PSTV 10-K Fiscal year ended Dec. 31, 2010

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)
ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
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 001-34375

CYTORI THERAPEUTICS, INC.

(Exact name of Registrant as Specified in Its Charter)

DELAWARE		33-0827593
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
3020 CALLAN ROAD, SAN DIEGO, CALIFORNIA		92121
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (858) 458-0900

Securities registered pursuant to Section 12(b) of the Act:

Common stock, par value $0.001

Warrants, exercisable for common stock, par value $0.001

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes o No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes o No ý

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 ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

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 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 ý	Non-Accelerated Filer o	Smaller reporting company o
		(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 ý

The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant on June 30, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, was $142,140,826 based on the closing sales price of the registrant’s common stock on June 30, 2010 as reported on the Nasdaq Global Market, of $3.48 per share.

As of February 28, 2011, there were 51,963,679 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for the 2010 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the end of the year ended December 31, 2010, are incorporated by reference in Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K.

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TABLE OF CONTENTS

	PART I
Item 1.	Business
Item 1A.	Risk Factors
Item 1B.	Unresolved Staff Comments
Item 2.	Properties
Item 3.	Legal Proceedings
Item 4.	(Reserved)
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.	Selected Financial Data
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk
Item 8.	Financial Statements and Supplementary Data
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.	Controls and Procedures
Item 9B.	Other Information
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance
Item 11.	Executive Compensation
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.	Certain Relationships and Related Transactions, and Director Independence
Item 14.	Principal Accountant Fees and Services
	PART IV
Item 15.	Exhibits, Financial Statement Schedules

PART I

Item 1. Business

General

Cytori Therapeutics, Inc., or Cytori, develops, manufactures, and sells a portfolio of medical products and devices to enable the practice of regenerative medicine. Regenerative medicine describes the emerging field that aims to repair or restore lost or damaged tissue and cell function. By providing real-time access to naturally occurring stem and regenerative cells in fat tissue and optimized fat grafting technologies, we aim to address ischemic conditions and diseases, including soft tissue repair, acute heart attacks and chronic myocardial ischemia, along with a broad pipeline spanning cardiovascular disease, wound healing, gastrointestinal disorders, stress urinary incontinence, liver and renal disease, spinal disc degeneration and pelvic health conditions. To achieve our goal of making regenerative medicine available worldwide, we have partnered with Olympus Corporation, GE Healthcare, and Green Hospital Supply, Inc..

Our core technology is the patented Celution ® family of products which processes patients’ adipose tissue to obtain adipose-derived stem and regenerative cells (ADRCs) at the point of care. The Celution ® family of products consists of a central device, a related single-use consumable used for each patient procedure, proprietary enzyme reagents, and related instrumentation. Our commercialization model is based on the sale of Celution ® Systems and on generating recurring revenues from the single-use consumable sets.

Our PureGraft™ System, or PureGraft™, formally launched in the U.S. in April 2010 at the meeting of the American Society of Aesthetic Plastic Surgery (ASAPS) following Food and Drug Administration, or FDA, clearance in January 2010, optimizes the preparation of autologous fat grafts.  PureGraft™ is an innovative consumable product that provides consistent, quality grafts for use in aesthetic body contouring procedures. In Europe, PureGraft™ is sold as a complement to the Celution® System. We received the EU CE Mark for PureGraft™ in July 2010. In the United States, PureGraft™ is a strategic product that allows us to build relationships in the cosmetic and reconstructive surgery community while Celution® is under review by the FDA. In addition, we believe our PureGraft™ customer base will provide valuable sales leads, if Celution® is approved in the United States.

We also sell the StemSource® family of products worldwide, including in the United States, for research as well as for the cryopreservation and storage of ADRCs.  The StemSource® System is offered as a standalone product, or as a part of a comprehensive suite of systems, equipment, and protocols for ADRC and fat tissue banking, collectively referred to as a StemSource® Cell Bank. The StemSource® Cell Bank is being marketed in Japan through our commercialization partner, Green Hospital Supply, Inc. (Green Hospital Supply) and in the United States by our direct sales team. The first U.S. StemSource® Bank was sold in Texas in May 2010.

Commercial Activities & Markets: the Celution® System

Cytori’s commercial activities are currently focused in two areas: regenerative medicine (breast reconstruction, soft tissue defect filling) and regenerative aesthetics (elective, cosmetic surgery procedures). In Europe and Asia-Pacific, Cytori’s core product, the Celution® System, or Celution®, provides physicians with clinical grade stem and regenerative cells at the point of care for re-implantation into the patient. It is the only such device with a CE Mark under the Europe’s medical device directive (MDD 93/42/EEC). With expanded CE Mark approval received in July 2010, the Celution® System is currently sold for use in Europe for cosmetic and reconstructive procedures, including breast reconstruction and augmentation, soft tissue defect repair, healing of Crohn’s wounds, buttock augmentation, and facial procedures. We are currently working with the FDA on multiple fronts to make Celution® available in the United States.

With our newly expanded CE Mark claims for breast reconstruction and wound healing, we are shifting our sales focus to concentrate more on hospitals, rather than private pay clinics. We are seeking to broaden Celution® adoption through our 70-patient, European multi-center post-marketing trial, RESTORE 2.  Interim 6 month data on the first 32 patients, indicating high levels of patient and physician satisfaction, was presented at the San Antonio Breast Cancer Symposium in December 2009. The data was further supported by interim 6 and 12 month results reported by an investigator in June of this year. Complete 12-month results were reported in March 2011.

Introduced in Europe and Asia-Pacific in the first quarter of 2008, Celution ® is currently sold directly or through select medical distributors, including GE Healthcare, in many European countries including Austria, Belgium, Denmark, Germany, Greece, Finland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, and the United Kingdom, as well is in select Asian, Middle Eastern, and Eastern European countries.  Our distribution agreement with GE Healthcare was amended in September 2010. The agreement, which has been extended through 2011, returned to Cytori rights to sell Celution® for cosmetic and reconstructive surgery applications. GE Healthcare maintains non-exclusive cosmetic and reconstructive surgery rights for Celution®.

In addition to sales into the reconstructive and cosmetic surgery markets, the Celution ® System is being marketed to physicians, academic centers, and research hospitals, to fulfill the demand for access to clinical-grade stem and regenerative cells.  Availability at the point of care enables physicians to apply the cells across an array of applications. Certain physicians have chosen to study patient outcomes to understand the benefit of these cells under their own independently sponsored studies. We are aware of physicians around the world independently conducting investigator initiated studies for breast augmentation and reconstruction, stress urinary incontinence, wound healing, liver insufficiency, radiation injury, and bone regeneration. Researchers are also using ADRCs for preclinical research in kidney disease, spinal disc injury, periodontal disease, vocal cord paralysis and peripheral vascular disease, among others.  We expect the breadth of these new applications to grow as physicians and researchers continue to develop and adopt cell based regenerative medicine into their treatment strategies based on the availability of safe clinical grade cells at the point of care.

Pipeline: the Celution® System

Cardiovascular Disease: Acute Myocardial Infarction & Chronic Myocardial Ischemia

The most advanced therapeutic application in our product development pipeline is cardiovascular disease. Building upon extensive preclinical work, we have completed two clinical trials in Europe investigating the use of ADRCs processed with the Celution ® System as potential treatment for cardiovascular disease. The PRECISE clinical trial for chronic myocardial ischemia, a severe form of coronary artery disease and the APOLLO trial for acute heart attacks are both double-blind, placebo controlled safety and feasibility studies.

Primary outcomes of the APOLLO trial at 6 months were reported in May 2010 at the 7 th International Symposium on Cardiovascular Cell Therapy and at the American Heart Association in November 2010. In addition to safety, the data showed positive signals for efficacy:  a reduction in infarct size and an improvement in perfusion. Six month primary outcomes in the PRECISE trial were reported at the same conference in May 2010, with additional 18 month data presented at the American Heart Association in November 2010. The data showed, in addition to safety, a statistically significant improvement in patient’s functional capacity.

Building on the positive results of the APOLLO study, Cytori has initiated a European pivotal, approval trial for use of the Celution® System to treat patients with acute heart attacks, the ADVANCE trial. The ADVANCE trial is a randomized, placebo controlled, double-blind trial that will enroll up to 360 patients with myocardial infarction in up to 35 treatment centers, predominately in Europe.  This trial will use our next-generation Celution® device, the Celution® One System, manufactured by the Olympus-Cytori Joint Venture.  Celution® One can process greater tissue volumes in less time, maximizing the efficiency for the hospital and cath-lab setting. In January 2011, Cytori received approval to initiate the ADVANCE trial in the Netherlands. Additional country and trial-center approvals are anticipated throughout Europe during the first half of 2011.

We believe there is significant need for new forms of treatment for cardiovascular disease, which represents one of the largest healthcare market opportunities. According the American Heart Association Heart Disease & Stroke Statistics: 2010 Update, it is estimated that in the United States alone, there were approximately 8,500,000 heart attacks for the last reported year, with more than 17,000,000 people suffering from coronary heart disease.

Other Applications

Other potential applications for the Celution ® System family of products under investigation include wound healing, gastrointestinal disorders, stress urinary incontinence, liver and renal disease, spinal disc degeneration, pelvic health conditions, and  vascular disease. Several of these applications are being studied as part of independent, investigator-led clinical studies sponsored and funded by the investigators in Asia and Europe.  Additionally, our scientists are, to a varying degree, investigating some of these applications in pre-clinical models. As an example, preclinical renal data was published in October 2010 showing significant improvement in survival in the cell treated group in an animal model.

In December 2010, Cytori entered into a strategic equity agreement with Astellas Pharma Inc, the second largest pharmaceutical company in Japan. As part of the agreement, we granted Astellas Pharma a two year right of first refusal to enter into a development and commercialization collaboration with us regarding the use of our technology, on a worldwide basis, for the treatment of liver conditions. We also granted Astellas Pharma a non-voting observer seat on our Board of Directors and the right to designate a representative member to our Scientific Advisory Board.

Commercial Activities & Markets: PureGraft™ and StemSource®

PureGraft™

The PureGraft™250/PURE System, or PureGraft™, is designed to streamline the fat graft preparation process by selectively washing and filtering the tissue to remove contaminants in a closed, sterile field. PureGraft™, was cleared for sale in the U.S. and approval for sale in the EU in January and July 2010, respectively, and is currently being sold into the regenerative medicine arena (for breast reconstruction) and the regenerative aesthetics (cosmetic procedure) markets in the US and in the EU.

By providing consistent, quality grafts, PureGraft™ provides an innovative solution for breast cancer patients who have undergone a lumpectomy or partial mastectomy, for which there is no generally accepted reconstruction option. We have also taken the PureGraft™ technology and applied it toward cosmetic fat grafting procedures. PureGraft™ provides a natural option for women who are looking to enhance or contour their bodies without artificial implants or substances. To promote the demand for PureGraft™, we have substantially increased our U.S. sales force to include regional sales representatives in the Pacific states, Midwest, Mid-America, East Coast and Southeast and added additional personnel to our EU based team.

Used in conjunction with the Celution® System in Europe to further optimize cell-enriched fat grafting procedures or as a standalone device in the US for optimized fat grafting procedures, PureGraft™ is a strategic product for our sales team.  In Europe, PureGraft™ provides a low-cost entry point into the regenerative medicine and regenerative aesthetics fields. As our Celution® technology becomes more established and accepted, some of our PureGraft™ customers may find that Celution® is a better fit for their practice as they strive to distinguish themselves from their competitors. In the US, PureGraft™ allows our sales team to build relationships within the cosmetic and reconstructive surgery community that we can later draw on, once Celution® becomes available in the US.

StemSource®

Our StemSource® product line, available in the US and the rest of world, is laboratory equipment designed to separate and concentrate stem and regenerative cells from adipose tissue. The StemSource® System, or StemSource®, is available worldwide for research and laboratory use and as the foundation of our StemSource® Cell Bank for cryopreserving patients’ adult stem and regenerative cells for potential later use. In 2010, Cytori further developed the StemSource® Cell Bank to include additional features for processing intact adipose tissue for cryopreservation.  StemSource® tissue banking of intact adipose tissue allows for greater versatility in future procedures, and makes banking more practical for plastic surgery clinics.

The StemSource® Cell Bank is being marketed to hospitals, plastic surgery clinics, tissue banks, and stem cell banking companies in Europe, Asia and the US. With a StemSource ® Cell Bank on site, such facilities will be able to offer their patients the option of storing their adipose tissue and adipose tissue-derived stem and regenerative cells, accessing them in the future when clinical applications are approved.

For our hospital, tissue bank and surgery clinic partners, the economic value of a StemSource® Cell Bank lies in the recurring revenue from processing and freezing.  It starts with a tissue collection procedure, which may be performed during an already planned surgery or a separate elective procedure. The cells are prepared for storage using the StemSource ® System, which automates the separation and concentration of stem and regenerative cells from adipose tissue and thereby allows hospitals to more affordably offer such service to their patients. We have found that this model is also conducive to the plastic surgery clinic setting. Not only is liposuction already a part of a plastic surgery practice, banking a patient’s fat makes it much more likely that the patient will return to cash in their investment, providing critical patient retention for the practice. Tissue banking allows for a greater versatility in potential procedures to be performed, and makes banking more practical for plastic surgery clinics.

We are currently marketing the StemSource® Cell Bank worldwide through a combination of distributor relationships and direct sales. Cytori remains responsible for manufacturing the StemSource® System and sourcing all necessary equipment, including but not limited to cryopreservation chambers, cooling and thawing devices, cell banking protocols and the proprietary software and database application.

In Japan, Korea, Taiwan and Thailand, we sell the StemSource® Cell Bank directly and through our partner Green Hospital Supply, Inc. We equally split revenues from the sales of StemSource ® Cell Banks and single-use, per-procedure consumables sold by Green Hospital Supply.  Green Hospital Supply continues its sales and marketing efforts in these territories for larger institutional sales to hospitals and universities, while Cytori focuses primarily on marketing and selling the StemSource ® Cell Banks in these territories to local private clinics. In addition to our agreement with Green Hospital, GE Healthcare is selling the StemSource® translational research platform in Thailand as a part of our distribution agreement.

In the European Union, Cytori is selling the StemSource® equipment for translational research and as a part of the cell banking platform directly and through our distribution agreement with GE Healthcare, amended in September 2010 to continue through 2011. In the United States, we sell StemSource® for translational research and cell banking directly and through GE Healthcare. In May 2010, we sold our first U.S. cell bank.

Other Products

Celution®, PureGraft™ and StemSource® are currently our primary product offerings. We also sell a range of ancillary products designed to optimize tissue harvest and graft delivery. Among the offerings is the Celbrush™, a surgical instrument for precise delivery of micro droplets that was launched in 2009. Sold separately and in combination with other items, the Celbrush™ is sold to reconstructive and cosmetic surgeons worldwide.

Additionally, we have a ThinFilm biomaterial product line in Japan. We sold our non-Japan Thin Film business in 2004. Pending regulatory approval in Japan, this product line would be distributed exclusively through Senko Medical Trading Co. (Senko) for anti-adhesion applications, soft tissue support, and minimization of the attachment of soft tissues throughout the body.

Manufacturing

The Celution® and StemSource® Systems and related single-use consumables as well our PureGraft™ technology are being manufactured at Cytori’s headquarters in San Diego, CA.  Our internal manufacturing capabilities are expected to enable us to meet anticipated demand in 2011.

In the future, the next generation commercial Celution ® System (Celution ® One) will be manufactured through a joint venture arrangement between Cytori and Olympus Corporation (Olympus), a global optics and life science company.  Olympus-Cytori Inc. (the Joint Venture), enables Cytori to access Olympus’ expertise in engineering, manufacturing and servicing of sophisticated medical devices.  The Joint Venture will supply the Celution ® One System for all therapeutic applications solely to Cytori at a formula-based transfer price. Cytori owns Celution ® System marketing rights for all therapeutic applications.

Competition

We compete with multiple pharmaceutical, biotechnology and medical device companies involved in the development and commercialization of medical technologies and therapies.

Regenerative medicine is rapidly progressing, in large part through the development of cell-based therapies or devices designed to isolate cells from human tissues. Most efforts involve cell sources, such as bone marrow, embryonic and fetal tissue, umbilical cord and peripheral blood, and skeletal muscle.  We work exclusively with adult stem and regenerative cells from adipose tissue.

Companies working in this area of regenerative medicine include, among others, Aastrom Biosciences, Aldagen, BioTime, Baxter International, Inc., Celgene, Genzyme (acquired by Sanofi-aventis), Geron, Harvest Technologies, Mesoblast, Osiris Therapeutics, and Tissue Genesis, Inc. Many of our competitors and potential competitors have substantially greater financial, technological, research and development, marketing, and personnel resources than we do.  We cannot with any accuracy forecast when or if these companies are likely to bring cell therapies to market for indications that we are also pursuing.

Some of our competitors are also working with adipose-derived cells.  To the best of our knowledge, none of these companies are currently conducting prospective, controlled human clinical trials nor do any of these companies have regulatory clearance for their product in Europe (under the medical device directive) or in the United States. In addition, we are aware of several surgeons who are performing autologous fat transfers using manual methods, some of whom enrich the fat with autologous adipose-derived cells.

Companies researching and developing cell-based therapies for cardiovascular disease include, among others, Aldagen, Baxter, Harvest Technologies, Mesoblast, and Osiris. Baxter completed a Phase II study in the United States using stem cells extracted from peripheral blood for chronic myocardial ischemia. Mesoblast is conducting a Phase II study in heart failure and another Phase II in combination with a heart assist device.  Osiris Therapeutics, Inc. completed enrollment in a Phase II clinical trial using allogeneic (donor), mesenchymal stem cells, for acute myocardial infarction.

Research and Development

Research and development expenses were $9,687,000, $12,231,000 and $17,371,000 for the years ended December 31, 2010, 2009 and 2008, respectively.  As a part of our shift towards commercialization, research and development expenses significantly reduced starting in the first half of 2009.

Our research and development efforts in 2010 focused predominantly on the following areas:

·

Completed patient follow-up in our 70 patient European breast reconstruction post-marketing clinical study using the Celution ® System. The study took place across several centers in Europe and measured safety, patient and physician satisfaction, improvement in breast deformity as well as other outcomes related to autologous fat transfers enriched with the Celution ® System output to correct partial mastectomy defects. Full 12 month primary outcomes will be announced in the first half of 2011;

·	Six month data from two randomized, double blind, placebo controlled European clinical trials in chronic myocardial ischemia and acute heart attacks were reported in May 2010.  Eighteen month chronic ischemia data was subsequently reported in November 2010;

·	Planning & initial steps taken in preparation for a pivotal, approval trial for acute heart attack patients (the ADVANCE study). Study initiation is anticipated to take place throughout 2011;

·	Preparation and submission of multiple regulatory filings in the United States, Europe, and Japan related to various cell and tissue processing systems under development;

·	Continued optimization and development of the Celution ® System family of products, single-use consumables and related instrumentation, including software updates for process efficiencies and to accommodate multiple languages;

·	Collaboration with Olympus Corporation to finalize the development of the Celution ® One System, the next-generation Celution® System, which will be manufactured by the Olympus-Cytori Joint Venture;

·	Development and optimization of the next generations of the PureGraft™ product line;

·	Development of the infrastructure and logistics for the commercialization expansion of the StemSource ® Cell Bank in the United States, Europe and Asia, including optimization of proprietary systems and technology and the development of the tissue banking component;

·	Investigating the cellular and molecular properties, composition, and characteristics of stem and regenerative cells residing in adipose tissue to increase our understanding and control of our therapeutic products and to improve our intellectual property position.

Customers

Cytori has established a network of distributors, including GE Healthcare, who offer our Celution ® System, instrumentation and consumables to surgeons and hospitals throughout Europe. These distributors purchase the devices from Cytori at a contractually agreed-upon transfer price. We also market our Celution ® System directly to customers in select countries within Europe. In addition, we offer the StemSource® 900/MB as laboratory equipment or as part of the StemSource ® Cell Bank (a comprehensive suite of products to allow hospitals or tissue banks to cryopreserve adipose-derived stem and regenerative cells) both directly to customers and through GE Healthcare in the United States.  In Europe and Asia, we sell the Celution ® System directly to customers, many of whom are academic hospitals, who are sponsoring and funding their own independent, investigator-led clinical studies using the product.

In July 2004, we entered into a Distribution Agreement with Senko under which we granted to Senko an exclusive license to sell and distribute Thin Film products in Japan. The sale of products through Senko commences upon “commercialization,” which requires regulatory clearance from the Japanese regulatory authorities. We are currently pursuing the required regulatory clearance in Japan. Following commercialization, the Distribution Agreement has a five-year duration and is renewable for an additional five years after reaching mutually agreed minimum purchase guarantees.  In 2004, we sold all of our non-Japan Thin Film business.

Sales by Geographic Region

For the years ended December 31, 2010 and 2009, most of our product revenue came from sales of the Celution®800/CRS System, related instrumentation and consumables to the European and Asia-Pacific cosmetic and reconstructive surgery markets, as well as from sales of the StemSource® laboratory and banking equipment in the U.S. and Asia. Upon receiving regulatory approval during 2010, we began selling PureGraft™ Systems in the United States and Europe.  For the year ended December 31, 2008, all of our product revenue came from sales of Celution ® 800/CRS System to the European and Asia-Pacific reconstructive surgery market and installation of our first StemSource ® Cell Bank.

Under a distribution agreement with Senko, we are responsible for the completion of the initial regulatory application to the MHLW (the Japanese equivalent of the U.S. Food and Drug Administration).  We did not recognize development revenue based on milestones defined within this agreement in 2010, 2009 or 2008.  We have not generated any Thin Film product revenue in Japan yet, and we sold all our non-Japan Thin Film business in 2004.

We anticipate that our future international product revenues will increase in part as a result of our Distribution Agreement with Senko in the event our Thin Film products are approved for sale in Japan.

Planned Capital Expenditures

Although capital expenditures may vary significantly depending on a variety of factors, we may spend up to $1 million on capital equipment purchases in 2011.  These may be paid with our available cash, or financed if appropriate.

Raw Materials

Raw materials required to manufacture the Celution ® System family of products and disposables are commonly available from multiple sources, and we have identified and executed supply agreements with our preferred vendors.  Some specialty components are custom made for us, and we are dependent on the ability of these suppliers to deliver functioning parts in a timely manner to meet the ongoing demand for our products.  There can be no assurance that we will be able to obtain adequate quantities of the necessary raw materials supplies within a reasonable time or at commercially reasonable prices.  Interruptions in supplies due to price, timing, or availability or other issues with our suppliers could have a negative impact on our ability to manufacture products.

Intellectual Property

Our success depends in large part on our ability to protect our proprietary technology, including the Celution ® System product platform, and to operate without infringing on the proprietary rights of third parties. We rely on a combination of patent, trade secret, copyright and trademark laws, as well as confidentiality agreements, licensing agreements and other agreements, to establish and protect our proprietary rights. Our success also depends, in part, on our ability to avoid infringing patents issued to others. If we were judicially determined to be infringing on any third party patent, we could be required to pay damages, alter our products or processes, obtain licenses or cease certain activities.

To protect our proprietary medical technologies, including the Celution® System platform and other scientific discoveries, Cytori has 31 issued patents worldwide.  We have 12 issued U.S. patents and 19 issued international patents.  Of the 12 issued U.S. patents, 3 were issued in 2010 and 2 have been issued in 2011 thus far.  Of the 19 issued international patents, 6 were issued in 2010 and 1 has been issued so far in 2011.  In addition, we have over 100 patent applications pending worldwide related to our technology.  We are seeking additional patents on methods and systems for processing adipose-derived stem and regenerative cells, on the use of adipose-derived stem and regenerative cells for a variety of therapeutic indications, including their mechanisms of actions,  on compositions of matter that include adipose-derived stem and regenerative cells, and on other scientific discoveries. We are also the exclusive, worldwide licensee of the Regents of the University of California’s rights to a portfolio related to isolated adipose derived stem cells.

We cannot assure that any of our pending patent applications will be issued, that we will develop additional proprietary products that are patentable, that any patents issued to us will provide us with competitive advantages or will not be challenged by any third parties or that the patents of others will not prevent the commercialization of products incorporating our technology. Furthermore, we cannot assure that others will not independently develop similar products, duplicate any of our products or design around our patents. U.S. patent applications are not immediately made public, so we might be surprised by the grant to someone else of a patent on a technology we are actively using.

There is a risk that any patent applications that we file and any patents that we hold or later obtain could be challenged by third parties and declared invalid or infringing of third party claims.  A patent interference proceeding may be instituted with the U.S. Patent and Trademark Office (the “USPTO”) when more than one person files a patent application covering the same technology, or if someone wishes to challenge the validity of an issued patent.  At the completion of the interference proceeding, the USPTO will determine which competing applicant is entitled to the patent, or whether an issued patent is valid.  Patent interference proceedings are complex, highly contested legal proceedings, and the USPTO’s decision is subject to appeal.  This means that if an interference proceeding arises with respect to any of our patent applications, we may experience significant expenses and delay in obtaining a patent, and if the outcome of the proceeding is unfavorable to us, the patent could be issued to a competitor rather than to us.  In addition to interference proceedings, the USPTO can reexamine issued patents at the request of a third party seeking to have the patent invalidated.  All patents are subject to requests for reexamination by third parties.  This means that patents owned or licensed by us may be subject to reexamination and may be lost, or some or all claims may require amendment or cancellation, if the outcome of the reexamination is unfavorable to us. Patent reexamination proceedings are long and complex proceedings and could result in a reduction or loss of patent rights.

Patent law outside the United States is uncertain and in many countries is currently undergoing review and revisions. The laws of some countries may not protect our proprietary rights to the same extent as the laws of the United States. Third parties may attempt to oppose the issuance of patents to us in foreign countries by initiating opposition proceedings. Opposition proceedings against any of our patent filings in a foreign country could have an adverse effect on our corresponding patents that are issued or pending in the U.S. It may be necessary or useful for us to participate in proceedings to determine the validity of our patents or our competitors’ patents that have been issued in countries other than the United States. This could result in substantial costs, divert our efforts and attention from other aspects of our business, and could have a material adverse effect on our results of operations and financial condition.  We currently have pending patent applications and issued patents in Europe, Brazil, Mexico, India, Russia, Australia, Japan, Canada, China, Korea, and Singapore, among others.

In addition to patent protection, we rely on unpatented trade secrets and proprietary technological expertise. We cannot assure you that others will not independently develop or otherwise acquire substantially equivalent techniques, somehow gain access to our trade secrets and proprietary technological expertise or disclose such trade secrets, or that we can ultimately protect our rights to such unpatented trade secrets and proprietary technological expertise. We rely, in part, on confidentiality agreements with our marketing partners, employees, advisors, vendors and consultants to protect our trade secrets and proprietary technological expertise. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach or that our unpatented trade secrets and proprietary technological expertise will not otherwise become known or be independently discovered by competitors.

Government Regulation

As newly developed medical devices, our Celution® and PureGraft™ family of products must receive regulatory clearances or approvals from the European Union, the FDA and, from other state governments prior to their sale.  Our current and future Celution® Systems are or will be subject to stringent government regulation in the United States by the FDA under the Federal Food, Drug and Cosmetic Act.  The FDA regulates the design/development process, clinical testing, manufacture, safety, labeling, sale, distribution, and promotion of medical devices and drugs.  Included among these regulations are pre-market clearance and pre-market approval requirements, design control requirements, and the Quality System Regulations/Good Manufacturing Practices.  Other statutory and regulatory requirements govern, among other things, registration and inspection, medical device listing, prohibitions against misbranding and adulteration, labeling and post-market reporting.

The Celution® System family of products must also comply with the government regulations of each individual country in which the products are to be distributed and sold. These regulations vary in complexity and can be as stringent, and on occasion even more stringent, than FDA regulations in the United States. International government regulations vary from country to country and region to region. For example, regulations in some parts of the world only require product registration while other regions / countries require a complex product approval process. Due to the fact that there are new and emerging cell therapy and cell banking regulations that have recently been drafted and/or implemented in various countries around the world, the application and subsequent implementation of these new and emerging regulations have little to no precedence. Therefore, the level of complexity and stringency is not always precisely understood today for each country, creating greater uncertainty for the international regulatory process. Furthermore, government regulations can change with little to no notice and may result in up-regulation of our product(s), thereby, creating a greater regulatory burden for our cell processing and cell banking technology products.

Summary of Celution ® System Family Regulatory Status

Region	Clinical Applications	Regulatory Status
Japan	Cell Banking	Approved
Europe	Cell Processing  for re-implantation or re-infusion into same patient (General Processing)	CE Mark
	Breast reconstruction, healing of Crohn’s wounds and other cosmetic procedures	CE Mark
	Cardiovascular disease	In clinical trials
	Multiple specific surgical claims	Pre-clinical
	Cell Concentration	CE Mark
	Cosmetic and reconstructive surgery claims (Celution® One)	In process
USA	Soft tissue filling/aesthetic body contouring	In process
	Cardiovascular disease	Pre-clinical
	Multiple general surgical claims	Pre-clinical
	Blood processing	510k clearance

Summary of PureGraft™ and Celbrush™ Regulatory Status

Series	Region	Clinical Applications	Regulatory Status
PureGraft™250/PURE System	USA	For use in the harvesting, filtering and transferring of autologous fat tissue for reinjecting back into the same patient for aesthetic body contouring	510(k) clearance
PureGraft™250/PURE-EU System	Europe	For use in the harvesting, filtering and transferring of autologous fat tissue for reinjecting back into the same patient for aesthetic body contouring	CE Marked
PureGraft™250/PURE System	Japan	For use in the harvesting, filtering and transferring of autologous fat tissue for reinjecting back into the same patient for aesthetic body contouring	In process
Celbrush™	USA	For precise delivery of tissue micro droplets	Registered
Celbrush™	Europe	For precise delivery of tissue micro droplets	CE Marked
Celbrush™	Japan	For precise delivery of tissue micro droplets	In process

The regulatory process can be lengthy, expensive, and uncertain.  Before any new medical device may be introduced to the U.S. market, the manufacturer generally must obtain FDA clearance or approval through either the 510(k) pre-market notification process (which our PureGraft™ System has received) or the lengthier pre-market approval application (PMA) process.  It generally takes from three to 12 months from submission to obtain 510(k) pre-market clearance, although it may take longer.  Approval of a PMA could take four or more years from the time the process is initiated.  The 510(k) and PMA processes can be expensive, uncertain, and lengthy, and there is no guarantee of ultimate clearance or approval.  Our core Celution® System processing device products under development as well as Olympus-Cytori’s may be subject to the lengthier PMA process for many specific applications.  Securing FDA clearances and approvals may require the submission of extensive clinical data and supporting information to the FDA, and there can be no guarantee of ultimate clearance or approval.  Failure to comply with applicable requirements can result in application integrity proceedings, fines, recalls or seizures of products, injunctions, civil penalties, total or partial suspensions of production, withdrawals of existing product approvals or clearances, refusals to approve or clear new applications or notifications, and criminal prosecution.

Medical devices are also subject to post-market reporting requirements for deaths or serious injuries when the device may have caused or contributed to the death or serious injury, and for certain device malfunctions that would be likely to cause or contribute to a death or serious injury if the malfunction were to recur.  If safety or effectiveness problems occur after the product reaches the market, the FDA may take steps to prevent or limit further marketing of the product.  Additionally, the FDA actively enforces regulations prohibiting marketing and promotion of devices for indications or uses that have not been cleared or approved by the FDA. In addition, modifications or enhancements of products that could affect the safety or effectiveness or effect a major change in the intended use of a device that was either cleared through the 510(k) process or approved through the PMA process may require further FDA review through new 510(k) or PMA submissions.

Lastly, the FDA is currently considering modifications to the 510(k) process.  The extent and effect of these proposals are not known.  Moreover, the effect of these changes on our ability to obtain future 510(k) clearances is also not clear.  Regardless of the effect, it is relatively well accepted that these changes to the FDA 510(k) system will result in a more rigorous approval process.

Under the terms of our Joint Venture Agreements with Olympus, we are the party with the primary responsibility for obtaining regulatory approvals to sell the Olympus-Cytori, Inc. devices.  To date we have prepared and submitted multiple regulatory filings in the United States and Europe related to various cell processing systems under development, which notably resulted in receipt of a CE Mark on the Celution ® 800 System and the PureGraft™ 250/PURE System as well as 510(k) clearance in the United States for various related medical technologies, including the PureGraft™250/PURE System and an autologous blood processing device.

In July 2009, we learned that the Celution®700/AFT will be regulated in the United States by the FDA as a medical device. Subsequently, we filed an initial 510(k) marketing application for use in aesthetic body contouring and/or filling of soft tissue voids with the FDA in November 2009. Our application was reviewed by the FDA's Center for Biologics Evaluation and Research under the law applicable to medical devices, and in February 2010 they informed us that our Celution® 700/AFT has been classified as a class III medical device for which a PMA will be required for these applications.  We are currently working with the FDA to determine if this classification is final and if so, the necessary size and scope of clinical studies to obtain an approval and are exploring multiple additional avenues to bring Celution® to the United States.

We must comply with extensive regulations from foreign jurisdictions regarding safety, manufacturing processes and quality.   These regulations, including the requirements for marketing authorization, may differ from the FDA regulatory scheme in the United States.  Specifically, in regard to our Thin Film product line in Japan (distributed by Senko), we have been seeking marketing authorization from the Japanese Ministry of Health, Labour and Welfare, but have not obtained approvals yet.

Staff

As of December 31, 2010, we had 124 employees, including part-time and full-time employees.  These employees are comprised of 16 employees in manufacturing, 39 employees in research and development, 37 employees in sales and marketing and 32 employees in management, finance and administration.  From time to time, we also employ independent contractors to support our operations.  Our employees are not represented by any collective bargaining agreements and we have never experienced an organized work stoppage.

Web Site Access to SEC Filings

We maintain an Internet website at www.cytori.com. Through this site, we make available free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (SEC). In addition, we publish on our website all reports filed under Section 16(a) of the Securities Exchange Act by our directors, officers and 10% stockholders. These materials are accessible via the Investor Relations section of our website within the “SEC Filings” link. Some of the information is stored directly on our website, while other information can be accessed by selecting the provided link to the section on the SEC website, which contains filings for our company and its insiders.

The SEC maintains an Internet site that contains reports, proxy information and information statements, and other information regarding issuers that file electronically with the SEC.  The address of that website is http://www.sec.gov .  The materials are also available at the SEC’s Public Reference Room, located at 100 F Street, Washington, D.C. 20549.  The public may obtain information through the public reference room by calling the SEC at 1-800-SEC-0330.

Item 1A. Risk Factors

In analyzing our company, you should consider carefully the following risk factors together with all of the other information included in this annual report on Form 10-K.  Factors that could adversely affect our business, operating results, and financial condition, as well as adversely affect the value of an investment in our common stock,  include those discussed below, as well as those discussed above in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere throughout this annual report on Form 10-K.

We are subject to the following significant risks, among others:

We may need to raise more cash in the future

We have almost always had negative cash flows from operations.  Our business will continue to result in a substantial requirement for research and development expenses for several years, during which we may not be able to bring in sufficient cash and/or revenues to offset these expenses.  We will likely be required to raise capital from one or more sources in the future to continue funding our operations to profitability.  We do not currently believe that our cash balance and the revenues from our operations will be sufficient to fund the development and marketing efforts required to reach profitability without raising additional capital from accessible sources of financing in the future.  In addition, our Amended and Restated Loan and Security Agreement with General Electric Capital Corporation, Silicon Valley Bank and Oxford Finance Corporation requires us to maintain certain minimum cash requirements, and if our cash reserves fall below those minimum requirements, then we could be in default under our loan agreement and subject to potential adverse remedies by the lenders, which would have a substantial and material adverse effect on our business, financial condition, results of operations, the value of our common stock and warrants and our ability to raise capital.  There is no guarantee that adequate funds will be available when needed from additional debt or equity financing, arrangements with development and commercialization partners, increased results of operations, or from other sources, or on terms attractive to us.  Our inability to obtain sufficient additional funds in the future would, at a minimum, require us to delay, scale back, or eliminate some or all of our research or product development, manufacturing operations, clinical or regulatory activities, which could have a substantial negative effect on our results of operations and financial condition.

Continued turmoil in the economy could harm our business

Negative trends in the general economy, including trends resulting from an actual or perceived recession, tightening credit markets, increased cost of commodities, including oil, actual or threatened military action by the United States and threats of terrorist attacks in the United States and abroad, could cause a reduction of investment in and available funding for companies in certain industries, including ours.  Our ability to raise capital has been and may in the future be adversely affected by downturns in current credit conditions, financial markets and the global economy.

We have never been profitable on an operational basis and expect significant operating losses for the next few years

We have incurred net operating losses in each year since we started business.  As our focus on the Celution ® System platform and development of therapeutic applications for its cellular output has increased, losses have resulted primarily from expenses associated with research and development activities and general and administrative expenses.  While we work continuously to implement cost reduction measures where possible, we nonetheless expect to continue operating in a loss position on a consolidated basis and that recurring operating expenses will be at high levels for the next several years, in order to perform clinical trials, additional pre-clinical research, product development, and marketing.  As a result of our historic losses, we have been, and are likely to continue to be, reliant on raising outside capital to fund our operations as discussed in the prior risk factor.

Our business strategy is high-risk

We are focusing our resources and efforts primarily on development of the Celution ® System family of products and the therapeutic applications of its cellular output, which requires extensive cash needs for research, development, and commercialization activities.  This is a high-risk strategy because there is no assurance that our products will ever become commercially viable (commercial risk), that we will prevent other companies from depriving us of market share and profit margins by selling products based on our inventions and developments (legal risk), that we will successfully manage a company in a new area of business (regenerative medicine) and on a different scale than we have operated in the past (operational risk), that we will be able to achieve the desired therapeutic results using stem and regenerative cells (scientific risk), or that our cash resources will be adequate to develop our products until we become profitable, if ever (financial risk).  We are using our cash in one of the riskiest industries in the economy (strategic risk).  This may make our stock an unsuitable investment for many investors.

We must keep our joint venture with Olympus operating smoothly

Our business depends in part on keeping our Joint Venture collaboration with Olympus operating smoothly and efficiently.  We have given Olympus-Cytori, Inc. an exclusive license to manufacture future generation Celution ® System devices.  If Olympus-Cytori, Inc. does not successfully develop and manufacture these devices, we may not be able to commercialize these devices successfully into the market.  In addition, future disruption or breakup of our relationship would be extremely costly to our reputation, in addition to causing many serious practical problems.

We and Olympus must overcome contractual and cultural barriers.  Although our relationship is formally measured by a set of complex contracts, many aspects of the relationship will be non-contractual and must be worked out between the parties and the responsible individuals.  The Joint Venture is intended to have a long life, and it is difficult to maintain cooperative relationships over a long period of time in the face of various kinds of change.  Cultural differences, including language barrier to some degree, may affect the efficiency of the relationship.

Olympus-Cytori, Inc. is 50% owned by us and 50% owned by Olympus.  By contract, each side must consent before any of a wide variety of important business actions can occur.  This situation possesses a risk of potentially time-consuming and difficult negotiations which could at some point delay the Joint Venture from pursuing its business strategies.

Olympus is entitled to designate the Joint Venture's chief executive officer and a majority of its board of directors, which means that day-to-day decisions which are not subject to a contractual veto will essentially be controlled by Olympus.  In addition, Olympus-Cytori, Inc. may require more money than its current capitalization in order to complete development and production of future generation devices.  If we are unable to help provide future financing for Olympus-Cytori, Inc., our relative equity interest in Olympus-Cytori, Inc. may decrease.

Furthermore, under a License/Joint Development Agreement among Olympus-Cytori, Inc., Olympus, and us, Olympus will have a primary role in the development of Olympus-Cytori, Inc.’s next generation devices.  Although Olympus has extensive experience in developing medical devices, this arrangement will result in a reduction of our control over the development and manufacturing of the next generation devices.

We have a limited operating history; operating results and stock price can be volatile like many life science companies

Our prospects must be evaluated in light of the risks and difficulties frequently encountered by emerging companies and particularly by such companies in rapidly evolving and technologically advanced biotech and medical device fields.  From time to time, we have tried to update our investors’ expectations as to our operating results by periodically announcing financial guidance.  However, we have in the past been forced to revise or withdraw such guidance due to lack of visibility and predictability of product demand.

We are vulnerable to competition and technological change, and also to physicians’ inertia

We compete with many domestic and foreign companies in developing our technology and products, including biotechnology, medical device, and pharmaceutical companies.  Many current and potential competitors have substantially greater financial, technological, research and development, marketing, and personnel resources.  There is no assurance that our competitors will not succeed in developing alternative products that are more effective, easier to use, or more economical than those which we have developed or are in the process of developing, or that would render our products obsolete and non-competitive.  In general, we may not be able to prevent others from developing and marketing competitive products similar to ours or which perform similar functions.

Competitors may have greater experience in developing therapies or devices, conducting clinical trials, obtaining regulatory clearances or approvals, manufacturing and commercialization.  It is possible that competitors may obtain patent protection, approval, or clearance from the FDA or achieve commercialization earlier than we can, any of which could have a substantial negative effect on our business.  Finally, Olympus and our other partners might pursue parallel development of other technologies or products, which may result in a partner developing additional products competitive with ours.

We compete against cell-based therapies derived from alternate sources, such as bone marrow, umbilical cord blood and potentially embryos.  Doctors historically are slow to adopt new technologies like ours, whatever the merits, when older technologies continue to be supported by established providers.  Overcoming such inertia often requires very significant marketing expenditures or definitive product performance and/or pricing superiority.

We expect physicians’ inertia and skepticism to also be a significant barrier as we attempt to gain market penetration with our future products. We believe we will need to finance lengthy time-consuming clinical studies (so as to provide convincing evidence of the medical benefit) in order to overcome this inertia and skepticism particularly in reconstructive surgery, cell preservation, the cardiovascular area and many other indications.

Most potential applications of our technology are pre-commercialization, which subjects us to development and marketing risks

We are in a relatively early stage of the path to commercialization with many of our products.  We believe that our long-term viability and growth will depend in large part on our ability to develop commercial quality cell processing devices and useful procedure-specific consumables, and to establish the safety and efficacy of our therapies through clinical trials and studies.  With our Celution ® System platform, we are pursuing new approaches for reconstructive surgery, preservation of stem and regenerative cells for potential future use, therapies for cardiovascular disease, gastrointestinal disorders and spine and orthopedic conditions.  There is no assurance that our development programs will be successfully completed or that required regulatory clearances or approvals will be obtained on a timely basis, if at all.

There is no proven path for commercializing the Celution ® System platform in a way to earn a durable profit commensurate with the medical benefit.  Although we began to commercialize our reconstructive surgery products in Europe and certain Asian markets, and our cell banking products in Japan, Europe, and certain Asian markets in 2008, additional market opportunities for our products and/or services are likely to be another two to four years away.

Successful development and market acceptance of our products is subject to developmental risks, including failure of inventive imagination, ineffectiveness, lack of safety, unreliability, failure to receive necessary regulatory clearances or approvals, high commercial cost, preclusion or obsolescence resulting from third parties’ proprietary rights or superior or equivalent products, competition from copycat products, and general economic conditions affecting purchasing patterns.  There is no assurance that we or our partners will successfully develop and commercialize our products, or that our competitors will not develop competing technologies that are less expensive or superior.  Failure to successfully develop and market our products would have a substantial negative effect on our results of operations and financial condition.

Future clinical trial results may differ significantly from our expectations

While our early clinical trial results so far have been very positive, and we have proceeded incrementally in the our these clinical trials in an effort to gauge the risks of proceeding with larger and more expensive trials, we cannot guarantee that we will not experience negative results in these larger and much more expensive clinical trials, such as the new ADVANCE acute heart attack trial in Europe. Poor results in our clinical trials could result in substantial delays in commercialization, substantial negative effects on the perception of our products, and substantial additional costs. These risks are increased by our reliance on third parties in the performance of many of the clinical trial functions, including the clinical investigators, hospitals, and other third party service providers.

The timing and amount of Thin Film revenues from Senko are uncertain

The sole remaining product line in our MacroPore Biosurgery segment is our Japan Thin Film business.  Our right to receive royalties from Senko, and to recognize certain deferred revenues, depends on the timing of MHLW approval for commercialization of the product in Japan.  We have no control over this timing and our previous expectations have not been met.  Also, even after commercialization, we will be dependent on Senko, our exclusive distributor, to drive product sales in Japan.

We have limited manufacturing experience

We have limited experience in manufacturing the Celution ® System platform or its consumables at a commercial level.  With respect to our Joint Venture, although Olympus is a highly capable and experienced manufacturer of medical devices, there can be no guarantee that the Olympus-Cytori Joint Venture will be able to successfully develop and manufacture the next generation Celution ® System in a manner that is cost-effective or commercially viable, or that development and manufacturing capabilities might not take much longer than currently anticipated to be ready for the market.

Although we have begun introduction of the Celution ® 800 and the StemSource ® 900-based Cell Bank in 2008, we cannot assure that we will be able to manufacture sufficient numbers of such products to meet the demand, or that we will be able to overcome unforeseen manufacturing difficulties for these sophisticated medical devices, as we await the availability of the Joint Venture next generation Celution ® System.

In the event that the Olympus-Cytori Joint Venture is not successful, Cytori may not have the resources or ability to self-manufacture sufficient numbers of devices and consumables to meet market demand, and this failure may substantially extend the time it would take for us to bring a more advanced commercial device to market. This makes us significantly dependant on the continued dedication and skill of Olympus for the successful development of the next generation Celution ® System.

We may not be able to protect our proprietary rights

Our success depends in part on whether we can maintain our existing patents, obtain additional patents, maintain trade secret protection, and operate without infringing on the proprietary rights of third parties.

There can be no assurance that any of our pending patent applications will be approved or that we will develop additional proprietary products that are patentable. There is also no assurance that any patents issued to us will not become the subject of a re-examination, will provide us with competitive advantages, will not be challenged by any third parties, or that the patents of others will not prevent the commercialization of products incorporating our technology.  Furthermore, there can be no guarantee that others will not independently develop similar products, duplicate any of our products, or design around our patents.

Our commercial success will also depend, in part, on our ability to avoid infringing on patents issued to others.  If we were judicially determined to be infringing on any third-party patent, we could be required to pay damages, alter our products or processes, obtain licenses, or cease certain activities.  If we are required in the future to obtain any licenses from third parties for some of our products, there can be no guarantee that we would be able to do so on commercially favorable terms, if at all.  U.S. patent applications are not immediately made public, so we might be surprised by the grant to someone else of a patent on a technology we are actively using.  As noted above and in the case of the University of Pittsburgh lawsuit, even patents issued to us or our licensors might be judicially determined to belong in full or in part to third parties.

Litigation, which would result in substantial costs to us and diversion of effort on our part, may be necessary to enforce or confirm the ownership of any patents issued or licensed to us, or to determine the scope and validity of third-party proprietary rights.  If our competitors claim technology also claimed by us and prepare and file patent applications in the United States, we may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office or a foreign patent office to determine priority of invention, which could result in substantial costs to and diversion of effort, even if the eventual outcome is favorable to us.  Any such litigation or interference proceeding, regardless of outcome, could be expensive and time-consuming.

Successful challenges to our patents through oppositions, reexamination proceedings or interference proceedings could result in a loss of patent rights in the relevant jurisdiction. If we are unsuccessful in actions we bring against the patents of other parties and it is determined that we infringe the patents of third-parties, we may be subject to litigation, or otherwise prevented from commercializing potential products in the relevant jurisdiction, or may be required to obtain licenses to those patents or develop or obtain alternative technologies, any of which could harm our business. Furthermore, if such challenges to our patent rights are not resolved in our favor, we could be delayed or prevented from entering into new collaborations or from commercializing certain products, which could adversely affect our business and results of operations.

In addition to patents, which alone may not be able to protect the fundamentals of our regenerative cell business, we also rely on unpatented trade secrets and proprietary technological expertise.  Some of our intended future cell-related therapeutic products may fit into this category.  We rely, in part, on confidentiality agreements with our partners, employees, advisors, vendors, and consultants to protect our trade secrets and proprietary technological expertise. There can be no guarantee that these agreements will not be breached, or that we will have adequate remedies for any breach, or that our unpatented trade secrets and proprietary technological expertise will not otherwise become known or be independently discovered by competitors.

Our amended regenerative cell technology license agreement with the Regents of the University of California (UC) which includes issued U.S. patent number 7,470,537, contains certain developmental milestones, which if not achieved could result in the loss of exclusivity or loss of the license rights. The loss of such rights could impact our ability to develop certain regenerative cell technology products.  Also, our power as licensee to successfully use these rights to exclude competitors from the market is untested.

Failure to obtain or maintain patent protection, or protect trade secrets, for any reason (or third-party claims against our patents, trade secrets, or proprietary rights, or our involvement in disputes over our patents, trade secrets, or proprietary rights, including involvement in litigation), could have a substantial negative effect on our results of operations and financial condition.

We may not be able to protect our intellectual property in countries outside the United States

Intellectual property law outside the United States is uncertain and in many countries is currently undergoing review and revisions.  The laws of some countries do not protect our patent and other intellectual property rights to the same extent as United States laws.  This is particularly relevant to us as most of our current commercial product sales and clinical trials are outside of the United States.  Third parties may attempt to oppose the issuance of patents to us in foreign countries by initiating opposition proceedings. Opposition proceedings against any of our patent filings in a foreign country could have an adverse effect on our corresponding patents that are issued or pending in the United States. It may be necessary or useful for us to participate in proceedings to determine the validity of our patents or our competitors’ patents that have been issued in countries other than the U.S. This could result in substantial costs, divert our efforts and attention from other aspects of our business, and could have a material adverse effect on our results of operations and financial condition. We currently have pending patent applications in Europe, Australia, Japan, Canada, China, Korea, and Singapore, among others.

We and Olympus-Cytori, Inc. are subject to FDA regulation

As newly developed medical devices, the Celution ® System family of products must receive regulatory clearances or approvals from the FDA and, in many instances, from non-U.S. and state governments prior to their sale.  The Celution ® System family of products is subject to stringent government regulation in the United States by the FDA under the Federal Food, Drug and Cosmetic Act.  The FDA regulates the design/development process, clinical testing, manufacture, safety, labeling, sale, distribution, and promotion of medical devices and drugs.  Included among these regulations are pre-market clearance and pre-market approval requirements, design control requirements, and the Quality System Regulations/Good Manufacturing Practices.  Other statutory and regulatory requirements govern, among other things, establishment registration and inspection, medical device listing, prohibitions against misbranding and adulteration, labeling and post-market reporting.

The regulatory process can be lengthy, expensive, and uncertain.  Before any new medical device may be introduced to the U.S. market, the manufacturer generally must obtain FDA clearance or approval through either the 510(k) pre-market notification process or the lengthier pre-market approval application, or PMA, process.  It generally takes from three to 12 months from submission to obtain 510(k) pre-market clearance, although it may take longer.  Approval of a PMA could take four or more years from the time the process is initiated.  The 510(k) and PMA processes can be expensive, uncertain, and lengthy, and there is no guarantee of ultimate clearance or approval.  We expect that some of our future products under development as well as Olympus-Cytori’s will be subject to the lengthier PMA process.  Securing FDA clearances and approvals may require the submission of extensive clinical data and supporting information to the FDA, and there can be no guarantee of ultimate clearance or approval.  Failure to comply with applicable requirements can result in application integrity proceedings, fines, recalls or seizures of products, injunctions, civil penalties, total or partial suspensions of production, withdrawals of existing product approvals or clearances, refusals to approve or clear new applications or notifications, and criminal prosecution.

Medical devices are also subject to post-market reporting requirements for deaths or serious injuries when the device may have caused or contributed to the death or serious injury, and for certain device malfunctions that would be likely to cause or contribute to a death or serious injury if the malfunction were to recur.  If safety or effectiveness problems occur after the product reaches the market, the FDA may take steps to prevent or limit further marketing of the product.  Additionally, the FDA actively enforces regulations prohibiting marketing and promotion of devices for indications or uses that have not been cleared or approved by the FDA.

There can be no guarantee that we will be able to obtain the necessary 510(k) clearances or PMA approvals to market and manufacture our other products in the United States for their intended use on a timely basis, if at all.  Delays in receipt of or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or failure to comply with existing or future regulatory requirements could have a substantial negative effect on our results of operations and financial condition.

To sell in international markets, we will be subject to regulation in foreign countries

In cooperation with our distribution partners, we intend to market our current and future products both domestically and in many foreign markets. A number of risks are inherent in international transactions.  In order for us to market our products in Europe, Canada, Japan and certain other non-U.S. jurisdictions, we need to obtain and maintain required regulatory approvals or clearances and must comply with extensive regulations regarding safety, manufacturing processes and quality.  For example, we still have not obtained regulatory approval for our Thin Film products in Japan.  These regulations, including the requirements for approvals or clearances to market, may differ from the FDA regulatory scheme.  International sales also may be limited or disrupted by political instability, price controls, trade restrictions and changes in tariffs.  Additionally, fluctuations in currency exchange rates may adversely affect demand for our products by increasing the price of our products in the currency of the countries in which the products are sold.

There can be no assurance that we will obtain regulatory approvals or clearances in all of the countries where we intend to market our products, or that we will not incur significant costs in obtaining or maintaining foreign regulatory approvals or clearances, or that we will be able to successfully commercialize current or future products in various foreign markets.  Delays in receipt of approvals or clearances to market our products in foreign countries, failure to receive such approvals or clearances or the future loss of previously received approvals or clearances could have a substantial negative effect on our results of operations and financial condition.

Changing, New and/or Emerging Government Regulations

Government regulations can change without notice. Given the fact that Cytori operates in various international markets, our access to such markets could change with little to no warning due to a change in government regulations that suddenly up-regulate our product(s) and create greater regulatory burden for our cell therapy and cell banking technology products.

Due to the fact that there are new and emerging cell therapy and cell banking regulations that have recently been drafted and/or implemented in various countries around the world, the application and subsequent implementation of these new and emerging regulations have little to no precedence. Therefore, the level of complexity and stringency is not known and may vary from country to country, creating greater uncertainty for the international regulatory process.

Anticipated or unanticipated changes in the way or manner in which the FDA regulates products or classes/groups of products can delay, further burden, or alleviate regulatory pathways that were once available to other products.  There are no guarantees that such changes in FDA’s approach to the regulatory process will not deleteriously affect some or all of our products or product applications.

We do not know if the current FDA proposed changes to the 510(k) system will have any material effect on any of our current or future 510(k) applications.

Health Insurance Reimbursement Risks

New and emerging cell therapy and cell banking technologies, such as those provided by the Celution ® System family of products, may have difficulty or encounter significant delays in obtaining health care reimbursement in some or all countries around the world due to the  novelty of our cell therapy and cell banking technology and subsequent lack of existing reimbursement schemes / pathways. Therefore, the creation of new reimbursement pathways may be complex and lengthy with no assurances that such reimbursements will be successful. The lack of health insurance reimbursement or reduced or minimal reimbursement pricing may have a significant impact on our ability to successfully sell our cell therapy and cell banking technology product(s) into a county or region.

Concentration of Sales

We have a significant concentration of sales in Japan, the United States, and Europe given our early stage of commercialization.  As a result of this regional concentration of sales, changes in the regulatory environment in these countries, or any other countries in which we have a significant concentration of sales, could adversely impact our sales.  If the government of any of these countries significantly curtailed or prohibited the sale of our products, our revenues would be adversely affected.

Market Acceptance of New Technology

New and emerging cell therapy and cell banking technologies, such as those provided by the Celution ® System family of products, may have difficulty or encounter significant delays in obtaining market acceptance in some or all countries around the world due to the novelty of our cell therapy and cell banking technologies. Therefore, the market adoption of our cell therapy and cell banking technologies may be slow and lengthy with no assurances that significant market adoption will be successful. The lack of market adoption or reduced or minimal market adoption of our cell therapy and cell banking technologies may have a significant impact on our ability to successfully sell our product(s) into a country or region.

We and/or the Joint Venture have to maintain quality assurance certification and manufacturing approvals

The manufacture of our Celution ® System will be, and the manufacture of any future cell-related therapeutic products would be, subject to periodic inspection by regulatory authorities and distribution partners.  The manufacture of devices and products for human use is subject to regulation and inspection from time to time by the FDA for compliance with the FDA’s Quality System Regulation, or QSR, requirements, as well as equivalent requirements and inspections by state and non-U.S. regulatory authorities.  There can be no guarantee that the FDA or other authorities will not, during the course of an inspection of existing or new facilities, identify what they consider to be deficiencies in our compliance with QSRs or other requirements and request, or seek remedial action.

Failure to comply with such regulations or a potential delay in attaining compliance may adversely affect our manufacturing activities and could result in, among other things, injunctions, civil penalties, FDA refusal to grant pre-market approvals or clearances of future or pending product submissions, fines, recalls or seizures of products, total or partial suspensions of production, and criminal prosecution.  There can be no assurance after such occurrences that we will be able to obtain additional necessary regulatory approvals or clearances on a timely basis, if at all.  Delays in receipt of or failure to receive such approvals or clearances, or the loss of previously received approvals or clearances could have a substantial negative effect on our results of operations and financial condition.

We depend on a few key officers

Our performance is substantially dependent on the performance of our executive officers and other key scientific and sales staff, including Christopher J. Calhoun, our Chief Executive Officer, and Marc Hedrick, MD, our President.  We rely upon them for strategic business decisions and guidance. We believe that our future success in developing marketable products and achieving a competitive position will depend in large part upon whether we can attract and retain additional qualified management and scientific personnel.  Competition for such personnel is intense, and there can be no assurance that we will be able to continue to attract and retain such personnel.  The loss of the services of one or more of our executive officers or key scientific staff or the inability to attract and retain additional personnel and develop expertise as needed could have a substantial negative effect on our results of operations and financial condition.

We may not have enough product liability insurance

The testing, manufacturing, marketing, and sale of our regenerative cell products involve an inherent risk that product liability claims will be asserted against us, our distribution partners, or licensees.  There can be no guarantee that our clinical trial and commercial product liability insurance is adequate or will continue to be available in sufficient amounts or at an acceptable cost, if at all.  A product liability claim, product recall, or other claim, as well as any claims for uninsured liabilities or in excess of insured liabilities, could have a substantial negative effect on our results of operations and financial condition.  Also, well-publicized claims could cause our stock to fall sharply, even before the merits of the claims are decided by a court.

Our charter documents contain anti-takeover provisions and we have adopted a Stockholder Rights Plan to prevent hostile takeovers

Our Amended and Restated Certificate of Incorporation and Bylaws contain certain provisions that could prevent or delay the  acquisition of Cytori by means of a tender offer, proxy contest, or otherwise.  They could discourage a third party from attempting to acquire control of Cytori, even if such events would be beneficial to the interests of our stockholders.  Such provisions may have the effect of delaying, deferring, or preventing a change of control of Cytori and consequently could adversely affect the market price of our shares. Also, in 2003 we adopted a Stockholder Rights Plan of the kind often referred to as a poison pill. The purpose of the Stockholder Rights Plan is to prevent coercive takeover tactics that may otherwise be utilized in takeover attempts. The existence of such a rights plan may also prevent or delay a change in control of Cytori, and this prevention or delay adversely affect the market price of our shares.

We pay no dividends

We have never paid cash dividends in the past, and currently do not intend to pay any cash dividends in the foreseeable future.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

We currently lease 60,118 square feet at 3020 and 3030 Callan Road, San Diego, California.  The related lease agreement bears monthly rent at a rate of $1.75 per square foot, with annual increase of $0.05 per square foot.  The lease term is 64 months, commencing on July 1, 2010 and expiring on October 31, 2015. In connection with this lease, we received a four month rent abatement period and an allowance for leasehold improvements of approximately $300,000. Additionally, we’ve entered into several lease agreements for international office locations and corporate housing for our employees on international assignments.  For these properties, we pay an aggregate of approximately $155,000 in rent per month.

Item 3. Legal Proceedings

From time to time, we have been involved in routine litigation incidental to the conduct of our business. As of December 31, 2010, we were not a party to any material legal proceeding.

Item 4. (Reserved)

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Prices

From August 2000 (our initial public offering in Germany) through September 2007 our common stock was quoted on the Frankfurt Stock Exchange under the symbol “XMPA” (formerly XMP). In September 2007 our stock closed trading on the Frankfurt Stock Exchange.  Effective December 19, 2005, our common stock began trading on the Nasdaq Capital Market under the symbol “CYTX,” and has since transferred to the Nasdaq Global Market effective February 14, 2006. Warrants, issued as part of a financing agreement in March 2009, began trading on the Nasdaq Global Market under the symbol “CYTXW” effective June 22, 2009.   The following tables show the high and low sales prices for our common stock and warrants for the periods indicated, as reported by the Nasdaq Stock Market. These prices do not include retail markups, markdowns or commissions.

Common Stock

		High			Low
2009
Quarter ended March 31, 2009		$	5.14		$	1.68
Quarter ended June 30, 2009		$	4.80		$	1.42
Quarter ended September 30, 2009		$	4.32		$	2.93
Quarter ended December 31, 2009		$	6.65		$	3.08

2010
Quarter ended March 31, 2010		$	9.50		$	4.40
Quarter ended June 30, 2010		$	6.12		$	3.42
Quarter ended September 30, 2010		$	5.43		$	3.15
Quarter ended December 31, 2010		$	6.15		$	4.07

All of our outstanding shares have been deposited with DTCC since December 9, 2005.

Warrants

		High			Low
2009
Quarter ended June 30, 2009		$	2.00		$	1.60
Quarter ended September 30, 2009		$	2.37		$	1.40
Quarter ended December 31, 2009		$	4.50		$	1.74

2010
Quarter ended March 31, 2010		$	6.90		$	2.62
Quarter ended June 30, 2010		$	4.70		$	1.94
Quarter ended September 30, 2010		$	3.64		$	2.05
Quarter ended December 31, 2010		$	4.19		$	2.99

As of February 28, 2011, we had approximately twenty seven record holders of our common stock and three record holders of our warrants.  Because many of our shares and warrants are held by brokers and other institutions on behalf of stockholders and warrantholders, we are unable to estimate the total number of individual stockholders and warrantholders represented by these record holders.

Dividends

We have never declared or paid any dividends and do not anticipate paying any in the foreseeable future.

Equity Compensation Plan Information

Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a))
		(a)		(b)			(c)
Equity compensation plans approved by security holders (1)		2,766,271		$	4.64		—
Equity compensation plans not approved by security holders (2)		4,324,687		$	5.50		1,305,400
Total		7,090,958		$	5.16		1,305,400

________________________________________

(1)

The 1997 Stock Option and Stock Purchase Plan expired on October 22, 2007.

(2)

The maximum number of shares shall be cumulatively increased on the first January 1 after the Effective Date, August 24, 2004, and each January 1 thereafter for 9 more years, by a number of shares equal to the lesser of (a) 2% of the number of shares issued and outstanding on the immediately preceding December 31, and (b) a number of shares set by the Board.

Comparative Stock Performance Graph

The following graph shows how an initial investment of $100 in our common stock would have compared to an equal investment in the Nasdaq Composite Index and the NASDAQ Biotechnology Index during the period from December 31, 2005 through December 31, 2010. The performance shown is not necessarily indicative of future price performance.

Item 6. Selected Financial Data

The selected data presented below under the captions “Statements of Operations Data,” “Statements of Cash Flows Data” and “Balance Sheet Data” for, and as of the end of, each of the years in the five-year period ended December 31, 2010, are derived from, and should be read in conjunction with, our audited consolidated financial statements. The consolidated balance sheets as of December 31, 2010 and 2009, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2010, which have been audited by KPMG LLP, an independent registered public accounting firm, and their report thereon, are included elsewhere in this annual report. The consolidated balance sheets as of December 31, 2008, 2007 and 2006, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows for the years ended December 31, 2007 and 2006, which were also audited by KPMG LLP, are included with our annual reports previously filed.

The information contained in this table should also be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes thereto included elsewhere in this report (in thousands except share and per share data):

		2010				2009				2008				2007				2006
Statements of Operations Data:
Product revenues:
Sales to related party		$	590			$	591			$	28			$	792			$	1,451
Sales to third parties			7,664				5,246				4,500				—				—
			8,254				5,837				4,528				792				1,451
Cost of product revenues			3,908				3,394				1,854				422				1,634
Gross profit (loss)			4,346				2,443				2,674				370				(183	)
Development revenues:
Development, related party			2,122				8,840				774				5,158				6,057
Other, related party			—				—				1,500				—				—
Research grants and other			251				53				51				99				419
			2,373				8,893				2,325				5,257				6,476
Operating expenses:
Research and development			9,687				12,231				17,371				20,020				21,977
Sales and marketing			11,040				6,583				4,602				2,673				2,055
General and administrative			12,570				10,415				11,727				14,184				12,547
Change in fair value of warrants			(1,285	)			4,574				—				—				—
Change in fair value of option liabilities			30				(920	)			1,060				100				(4,431	)
Total operating expenses			32,042				32,883				34,760				36,977				32,148
Total operating loss			(25,323	)			(21,547	)			(29,761	)			(31,350	)			(25,855	)
Other income (expense):
Gain on sale of assets			—				—				—				1,858				—
Interest income			9				20				230				1,028				708
Interest expense			(2,052	)			(1,427	)			(420	)			(155	)			(199	)
Other income (expense), net			23				(218	)			(40	)			(46	)			(27	)
Equity loss in investments			(151	)			(44	)			(45	)			(7	)			(74	)
Net loss		$	(27,494	)		$	(23,216	)		$	(30,036	)		$	(28,672	)		$	(25,447	)
Basic and diluted net loss per share		$	(0.60	)		$	(0.65	)		$	(1.12	)		$	(1.25	)		$	(1.53	)
Basic and diluted weighted average common shares			45,947,966				35,939,260				26,882,431				22,889,250				16,603,550
Statements of Cash Flows Data:
Net cash used in operating activities		$	(23,574	)		$	(23,807	)		$	(33,389	)		$	(29,995	)		$	(16,483	)
Net cash provided by (used in) investing activities			(1,290	)			(221	)			(393	)			5,982				591
Net cash provided by financing activities			64,678				24,271				34,928				26,576				16,787
Net increase in cash			39,814				243				1,146				2,563				895
Cash and cash equivalents at beginning of year			12,854				12,611				11,465				8,902				8,007
Cash and cash equivalents at end of year		$	52,668			$	12,854			$	12,611			$	11,465			$	8,902
Balance Sheet Data:
Cash, cash equivalents and short-term investments		$	52,668			$	12,854			$	12,611			$	11,465			$	12,878
Working capital			45,730				9,915				10,090				4,168				7,392
Total assets			66,347				24,749				25,609				21,507				24,868
Deferred revenues, related party			5,512				7,634				16,474				18,748				23,906
Deferred revenues			4,929				2,388				2,445				2,379				2,389
Warrant liabilities			4,987				6,272				—				—				—
Option liabilities			1,170				1,140				2,060				1,000				900
Long-term deferred rent			398				—				168				473				741
Long-term obligations, less current portion			13,255				2,790				5,044				237				1,159
Total stockholders’ equity (deficit)		$	22,873			$	(3,658	)		$	(7,717	)		$	(9,400	)		$	(10,813	)