that such a request is submitted, the receiving party shall make a senior executive available to discuss the matter within 10 business days. If the matter is not resolved by such meeting, either party may send a written request that the dispute be submitted to mediation. Such request shall include the names of at least three U.S. based mediators or mediation services, each of which must have appropriate professional training and experience in business mediation. The parties shall work in good faith to agree on a mediator within five business days of receipt of the request, and the mediation shall be scheduled as soon as reasonably practicable, but in any case within 30 days of receipt of the request. The mediation shall occur in the principal office city of the request recipient. All costs of mediation shall be borne equally by the parties. In the event that a mutually agreeable resolution cannot be reached through mediation, either party may proceed to use the courts or other legal methods to achieve resolution. Nothing in this Section 19.3 shall be construed as

Page 13 –SUPPLY AGREEMENT

		preventing either party from using the courts directly and immediately for injunctive relief pursuant to Section 16 in the event that imminent harm is threatened, or as preventing either party from proceeding to litigation in the event that mediation is unsuccessful.

19.4		Further Assurance. Each party shall execute and deliver, at the request of the other party, such further documents or instruments, and shall perform such further acts, that may be reasonably required to fully accomplish the intent of this Agreement.

19.5		Waiver of Breach. The waiver by either party of a breach of any term or provision of this Agreement shall not be construed as a waiver of any subsequent breach of the same or any other term or provision by either party.

19.6		Modification. This Agreement may not be amended or modified except in a writing executed by the parties.

19.7		Assignment. This Agreement shall be binding upon and operate to the benefit of the parties and their successors and permitted assigns.

19.8		Relationship of Parties. The relationship of the parties under this Agreement is that of independent contractors. Nothing contained in this Agreement is intended or is to be construed so as to constitute the parties as partners or joint venturers, or either party as an agent or employee of the other. Neither party has any express or implied right under this Agreement to assume or create any obligation on behalf of or in the name of the other, or to bind the other party to any contract, agreement or undertaking with any third party, and no conduct of the parties shall be deemed to infer such right.

19.9		Severability. If any provision of this Agreement is finally held to be invalid, illegal or unenforceable by a court or agency of competent jurisdiction, that provision shall be severed or shall be modified by the parties so as to be legally enforceable (and to the extent modified, it shall be modified so as to reflect, to the extent possible, the intent of the parties), and the validity, legality and enforceability of the remaining provisions shall not be affected or impaired in any way.

19.10		Interpretation. Time is of the essence of this Agreement in all particulars. All monetary figures are in U.S. Dollars. The term “days” means calendar days. As the context may require in this Agreement, the use of any gender (male, female or neuter) shall include any other gender, and the singular shall include the plural and the plural the singular. The word “person” includes individual, joint venture, partnership, limited liability company, corporation, association, trust or any other entity or organization. The captions heading the sections and subsections of this Agreement are inserted for convenience of reference only, and are not to be used to define, limit or describe the scope or Intent of any term, provision, section or subsection of this Agreement. Each Schedule described in and attached to this Agreement is incorporated in it. This Agreement may be executed in several counterparts, each of which shall be deemed an original but all of which taken together shall constitute one and the same instrument.

20.11		Integration. THIS AGREEMENT CONTAINS THE FINAL AND CONCLUSIVE AGREEMENT AND UNDERSTANDING OF THE PARTIES WITH RESPECT TO

Page 14 – SUPPLY AGREEMENT

THE SUBJECT MATTER OF IT, AND SUPERSEDES ALL PRIOR AND CONTEMPORANEOUS AGREEMENTS, PROMISES, REPRESENTATIONS, AGREEMENTS OR UNDERSTANDINGS, ORAL OR WRITTEN, BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT, including without limitation any Heads of Agreement.

EXECUTED by the parties through their duly authorized representatives as of the date first written above.


QUANTRX BIOMEDICAL CORPORATION		CYTOCORE, INC.

By	/s/ William H. Fleming	By	/s/ Robert F. McCullough Jr.
	William H. Fleming, Ph. D., CSO		Robert F. McCullough Jr., CEO

	QUANTRX		5/14/08 CYTOCORE

Page 15 – SUPPLY AGREEMENT

Schedule A — DATA

Data includes all data from all clinical trials utilizing the Products and all information pertaining to manufacturing and regulatory approvals as exists or becomes available during this Agreement. Data also means that descriptive and manufacturing information that is required for use in regulatory submissions.

Schedule A

Schedule B — Products and Specifications

Schedule B of this Agreement comprises a Bill of Materials that defines a composition of the Product that is intended for use in clinical trials in the US. The Parties recognize that laws, regulations, customs and/or practices in various countries may dictate or otherwise require that the labeling and/or other aspects of the composition of Product for clinical trial use or commercial sale differ from that specified in Schedule B. Therefore, from time to time CytoCore may request and QuantRx may agree to produce a version of the Product that conforms to the laws and regulations of a particular country or market. Each such version shall be defined by a Bill of Materials and shall be assigned a unique identification. Each such Bill of Materials agreed upon in writing by the Parties shall be incorporated by reference into Schedule B of this Agreement.

Initial Specifications:

1. Outer carton (SKU), having the outside dimensions of: 5.5x7x2.5 inches

2. Tyvek envelop, self sealing, having the outside dimensions of: 9x6 inches

3. Sarstadt five (5) part biological mailing vial

4. 19ml CytoLyt® per kit, dispensed into (3) vial

5. Miniforms, untreated (2)

6. Vinyl glove (1)

7. Clinical study label for envelop (1) and SKU

8. Single color Product Insert for Clinical (trial) use

NOTE: the above applies to Product for use in clinical trials and will be revised to reflect the configuration of the commercial product upon receipt of regulatory clearance.

NOTE: Multiple versions of the Product, each with a unique SKU, will be required. A separate Bill of Materials (Specification) will be prepared for each version. These versions will differ in terms of labeling and package inserts based upon the laws and regulations of the intended destination country; whether the Product is intended for use in a clinical trial; or whether the product is intended for use as a professional sample.

Schedule B

Schedule C

Purchase Prices: CytoCore will purchase each “PadKit®” at QuantRx’s direct cost plus a 35% markup.

Price for each PadKit in CY2008 shall be US$5.00 each. To be revised based upon year 1 order quantity

Schedule D

EX-31 3 c34773exv31.htm EXHIBIT 31 exv31

Exhibit 31

CERTIFICATION

I, Robert F. McCullough Jr., certify that:

(1)		I have reviewed this quarterly report on Form 10-Q of CytoCore, Inc.;

(2)		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3)		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4)		I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.		designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

b.		designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.		evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.		disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5)		I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.		all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


		/s/ Robert F. McCullough Jr.

		Robert F. McCullough Jr.
		Chief Executive Officer and
		Chief Financial Officer
		Dated: August 11, 2008

EX-32 4 c34773exv32.htm EXHIBIT 32 exv32

Exhibit 32

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned Chief Executive Officer and Chief Financial Officer of the Company certifies that, to his knowledge:

1. The Company’s Form 10-Q for the quarter ended June 30, 2008 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


		/s/ Robert F. McCullough, Jr.

		Robert F. McCullough, Jr.
		Chief Executive Officer and
		Chief Financial Officer
		Dated: August 11, 2008

-----END PRIVACY-ENHANCED MESSAGE-----

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents