BUF Minrad International

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended: June 30, 2008

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

For the transition period from                      to                     

Commission file number: 000-49635

MINRAD INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware		870299034
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
50 Cobham Drive, Orchard Park, New York		14127
(Address of principal executive offices)		(Zip Code)

(716) 855-1068
Issuer’s Telephone Number

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

Yes þ 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. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of August 14, 2008, there were 49,302,462 outstanding shares of the registrant’s $0.01 par value common stock.

 

 

TABLE OF CONTENTS

		PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets at June 30, 2008 and December 31, 2007			3
Consolidated Statements of Operations Three and Six month periods ended June 30, 2008 and 2007			4
Consolidated Statement of Changes in Stockholders’ Equity (Deficit) Six-month period ended June 30, 2008			5
Consolidated Statement of Changes in Stockholders’ Equity (Deficit) Six-month period ended June 30, 2007			6
Consolidated Statements of Cash Flows Six-month periods ended June 30, 2008 and 2007			7
Notes to Financial Statements			8
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			20
ITEM 4T. CONTROLS AND PROCEDURES			20
PART II. OTHER INFORMATION			22
ITEM 1. LEGAL PROCEEDINGS			22
ITEM 2. UNREGISTERED SALES OF 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			23
SIGNATURES			24
EX-31.1
EX-31.2
EX-32.1

MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

Item 1. Financial Statements

		June 30, 2008
		(unaudited)				December 31, 2007
ASSETS
Current assets:
Cash and cash equivalents		$	7,604			$	238
Investments			540				—
Accounts receivable, net			10,334				3,310
Inventories, net			8,877				12,402
Prepaid expenses and other			1,275				2,121
Total current assets			28,630				18,071
Property and equipment:
Machinery and equipment			15,542				15,169
Computers			1,482				1,471
Furniture and fixtures			919				815
Leasehold improvements			385				385
Construction in progress			8,373				7,692
			26,701				25,532
Less accumulated depreciation			4,276				2,247
Net property and equipment			22,425				23,285
Other assets, net			3,938				639
Total assets		$	54,993			$	41,995
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Demand notes payable		$	—			$	6,000
Accounts payable			2,221				12,983
Accrued expenses			841				1,004
Current portion of long-term debt			210				206
Current portion of deferred revenue			391				103
Total current liabilities			3,663				20,296
Long-term liabilities:
Long-term debt			41,619				1,725
Long-term deferred revenue			845				897
Total long-term liabilities			42,464				2,622
Commitments and Contingencies (Note 12)			—				—
Stockholders’ equity:
Common stock			490				487
Additional paid-in-capital			85,656				80,869
Accumulated other comprehensive loss			(150	)			—
Accumulated deficit			(77,130	)			(62,279	)
Total stockholders’ equity			8,866				19,077
Total liabilities and stockholders’ equity		$	54,993			$	41,995

See accompanying notes.

MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

		Three month periods ended								Six month periods ended
		June 30, 2008				June 30, 2007				June 30, 2008				June 30, 2007
Revenue		$	4,152			$	4,304			$	15,947			$	7,230
Cost of goods sold			4,637				3,287				12,471				5,523
Gross profit (loss)			(485	)			1,017				3,476				1,707
Operating expenses:
Sales and marketing			1,818				1,962				5,512				3,872
Research and development			917				1,386				2,026				2,447
Finance and administrative			2,102				1,097				3,824				2,293
Reserve for potential uncollectible receivable — Note 2			1,023				—				1,023				—
Total operating expenses			5,860				4,445				12,385				8,612
Operating loss			(6,345	)			(3,428	)			(8,909	)			(6,905	)
Interest expense			(1,052	)			(17	)			(1,681	)			(20	)
Interest income			40				57				45				151
Loss on early extinguishment of debt			(4,587	)			—				(4,587	)			—
Other income and expense			260				—				281				—
Total non-operating income (expense)			(5,339	)			40				(5,942	)			131
Net loss		$	(11,684	)		$	(3,388	)		$	(14,851	)		$	(6,774	)
Net Loss per share basic and diluted		$	(0.24	)		$	(0.07	)		$	(0.30	)		$	(0.14	)
Weighted average common shares outstanding basic and diluted			48,869,217				47,213,653				48,802,367				47,142,763

See accompanying notes.

MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
SIX-MONTH PERIOD ENDED JUNE 30, 2008 (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

		Common Stock								Additional				Accumulated Other				Accumulated
		Shares				Amount				Paid-In Capital				Comprehensive Loss				Deficit				Total
Balance at December 31, 2007			48,688,802			$	487			$	80,869			$	—			$	(62,279	)		$	19,077
Stock options exercised			20,000				—				36				—				—				36
Warrants exercised			59,464				1				53				—				—				54
Discount on long-term debt, net of tax effect			—				—				3,056				—				—				3,056
Stock based compensation			—				—				502				—				—				502
Net loss			—				—				—				—				(3,167	)			(3,167	)
Other comprehensive loss:
Unrealized loss on investments			—				—				—				(195	)			—				(195	)
Total comprehensive loss			—				—				—				—				—				(3,362	)
Balance at March 31, 2008			48,768,266			$	488			$	84,516			$	(195	)		$	(65,446	)		$	19,363
Stock options exercised			71,500				1				100				—				—				101
Warrants exercised			87,026				1				99				—				—				100
Stock based compensation			—				—				524				—				—				524
Tax effect on early extinguishment of debt			—				—				417				—				—				417
Net loss			—				—				—				—				(11,684	)			(11,684	)
Other comprehensive gain:
Unrealized gain on investments			—				—				—				45				—				45
Total comprehensive loss			—				—				—				—				—				(11,639	)
Balance at June 30, 2008			48,926,792			$	490			$	85,656			$	(150	)		$	(77,130	)		$	8,866

See accompanying notes.

MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

SIX-MONTH PERIOD ENDED JUNE 30, 2007 (UNAUDITED)

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

		Common Stock								Additional				Accumulated
		Shares				Amount				Paid-In Capital				Deficit				Total
Balance at December 31, 2006			47,048,240			$	470			$	76,513			$	(43,481	)		$	33,502
Conversion of preferred stock and accrued dividends to common stock
Stock options exercised			45,291				1				116				—				117
Stock based compensation			—				—				122				—				122
Stock warrants exercised			—				—				—				—				—
Net loss			—				—				—				(3,386	)			(3,386	)
Balance at March 31, 2007			47,093,531			$	471			$	76,751			$	(46,867	)		$	30,355
Stock options exercised			241,331				2				407				—				409
Stock based compensation			—				—				275				—				275
Stock warrants exercised			389,400				3				553				—				556
Net loss			—				—				—				(3,388	)			(3,388	)
Balance at June 30, 2007			47,724,262			$	476			$	77,986			$	(50,255	)		$	28,207

See accompanying notes.

MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

		Six-month period ended
		June 30, 2008				June 30, 2007
Cash flows from operating activities:
Net loss		$	(14,851	)		$	(6,774	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization			2,041				478
Stock based compensation			1,026				397
Loss on debt extinguishment			4,058				—
Amortization of capitalized fees associated with long-term debt			240				—
Provision for potentially uncollectible receivables			1,243				—
Provision for inventory reserves			853				—
Change in operating assets and liabilities:
Accounts receivable			(8,266	)			1,302
Inventories			2,672				(5,932	)
Other assets			744				(1,502	)
Accounts payable			(4,893	)			1,789
Accrued and other liabilities			(617	)			(548	)
Net cash used by operating activities			(15,750	)			(10,790	)
Cash flows from investing activities:
Purchases of property and equipment			(7,037	)			(6,838	)
Proceeds from sale of investments			—				7,249
Acquisition of other assets, net			(136	)			7
Net cash (used) provided by investing activities			(7,173	)			418
Cash flows from financing activities:
Proceeds under long-term debt borrowings, net of costs			51,100				2,063
Borrowings under demand notes payable			—				3,800
Repayments under demand notes payable			(6,000	)			—
Principal payments on long-term debt			(15,102	)			(33	)
Proceeds from options exercised			137				525
Proceeds from warrants exercised			154				555
Net cash provided by financing activities			30,289				6,910
Net increase (decrease) in cash and cash equivalents			7,366				(3,462	)
Cash and cash equivalents — Beginning of period			238				4,664
Cash and cash equivalents — End of period		$	7,604			$	1,202

See accompanying notes.

MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

NOTE 1 — BASIS OF PRESENTATION

     The accompanying consolidated financial statements of Minrad International, Inc. and its wholly owned subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. All such adjustments are of a normal recurring nature. Operating results for the six-month period ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ended December 31, 2008. For further information, refer to the Company’s consolidated financial statements and footnotes as of December 31, 2007 and 2006; as filed with the Securities and Exchange Commission (“SEC”) on Form 10-KSB/A on April 21, 2008.

NOTE 2 — PROVISION FOR POTENTIALLY UNCOLLECTIBLE U.S. RECEIVABLE

     The Company determined the collectibility of the trade accounts receivable from the Company’s U.S. distributor is uncertain, based on facts and circumstances that became known prior to the filing of the Form 10-Q for the period ended June 30, 2008. The Company is pursuing various alternatives to realize the collectibility of this receivable in future periods. Until all efforts to realize the collectibility of the receivable are concluded, a non-cash provision for the amount of $1,023 has been recorded in the quarter ended June 30, 2008.

NOTE 3 — RECENT ACCOUNTING PRONOUNCEMENTS

     In February 2008, FASB issued FASB Staff Position (“FSP”) FAS 157-1 “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurement for Purposes of Lease Classification or Measurement under Statement 13,” and FSP FAS 157-2, “Effective Date of FASB Statement No. 157. ” FSP FAS 157-1 amends the scope of SFAS No. 157 and other accounting standards that address fair value measurements for purpose of lease classification or measurement under Statement 13. The FSP is effective on initial adoption of Statement 157, FSP FAS 157-2 defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. We do not expect the adoption of FSP FAS 157-1 and FSP FAS 157-2 will have a material impact on our consolidated financial statements.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows entities to voluntarily choose, at specified election dates, to measure many financial assets and liabilities at fair value. The effective date for the Company is January 1, 2008. The adoption of SFAS 159 did not impact the Company’s consolidated financial statements.

     In April 2008, the FASB issued FSP FAS 142-3, “Determination of Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS 142, “Goodwill and Other Intangible Assets.” FSP FAS 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact the adoption of FAS FSP 142-3 will have on its financial statements.

     In May 2008, the FASB issued FASB Staff Position (“FSP”) APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”), which clarifies the accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement. FSP APB 14-1 specifies that an issuer of such instruments should separately account for the liability and equity components of the instruments in a manner that reflect the issuer’s non-convertible debt borrowing rate when interest costs are recognized in subsequent periods. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008, and retrospective application is required for all periods presented. The Company is currently evaluating the potential impact of the adoption of FSP APB 14-1 on its financial statements.

     In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. The purpose of this statement is to improve financial reporting by providing a consistent framework for determining applicable accounting principles to be used in the preparation of financial statements presented in conformity with accounting principles generally accepted in the United States of America. SFAS No. 162 will become effective 60 days

MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

NOTE 3— RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

after the SEC’s approval. The Company believes that the adoption of this standard on its effective date will not have a material effect on the consolidated financial statements

     In June 2008, the FASB issued FSP EITF 03-6-1 to address whether instruments granted in share-based payment transactions are participating securities prior to their vesting and therefore need to be included in the earnings per share calculation under the two-class method described in SFAS No. 128, “Earnings per Share.” This FSP requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents as participating securities and thus, include them in calculation of basic earnings per share. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008. The Company does not anticipate a material impact on its financial statements or its computation of basic earnings per share upon adoption.

     During the quarter ended June 30, 2008, the Company adopted FSP 00-19-2, Accounting for Registration Payment Arrangements. This FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. The Company has determined it to be reasonably possible, that it will be required to remit payments to the investors for failing to obtain an effective registration statement on or before August 19, 2008(see Note 12).

     During the quarter ended March 31, 2008, the Company adopted SFAS No. 130, Reporting Other Comprehensive Income , which the Company applied to the investment in common stock of a distribution partner. In accordance with SFAS No. 115, the Company recorded the receipt of the shares as an available for sale investment and reports unrealized gains or losses on the investments as part of other comprehensive income. The investment was originally recognized at $690 and a subsequent unrealized loss of $150 was recorded as of June 30, 2008 to reflect the investment at its fair value as of that date.

NOTE 4 — INVENTORIES

     Inventories consist of the following:

		June 30,				December 31,
		2008				2007
Raw materials		$	1,478			$	5,003
Work-in-progress			9,506				8,598
Finished goods			1,257				1,311
Inventory reserves			(3,364	)			(2,510	)
		$	8,877			$	12,402

NOTE 5 — DEBT

     In 2007, the Commonwealth of Pennsylvania Department of Community and Economic Development provided two loans to the Company for a maximum combined total of $2,150 (collectively, the “PA Loans”). The loans are for capital improvements at the Company’s Bethlehem, PA facility.

     The Machinery and Equipment Loan (MELF) is for a maximum total of $1,275 with a seven year term at an interest rate of 3.25%. The Pennsylvania Industrial Development Authority (PIDA) loan is for a maximum total of $875 with a fifteen year term at an interest rate of 4.75%. Interest rates on both loans are contingent based on the Company meeting certain restrictive covenants including increasing the employment levels, which the company was in compliance with at June 30, 2008. These loans are secured by a priority lien on the property and equipment located at the Bethlehem, PA facility.

MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

NOTE 5 — DEBT (CONTINUED)

     Approximate future principle payments on the PA loans are as follows for the years ended December 31:

Year		Commitment
2008		$	104
2009			214
2010			221
2011			229
2012			238
Thereafter			823
Total		$	1,829

     The Company entered into a line of credit with First Niagara Bank in June, 2007 which was structured as a demand facility and provided for maximum borrowings of $5,000.

     On December 26, 2007, the Company entered into a second line of credit with First Niagara Bank for additional borrowings of $1,000. In February, 2008, both lines of credit with First Niagara Bank were repaid and the facility was terminated.

     On February 7, 2008, Minrad, Inc. entered into a term loan with Laminar Direct Capital L.P. The term loan had an aggregate principal face amount of $15,000, had a three year term and was to be used to fund general corporate expenses and working capital, and pay costs, fees and end expenses related to the transaction. The term loan accrued interest at fifteen percent per annum, 80% of which was payable in cash and 20% of which was payable in cash or interest paid-in-kind (“PIK”).

     In addition to a note evidencing the Loan, the Company issued Laminar Direct Capital L.P. warrants to purchase 3,208,427 shares of common stock. The warrants have a seven year exercise period, $2.25 exercise price, registration rights, and represent 5% of the Registrant’s fully diluted equity immediately after the closing of the transaction. The warrants were valued at $3,473, using the Black-Scholes option pricing model. These warrants were classified as a note discount, which was being amortized into interest over the life of the loan. In May 2008, in connection with the execution of the Securities Purchase Agreement described below, the Company paid $16,263 to Laminar Direct Capital L.P. in satisfaction of all amounts owed by the Company to Laminar Direct Capital L.P. This payment included a prepayment penalty of $753 for early extinguishment of the facility. Accordingly the unamortized portion of the note discount related to the warrants and all capitalized costs associated with the transaction were written off in the second quarter of 2008 and classified as loss on early extinguishment of debt.

     On May 5, 2008, Minrad International, Inc. entered into a Securities Purchase Agreement with certain institutional accredited investors to sell and issue an aggregate of $40,000 in principal amount of the Company’s Senior Secured Convertible Notes (the Notes), bearing 8% interest per annum payable quarterly in cash in arrears beginning June 30, 2008.

     The Notes are convertible, at any time following their issuance, into shares of common stock of the Company, $0.01 par value per share, at an initial conversion price of $2.65 per share, subject to certain adjustments set forth therein. The Notes mature on the third anniversary of the date of issuance. Principal payments and interest due at maturity will be payable in cash. The Notes contain a registration rights provision, requiring the Company to file a registration statement with the Securities and Exchange Commission within 45 days of issuance and to have the registration statement be made effective within 105 days of issuance. Failure to comply with the Registration Rights Agreement provisions could result in the Company being required to pay a registration delay fee of 0.033% of the face value of the Notes per day, up to a maximum of $10,000. In addition, the Notes are secured by a lien on all assets of the Company (including a mortgage on the Company’s Bethlehem manufacturing facility). This lien is senior secured, except for those exclusions specifically listed in the Notes. In addition, the Notes require compliance with certain financial and operational covenants, including but not limited to limitations on incurring indebtedness, incurring liens, restricted payments, stock repurchases, use of proceeds, and minimum EBITDA requirements for specified twelve-month periods. Upon an event of default, including non-compliance with the covenants required by the Notes, the holders of the Notes may require the Company to

MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

NOTE 5 — DEBT (CONTINUED)

redeem the Notes at a price equal to the greater of (i) 120% of the amount to be redeemed or (ii) an amount equal to the amount to be redeemed divided by the then applicable conversion price, multiplied by the greatest closing sale price of the Company’s stock during the period in which the default occurred. The Company was in compliance with all covenants as of June 30, 2008. The proceeds were used to repay in full all amounts owed by the Company to Laminar Direct Capital L.P., paying placement agent and other fees related to the transaction, and for working capital and general corporate purposes.

NOTE 6 — EQUITY

     During the six-month period ended June 30, 2008, the Company issued 91,500 shares of common stock through options exercised by its employees at a weighted average of $1.49 per share with the net proceeds of $137. Additionally, the Company issued 146,490 shares of common stock through the exercise of warrants at a weighted average exercise price of $1.05 per share, with net proceeds of $154.

NOTE 7 — SUPPLEMENTAL CASH FLOW INFORMATION

     Cash paid for interest during the six-month period ended June 30, 2008 amounted to $1,235 (compared to $20 in 2007). There was minimal cash paid for income taxes for the six-month periods ended June 30, 2008 and 2007.

		2008				2007
Non-cash investing and financing activities :
Property and equipment acquisitions recorded as accounts payable		$	103			$	506
Investments		$	690			$	—
Unrealized loss on investments available for sale		$	150			$	—
Tax effect of warrants with debt extinguishment		$	417			$	—

NOTE 8 — STOCK OPTIONS

     The Company has adopted an incentive stock option plan, which authorizes the grant up to 11,170,500 options to officers and other employees. The options may be exercised in specific increments usually beginning one or two years after the date of grant, and generally expire two to five years from their respective vesting dates or earlier if employment is terminated.

     For the six-month period ended June 30, 2008, the Company recorded compensation costs for options granted under the plan amounting to $1,026, of which $702 was for service based option grants and $324 was for performance based option grants ($397, of which $455 was for service based option grants and $(58) was for performance based option grants for the six-month period ended June 30, 2007). During the six-month period ended June 30, 2007, Management revised its estimate for the satisfaction of certain performance requirements for meeting certain performance based milestones related to the performance options previously recorded, resulting in a decrease of expense of $142, reducing compensation costs during six-month period ended June 30, 2007.

MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

NOTE 8 — STOCK OPTIONS (CONTINUED)

     Management has valued the options at their date of grant utilizing the Black Scholes Option Pricing Model. The following weighted-average assumptions were utilized in the fair value calculation:

		Six-Month Periods Ended
		June 30,				June 30,
		2008				2007
Service Based Options
Expected dividend yield			0	%			0	%
Expected stock price volatility			36	%			34	%
Risk-free interest rate			3.2	%			4.7	%
Expected life of options		5.9 Years				3.7 Years

		Six-Month Periods Ended
		June 30,				June 30,
		2008				2007
Performance Based Options
Expected dividend yield			0	%			N/A
Expected stock price volatility			36	%			N/A
Risk-free interest rate			3.1	%			N/A
Expected life of options		4.9 Years					N/A

     A summary of the status of the options granted under the incentive stock option plan is presented below:

		Number of								Weighted
		Shares				Weighted				Average				Aggregate
		Subject To				Average				Remaining				Intrinsic
		Options				Exercise Price				Life (Years)				Value
Service Based Options:
Outstanding as of December 31, 2007			3,718,036			$	3.35
Granted to employees — Six-month period ended June 30, 2008			1,971,500			$	2.48
Forfeited — Six-month period ended June 30, 2008			(502,000	)		$	4.49
Exercised — Six-month period ended June 30, 2008			(91,500	)		$	1.49
Outstanding as of June 30, 2008			5,096,036			$	2.93				3.62			$	803
Exercisable as of June 30, 2008			2,555,036			$	2.62				2.37			$	798

		Number of								Weighted
		Shares				Weighted				Average				Aggregate
		Subject To				Average				Remaining				Intrinsic
		Options				Exercise Price				Life (Years)				Value
Performance Based Options:
Outstanding as of December 31, 2007			1,341,375			$	5.20
Granted to employees — Six-month period ended June 30, 2008			1,228,750			$	2.43
Forfeited — Six-month period ended June 30, 2008			(35,000	)		$	4.43
Exercised — Six-month period ended June 30, 2008			—			$	—
Outstanding as of June 30, 2008			2,535,125			$	3.87				3.47			$	1
Exercisable as of June 30, 2008			136,375			$	4.18				0.42			$	—

MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

NOTE 8 — STOCK OPTIONS (CONTINUED)

     The weighted-average grant date fair value of options granted during the six-month period ended June 30, 2008 was $0.73 for service options and $0.46 for performance options ($1.57 and $0.00 during the six-month period ended June 30, 2007). The total intrinsic value of options exercised during the six-month period ended June 30, 2008 was $72 ($1,169 during the six-month period ended June 30, 2007).

     The following table summarizes the status of the Company’s non-vested options under the incentive stock option plan:

		Number of
		Non-vested				Weighted
		Shares Subject To				Average Grant-
Service Based Options:		Options				Date Fair Value
Non-vested as of December 31, 2007			1,384,500			$	1.56
Non-vested granted — Six-month period ended June 30, 2008			1,971,500			$	0.73
Vested — Six-month period ended June 30, 2008			(385,000	)		$	1.31
Forfeited — Six-month period ended June 30, 2008			(430,000	)		$	1.38
Non-vested as of June 30, 2008			2,541,000			$	0.99

		Number of
		Non-vested				Weighted
		Shares Subject To				Average Grant-
Performance Based Options:		Options				Date Fair Value
Non-vested as of December 31, 2007			1,210,000			$	1.22
Non-vested granted — Six-month period ended June 30, 2008			1,228,750			$	0.46
Vested — Six-month period ended June 30, 2008			(5,000	)		$	0.84
Forfeited — Six-month period ended June 30, 2008			(35,000	)		$	1.11
Non-vested as of June 30, 2008			2,398,750			$	0.83

     As of June 30, 2008, the unrecognized compensation cost related to non-vested options granted, for which vesting is probable, under the plan was approximately $2,108 ($1,455 for service based options and $653 for performance based options). These costs are expected to be recognized over a weighted average period of 0.9 years (0.9 years for the service based options and 0.9 years for performance based options). The total fair value of shares vested during the six-month period ended June 30, 2008 was $509 ($271 during the six-month period ended June 30, 2007).

NOTE 9 — INCOME TAXES

     As of March 31, 2008 the Company had net deferred income tax liabilities of approximately $417 which consisted of the tax effect of the difference in basis between GAAP and tax purposes for the 3,208,427 warrants issued to Laminar Direct Capital L.P. in connection with the term loan entered into in February, 2008. During the second quarter of 2008, deferred tax liabilities of $417 relating to the warrants were reversed in connection with the extinguishment of the term loan with Laminar Direct Capital L.P (See Note 5).

     Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109.” FIN 48 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements in accordance with SFAS No. 109. Tax positions must meet a “more-likely-than-not” recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. During the six-month period ended June 30, 2008, the Company recognized no additional uncertain tax positions.

MINRAD INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

NOTE 10 — EARNINGS PER SHARE

     If the Company had generated earnings during the six-month period ended June 30, 2008, approximately 17,929,000 common stock equivalent shares would have been added to the weighted average shares outstanding (approximately 7,359,000 for the six-month period ended June 30, 2007). These additional shares represent the assumed exercise of common stock options and warrants whose exercise price is less than the average fair value of the Company’s stock during the period as well as common shares issuable in the event holders of the Senior Secured Convertible Notes were to convert the notes into shares of the Company’s common stock. The proceeds of the exercise of options and warrants are assumed to be used to purchase common shares for treasury and the incremental shares are added to the weighted average shares outstanding while the Notes are assumed to be converted under the if-converted method.

NOTE 11 — CUSTOMER CONCENTRATION

     The Company had sales to their primary U.S. distributor amounting to $7,784 for the six-month period ended June 30, 2008, which represented 49% of revenue. The customer’s gross receivable represents 72% of accounts receivable as of June 30, 2008. A portion of the U.S. receivable has been reserved as potentially uncollectible as of June 30, 2008 (see Note 2).

NOTE 12 —COMMITMENTS AND CONTINGENCIES

     In June, 2008, the Company’s Bethlehem, Pennsylvania manufacturing plant experienced equipment damage and downtime caused by a burst disc in a Sevoflurane reactor. Repair to the equipment as well as lost product in the reactor is covered by property damage insurance. The actual repair costs incurred and inventory loss for the product in the reactor at the time of the incident, less applicable deductibles, has been classified as insurance proceeds receivable in the financial statements as of June 30, 2008. Additionally, there will be a business interruption claim to recover the lost profits and unabsorbed overheads related to the outage, less a per day deductable. A claim is expected to be filed in the third quarter, 2008. The Company expects to record the gain for the business interruption portion of the insurance proceeds, if any, at the time of final claim settlement.

     As part of the senior secured convertible notes agreement contains a registration rights provision that requires the Company to file a registration statement with the Securities and Exchange Commission within 45 days of issuance, which the Company has complied with. Because the additional registration statement was subject to a full review by the SEC, the additional share registration must be declared effective by the Commission on or before August 19, 2008 or the note holders will be entitled to relief for damages. The Company will be required to pay $13 for each day delay, up to a maximum of $10,000.

     In accordance with FSP 00-19-2, the contingent liability has been measured in accordance with the criteria in FASB Statement No. 5, and has been determined to be reasonably possible, therefore not accrued but disclosed in the financial statements. In the event that the effectiveness of the registration statement does not occur by August 19, 2008, the Company believes the damages would likely be less than $600.

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

Overview:

          The following Management’s Discussion and Analysis (“MD&A”) is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited condensed financial statements. You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements, including the notes thereto, included elsewhere in this quarterly report on Form 10-Q and with our Form 10-KSB/A filed with the SEC on April 21, 2008.

Company Background

          We operate an interventional pain management business with three focus areas: (1) anesthesia and analgesia, (2) real-time image guidance, and (3) conscious sedation. Our products are sold on a global basis. In our anesthesia and analgesia business we are currently engaged in the manufacture and sale of generic inhalation anesthetics that are primarily used for human and veterinary surgical interventions. Our real-time image guidance business is focused on the commercialization and sale of the SabreSource ^TM System and the accompanying Light Sabre ^TM disposable procedure instruments. These products have multiple applications in orthopedics, neurosurgery, interventional radiology and anesthesia. We also are developing a drug / drug delivery system for conscious sedation, which, similar to nitrous oxide used in dental surgery, provides a patient with pain relief without loss of consciousness.

Results of Operations

           Summarized selected financial data for the three and six months ended June 30, 2008 and 2007:

		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 1 ^st 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 pursuant to the temporary rules of the SEC that permit the Company to provide only management’s report in the aforementioned annual report on Form 10-KSB/A filed with the SEC on April 21, 2008.

Plan for Remediation of Material Weaknesses.

          In response to the identified material weaknesses, management, with oversight from the Company’s audit committee, plans to improve our control environment and to remedy the identified material weaknesses by adding qualified resources to implement maintain and monitor the required internal controls over the financial reporting process. These ongoing efforts are focused on (i) hiring additional qualified resources to provide for reasonable and

necessary segregation of duties to allow for the compilation, review and analysis of complete financial reporting in a timely manner, (ii ) the issuance of accounting policies and procedures to ensure transactions are accounted for in accordance with generally accepted accounting principles (“U.S. GAAP”) and company policies (iii) consulting with third party accounting firms with the appropriate level of expertise on complex and emerging areas of U.S. GAAP.

          Notwithstanding the material weaknesses discussed above, management believes that the financial statements included in this report present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented in accordance with U.S. generally accepted accounting principles.

Changes in Internal Control over Financial Reporting.

          While we still believe the material weaknesses identified at year end still exist, there has been some progress in several areas. Several key management changes in the quarter were made which will improve internal controls over financial reporting. Our new Chief Financial Officer, who joined the company on March 3, 2008, has been in place throughout the entire quarter. Additionally, a new President and Chief Operating Officer also has been named, effective April 1, 2008. A new Controller and Chief Accounting Officer has joined the company and a new Treasurer named, both effective June 16, 2008. With these changes, there has been a redefinition of roles and a better segregation of duties between the Controller and Treasurer. Additionally, controls over cash management have been strengthened within the period. There have been improvements in the review over the financial reporting process and improved segregation of duties, although not for the entire quarter and not to the desired levels.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings .

          Not applicable

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

          Not applicable.

Item 3. Defaults upon Senior Securities.

          Not applicable.

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

          We held our annual meeting of shareholders on May 14, 2008. The purpose of that meeting and the voting results were as follows:

1.

To elect 8 directors to hold office for a term of one year. Each of our directors were re-elected. The vote was as follows:

		FOR				AGAINST				% FOR ELECTION
Burns			35,910,942				155,204				73.6	%
DiGiacinto			36,017,748				48,398				73.9	%
Donaldson			36,012,977				53,169				73.8	%
Farley			36,019,138				47,008				73.9	%
Hopper			35,509,252				556,894				72.8	%
Lifeso			35,507,599				558,547				72.8	%
Stanley			35,508,552				557,594				72.8	%
Zbar			35,932,936				133,210				73.7	%

2.

To amend the 2004 Stock Option Plan to increase the aggregate number of shares of common stock that may be issued by 4,000,000 shares:

						BROKER
FOR		AGAINST				NON VOTE				ABSTAIN
17,891,231			3,936,645				14,194,653				43,617

Item 5. Other Information.

          None.

Item 6. Exhibits and Reports on Form 8-K .

           The following exhibits are filed as part of this Quarterly Report on Form 10-Q :

Exhibit
No.
31.1		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a)/15d-14(a) under the Exchange Act.
31.2		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a)/15d-14(a) under the Exchange Act.
32.1		Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Signatures

          In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

Minrad (AMEX:BUF)
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