UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


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

For the Quarterly Period Ended September 30, 2008

OR


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 001-32518

[GRAPHIC MISSING]

CYTOMEDIX, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		23-3011702
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

416 Hungerford Drive, Suite 330
Rockville, MD 20850

(Address of Principal Executive Offices) (Zip Code)

(240) 499-2680

(Registrant’s Telephone Number, Including Area Code)

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 x No o

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.

Large Accelerated Filer o Accelerated Filer o Non-accelerated Filer o Smaller Reporting Company x

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 33,943,201 shares of Common stock, par value $.0001, outstanding as of October 24, 2008.

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CYTOMEDIX, INC.


	Page
PART I. FINANCIAL INFORMATION		1
Item 1. Financial Statements		1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
Item 3. Quantitative and Qualitative Disclosures About Market Risk		20
Item 4. Controls and Procedures		20
PART II. OTHER INFORMATION		22
Item 1. Legal Proceedings		22
Item 1A. Risk Factors		22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		22
Item 3. Defaults Upon Senior Securities		22
Item 4. Submission of Matters to a Vote of Security Holders		22
Item 5. Other Information		23
Item 6. Exhibits (see Exhibit Index at end of report)		23
Signatures		24
Exhibit Index		25

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PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

CYTOMEDIX, INC.

BALANCE SHEETS


	September 30, 2008			December 31, 2007
	(Unaudited)
ASSETS
Current assets
Cash	$	4,742,254		$	5,136,446
Accounts and royalties receivable, net		343,457			356,062
Patent settlements receivable, current portion		200,143			382,997
Prepaid expenses, inventory, and other current assets		280,046			238,148
Total current assets		5,565,900			6,113,653
Patent settlements receivable		—			193,978
Property and equipment, net		81,238			20,242
Patents, net		1,559,308			1,672,483
Goodwill		2,021,623			2,021,623
Total assets	$	9,228,069		$	10,021,979
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses	$	1,193,018		$	948,297
Deferred revenues, current portion		215,285			215,285
Dividends payable on Series A and Series B preferred stock		25,278			14,050
Total current liabilities		1,433,581			1,177,632
Deferred revenues		35,881			197,344
Other liabilities		180,000			19,400
Total liabilities		1,649,462			1,394,376
Commitments and contingencies
Stockholders’ equity
Series A Convertible preferred stock; $.0001 par value, authorized 5,000,000 shares; 2008 and 2007 issued and outstanding – 75,358 and 92,837 shares, respectively, liquidation preference of $75,358 and $92,837, respectively		8			9
Series B Convertible preferred stock; $.0001 par value, authorized 5,000,000 shares; 2008 and 2007 issued and outstanding – 85,405 shares, liquidation preference of $85,405		9			9
Series C Convertible preferred stock; $.0001 par value, authorized 1,000,000 shares; 2008 and 2007 issued and outstanding – 0.0 shares		—			—
Common stock; $.0001 par value, authorized 65,000,000 shares; 2008 issued and outstanding – 33,932,623 shares; 2007 issued and outstanding – 31,926,788 shares		3,393			3,193
Additional paid-in capital		41,940,706			40,026,574
Accumulated deficit		(34,365,509	)		(31,402,182	)
Total stockholders’ equity		7,578,607			8,627,603
Total liabilities and stockholders’ equity	$	9,228,069		$	10,021,979

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

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CYTOMEDIX, INC.

STATEMENTS OF OPERATIONS
(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Revenues
Sales	$	25,507		$	20,445		$	72,255		$	40,950
Royalties		473,864			441,512			1,482,424			1,382,358
Total revenues		499,371			461,957			1,554,679			1,423,308
Cost of revenues
Cost of sales		5,244			2,309			11,009			4,867
Cost of royalties		103,679			143,792			422,675			640,734
Total cost of revenues		108,923			146,101			433,684			645,601
Gross profit		390,448			315,856			1,120,995			777,707
Operating expenses
Salaries and wages		523,800			499,642			1,955,107			1,297,026
Consulting expenses		94,566			98,353			147,214			194,841
Professional fees		164,626			1,859,071			682,855			2,354,661
Trials and studies		28,034			—			28,034			—
General and administrative expenses		483,024			478,297			1,473,019			1,127,948
Total operating expenses		1,294,050			2,935,363			4,286,229			4,974,476
Loss from operations		(903,602	)		(2,619,507	)		(3,165,234	)		(4,196,769	)
Other income
Interest income, net		37,737			75,082			136,428			222,419
Other gain		100			—			5,350			6,008
Patent litigation settlements, net		62,796			4,592			71,357			6,362
Total other income		100,633			79,674			213,135			234,789
Loss before provision for income taxes		(802,969	)		(2,539,833	)		(2,952,099	)		(3,961,980	)
Income tax provision		—			—			—			—
Net loss		(802,969	)		(2,539,833	)		(2,952,099	)		(3,961,980	)
Preferred dividend on:
Series A preferred stock		1,814			7,921			5,934			23,303
Series B preferred stock		1,710			1,570			5,294			4,966
Net loss to common stockholders	$	(806,493	)	$	(2,549,324	)	$	(2,963,327	)	$	(3,990,249	)
Loss per common share –
Basic and diluted	$	(0.03	)	$	(0.09	)	$	(0.09	)	$	(0.14	)
Weighted average shares outstanding –
Basic and diluted		32,257,869			29,639,294			32,038,305			29,207,901

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

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CYTOMEDIX, INC.

STATEMENTS OF CASH FLOWS
(Unaudited)


	Nine Months Ended September 30,
	2008			2007
Cash flows from operating activities:
Net loss	$	(2,952,099	)	$	(3,961,980	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		122,701			119,422
Stock-based compensation – consultants and other		56,365			792,890
Stock-based compensation – employees and directors		412,652			327,788
Stock issued to outside patent counsel		—			1,144,000
Gain on disposal of assets		(5,200	)		(1,600	)
Change in current assets		153,561			113,253
Change in patent settlements receivable		193,978			284,478
Change in accounts payable and accrued expenses		244,721			(61,236	)
Change in deferred revenues		(161,463	)		(74,925	)
Change in other liabilities		160,600			(156,000	)
Net cash used in operating activities		(1,774,184	)		(1,473,910	)
Cash flows from investing activities
Purchase of equipment		(70,522	)		—
Proceeds from sale of equipment		5,200			1,600
Net cash provided by (used in) investing activities		(65,322	)		1,600
Cash flows from financing activities:
Proceeds from sale of common stock, net		1,445,314			218,750
Proceeds from amendment of warrant terms		—			35,000
Net cash provided by financing activities		1,445,314			253,750
Net decrease in cash		(394,192	)		(1,218,560	)
Cash, beginning of period		5,136,446			4,662,199
Cash, end of period	$	4,742,254		$	3,443,639

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

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CYTOMEDIX, INC.

NOTES TO FINANCIAL STATEMENTS

Note 1 — Description of Business

Cytomedix is a biotechnology company that develops, sells, and licenses regenerative biological therapies, including the AutoloGel System, a medical device for the production and delivery of platelet rich plasma (“PRP”) gel derived from the patient’s own blood. The AutoloGel^TM System is cleared by the Food and Drug Administration (“FDA”) for use on a variety of exuding wounds. The Company is currently pursuing a multi-faceted strategy to penetrate the chronic wound market with its AutoloGel^TM System. The Company is also moving forward with the development of other product candidates in its pipeline. Most notably is its CT-112 product, an anti-inflammatory peptide that has shown promise in pre-clinical testing, and for which the Company is currently preparing an Investigational New Drug (“IND”) application for the FDA.

Note 2 — Basis of Presentation

The unaudited condensed financial statements included herein have been prepared by Cytomedix without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The financial statements reflect all adjustments that are, in the opinion of management, necessary to fairly state such information. All such adjustments are of a normal recurring nature. Although the Company believes that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations.

The year-end condensed balance sheet data were derived from audited financial statements but do not include all disclosures required by accounting principles generally accepted in the United States of America.

These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s 2007 Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for interim periods are not necessarily indicative of the results for any subsequent quarter or the entire fiscal year ending December 31, 2008.

Basic and diluted net losses per common share are presented in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings Per Share (“SFAS 128”), for all periods presented. In accordance with SFAS 128, basic and diluted net losses per common share have been computed using the weighted-average number of shares of common stock outstanding during the period. During periods of net losses, shares associated with outstanding stock options, stock warrants, and convertible preferred stock are not included because the inclusion would be anti-dilutive (i.e., reduce the net loss per share). The total numbers of such shares excluded from diluted net loss per common share were 9,338,214 for the three and nine months ended September 30, 2008, and 9,280,351 for the three and nine months ended September 30, 2007.

Note 3 — Capital Stock Activity

The Company issued 2,005,835 shares of Common stock during the nine months ended September 30, 2008. The following table lists the sources of and the proceeds from those issuances:


Source	# of Shares		Total Proceeds
Issuance of shares pursuant to registered direct offering completed in Third Quarter 2008		2,000,008	$	1,500,000
Conversion of series A convertible preferred shares		5,827		—
Totals		2,005,835	$	1,500,000

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CYTOMEDIX, INC.

NOTES TO FINANCIAL STATEMENTS

Note 3 — Capital Stock Activity – (continued)

In August 2008, the Company entered into securities purchase agreements with certain investors for their purchase of up to 2,000,000 shares (subject to rounding for partial shares) of Cytomedix’s common stock at a purchase price of $0.75 per share, and 4-year warrants to purchase an additional 1,000,000 (subject to rounding for partial shares) shares of Cytomedix’s common stock at an exercise price of $1.00 (the “Financing”). Holders of the warrants may exercise warrants at any time through August 29, 2012. The securities in this financing were offered and sold pursuant to a prospectus dated March 26, 2008 and a prospectus supplement dated August 22, 2008, pursuant to the Company’s effective shelf registration statement on Form S-3 (SEC File No. 333-147793). As a result of this Financing, Cytomedix received gross proceeds of approximately $1,500,000 (before customary offering expenses of approximately $55,000, and excluding any proceeds that Cytomedix may receive upon exercise of the warrants). Certain officers and directors of the Company participated in this offering on the same terms and provisions as public investors.

The following table summarizes the stock options granted by the Company during the three and nine months ended September 30, 2008. These options were granted to employees, consultants, and board members under the Company’s Long-Term Incentive Plan.

Three Months Ended
September 30, 2008

Nine Months Ended
September 30, 2008

Options Granted

Exercise Price

Options Granted

Exercise Price

562,000

$0.65 – $0.75

985,500

$0.65 – $1.54

During the nine months ended September 30, 2008, 381,000 options were forfeited by contract due to the termination of the underlying service arrangement.

On September 18, 2008, pursuant to the Certificate of Designation filed with the Delaware Secretary of State, the Board of Directors authorized a stock dividend on the Company’s Series A and B Convertible Preferred shares. This dividend will result in the issuance of 14,859 and 6,895 shares of Series A and B Convertible Preferred stock, respectively.

No dividends were declared or paid on the Company’s Common Stock in any of the periods discussed in this report.

The Company had the following outstanding warrants and options:


	# Outstanding
Equity Instrument	September 30, 2008		December 31, 2007
D Warrants		304,033		304,033
Unit Warrants		1,812,500		1,812,500
Fitch/Coleman Warrants		975,000		975,000
August 2008 Warrants		1,000,007		—
Other warrants		1,293,900		1,293,900
Options issued under the Long-Term Incentive Plan		3,899,187		3,294,687

Note 4 — Settlement and License Agreements

Through August 2, 2007 the Company’s ongoing patent enforcement strategy was being conducted on a full contingency basis by the law firms Fitch, Even, Tabin & Flannery and Robert F. Coleman and Associates under a three party retainer agreement. As of that date, the Company agreed with these firms to issue equity and other compensation in return for a full waiver of all past and future contingent fees that would be due under this agreement and also agreed to the basic terms of a new retainer agreement. The Company issued 1.3 million shares of its Common stock and warrants to purchase an additional 975,000 shares (the “Warrants”) to these firms. The Warrants expire 7.5 years from their date of issuance. The strike price on the

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CYTOMEDIX, INC.

NOTES TO FINANCIAL STATEMENTS

Note 4 — Settlement and License Agreements – (continued)

Warrants will be: 325,000 at $1.25 (“Group A”); 325,000 at $1.50 (“Group B”); and 325,000 at $1.75 (“Group C”). The Company may call 25% of the warrants each quarter beginning in the quarter that the subsequent transfer of the stock underlying the warrants is registered and the stock is trading at or above
the following call prices for ten consecutive trading days: Group A — $4/share; Group B — $5/share; Group C — $6/share. In conjunction with the stock and warrants, the Company recorded approximately $1,721,000, as Professional fees in the Statement of Operations in the third quarter of 2007. The Medtronic license agreement was handled under a separate three party retainer agreement, which remains in place.

Note 5 — Commitments and Contingencies

The Company is prohibited from granting a security interest in the Company’s patents and/or future royalty streams under the terms of the Series A and B Convertible Preferred stock.

Under the Company’s plan of reorganization upon emergence from bankruptcy in July 2002, the Series A Preferred stock and the dividends accrued thereon that existed prior to emergence from bankruptcy are to be exchanged into one share of new Common stock for every five shares of Series A Preferred stock held as of the date of emergence from bankruptcy. This exchange is contingent on the Company’s attaining aggregate gross revenues for four consecutive quarters of at least $10,000,000 prior to July 2009 and would result in the issuance of approximately 325,000 shares of Common stock.

The Company is party to a registration rights agreement and a related warrant agreement with one of its former consultants. The registration rights agreement provides for liquidated damages, at the discretion of the warrant holder, in the event that the registration statement relating to the shares underlying the warrants becomes ineffective. The Company’s obligations under this agreement run through the earlier of April 1,
2012 or two years after the exercise of the related warrants. At the discretion of the warrant holder, the liquidated damages may take the form of cash or additional shares of the Company’s Common stock. As of September 30, 2008, the Company has estimated the maximum undiscounted liquidated damages at $105,000. However, the Company has determined that it is unlikely that circumstances allowing for the aforementioned liquidated damages would arise, and therefore no contingent liability has been recorded.

In conjunction with its FDA clearance, the Company agreed to conduct a post-market surveillance study to further analyze the safety profile of bovine thrombin as used in the AutoloGel^TM System. This study is estimated to cost approximately $500,000 over a period of three years, beginning in the third quarter of 2008. As of September 30, 2008, $27,000 had been incurred.

In June 2008, the Company renewed its operating lease for its office space in Rockville, MD which was set to expire in July 2008. Under the terms of the renewed lease, the new expiration date is December 31, 2009 and monthly rent expense is approximately $5,600 from August 2008 through July 2009 and approximately $5,800 thereafter.

On July 31, 2008, the Board of Directors (the “Board”) approved an amendment to the letter agreement by and between the Company and Martin Rosendale, the Company’s Chief Executive Officer. Under the terms of the amendment, in the event of the Company’s termination of Mr. Rosendale’s employment during the employment term, the Company will be required to pay a one-time severance payment in the amount equal to $50,000 payable subject to customary withholding tax and other employment taxes as may be required under applicable rules and regulations. Mr. Rosendale is not entitled to any such severance payment in the event he voluntarily terminates his agreement with the Company. The Board appointed Mr. Rosendale as Chief Executive Officer of the Company effective as of the date of the previous CEO’s departure.

The Company has submitted a purchase order for the supply of its CT-112 anti-inflammatory peptide, sufficient to conduct certain tests in support of an IND application and Phase I clinical trial in humans. The purchase order obligates the Company for a payment up to $85,000 upon the delivery of the requested amount of CT-112 from the manufacturer, which is expected sometime in the fourth quarter of 2008.

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CYTOMEDIX, INC.

NOTES TO FINANCIAL STATEMENTS

Note 6 — Income Taxes

No provision for income taxes has been recorded as there are no taxes payable due to the Company’s significant net operating loss carry forwards. Because the Company has determined that the realization of future benefit from the net operating losses is not assured, the Company has reserved for the entire remaining benefit.

The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The only periods subject to examination for the Company’s federal return are the 2003 through 2007 tax years. The Company believes that its income tax filing positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded.

The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income before taxes. There were no such items during the periods covered in this report.

Note 7 — Termination and Consulting Agreement

On June 5, 2008, the Company and Kshitij Mohan, the Company’s former Chief Executive Officer and Chairman of the Board of Directors, entered into a Termination and Consulting Agreement (the “Agreement”), pursuant to which Dr. Mohan agreed, among other things, to step down as the CEO and Chairman and to become a consultant to the Company effective June 30, 2008.

As part of the Agreement, Dr. Mohan is entitled to the following compensation:

•

$500,000 to be paid in 24 equal monthly installments, beginning in July 2008

•

$5,000 toward legal fees incurred by Dr. Mohan related to this Agreement

•

Continuation of health benefits under the Company’s health insurance plans

The Company recorded $510,000 in compensation expense in the second quarter of 2008 which represents the present value of the above outlined special termination benefits to Dr. Mohan. Additionally, the Company reversed $192,000 in accrued bonus expense for Dr. Mohan. The net expense is reflected in the Salaries and wages line on the Statements of Operations and $257,000 and $180,000, representing the short and long term components of the remaining obligation to Dr. Mohan, are reflected in the Accounts payable and accrued expenses and Other liabilities lines of the Balance Sheets, respectively.

Note 8 — Recent Accounting Pronouncements

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. In October 2008 the FASB issued FSP SFAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, to clarify the application of FASB Statement No. 157, Fair Value Measurements, in a market that is not active. The Company does not expect the adoption of FSP SFAS 157-2 or 157-3 to have a significant impact on the financial statements.

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CYTOMEDIX, INC.

NOTES TO FINANCIAL STATEMENTS

Note 8 — Recent Accounting Pronouncements – (continued)

On January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 (“SFAS 159”). This Statement provides companies with an option to measure, at specified election dates, many financial instruments and certain other items at fair value that are not currently measured at fair value. A company that adopts SFAS 159 will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This Statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The adoption of SFAS 159 has not had a material impact on the Company’s financial statements.

In December 2007, FASB issued SFAS No. 141R, Business Combinations (“SFAS 141R”), which impacts the accounting for business combinations. The statement requires changes in the measurement of assets and liabilities required in favor of a fair value method consistent with the guidance provided in SFAS 157 (see above). Additionally, the statement requires a change in accounting for certain acquisition related expenses and business adjustments which no longer are considered part of the purchase price. Adoption of this standard is required for fiscal years beginning after December 15, 2008. Early adoption of this standard is not permitted. The statement requires prospective application for all acquisitions after the date of adoption. The Company is currently evaluating the effect that the adoption of SFAS 141R will have on its results of operations and financial position. However, the adoption of SFAS 141R is not expected to have a material impact on the Company’s financial statements.

Note 9 — Subsequent Events

Effective October 1, 2008, Mr. David E. Jorden joined the Company as a full time employee with the title Executive Board Member, Investor Relations. Mr. Jorden is also a greater than 5% owner of the Company and in September 2008 was elected to serve on the Board of Directors.

In October 2008, the Company executed amendments to certain terms and provisions of its outstanding Unit Offering Warrants to purchase the common stock of the Company, issued in the March 2004 private placement (the “Unit Warrants”) and of the FEQ Investment warrant issued in April 2004 (the “FEQ Warrant”). Specifically, the Unit Warrant amendments were as follows: (i) the term of such warrants was extended from March 31, 2009 to March 31, 2010, (ii) the exercise price of the warrants was increased by 10% from $1.50 to $1.65 per share, and (iii) the call provision was amended so that such instruments are callable by the Company in the event the closing price of the Company’s securities is in excess $5.00 per share for at least 10 consecutive trading days. The FEQ Warrant was amended so that (i) its term was extended from April 1, 2009 to April 1, 2010, (ii) the exercise price of the warrant was increases by 10% from $1.00 to $1.10 per share and (iii) a call provision identical to the one added to the Unit Warrants was added to the FEQ Warrant. The foregoing amendments to the warrants were approved by the requisite vote of the warrant holders and are effective as of October 31, 2008.

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

Description of the Business

Overview

Cytomedix is a biotechnology company that develops, sells, and licenses regenerative biological therapies, including the AutoloGel^TM System, a medical device for the production and delivery of platelet rich plasma (“PRP”) gel derived from the patient’s own blood. The AutoloGel^TM System is cleared by the Food and Drug Administration (“FDA”) for use on a variety of exuding wounds. The Company is currently pursuing a multi-faceted strategy to penetrate the chronic wound market with its AutoloGel^TM System. The Company is also moving forward with the development of other product candidates in its pipeline. Most notably is its CT-112 product, an anti-inflammatory peptide that has shown promise in pre-clinical testing, and for which the Company is currently preparing an Investigational New Drug (“IND”) application for the FDA.

AutoloGel^TM System

Market

Cytomedix’s AutoloGel^TM System currently targets the chronic, non-healing wound market, which the Company estimates to be a $2.2 billion market. Chronic, non-healing wounds typically arise from one of three etiologies: diabetic foot ulcers, venous leg ulcers, and pressure ulcers. The following table lists the incidence of these wound types:

Incidence of Chronic Wounds in the U.S.
(Number of Wounds in Millions)

Source: Advanced Wound Management: Healing and Restoring Lives;
Advanced Medical Technology Association (AdvaMed), June 2006


	U.S.
Diabetic Foot Ulcers		1.5
Venous Leg Ulcers		2.5
Pressure Ulcers		2.0
Totals		6.0

The prevalence of chronic wounds in the U.S. is linked directly to increased aging demographics, vascular diseases, venous insufficiency, and excessive pressure and diabetic neuropathy. The prevalence of worldwide chronic wounds is estimated to be 18 million⁽¹⁾.

(1)

Growth Factors: Indications, Products, and Markets; Kalorama Publications; October 2003.

Broadly, the Company divides this market into two categories: (i) Medicare direct reimbursed, and (ii) less Medicare-sensitive. The direct reimbursed category includes all treatments that could be eligible for direct reimbursement from Medicare. The less-Medicare sensitive category includes government agencies (including the Veterans Administration (“VA”), Department of Defense, Indian Health Services, and others), capitated environments (including Long-Term Acute Care hospitals (“LTAC”), health maintenance organizations, and others), state Medicaid agencies, and commercial third-party payors (e.g. Blue Cross/Blue Shield, Aetna, United Healthcare, etc).

The Company believes that within the less Medicare-sensitive category, LTAC’s and VA’s represent an approximately $500 million market. There are over 400 LTAC facilities in the U.S. accredited by the Joint Commission on the Accreditation of Healthcare Organizations. There are approximately 1,300 VA facilities and it is estimated that the VA, Department of Defense, and Workers Compensation Programs represent nearly 10% of the total national healthcare expenditures. The Company’s initial focus is on these LTAC and VA facilities as discussed in Sales and Marketing below.

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The Company believes that the wound care market is generally complex and crowded with some products struggling to verifiably demonstrate clinical efficacy. As such, the uptake of new products, including the AutoloGel^TM System, is generally slow, as most new products are met initially with a degree of skepticism. While this represents a challenge in the short-run, the Company believes the skepticism is to its benefit in the long-term, as it seeks to position the AutoloGel^TM System as a, credible wound care alternative addressing the largely unmet clinical need.

FDA Clearance

In September 2007, the Company received FDA marketing clearance for its AutoloGel^TM System. The indications for use are as follows:

“The AutoloGel^TM System is intended to be used at point-of-care for the safe and rapid preparation of platelet rich plasma (“PRP”) from a small sample of a patient’s own blood. Under the supervision of a healthcare professional, the PRP gel produced by the AutoloGel^TM System is suitable for exuding wounds, such as leg ulcers, pressure ulcers, and diabetic ulcers and for the management of mechanically or surgically debrided wounds.”

This clearance is a broad indication for use that encompasses many wound etiologies as well as debrided wounds. It is the Company’s belief that this also places Cytomedix as the only company with an FDA cleared PRP gel system specifically for use on chronic wounds.

The Company promotes the AutoloGel^TM System within the FDA’s specific marketing clearance for the gel to be used as a wound dressing for the management of these wounds. However, Company-sponsored published and unpublished studies including a prospective, multi-center, randomized, blinded, controlled, clinical trial (published in a peer reviewed medical journal) indicate increased wound healing with the use of AutoloGel^TM as compared to control as well as published data on traditional treatments and competing advanced treatments for diabetic foot ulcers, which is the Company’s initial focus within its target market. Increased healing is not specifically included in the FDA cleared indication. In the 510(k) process that was used, the claim made by the Company was that its product is substantially equivalent to other products legally on the market and therefore, the indication cleared was similar to that of other wound management products, which had not used healing as an endpoint, to which AutoloGel^TM was compared.

In conjunction with the positive clearance decision from the FDA, the Company agreed to conduct a post-market surveillance program to further analyze the safety profile of bovine thrombin as used in the AutoloGel^TM System. The Company has named this program “TAPS” (The AutoloGel^TM Post-marketing Surveillance). The TAPS program will analyze data from 300 patients over a three year period, does not contain any specific inclusion/exclusion criteria other than following the FDA cleared Instructions for Use, consists of some simple diagnostic blood tests, and is estimated to cost approximately $500,000. However, the Company expects to offset a portion of these costs through sales of the AutoloGel^TM System to those sites participating in the TAPS program. In addition to laboratory tests, data describing the wound repair process will be gathered and analyzed. The Company expects to leverage the data generated from this study to use as a tool in its sales and marketing efforts.

AutoloGel^TM Efficacy Studies

Cytomedix has completed several efficacy studies for AutoloGel^TM. The primary study was its prospective, randomized, blinded, controlled, multi-center clinical trial completed in 2005, designed to prove the efficacy and safety of its AutoloGel^TM System for the treatment of non-healing diabetic foot ulcers (the “RCT”). The audited results yielded 40 patients who met the trial protocol. Analysis of the size of wounds in the study showed that 35 out of the 40 patients (88%) had wounds less than or equal to 7 square centimeters in area and 2 cubic centimeters in volume (the “Majority Wound Group”). In the Majority Wound Group, the healing rate for AutoloGel^TM was 81.3% and that for the control group was 42.1%. The difference between these groups is statistically significant, with a p-value of 0.036. Within the full cohort of the 40 patients, 68.4% of the patients treated with AutoloGel^TM achieved full wound closure versus 42.9% of those patients treated in the control group. The difference between these groups is approaching statistical significance with a p-value of 0.125. Generally accepted statistical significance requires a p-value of 0.05 or less. The Company believes, based on publicly available data related to full closure for some other products for which such data is available, that the healing rates of AutoloGel^TM at 81.3% for the Majority Wound Group and 68.4% for all wound

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sizes are higher than any other wound care products cleared by the FDA or reimbursed by Medicare, although this comparison is not a definitive proof of overall clinical performance or superiority since, in order to prove that, one would have to conduct a head-to-head clinical study in which the patients would, at random, be subjected to either AutoloGel^TM or other technologies. Moreover, data on full closure of wounds from prospective, well-controlled, randomized, blinded clinical trials is not available for many wound management products on the market. In the Company’s clinical trial, the control group patients were not on placebo; rather, they were treated using a saline gel cleared by the FDA for wound management. If the control group patients healed at the originally anticipated rate of 20-30% for standard treatments for diabetic foot ulcers, the difference between the healing rates in the AutoloGel^TM group versus the control group could have been even more statistically significant.

The Company has completed several other prospective and retrospective case studies, wound registries, and/or non-randomized trials. The results of these studies demonstrate healing outcomes for AutoloGel^TM consistent with the experience in the RCT described above.

Cytomedix believes that the efficacy of AutoloGel^TM is directly linked to its formulation which includes specific centrifugation parameters, platelet concentrations, and reagents, all of which enjoy patent protection through at least early 2019 in the United States and several other countries.

Economic Study

In September 2007, B&D Consulting, an independent, national, advisory and advocacy firm located in Washington, DC, (“B&D”) completed a Company-commissioned cost effectiveness analysis of AutoloGel^TM as compared to certain alternative, advanced therapies for patients with diabetic foot ulcers (the “Economic Study”). Results of the Economic Study show that AutoloGel^TM “dominates” other therapies analyzed therein.

B&D developed the research methodology, model structure, assumptions, and inputs from the peer-reviewed literature, including the publication of Cytomedix’s RCT. Cytomedix paid B&D a one-time, fixed fee for its work. This fee was not dependent on the results of the Economic Study.

The estimated 5-year average direct wound care costs (exclusive of lost work, disability, etc.; inclusive of recurrent wounds, amputations, etc.) when AutoloGel^TM was used to treat the most commonly sized diabetic foot ulcers was approximately $15,000. This was markedly less than similar costs ranging from approximately $24,000 to $47,000 when either standard of care or advanced therapies were simulated. Furthermore, the model suggests a measurable increase in Quality Adjusted Life Years (“QALY”) (a function of increased survival rates and fewer wound complications) when AutoloGel^TM is used. Data from published articles of alternative treatments utilized in this model included such therapies as standard of care alone, tissue engineered grafts, ultrasound, single growth factor therapies, and negative pressure wound therapy. Therapies that did not have published, peer-reviewed studies of their use in diabetic foot ulcers, with full wound healing as the primary endpoint, were not considered in the Economic Study. This study has recently been accepted for publication in the journal Advances in Skin and Wound Care and will be published the end of 2008 or early 2009.

Sales and Marketing

The Company’s focus is currently on the market that is less sensitive to Medicare reimbursement. In the first quarter of 2008, it initiated a deliberate strategic launch designed to refine/perfect the sales approach for the AutoloGel^TM System and provide incremental investment in the sales and marketing efforts. Since that time, the Company’s efforts have mostly been spent on filling open sales representative positions to provide adequate territorial coverage, strengthening product positioning to leverage the competitive advantages of AutoloGel^TM as compared to competing technologies, identifying and responding to potential resistance to market acceptance, and refining the coordination of the Company’s clinical and scientific personnel with its sales team.

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Within the current target market, Cytomedix has focused most of its attention within LTAC’s and the VA Medical Centers. Its sales in 2008 have largely been generated from these facilities. In the latter part of 2008 and early 2009, the Company will focus largely on executing its sales strategy within this subset of its current target market, and will also initiate efforts to obtain selected commercial insurance reimbursement and expand state Medicaid coverage. Regarding commercial insurance, the Company will focus its efforts in high opportunity regions with a select group of insurers, in order to evaluate the prospects for this payment pathway. Although commercial insurers, as part of their coverage determinations, may consider the non-coverage status with Medicare (see below), they are independent organizations and Cytomedix believes the data contained in the Economic Study and clinical data discussed above may be attractive to these payors. Regarding Medicaid, the Company currently enjoys coverage in Illinois and Minnesota, and will seek to expand that to other states where it has adequate sales representation.

The Sales and Marketing department is currently comprised of a VP of Sales and Marketing, six regional sales representatives, and part-time support in the areas of product management and administration. The Company’s VP of Professional Services also devotes significant time interfacing with existing and prospective customers on a clinician-to-clinician basis. The Company generally outsources graphic design and other marketing-related activities as well as reimbursement strategy consulting.

The Company has exhibited and presented at several trade shows in support of the deliberate strategic launch strategy and expects that to continue. Its sales efforts have also been supported by a focused print advertising and direct mail campaign. In addition, abstracts regarding the RCT and the Economic Study have been accepted for poster and/or oral presentations at various wound care meetings.

During the first nine months of 2008, the Company was primarily focused on building an appropriate sales and marketing infrastructure. The Company intends to test effectiveness of its sales and marketing strategy in the coming fiscal quarters.

Medicare Reimbursement

In March 2008, the Centers for Medicare and Medicaid Services (“CMS”) re-affirmed its 2003 decision of non-coverage for PRP gel, which would include AutoloGel^TM. Although the less-Medicare sensitive market is significant, the Company believes the full market potential of the AutoloGel^TM System requires Medicare reimbursement. Therefore, it plans to continue to work with CMS and ultimately seek a positive coverage decision.

The Company met with CMS in April 2008 to determine the optimal path forward for obtaining Medicare coverage for its AutoloGel^TM System. The Company intends to continue this dialogue with CMS. Cytomedix is currently working with consultants and advisors to formulate a strategy to obtain Medicare coverage without conducting another prospective, randomized, blinded, controlled trial. However, no assurance can be given that a second such trial will not be necessary, or that even if it was conducted, that the resulting data would be deemed sufficient by CMS to reverse its existing non-coverage determination. The Company intends to request another meeting with CMS before the end of 2008 to discuss more specifically the grounds on which it expects to seek coverage.

The Company is also seeking to build additional support for a favorable CMS decision by increasing the usage of AutoloGel^TM in the marketplace through its sales and marketing efforts, expanding coverage by state Medicaid agencies (Illinois and Minnesota currently reimburse for AutoloGel^TM), seeking reimbursement from commercial third-party payors, and will consider other avenues as deemed appropriate.

Other Opportunities

The Company is seeking to identify other markets for its AutoloGel^TM System. Process, formulation, and device improvements will extend the Company’s market reach. 510(k) submissions, later in 2008 or early in 2009, for improvements in the AutoloGel^TM System will expand the cleared indicated uses and increase the markets accessible through promotional activities. In particular, the Company plans to seek 510(k) clearance for use of the AutoloGel^TM System to create PRP for use in orthopedic indications. This clearance would be similar to that held by several of the Company’s licensees who service the surgical market. The Company may seek strategic partnerships as the best means to address the markets outside of chronic wounds. Other markets where AutoloGel^TM may also be relevant are:

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•

Hair transplantation and/or hair growth

•

Angiogenesis (the growth of new blood vessels)

•

Application system for biologics, synthetics

•

Delivery system for stem cells

Anti-inflammatory Peptide

Cytomedix recently announced plans for entering the multi-billion dollar anti-inflammatory market with patent protected peptides derived from Platelet Factor 4, a growth factor released when blood platelets are activated. The Company’s initial peptide, designated CT-112, was discovered early in the research of platelet derived growth factors.

Pre-clinical animal studies have indicated that the CT-112 peptide may be active for the treatment of inflammatory diseases such as Rheumatoid Arthritis, Crohn’s Disease, Tissue Reperfusion Injury and other related medical conditions. The studies further indicated that CT-112 may be administered orally, unlike other anti-inflammatory drugs currently on the market which are administered via injection or infusion.

The Company is considering Rheumatoid Arthritis (“RA”) as the initial indication for CT-112, although it is evaluating other indications. The RA market is in excess of $12 billion annually, with three leading biologic products: Enbrel, Humira, and Remicade. Each one of these therapies is administered via injection or infusion and each has experienced serious adverse events.

In animal models, CT-112 was shown to reduce arthritis severity. It was shown to prevent bone and cartilage erosion, preserve joint architecture, and decrease the amount of plasma IL-1. Further, CT-112 was shown to be bio-available when administered orally which indicates that it may be administered as a pill. This could significantly ease the delivery to patients and is in contrast to existing, comparable therapies, many of which are injectibles.

Toxicology studies indicate that CT-112 is not mutagenic and there was no toxicity in a number of animal studies; in fact it was well tolerated over a wide range of doses from low to high. The Company therefore believes that it may not result in the type of serious side effects that have plagued other therapies in the field, including increased rates of heart attack and infection.

The Company has initiated contact with the FDA’s Office of Drug Evaluation II, is currently preparing its IND application, and plans to submit it to the FDA in the first quarter of 2009. The Company believes that the IND approval process will take approximately four months. If approved, the Company intends to move into a Phase I clinical trial. The Company estimates total costs of the IND application and Phase I clinical trial to be approximately $500,000.

The discovery of CT-112 in the mid 1990s, resulted during the research of platelet derived growth factors which led to the development of the Company’s Autologel^TM System. Since then, there have been further advances in peptide manufacturing technology and the understanding of the science underpinning such compounds. In addition, there is an increasing demand for new pharmaceutical products, particularly for anti-inflammatory compounds.

The Company would likely seek strategic partnerships for the further development of CT-112. Such partnerships would likely be milestone based and restricted to single indications or single routes of administration.

The Company’s CT-112 peptide is covered by patents through mid 2015 in the United States and mid 2014 in several European countries and Japan. Furthermore, the product meets all the criteria of the Patent Restoration Act and therefore the Company expects that the U.S. patent may be extended for an additional three to five years.

Other Patents

The Company holds patents in other areas such as angiogenic peptides and is continually assessing new opportunities to create or in-license other intellectual property assets.

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Licensing

The Company has firmly established its intellectual property rights arising from its process patents regarding the use of platelet releasates to heal damaged tissue. Over several years it has reached settlement and/or licensing agreements with numerous companies infringing or seeking to avoid infringement of the Company’s patents as listed in the table below. The underlying patents expire in late November 2009.

Licensee

Date of
Agreement

Date of
Expiration⁽⁴⁾

Lump Sum⁽⁶⁾

On-going Royalty Percentage⁽²⁾

DePuy Spine, Inc.⁽¹⁾

3/19/2001

11/24/2009

750,000

6.5%

3/4/2005

Medtronic, Inc. (assigned to Arteriocyte Medical Systems, Inc. effective November 2007)

5/1/2005

11/24/2009

680,000

7.5% on
disposables

1.5% on
hardware

Harvest Technologies, Inc.

6/30/2005

11/24/2009

500,000

7.5% on
disposables

1.5% on
hardware

Perfusion Partners and Associates, Inc.

6/26/2005

11/24/2009

250,000

⁽³⁾

10.0%

COBE Cardiovascular, Inc.

10/7/2005

11/24/2009

45,000

7.5% on
disposables

1.5% on
hardware

SafeBlood Technologies, Inc.

10/12/2005

11/24/2009

50,000

⁽³⁾

8.0% to 9.0%

Biomet Biologics, Inc.⁽⁵⁾

5/19/2006

11/24/2009

2,600,000

none

CellMedix, Inc.

11/28/2006

11/24/2009

30,000

9.5%

Smith and Nephew, Inc.

10/15/2007

11/24/2009

250,000

7.5%

(1)

Cytomedix has two license agreements with DePuy Spine, Inc. The original license agreement was dated March 19, 2001, subsequently amended on March 3, 2005, and provides for the use of applications under Cytomedix patents in the fields of diagnostic and therapeutic spinal, neurosurgery and orthopedic surgery. The second license agreement is dated March 4, 2005, and applies to all fields not covered in the original license agreement as amended.

(2)

Certain minimum royalties may apply to certain agreements and other royalty percentages may apply to future products covered under selected license agreements.

(3)

Some of these amounts are payable over a period of time as defined in executed notes payable to Cytomedix.

(4)

These dates reflect the expiration of the license in the U.S., which coincides with the expiration of the Knighton Patent in the U.S. In some cases, the licensing agreements applicable to territories outside the U.S. extend to the expiration of the patents in the respective foreign countries.

(5)

The Settlement and License Agreement with Biomet Biologics, Inc. (“Biomet”) called for a $2.6 million payout from Biomet to Cytomedix. This payout took the form of $1.4 million payable upon execution of the agreement and $100,000 payable at the end of each of 12 consecutive quarters beginning with the quarter ending September 2006. These payments are not tied to any performance commitments by Cytomedix and are not dependent on Biomet sales.

(6)

For DePuy, CellMedix, and Smith and Nephew, the lump sum payments represent up-front fees for the prospective period from contract execution through termination that are in addition to any ongoing royalty percentage. For all other licensees, the up-front fees represent settlements for past patent infringement.

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Recent Changes in the Company’s Executive Management

On June 5, 2008, Kshitij Mohan and the Company entered into a Termination and Consulting Agreement pursuant to which Dr. Mohan agreed, among other things, to step down as the Chief Executive Officer (“CEO”) and Chairman of the Board of Directors and to become a consultant to the Company effective June 30, 2008. The terms and provisions of this agreement are discussed in the Company’s Current Report on Form 8-K filed with the SEC on June 10, 2008, which discussion is incorporated by reference herein.

Effective as of July 1, 2008, following Dr. Mohan’s departure, the Board of Directors of the Company approved the appointment of Martin Rosendale as CEO of the Company. Prior to that appointment, Mr. Rosendale served as Executive Vice-President and Chief Operating Officer of Cytomedix. In connection with this employment, the Company and Mr. Rosendale entered into a letter agreement setting forth the terms of his employment with the Company, and subsequent to his appointment as CEO, Mr. Rosendale received an increase in base salary and an additional option grant. Such terms and provisions of the letter agreement and subsequent compensation adjustment are discussed in the Company’s Current Reports on Forms 8-K filed with the SEC on March 18 and September 24, respectively, which discussions are incorporated by reference herein.

Comparison of Operating Results for the Three and Nine Month Periods Ended September 30, 2008 and 2007

Currently, the Company’s revenues are primarily earned through its licensing agreements. These revenues, net of related royalty and contingent legal fees, represent the primary source of cash from operations for the Company. Sales of the Company’s products are modest. The Company’s revenues are generally insufficient to cover its operating expenses. Operating expenses primarily consist of employee compensation, professional fees, consulting expenses, and other general business expenses such as insurance, rent, and sales and marketing related items.

Cash generated from the Company’s licensing agreements is wholly dependent on covered sales generated by its licensees, which are entirely outside of the Company’s control. Although these revenues are entirely dependent on licensee sales and the Company cannot assure that these levels will continue, licensing revenues overall have been fairly stable in the recent past and the Company therefore believes that historical results of its licensing activities are a reasonable indicator of future performance in this area. Cash outflows from operations generally result from operating expenses. The Company does not believe that historical results are indicative of future expense levels as such future expense levels will likely change as developments warrant. For example, the Company has begun further investment in its sales and marketing efforts in conjunction with its product launch and on-going sales efforts now that FDA marketing clearance has been obtained. Additionally, spending levels will be impacted by how aggressively the Company pursues other strategic initiatives such as the further development of its anti-inflammatory peptide (CT-112) or other applications for AutoloGel^TM.

In late September 2007, the Company received FDA clearance to market its AutoloGel^TM System. In 2008, Cytomedix initiated a deliberate strategic launch of its AutoloGel^TM System, targeting selected venues within the less-Medicare sensitive market such as Veterans Administration and Long-term Acute Care facilities, intended to lay the foundation for long-term sales growth. Also in the first quarter of 2008, CMS completed its National Coverage Assessment and reaffirmed its non-coverage of autologous blood derived products when used on chronic wounds. Although CMS’ confirmation of its prior non-coverage determination will not affect the Company’s current sales and marketing strategy, which targets the less-Medicare sensitive market, it will delay indefinitely the Company’s ability to access the broader market. The Company is currently developing a detailed plan to obtain Medicare coverage for AutoloGel^TM.

Certain numbers in this section have been rounded for ease of analysis.

Revenues

Revenues rose $37,000 (8%) to $499,000 and $131,000 (9%) to $1,555,000 comparing the three and nine months ended September 30, 2008, respectively, to the same periods last year. Revenues are normally generated from two sources: the sale of the Company’s products and royalties received from licensing activities.

For the three month period, the increase was due to both higher royalty revenues ($32,000), and product sales ($5,000). For the nine month period, the increase was due to higher royalty revenues ($100,000) and increased

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product sales ($31,000). Royalties are directly dependent on sales of covered products by licensees, over which the Company exercises no control. Product sales remained modest as the Company primarily focused on laying the foundation for long term sales growth.

The Company plans to devote further resources to its efforts in the sales and marketing areas in the coming quarters.

Gross Profit

Gross profit rose $75,000 (24%) to $390,000 and $343,000 (44%) to $1,121,000 comparing the three and nine months ended September 30, 2008, respectively, to the same periods last year. For the same periods, gross margins rose to 78% and 72% from 68% and 55%, respectively.

For the three month period, the increase in gross profit was primarily due to higher revenues and improved margins driven by a mix shift to higher margin royalty revenues.

For the nine month period, the increase in gross profit was due to the higher revenue and improved margins. The improved margins were driven by reduced contingent legal fees pursuant to the Company’s agreement with its patent counsel reached on August 2, 2007 and a shift in revenue to the higher margin royalty revenue.

Operating Expenses

Operating expenses fell $1,641,000 (56%) to $1,294,000 and $688,000 (14%) to $4,286,000 comparing the three and nine months ended September 30, 2008, to the same periods last year. A discussion of the various components of Operating expenses follows below.

Salaries and Wages

Salaries and wages rose $24,000 (5%) to $524,000 and $658,000 (51%) to $1,955,000 comparing the three and nine months ended September 30, 2008, to the same periods last year.

For the three month period, the increase was primarily due to increased salaries, commissions and payroll taxes ($76,000) resulting from more employees, partially offset by decreased equity-based compensation ($64,000) due to lower fair values of options.

For the nine month period, the increase was primarily due to the accrual of the present value of a severance package for the former CEO ($510,000), increased equity-based compensation ($58,000), and more employees in 2008, partially offset by reduced bonus expense ($121,000) resulting primarily from the reversal of the bonus accrual for the former CEO.

Consulting Expenses

Consulting expenses fell $4,000 (4%) to $95,000 and $48,000 (24%) to $147,000 comparing the three and nine months ended September 30, 2008, to the same periods last year.

For the three month period, the change was nominal.

For the nine month period, the decrease was primarily due to reduced fees associated with the Company’s efforts to secure FDA clearance for its AutoloGel^TM System, said clearance being obtained in September 2007, and lower fees related to the Company’s efforts related to CMS’s re-consideration of coverage for PRP gel, which concluded in March 2008.

Professional Fees

Professional fees fell $1,694,000 (91%) to $165,000 and $1,672,000 (71%) to $683,000 comparing the three and nine months ended September 30, 2008, to the same periods last year.

For the three and nine month periods, the decreases were primarily due to lower equity-based compensation ($1,721,000) to the Company’s patent counsel in 2007 in exchange for a waiver of future contingent legal fee obligations on existing license agreements. See Note 4 to the Financial Statements for a further discussion of the agreement with the Company’s patent counsel.

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Trials and Studies

Trials and studies expenses rose to $28,000 from zero in each of the three and nine month periods ended September 30, 2008 as compared to the same period last year. These increases are primarily attributable to start-up costs associated with the Company’s TAPS program (post-market surveillance study) which it began incurring in the third quart of 2008.

General and Administrative Expenses

General and administrative expenses rose $5,000 (1%) to $483,000 and $345,000 (31%) to $1,473,000 comparing the three and nine months ended September 30, 2008, to the same periods last year.

The change for the three month period was nominal.

For the nine month period, the increase was primarily due to increased recruiting fees ($94,000), travel ($79,000), and employee benefits ($35,000) driven by more employees, higher marketing costs ($83,000), and minor increases in various other expenditures, partially offset by reduced equity-based compensation to the Board of Directors and outside service providers ($58,000).

Other Income/Expenses

Other income rose $21,000 (26%) to $101,000 and fell $22,000 (9%) to $213,000 comparing the three and nine months ended September 30, 2008, to the same periods last year.

For the three month period, the increase was due to the balloon payment ($67,000) associated from a settlement under an existing license agreement which was accounted for on a cash basis due to the uncertainty of collectability, partially offset by lower interest ($37,000) earned on cash invested in money market accounts and notes receivable balances.

For the nine month period, the decrease was due to lower interest ($86,000) earned on cash invested in money market accounts and notes receivable balances, partially offset by the settlement payment ($67,000) described in the preceding paragraph.

Liquidity and Capital Resources

The cash position of the Company at September 30, 2008 was approximately $4,742,000. The Company believes that it will have adequate cash on hand to fund operations for the next twelve months, based on the current level of licensing revenues and operating expenditures.

In August 2008, via a registered direct offering, the Company sold approximately 2,000,000 shares of its Common stock at a purchase price of $0.75 per share, and 4-year warrants to purchase an additional 1,000,000 shares of its Common stock at an exercise price of $1.00. As a result of this financing, the Company received net proceeds of approximately $1.45 million (exclusive of any proceeds the Company may receive upon exercise of the warrants).

Additional cash may be required if operating revenues do not materialize or the cost of operations increases. Furthermore, additional cash would likely be required for the Company to pursue all elements of its strategic plan. Specifically, additional cash would likely be required to complete a Phase I study for CT-112, accelerate investment in the sales and marketing areas beyond what is currently forecasted, effect significant new product development or modifications, and pursue certain other attractive opportunities for the Company. However, the timing of such activities is at the Company’s discretion. The Company is exploring potential strategic partnerships for some of these endeavors, which could likely offset at least a portion of the capital that would be required by the Company. The Company continuously assesses the state of the capital markets and its access to capital. It weighs the cost of capital against the expected benefits of accelerating the pursuit of certain strategic objectives.

The Company has certain warrants that are callable, subject to certain requirements including a minimum per share price ranging from $4 to $6, at an aggregate exercise price of approximately $2.5 million.

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(the “Unit Warrants”) and of the FEQ Investment warrant issued in April 2004 (the “FEQ Warrant”). Specifically, the Unit Warrant amendments were as follows: (i) the term of such warrants was extended from March 31, 2009 to March 31, 2010, (ii) the exercise price of the warrants was increased by 10% from $1.50 to $1.65 per share, and (iii) the call provision was amended so that such instruments are callable by the Company in the event the closing price of the Company’s securities is in excess $5.00 per share for at least 10 consecutive trading days. The FEQ Warrant was amended so that (i) its term was extended from April 1, 2009 to April 1, 2010, (ii) the exercise price of the warrant was increases by 10% from $1.00 to $1.10 per share and (iii) a call provision identical to the one added to the Unit Warrants was added to the FEQ Warrant. The foregoing amendments to the warrants were approved by the requisite vote of the warrant holders and are effective as of October 31, 2008.

The Company has no material commitments for capital expenditures. The Company has issued a purchase order in the amount of $85,000 for the supply of sufficient quantity of its CT-112 peptide in order to support the IND application and subsequent Phase 1 clinical trial. The Company expects the peptide to be delivered sometime in the fourth quarter of 2008, at which point payment will be due the manufacturer. The Company also plans to conduct a post-market surveillance study per its understanding reached with the FDA. The Company estimates that this new study will cost approximately $500,000 over the next three years, and of that amount, approximately $200,000 will be expended in the next 12 months.

Because the Company was in bankruptcy in 2002, the Company may not be able to obtain debt financing. All working capital required to implement the Company’s business plan will be provided by funds obtained through offerings of its equity securities, and revenues generated by the Company. There can be no assurance that the Company will be able to raise additional capital if and when needed, and, even if needed capital is raised, there can be no assurance that the Company will achieve its strategic goals. To continue its operations and complete the implementation of its current business plan, the Company will likely require additional long-term financing. There are no assurances that such financing will be available, or if available, it will be on terms acceptable to the Company. Any financing may result in significant dilution.

The licensing agreements, under which the Company’s royalty revenues are generated, expire in late November 2009.

Contractual Obligations

The Company has submitted a purchase order for the supply of its CT-112 anti-inflammatory peptide, sufficient to conduct certain tests in support of an IND application and, if approval is obtained from the FDA, a Phase I clinical trial in humans. The purchase order obligates the Company for a payment up to $85,000 upon the delivery of the requested amount of CT-112 from the manufacturer, which is expected sometime in the fourth quarter of 2008.

Prospects for the Future

Cytomedix’s near-term success is primarily dependent on the success of the AutoloGel^TM System, and the Company believes that AutoloGel^TM has a reasonable chance for success in the marketplace. The Company believes that, based on the results of the Company’s clinical trial and other clinical data as well as the results of the Economic Study, the AutoloGel^TM System provides substantial clinical benefit for diabetic foot ulcers and is more cost effective than most other wound treatments. Additionally, based on available clinical data and experience, the Company believes that AutoloGel^TM offers similar clinical and cost advantages when used to treat other chronic and open cutaneous wounds. The Company owns the patents on the process for utilizing platelet gel for treating damaged tissue and wound healing through 2009, which is the basis of its license agreements, and for the specific formulation of AutoloGel^TM, which it believes provides several competitive advantages. These patents expire in 2019.

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The Company believes that the FDA’s recent marketing clearance for the AutoloGel^TM System has increased the prospects for success. A key restriction on the Company’s ability to market AutoloGel^TM for its intended use has been removed and the Company launched its product at the end of the first quarter of 2008.

However, the recent CMS decision to continue its non-coverage of autologous blood-derived products when used on chronic wounds is a setback to the Company’s overall strategy. Although CMS’s confirmation of its prior non-coverage determination will not affect the Company’s current sales and marketing strategy which targets the less-Medicare sensitive market, it will indefinitely impede the Company’s ability to access the broader market for its products. The Company will be targeting segments of the direct reimbursed market by seeking coverage from commercial insurers as discussed previously in this report.

The deliberate strategic launch of the AutoloGel^TM System in 2008 is providing feedback as the Company seeks to best position its products in the marketplace and develop the most efficient and effective sales offering. The Company does anticipate increases in sales, though it is not currently providing any forecasts due to its short history with the FDA cleared system. The results of the Company’s on-going sales efforts through 2008 and early 2009 will reflect on the potential for AutoloGel^TM’s success in the chronic wound marketplace.

The Company believes that its CT-112 anti-inflammatory peptide represents a viable opportunity and intends to pursue it aggressively. Although there is no assurance that such results will be confirmed in subsequent clinical trials, the Company is encouraged by the results of the pre-clinical studies from both a safety and efficacy perspective. Such results, combined with the early indication that the compound may be suitable in pill form, the significant reductions in peptide manufacturing costs over the past decade, and the magnitude of the RA and other inflammatory disease markets are the basis on which the Company is seeking to move into human trials. However, although early data is promising, no reasonable conclusion can yet be drawn about CT-112’s prospects in the marketplace. FDA approval of an IND application is the next critical milestone toward the development of CT-112.

Recent Accounting Pronouncements

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The statement requires prospective application for all acquisitions after the date of adoption. The Company
is currently evaluating the effect that the adoption of SFAS 141R will have on its results of operations and financial position. However, the adoption of SFAS 141R is not expected to have a material impact on the Company’s financial statements.

Forward-looking Statements

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2, contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. When the words “believes,” “plans,” “anticipates,” “will likely result,” “will continue,” “projects,” “expects,” and similar expressions are used in this Form 10-Q, they are intended to identify “forward-looking statements,” and such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. The Company’s forward-looking statements generally relate to regulatory efforts, reimbursement efforts, licensing activities, intellectual property rights, product development, sales initiatives, and market acceptance of its products. Furthermore, the Company’s plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of management and the Board. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company’s actual results could differ materially from those anticipated in these forward-looking statements. Actual events, transactions and results may materially differ from the anticipated events, transactions or results described in such statements. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that such expectations will materialize. Many factors could cause actual results to differ materially from the Company’s forward looking statements.

These forward-looking statements speak only as of the date this report is filed. The Company cannot assure the reader that the projected results will be achieved. The Company undertakes no obligation to update the forward-looking statements contained in this report to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as may occur as part of its ongoing periodic reports filed with the SEC.

Given these uncertainties, the reader is cautioned not to place undue reliance on such statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company does not enter into financial instruments for speculation or trading purposes. In accordance with the Company’s investment policy, cash is to be invested in bank and institutional money market funds, or in T-Bills or short-term T-Notes. At September 30, 2008, the Company’s cash balance of approximately $4.7 million was maintained primarily in an institutional money market account, sensitive to changes in the general level of interest rates. Based on the Company’s cash balances at September 30, 2008, a 100 basis point increase or decrease in interest rates would have an approximately $47,000 impact on the Company’s annual interest income and net loss. Actual changes in rates may differ from the hypothetical assumption used in computing this exposure.

The Company does not presently have any derivative financial instruments.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission and that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure.

As of the end of the period covered in this report, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was carried out with the participation of management, including the Chief Executive Officer and Chief Financial Officer (“Certifying Officers”). This evaluation included the items described in management’s report on internal control over financial reporting

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included in Item 9A of the 2007 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 25, 2008 (the “2007 10-K”). Based on and as of the date of such evaluation and as a result of the material weaknesses described below, the Certifying Officers concluded that the disclosure controls and procedures were not effective.

In light of the material weaknesses described below, additional analysis and other post-closing procedures were performed to ensure the Company’s financial statements are prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented.

As determined in connection with the 2007 10-K, the Company did not maintain effective controls over the completeness and accuracy over certain financial statement note disclosures related to SFAS 109, Accounting for Income Taxes. Specifically, controls over the processes and procedures related to the determination and review of the financial statement note disclosures in this area were not adequate to ensure that the financial statement notes were prepared in accordance with generally accepted accounting principles. This control deficiency, which continues to exist as of September 30, 2008, could result in a misstatement of the note disclosures that would result in a material misstatement to the Company’s interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency constitutes a material weakness.

Also as determined in connection with the 2007 10-K, the Company did not maintain effective controls over the completeness and accuracy over the calculation of stock-based compensation expense and the related financial statement note disclosures. Specifically, controls over the processes and procedures related to the determination of the compensation amounts and the determination and review of the financial statement note disclosures were not adequate to ensure that the compensation amount and the related financial statement notes were prepared in accordance with generally accepted accounting principles. This control deficiency, which continues to exist as of September 30, 2008, resulted in the restatement of the Company’s quarterly and annual reports for 2006 on Forms 10-Q/A and 10-K/A and the Company’s first two quarterly reports for 2007 on Forms 10-Q/A to correct the Company’s stock-based compensation expense. Additionally, this material weakness could result in a misstatement of the stock-based compensation expense and the related note disclosures that would result in a material misstatement to the Company’s interim or annual financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency constitutes a material weakness.

The Company commenced remedial actions in the third quarter of 2007 to correct and strengthen the internal controls in those areas where material weaknesses were identified. These remedial actions are described in detail in the Company’s Annual Report for the period ended December 31, 2007 and included (i) formation of a Disclosure Committee to improve the execution of the Company’s controls over financial disclosure, (ii) identification and implementation of a software solution to reduce the risk of error in accounting for stock-based compensation and (iii) monitoring the effectiveness of the Disclosure Committee’s performance and the software solution for stock-based compensation to ensure that they have yielded the desired effect of mitigating the identified material weaknesses in the future. The remedial efforts are now exclusively in the monitoring phase and are expected to conclude by the end of 2008.

Changes in Internal Control over Financial Reporting

During the three months ended September 30, 2008, the Company developed and implemented the necessary controls around the software solution used to administer equity-based compensation. These controls are designed to ensure that all new option or warrant grants and all changes to existing options and warrants are entered into the administration system properly, completely, and reflect the grant as intended by the Board of Directors.

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PART II
OTHER INFORMATION

Item 1. Legal Proceedings

At present, the Company is not engaged in or the subject of any material pending legal proceedings.

Item 1A. Risk Factors

Except as set forth below and in the Company’s quarterly reports for fiscal quarters ended March 31 and June 30, 2008, respectively, there were no material changes from the risk factors as previously disclosed on the Company’s Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2007.

The Company’s Intention to Develop a Plan to Secure Medicare Reimbursement Without Conducting a New Randomized Controlled Trial May Not Be Successful

In March 2008, CMS reaffirmed its 2003 non-coverage decision for PRP gel, which would include AutoloGel^TM. Following CMS’s decision, the Company met with CMS in April 2008 to discuss the optimal path for securing future coverage for AutoloGel^TM and is currently working with consultants and advisors to develop a strategy to obtain Medicare reimbursement for AutoloGel^TM without undertaking a new randomized, controlled trial. There is no assurance that the Company will ultimately determine that this is the optimal route forward. If it chooses to undertake a new randomized, controlled trial, it would cost several millions of dollars and take multiple years to complete. The Company would likely need to obtain additional, outside financing to fund such a trial. Additionally, even if the Company develops a final strategy for obtaining Medicare reimbursement that does not require an RCT, there is no assurance that CMS will determine that the evidence is sufficient to reverse all or a portion of its existing non-coverage decision.

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

The Company issued no unregistered shares of Common stock during the three months ended September 30, 2008.

Item 3. Defaults Upon Senior Securities

N/A

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

The Company held its annual meeting of shareholders on September 19, 2008, at the Company’s offices in Rockville, Maryland. At the meeting, the shareholders elected James S. Benson, David P. Crews, Arun K. Deva, David E. Jorden, Stephen N. Keith, Mark T. McLoughlin, and Martin P. Rosendale as Directors to hold office until the next annual meeting of shareholders and until their successors are duly elected. A summary of votes cast follows below:


Nominee	Votes for		Votes Withheld		Abstentions*
James S. Benson		24,264,850		54,771		—
David P. Crews		24,264,850		54,771		—
Arun K. Deva		24,264,750		54,871		—
David E. Jorden		24,264,850		54,771		—
Stephen N. Keith		24,264,850		54,771
Mark T. McLoughlin		24,264,850		54,771		—
Martin P. Rosendale		24,264,850		54,771		—

Pursuant to the terms of the Proxy Statement, proxies received were voted, unless authority was withheld, in favor of the election of the six nominees.

Shareholders also voted to ratify the appointment of PricewaterhouseCoopers, LLC as the Company’s independent registered accountant for the fiscal year ending December 31, 2008 with 24,263,380 votes for, 34,193 votes against, and 22,047 abstentions.

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Further information regarding the meeting and the proposals submitted to a vote of the shareholders may be found in the Company’s definitive proxy statement filed with the Securities and Exchange Commission on August 11, 2008.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits listed in the accompanying Exhibit Index are furnished as part of this report.

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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.


		CYTOMEDIX, INC.
Date: October 31, 2008		By: /s/ Martin P. Rosendale Martin P. Rosendale, Chief Executive Officer
Date: October 31, 2008		By: /s/ Andrew S. Maslan Andrew S. Maslan, Chief Financial Officer and Chief Accounting Officer

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EXHIBIT INDEX


Number		Exhibit Table
2.1		First Amended Plan of Reorganization with All Technical Amendments (Previously filed on June 28, 2002, as exhibit to Current Report on Form 8-K, File No. 000-28443).
2.2		Amended and Restated Official Exhibits to the First Amended Plan of Reorganization of Cytomedix, Inc. with All Technical Amendments (Previously filed on May 10, 2004, as exhibit to Form 10-QSB for the quarter ended March 31, 2004, File No. 000-28443).
3(i)		Restated Certificate of Incorporation of Cytomedix, Inc. (Previously filed on November 7, 2002, as exhibit to Form 10-QSB for quarter ended June 30, 2001, File No. 000-28443).
3(i)(1)		Amendment to Restated Certificate of Incorporation of Cytomedix, Inc. (Previously filed on November 15, 2004, as exhibit to Form 10-QSB for quarter ended September 30, 2004, File No. 000-28443).
3(ii)		Restated Bylaws of Cytomedix, Inc. (Previously filed on November 7, 2002, as exhibit to Form 10-QSB for quarter ended June 30, 2001, File No. 000-28443).
10.1		Employment Agreement by and between Cytomedix, Inc. and Martin Rosendale (Previously filed on March 18, 2008 as exhibit to Current Report on Form 8-K, File No. 001-32518).
10.2		Termination and Consulting Agreement by and between Cytomedix, Inc. and Kshitij Mohan (Previously filed on June 10, 2008 as exhibit to Current Report on Form 8-K, File No. 001-32518).
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certificate of Chief Executive Officer pursuant to 18 U.S.C.ss.1350.
32.2		Certificate of Chief Financial Officer pursuant to 18 U.S.C.ss.1350.

Nuo Therapeutics, Inc. - Quarter Report: 2008 September (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended September 30, 2008

OR

For the Transition Period from to

Commission File Number 001-32518

CYTOMEDIX, INC.

416 Hungerford Drive, Suite 330 Rockville, MD 20850

(240) 499-2680

APPLICABLE ONLY TO CORPORATE ISSUERS

CYTOMEDIX, INC.

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PART I FINANCIAL INFORMATION

Item 1. Financial Statements

CYTOMEDIX, INC. BALANCE SHEETS

CYTOMEDIX, INC. STATEMENTS OF OPERATIONS (Unaudited)

CYTOMEDIX, INC. STATEMENTS OF CASH FLOWS(Unaudited)

CYTOMEDIX, INC. NOTES TO FINANCIAL STATEMENTS

Note 1 — Description of Business

Note 2 — Basis of Presentation

Note 3 — Capital Stock Activity

CYTOMEDIX, INC. NOTES TO FINANCIAL STATEMENTS

Note 3 — Capital Stock Activity – (continued)

Note 4 — Settlement and License Agreements

CYTOMEDIX, INC. NOTES TO FINANCIAL STATEMENTS

Note 4 — Settlement and License Agreements – (continued)

Note 5 — Commitments and Contingencies

CYTOMEDIX, INC. NOTES TO FINANCIAL STATEMENTS

Note 6 — Income Taxes

Note 7 — Termination and Consulting Agreement

Note 8 — Recent Accounting Pronouncements

CYTOMEDIX, INC. NOTES TO FINANCIAL STATEMENTS

Note 8 — Recent Accounting Pronouncements – (continued)

Note 9 — Subsequent Events

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

Description of the Business

Overview

AutoloGelTM System

Market

Incidence of Chronic Wounds in the U.S. (Number of Wounds in Millions)

FDA Clearance

AutoloGelTM Efficacy Studies

Economic Study

Sales and Marketing

Medicare Reimbursement

Other Opportunities

Anti-inflammatory Peptide

Other Patents

Licensing

Recent Changes in the Company’s Executive Management

Comparison of Operating Results for the Three and Nine Month Periods Ended September 30, 2008 and 2007

Revenues

Gross Profit

Operating Expenses

Salaries and Wages

Consulting Expenses

Professional Fees

Trials and Studies

General and Administrative Expenses

Other Income/Expenses

Liquidity and Capital Resources

Contractual Obligations

Prospects for the Future

Recent Accounting Pronouncements

Forward-looking Statements

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Changes in Internal Control over Financial Reporting

PART II OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

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

Item 3. Defaults Upon Senior Securities

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

Item 5. Other Information

Item 6. Exhibits

SIGNATURES

EXHIBIT INDEX

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

416 Hungerford Drive, Suite 330
Rockville, MD 20850

PART I
FINANCIAL INFORMATION

CYTOMEDIX, INC.

BALANCE SHEETS

CYTOMEDIX, INC.

STATEMENTS OF OPERATIONS
(Unaudited)

CYTOMEDIX, INC.

STATEMENTS OF CASH FLOWS
(Unaudited)

CYTOMEDIX, INC.

NOTES TO FINANCIAL STATEMENTS

CYTOMEDIX, INC.

NOTES TO FINANCIAL STATEMENTS

CYTOMEDIX, INC.

NOTES TO FINANCIAL STATEMENTS

CYTOMEDIX, INC.

NOTES TO FINANCIAL STATEMENTS

CYTOMEDIX, INC.

NOTES TO FINANCIAL STATEMENTS

AutoloGel^TM System

Incidence of Chronic Wounds in the U.S.
(Number of Wounds in Millions)

AutoloGel^TM Efficacy Studies

PART II
OTHER INFORMATION