Three months ended June 30                                  Six Months ended June 30
                                                                   %                                                                %
                        2008         2007        Change         Change             2008               2007          Change       Change
                                                                   (In millions, except per share amount)
Revenue                   4.2          4.3         (0.1 )            -4 %             15.9                7.2          8.7          121 %

Gross profit             (0.5 )        1.0         (1.5 )          -148 %              3.5                1.7          1.8          104 %

Operating expenses        5.8          4.4          1.4              32 %             12.4                8.6          3.8           44 %

Operating loss           (6.3 )       (3.4 )       (2.9 )            85 %             (8.9 )             (6.9 )       (2.0 )         29 %
Non-operating
income/ expense          (5.4 )        0.0         (5.4 )            NA               (6.0 )              0.1         (6.1 )         NA

Net loss                (11.7 )       (3.4 )       (8.3 )           245 %            (14.9 )             (6.8 )       (8.1 )        119 %

Net loss per share      (0.24 )      (0.07 )      (0.17 )                            (0.30 )            (0.14 )      (0.16 )

Gross profit as %
of revenue                -12 %         24 %        -36 %           points              22 %               24 %         -2 %       points
Operating expense
as % of revenue           141 %        103 %         38 %           points              78 %              119 %        -41 %       points
Operating loss a %
of revenue               -153 %        -80 %        -73 %           points             -56 %              -96 %         40 %       points
Net loss as % of
revenue                  -282 %        -79 %       -203 %           points             -93 %              -94 %          1 %       points

Revenue:
Revenue for the second quarter, 2008 declined by $0.1 million, a 4% decline versus second quarter, 2007. Revenue for the six months ended June 30, 2008 grew $8.7 million or 121% over revenue for the comparable period in 2007.

The following table contains geographic revenue for the second quarter and the six months ended 2008 and 2007:

           (Millions)                   Three months ended
           Region                June 30, 2008      June 30, 2007      % Change
           United States          $      1.4          $       1.0           37 %
           Europe                        0.5                  0.4           47 %
           Western Hemisphere            1.1                  2.6          -59 %
           Pacific Rim                   1.2                  0.3          260 %

           Total                  $      4.2          $       4.3           -4 %




            (Millions)                    Six months ended
            Region                June 30, 2008     June 30, 2007      % Change
            United States          $      8.4        $      1.6            420 %
            Europe                        2.0               0.5            290 %
            Western Hemisphere            2.4               4.3            -44 %
            Pacific Rim                   3.1               0.8            295 %

            Total                  $     15.9        $      7.2            121 %

Revenue increased in the second quarter, 2008 versus the same period in 2007 in all geographies except Western Hemisphere, where strong Western Hemisphere revenue second quarter, 2007 created a challenging year-on-year comparison for the region. For the six-month period ended June 30, 2008, growth was strong in all regions except Western Hemisphere, driven by very significant growth that occurred during the first quarter, 2008. In particular, U.S. revenue grew significantly versus 2007, where approval to sell sevoflurane did not occur until May, 2007. U.S. revenue accounted for 53% of total six-month revenue in 2008, versus 22% of total revenue in the comparable period last year.
The following table summarizes the Company's revenue by product line for the second quarter and the first six months of 2008 versus 2007:

     (Millions)                              Three months ended,
     Product Line                      June 30, 2008      June 30, 2007     % Change
     Sevoflurane                        $      2.7         $       3.2           -13 %
     Other Inhalants                           1.4                 1.0            29 %

     Total Anesthesia and Analgesia            4.1                 4.2            -3 %
     Image Guidance                            0.1                 0.1          - 28 %

     Total                              $      4.2         $       4.3            -4 %




     (Millions)                                Six months ended,
     Product Line                      June 30, 2008      June 30, 2007      % Change
     Sevoflurane                        $     11.7         $      4.8            145 %
     Other Inhalants                           3.9                2.3             68 %

     Total Anesthesia and Analgesia           15.6                7.1            120 %
     Image Guidance                            0.3                0.1            165 %

     Total                              $     15.9         $      7.2            121 %

The 4% decline in second quarter, 2008 revenue versus the same period in 2007 was driven by the shortfall in the sevoflurane product line, due to product availability in the second quarter, 2008 (as discussed in the gross profit section of this MD&A). The decline in sevoflurane was partially offset by growth in other inhalants during the second quarter. The 121% increase in revenue for the six months ended June 30 was driven by growth across all product lines. Sevoflurane growth for the six-month period ended June 30, 2008 was a result of strong performance of this product line in the first quarter. The $6.9 million sevoflurane increase accounted for 79% of the revenue growth for the first six months, 2008.

Gross Profit:
Gross profit grew 104% for the six months ended June 30, 2008. A strong first quarter performance, made possible by the start-up of the new independent sevoflurane production line in December, 2007 was the primary growth driver for gross profit in the six-month period ended June 30, 2008. However, in the second quarter, sevoflurane production, and therefore revenue, was significantly constrained by several factors. Early in the second quarter, 2008, there was a planned shutdown for cleanout of process equipment at our Bethlehem, PA facility. Also early in the quarter, due to the inability to obtain raw materials because of funding constraints, production was limited. In early June, when raw materials became available, an equipment breakdown in a sevoflurane reactor caused equipment damage and loss of production capacity, primarily in the sevoflurane production area. The low production capacity utilization drove unfavorable manufacturing variances in the second quarter and was a contributing factor in the gross profit decline of 148% and decline in the gross profit rate of 3600 basis points versus the prior year. By the end of second quarter, the facility returned to normal operations.
Gross profit for the second quarter was also unfavorably impacted by inventory write downs at the Orchard Park, New York facility, primarily for consumable inventory nearing its expiration date and write downs for Image Guidance devices that now are considered obsolete. Operating Expenses:
Operating expenses for the quarter ended June 30, 2008 increased by $1.4 million, or 32%, versus second quarter, 2007. $1.0 million of the increase is due to establishing a non-cash reserve for the accounts receivable due from the Company's U.S. distributor, as discussed in Note 2 to the financial statements. Finance and administration costs increased $1.0 million, while sales and marketing costs and research and development costs decreased by $0.1 million and $0.5 million respectively. Finance and administration cost growth of $1.0 million, which was a 92% increase, was driven by higher stock option expense, bad debt expense on international receivables and increased salary expense and severance costs versus the prior year. The sales and marketing decrease represented a 7% decline versus the prior year, primarily due to lower sales commission expenses. The research and development cost decline of $0.5 million, or 34%, was made possible by several actions. The completion of several projects, reductions in spending in non-core areas and transfer of resources to address other priorities within the company drove decreased spending. Partially offsetting the research and development cost reductions was $0.1 million increased investment in the conscious sedation project.
For the first six months of 2008, operating expenses increased $3.8 million, or 44%, versus the comparable period of 2007. The $3.8 million increase was comprised of the $1.0 million increase due to establishing a non-cash reserve for potentially uncollectible receivable due from the Company's U.S. distributor as previously discussed, $1.7 million sales and marketing and $1.5 million finance and administration increases, less a $0.4 million decrease in research and development spending. The sales and marketing expense growth of $1.7 million or 42% was driven by a $1.5 million expenditure for the World Congress of Anesthesia meeting, a once every four year event, and additional $0.2 million freight expense due to increased volume and air shipment of product. The $1.5 million finance and administration expense growth, which was an increase of 67%, was driven by higher incentive compensation versus the same period last year, as well as the other factors previously disclosed in the quarter discussion. Research and development cost reductions of 17% versus the prior year, or $0.4 million all occurred in the second quarter as discussed above, with the first quarter, 2008 costs being roughly comparable to the same period, 2007.
Operating Loss:
Loss from operations was $6.3 million for the second quarter, 2008 versus $3.4 million in 2007 for the same period, driven largely by the gross profit shortfall and the non-cash U.S. distributor receivable provision. The loss from operations for the six-month period ended June 30, 2008 was $8.9 million versus $6.9 million loss in the comparable period last year. Non-operating income/expense:
Non-operating expense was $5.4 million for the second quarter, 2008 as compared to minimal non-operating income or expense in the same period prior year. The non-operating expense includes $1.1 million interest expense, $4.6 million loss on early extinguishment of debt, less interest income and other income of $0.3 million. Interest expense of $1.1 million consists primarily of interest on two long term debt arrangements in place for portions of the period. The Laminar Direct Capital L.P. term loan was put in place in February and was extinguished

on May 9, 2008. Senior secured convertible notes were issued on May 5, 2008. Interest expense during the second quarter from these two arrangements totaled $1.0 million. The remaining interest related to two development loans with the Commonwealth of Pennsylvania. The loss on early extinguishment of debt was due to the retirement of the Laminar note prior to maturity. Included in this charge are a 5% redemption fee of $0.8 million, the write-off of the unamortized balance of warrant expense of $3.2 million and unamortized loan fees of $0.6 million. Remaining other income of $0.3 million includes primarily income on the receipt of shares of common stock of RxElite in consideration for extended payment terms.
Non-operating expense for the six-month period ending June 30, 2008 was $6.0 million as compared to net non-operating income of $0.1 million in the comparable 2007 period. Of the increase in expense of $6.1 million, $5.3 million related to the second quarter, which was discussed in the previous paragraph. The balance of the increase, which is $0.8 million increase in the first quarter, 2008 was driven by $0.6 million of additional interest due to the Laminar debt, the Commonwealth of Pennsylvania development loans and a demand facility with First Niagara Bank extinguished early in 2008. Liquidity and Capital:
Cash and cash equivalents were $7.6 million at June 30, 2008, as compared to cash and cash equivalents at December 31, 2007 of $0.2 million, resulting in an increase in cash and equivalents of $7.4 million in the six-month period ended June, 2008. The current ratio, which was 0.9: 1 at December 31, 2007 and 2.0:1 at March 31, 2008, improved to 7.8:1 on June 30, 2008.
The following table contains information on our cash flow for six months ended June 30, 2008 and 2007:

                                                           Six months ended June 30
                                                             2008             2007
 Net Cash used by Operating Activities                        (15.7 )           (10.8 )

 Net Cash provided (used) by Investing Activities              (7.2 )             0.4

 Net cash provided by Financing Activities                     30.3               6.9


 Net Increase (Decrease) in cash and cash equivalents           7.4              (3.5 )

Net cash used by operating activities was $15.7 million for the first six months of 2008 compared to $10.8 million in the first six months of 2007. In 2008, cash was used to fund the $14.9 million loss, offset by non-cash items of $9.5 million, including the reserve for a potentially uncollectible receivable from a U.S. distributor discussed in footnote 2 to the financial statements. Cash was also used to fund working capital of $10.3 million. The net increase in working capital reflects $8.3 million increase in gross accounts receivable and $2.7 million decrease in inventory. It includes the conversion of high year end levels of raw materials into finished goods, and ultimately into accounts receivable. Accounts payable decreased by $4.9 million, as available cash was used to pay down amounts owed to vendors, reaching current status with most major vendors. Changes in other assets and liabilities also resulted in a $0.2 million increase in cash.
Net cash used by investing activities was $7.2 million in the first six months of 2008, as compared to net cash provided by investing activities of $0.4 million in the equivalent period last year. In the first six months of 2008, cash was used primarily to pay vendors and contractors for the expansion of our Bethlehem, Pennsylvania sevoflurane capacity and construction of a tank farm at the facility that took place primarily in 2007.
Net cash provided by financing activities was $30.3 million for the six months ended June 30, 2008, as compared to $6.9 million for the same period last year. For the six-month period ended June 30, 2008, the net activity was the issuance of $40.0 million of senior secured notes on May 5, 2008, providing $36.7 million of new funding after fees associated with the issuance. The company repaid $6 million owed under a demand note with First Niagara Bank, which was outstanding at December 31, 2007. Additionally in the first six months of 2008, the company entered into a $15 million three-year note early in the 1st quarter with Laminar Direct Capital, L.P., which was subsequently extinguished on May 9, 2008 after the issuance of the senior secured notes.

Based on our business strategy as approved by our Board of Directors, our operational plan for 2008 will be funded by both internal and external sources of cash. Our primary external source of cash was the $40.0 million private placement of senior secured notes which occurred in May of 2008. Our internal sources of cash will be driven by our planned improvement in operating income, gross profit generated by increased sales and production and efficient working capital management. In the event that the U.S. distributor receivable is not collected, (see Note 2 to the financial statements), we will need to seek other sources of cash flow in either the public or private debt or equity markets.

Forward-Looking Statements
This quarterly report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements, other than statements of historical fact, contained in this quarterly report on Form 10-Q constitute forward-looking statements. In some cases you can identify forward-looking statements by terms such as "may," "intend," "might," "will," "should," "could," "would," "expect," "believe," "estimate," "anticipate," "predict," "project," "potential," or the negative of these terms and similar expressions intended to identify forward-looking statements.
Forward-looking statements are based on assumptions and estimates and are subject to risks and uncertainties. Reference is made to the information appearing under the heading "Risk Factors" in Item 1 of our annual report on Form 10-KSB/A for the year ended December 31, 2007 filed with the SEC on April 21, 2008 ("Risk Factors"), which is incorporated herein by reference. We have identified in the Risk Factors and elsewhere in this Form 10-Q some of the factors that may cause actual results to differ materially from those expressed or assumed in any of our forward-looking statements. There may be other factors not so identified. You should not place undue reliance on our forward-looking statements. As you read this quarterly report on Form 10-Q you should understand that these statements are not guarantees of performance or results. Further, any forward-looking statement speaks only as of the date on which it is made and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time that may cause our business not to develop as we expect and it is not possible for us to predict all of them. Factors that may cause actual results to differ materially from those expressed or implied by our forward-looking statements include those described in the Risk Factors.
Item 3. Quantitative and Qualitative Disclosure about Market Risk.
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item. Item 4T. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
Management is responsible for establishing and maintaining effective disclosure controls and procedures. As of June 30, 2008, our Chief Executive Officer and Chief Financial Officer participated with our management in evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the Securities and Exchange Commission ("SEC") reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified by the SEC's rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In light of the discussion of material weaknesses set forth below, these officers have concluded that our disclosure controls and procedures were not effective. To address the material weaknesses described below, we performed additional analyses and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Accordingly, management believes that the financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, result of operations and cash flows for the periods presented.
Management's Report on Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed by, or under the supervision of, a public company's principal executive and principal financial officers, or persons performing similar functions, and effected by the board of directors, management and other personnel, 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 ("GAAP") including those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the

assets of the company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the company, and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has assessed the effectiveness of our internal control over financial reporting as of December 31, 2007 (the last annual Management's Assessment of Internal Control over Financial Reporting). In making this assessment, our management used the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). A material weakness is a control deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. In connection with management's assessment of our internal control over financial reporting described above, management has identified the following material weaknesses in the Company's internal control over financial reporting as of December 31, 2007:
• We were ineffective in maintaining a sufficient complement of qualified accounting personnel and controls associated with segregation of duties. Currently, all aspects of our financial reporting process, are performed by a single individual with limited segregation of duties and limited secondary review, including but not limited to access to the underlying accounting records and systems, the ability to post and record journal entries and responsibility for the preparation of the financial statements. This creates certain incompatible duties and a lack of review over the financial reporting process that would likely fail to detect errors in spreadsheets, calculations, or assumptions used to compile the financial statements and related disclosures with the SEC. Specifically, we determined that because of the latter situation, our controls over the preparation, review and monitoring of the financial statements were ineffective to provide reasonable assurance that financial disclosures agreed to appropriate supporting detail, calculations or other documents.

• Our documentation of accounting policies and procedures is incomplete to the level necessary to ensure accounting for transactions are accounted by the limited accounting staff in accordance with generally accepted accounting principles properly each reporting period.

• We installed a new enterprise wide information system during 2007 that is utilized to plan and execute the business. However the accounting modules and functionality of the new system are not fully implemented or utilized by Company personnel to process transactions which have contributed to weaknesses in internal control over financial reporting.

• We have a complex chemical production process which was not properly reflected in the accounting records captured in our enterprise wide information system at the end of 2007 and at interim reporting dates during 2007. In this regard, audit adjustments were made relating to both the quantity and value of inventory at December 31, 2007. Additional management time has been required to ensure that inventory has been properly accounted for during and at the end of each financial reporting period.

As a result of the material weaknesses described above, our management concluded that as of December 31, 2007, we did not maintain effective internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework issued by the COSO.
The annual report included on Form 10-KSB/A referred to above did not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm . . .