UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-Q





(Mark
One)





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





For
      the quarterly period ended June 30,
2008





Or





£
            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 000-20805





ReGen
Biologics, Inc.


(Exact
name of registrant as specified in its charter)





Delaware
            
            23-2476415(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)411
      Hackensack Avenue,10th
      Floor,Hackensack,
      NJ
            
            07601(Address
      of principal executive offices)
            
            (Zip
      Code)





Registrant’s
telephone number, including area code:


(201)
651-5140





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 R No £





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
definition of “large accelerated filer,”  “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):


Large
      accelerated filer £
            Accelerated
      filer £
            Non-accelerated
      filer £
            Smaller
      reporting company R


(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 £ No R





The
number of outstanding shares of the registrant’s common stock as of August 4,
2008 was 104,243,082.





REGEN
BIOLOGICS, INC.





INDEX





Page No.PART
      I - FINANCIAL INFORMATIONItem
      1. Financial Statements
            
            3Condensed Consolidated Balance Sheets at June 30, 2008
      (unaudited) and December 31, 2007
            
            3Condensed Consolidated Statements of Operations for the Three
      Months Ended June 30, 2008 (unaudited) and 2007 (unaudited), the Six
      Months Ended June 30, 2008 (unaudited) and 2007 (unaudited) and the Period
      from December 21, 1989 (inception) to June 30, 2008
      (unaudited)
            
            4Consolidated Statement of Changes in Stockholders’ Equity
      (Deficit) and Series A & Series C Redeemable Convertible Preferred
      Stock for the Period from December 21, 1989 (inception) to June 30, 2008
      (unaudited)
            
            6Condensed Consolidated Statements of Cash Flows for the Six
      Months Ended June 30, 2008 (unaudited) and 2007 (unaudited) and the Period
      from December 21, 1989 (inception) to June 30, 2008
      (unaudited)
            
            12Notes to Condensed Consolidated Financial Statements
      (unaudited)
            
            13Item
      2. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
            
            23Item
      3. Quantitative and Qualitative Disclosures about Market
      Risk
            
            32Item
      4T. Controls and Procedures
            
            32PART
      II - OTHER INFORMATIONItem
      1. Legal Proceedings
            
            34Item
      1A. Risk Factors
            
            34Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds
            
            34Item
      3. Defaults Upon Senior Securities
            
            34Item
      4. Submission of Matters to a Vote of Security
      Holders
            
            34Item
      5. Other Information
            
            35Item
      6. Exhibits
            
            36Signatures
            
            39Certification





2
 Index





PART
I - FINANCIAL INFORMATION





Item1. Financial Statements.





REGENBIOLOGICS, INC.


(A
Development Stage Company)


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Dollars
in thousands, except per share data)





June 30, 2008
            
            
            December 31, 2007(unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
            
            $
            602
            
            
            $
            4,008Short-term
      investments
            
            
            —
            
            
            
            100Trade
      receivables, net of allowance for doubtful accounts of $2 and $3, as of
      June 30, 2008 and December 31, 2007, respectively
            
            
            163
            
            
            
            236Inventory
            
            
            292
            
            
            
            311Prepaid
      expenses and other current assets
            
            
            427
            
            
            
            336Total
      current assets
            
            
            1,484
            
            
            
            4,991Property
      and equipment, net
            
            
            368
            
            
            
            402Other
      assets
            
            
            407
            
            
            
            109Total
      assets
            
            $
            2,259
            
            
            $
            5,502LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)Current
      liabilitiesAccounts
      payable
            
            $
            363
            
            
            $
            220Accounts
      payable to related party
            
            
            4
            
            
            
            4Accrued
      expenses
            
            
            530
            
            
            
            352Other
      current liabilities
            
            
            14
            
            
            
            79Total
      current liabilities
            
            
            911
            
            
            
            655Other
      liabilities
            
            
            197
            
            
            
            204Long-term
      portion of capital leases
            
            
            15
            
            
            
            22Long-term
      portion of notes payable to related party, including accrued interest of
      $2,316 and $2,122 at June 30, 2008 and December 31, 2007,
      respectively
            
            
            8,359
            
            
            
            8,165Total
      liabilities
            
            
            9,482
            
            
            
            9,046Series
      A redeemable convertible preferred stock, $.01 par value; 15,309,822
      shares authorized; issued and outstanding 2,483,116 shares at liquidation
      preference of $1,113 at June 30, 2008 and December 31,
2007
            
            
            1,113
            
            
            
            1,113Series
      C redeemable convertible preferred stock, $.01 par value; 30,000,000
      shares authorized; issued and outstanding 6,583,348 shares at liquidation
      preference of $2,950 as of June 30, 2008 and December 31,
    2007
            
            
            2,791
            
            
            
            2,757Stockholders’
      equity (deficit)Series
      D contingently convertible preferred stock, options and warrants;
      preferred stock, $.01 par value; 500,000 shares authorized; issued and
      outstanding 135,715 shares at liquidation preference of $5,700 as of June
      30, 2008 and December 31, 2007
            
            
            5,560
            
            
            
            5,560Series
      E contingently convertible preferred stock, $.01 par value; 500,000 shares
      authorized; issued and outstanding 7,500 shares at liquidation preference
      of $68 at June 30, 2008
            
            
            114
            
            
            
            —Common
      stock, $.01 par value; 165,000,000 shares authorized; issued 104,243,082
      shares at June 30, 2008, and 104,136,941 shares at December 31,
      2007
            
            
            1,044
            
            
            
            1,042Additional
      paid-in capital
            
            
            82,274
            
            
            
            81,440Deficit
      accumulated during development stage
            
            
            (100,119
            )
            
            
            (95,456
            )Total
      stockholders’ deficit
            
            
            (11,127
            )
            
            
            (7,414
            )Total
      liabilities and stockholders’ deficit
            
            $
            2,259
            
            
            $
            5,502





See
accompanying Notes to Condensed Consolidated Financial Statements.





3
 Index





REGENBIOLOGICS, INC.


(A
Development Stage Company)


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)


(Dollars
in thousands, except per share data)





Three Months Ended June 30
            
            
            Six Months Ended June 30,
            
            
            Period from
              December
      21, 1989
              (Inception)
      to2008
            
            
            2007
            
            
            2008
            
            
            2007
            
            
            June 30, 2008Revenue:Sales
            
            $
            222
            
            
            $
            159
            
            
            $
            556
            
            
            $
            328
            
            
            $
            5,411Royalties
            
            
            14
            
            
            
            12
            
            
            
            23
            
            
            
            24
            
            
            
            349Grant
      and other revenue
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            433Total
      revenue
            
            
            236
            
            
            
            171
            
            
            
            579
            
            
            
            352
            
            
            
            6,193Expenses:Cost
      of goods sold
            
            
            137
            
            
            
            86
            
            
            
            280
            
            
            
            178
            
            
            
            5,165Research
      and development
            
            
            1,005
            
            
            
            1,193
            
            
            
            2,003
            
            
            
            2,256
            
            
            
            54,623Business
      development, general and administrative
            
            
            1,313
            
            
            
            2,027
            
            
            
            2,782
            
            
            
            3,721
            
            
            
            40,515Recognition
      of expense for the minimum pension liability upon termination of defined
      benefit pension plan
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            58Total
      expenses
            
            
            2,455
            
            
            
            3,306
            
            
            
            5,065
            
            
            
            6,155
            
            
            
            100,361Operating
      loss
            
            
            (2,219
            )
            
            
            (3,135
            )
            
            
            (4,486
            )
            
            
            (5,803
            )
            
            
            (94,168
            )Merger
      cost
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (515
            )Interest
      and other income
            
            
            13
            
            
            
            121
            
            
            
            45
            
            
            
            212
            
            
            
            2,484Rental
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            2,547Rent
      expense
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (2,409
            )Interest
      and other expense
            
            
            (110
            )
            
            
            (121
            )
            
            
            (188
            )
            
            
            (235
            )
            
            
            (4,395
            )License
      fees
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            2,050Net
      loss
            
            
            (2,316
            )
            
            
            (3,135
            )
            
            
            (4,629
            )
            
            
            (5,826
            )
            
            
            (94,406
            )Deemed
      dividend to Series C Preferred Stockholders upon issuance of Series C
      Preferred Stock with a beneficial conversion and amortization of related
      issuance costs
            
            
            (17
            )
            
            
            (18
            )
            
            
            (34
            )
            
            
            (211
            )
            
            
            (5,713
            )Deemed
      dividend to stockholders for issuance of warrants and extension of
      options
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (115
            )Net
      loss attributable to common stockholders
            
            $
            (2,333
            )
            
            $
            (3,153
            )
            
            $
            (4,663
            )
            
            $
            (6,037
            )
            
            $
            (100,234
            )Basic
      and diluted net loss per share attributable to common
      stockholders
            
            $
            (0.02
            )
            
            $
            (0.03
            )
            
            $
            (0.04
            )
            
            $
            (0.06
            )
            
            $
            (3.19
            )Weighted
      average number of shares used for calculation of net loss per
      share
            
            
            104,243,082
            
            
            
            103,890,480
            
            
            
            104,208,283
            
            
            
            103,003,965
            
            
            
            31,387,173





See
accompanying Notes to Condensed Consolidated Financial Statements.





4
 Index





ReGenBiologics, Inc.


(A Development Stage
Company)


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) AND SERIES


A
AND SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK


Period
from December 21, 1989 (inception) to June 30, 2008 (unaudited)


(Dollars
in thousands, except per share data)




Series
      A
            
            
            Series
      C
            
            
            Stockholders’
      Equity (Deficit)Redeemable
            
            
            Redeemable
            
            
            Series
      A – F
            
            
            Series
      B, Series D and Series E
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            DeficitConvertible
              Preferred
            
            
            Convertible
              Preferred
            
            
            Convertible
              Preferred
            
            
            Convertible
              Preferred
            
            
            
            
            
            
            
            
            Additional
            
            
            Deferred
            
            
            Accumulated
              During
            
            
            Accumulated
              Other
            
            
            Total
              Stockholders'Stock
            
            
            Stock
            
            
            Stock
            
            
            Stock
            
            
            Common
      Stock
            
            
            Paid-In
            
            
            Stock
            
            
            Development
            
            
            Comprehensive
            
            
            EquityShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Compensation
            
            
            Stage
            
            
            Loss
            
            
            (Deficit)Issuance
      of common stock at $0.03127 per share for net assets contributed by
      founders in May 1990
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,400,000
            
            
            $
            1
            
            
            $
            44
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            45Issuance
      of common stock at $0.005 per share for cash in November
    1991
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            700,000
            
            
            
            —
            
            
            
            3
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3Issuance
      of Series A convertible preferred stock at $1.00 per share for cash in
      April 1991, net of offering costs of $44
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            725,000
            
            
            $
            1
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            681
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            682Issuance
      of Series B convertible preferred stock at $3.00 per share for cash and in
      exchange for notes payable in January, March, May, and July 1992, net of
      offering costs of $29
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,226,338
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            3,650
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,650Net
      loss from inception (December 21, 1989) through December 31,
      1992
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            $
            (2,476
            )
            
            
            
            
            
            
            (2,476
            )Balance
      at December 31, 1992
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,951,338
            
            
            
            1
            
            
            
            
            
            
            
            
            
            
            
            2,100,000
            
            
            
            1
            
            
            
            4,378
            
            
            
            
            
            
            
            (2,476
            )
            
            
            
            
            
            
            1,904Issuance
      of Series C convertible preferred stock at $4.50 per share for cash in
      December 1993, net of offering costs of $29
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            550,552
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            2,448
            
            
            
            
            
            
            
            —
            
            
            
            
            
            
            
            2,448Exercise
      of common stock options at $0.30 per share for cash in February
      1993
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            200
            
            
            
            —
            
            
            
            1
            
            
            
            
            
            
            
            —
            
            
            
            
            
            
            
            1Issuance
      of common stock at $0.30 per share in 1993 in exchange for services to a
      consultant
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            5,000
            
            
            
            —
            
            
            
            1
            
            
            
            
            
            
            
            —
            
            
            
            
            
            
            
            1Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            (1,342
            )
            
            
            
            
            
            
            (1,342
            )Balance
      at December 31, 1993
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,501,890
            
            
            
            1
            
            
            
            
            
            
            
            
            
            
            
            2,105,200
            
            
            
            1
            
            
            
            6,828
            
            
            
            
            
            
            
            (3,818
            )
            
            
            
            
            
            
            3,012Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            (1,463
            )
            
            
            
            
            
            
            (1,463
            )Balance
      at December 31, 1994
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,501,890
            
            
            
            1
            
            
            
            
            
            
            
            
            
            
            
            2,105,200
            
            
            
            1
            
            
            
            6,828
            
            
            
            
            
            
            
            (5,281
            )
            
            
            
            
            
            
            1,549Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            (1,959
            )
            
            
            
            
            
            
            (1,959
            )Balance
      at December 31, 1995
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,501,890
            
            
            $
            1
            
            
            
            
            
            
            
            
            
            
            
            2,105,200
            
            
            $
            1
            
            
            $
            6,828
            
            
            
            
            
            
            $
            (7,240
            )
            
            
            
            
            
            $
            (410
            )


____________





See
accompanying Notes to Condensed Consolidated Financial Statements.





5
 Index





ReGen
Biologics, Inc.


(A Development Stage
Company)


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) AND SERIES


A
AND SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)


Period
from December 21, 1989 (inception) to June 30, 2008 (unaudited)


(Dollars
in thousands, except per share data)





Series
      A
            
            
            Series
      C
            
            
            Stockholders’
      Equity (Deficit)Redeemable
              Convertible
              Preferred
            
            
            Redeemable
              Convertible
              Preferred
            
            
            Series
      A - F
              Convertible
              Preferred
            
            
            Series
      B, Series D
              and
      Series E
              Convertible
              Preferred
            
            
            
            
            
            Additional
            
            
            Deferred
            
            
            Deficit
              Accumulated
              During
            
            
            Accumulated
              Other
            
            
            Total
              Stockholders'Stock
            
            
            Stock
            
            
            Stock
            
            
            Stock
            
            
            Common
      Stock
            
            
            Paid-In
            
            
            Stock
            
            
            Development
            
            
            Comprehensive
            
            
            EquityShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Compensation
            
            
            Stage
            
            
            Loss
            
            
            (Deficit)Balance
      at December 31, 1995 (brought forward)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,501,890
            
            
            $
            1
            
            
            
            
            
            
            
            
            
            
            
            2,105,200
            
            
            $
            1
            
            
            $
            6,828
            
            
            
            
            
            
            $
            (7,240
            )
            
            
            
            
            
            $
            (410
            )Issuance
      of Series D convertible preferred stock at $7.25 per share for cash in
      March and April 1996, net of offering costs of $536
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,191,321
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            8,101
            
            
            
            
            
            
            
            —
            
            
            
            
            
            
            
            8,101Exercise
      of common stock options at $0.10, $0.30, and $0.45 per share in August and
      October 1996
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            163,333
            
            
            
            —
            
            
            
            43
            
            
            
            
            
            
            
            —
            
            
            
            
            
            
            
            43Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            (1,931
            )
            
            
            
            
            
            
            (1,931
            )Balance
      at December 31, 1996
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,693,211
            
            
            
            1
            
            
            
            
            
            
            
            
            
            
            
            2,268,533
            
            
            
            1
            
            
            
            14,972
            
            
            
            
            
            
            
            (9,171
            )
            
            
            
            
            
            
            5,803Issuance
      of Series E convertible preferred stock at $7.25 per share for cash in
      August and September 1997, net of offering costs of $53
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            335,314
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            2,378
            
            
            
            
            
            
            
            —
            
            
            
            
            
            
            
            2,378Exercise
      of common stock options at $0.10, $0.30, and $0.45 per share in April,
      August, and September 1997
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            32,111
            
            
            
            —
            
            
            
            5
            
            
            
            
            
            
            
            —
            
            
            
            
            
            
            
            5Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            (3,868
            )
            
            
            
            
            
            
            (3,868
            )Balance
      at December 31, 1997
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,028,525
            
            
            
            1
            
            
            
            
            
            
            
            
            
            
            
            2,300,644
            
            
            
            1
            
            
            
            17,355
            
            
            
            
            
            
            
            (13,039
            )
            
            
            
            
            
            
            4,318Exercise
      of common stock options at $0.10, $0.20, $1.27, and $1.45 per share in
      May, July, November and December 1998, respectively
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            159,879
            
            
            
            —
            
            
            
            108
            
            
            
            
            
            
            
            —
            
            
            
            
            
            
            
            108Compensation
      expense associated with stock option modifications
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            56
            
            
            
            
            
            
            
            —
            
            
            
            
            
            
            
            56Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            (3,815
            )
            
            
            
            
            
            
            (3,815
            )Balance
      at December 31, 1998
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,028,525
            
            
            
            1
            
            
            
            
            
            
            
            
            
            
            
            2,460,523
            
            
            
            1
            
            
            
            17,519
            
            
            
            
            
            
            
            (16,854
            )
            
            
            
            
            
            
            667Exercise
      of common stock options at $.725 and $1.45 per share in April, June and
      August 1999
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            42,396
            
            
            
            —
            
            
            
            32
            
            
            
            
            
            
            
            —
            
            
            
            
            
            
            
            32Issuance
      of Series F convertible preferred stock at $8.73 per share for
      cash
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            453,310
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            3,956
            
            
            
            
            
            
            
            —
            
            
            
            
            
            
            
            3,956Compensation
      expense associated with stock option grants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            3,436
            
            
            $
            (3,247
            )
            
            
            —
            
            
            
            
            
            
            
            189Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (5,458
            )
            
            
            
            
            
            
            (5,458
            )Balance
      at December 31, 1999
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,481,835
            
            
            $
            1
            
            
            
            
            
            
            
            
            
            
            
            2,502,919
            
            
            $
            1
            
            
            $
            24,943
            
            
            $
            (3,247
            )
            
            $
            (22,312
            )
            
            
            
            
            
            $
            (614
            )


____________





See
accompanying Notes to Condensed Consolidated Financial Statements.





6
 Index





ReGen
Biologics, Inc.


(A Development Stage
Company)


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) AND SERIES A


AND
SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)


Period
from December 21, 1989 (inception) to June 30, 2008 (unaudited)


(Dollars
in thousands, except per share data)








Series
      A
            
            
            Series
      C
            
            
            Stockholders’
      Equity (Deficit)Redeemable
              Convertible
              Preferred
            
            
            Redeemable
              Convertible
              Preferred
            
            
            Series
      A - F
              Convertible
              Preferred
            
            
            Series
      B, Series D
              and
      Series E
              Convertible
              Preferred
            
            
            
            
            
            Additional
            
            
            Deferred
            
            
            Deficit
              Accumulated
              During
            
            
            Accumulated
              Other
            
            
            Total
              Stockholders'Stock
            
            
            Stock
            
            
            Stock
            
            
            Stock
            
            
            Common
      Stock
            
            
            Paid-In
            
            
            Stock
            
            
            Development
            
            
            Comprehensive
            
            
            EquityShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Compensation
            
            
            Stage
            
            
            Loss
            
            
            (Deficit)Balance
      at December 31, 1999 (brought forward)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,481,835
            
            
            $
            1
            
            
            
            
            
            
            
            
            
            
            
            2,502,919
            
            
            $
            1
            
            
            $
            24,943
            
            
            $
            (3,247
            )
            
            $
            (22,312
            )
            
            
            
            
            
            $
            (614
            )Compensation
      expense associated with stock option grants in prior year
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            738
            
            
            
            —
            
            
            
            
            
            
            
            738Compensation
      expense associated with stock option grants in current
year
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            2,124
            
            
            
            (1,642
            )
            
            
            —
            
            
            
            
            
            
            
            482Stock
      options cancelled during 2000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            (1,089
            )
            
            
            1,089
            
            
            
            —
            
            
            
            
            
            
            
            —Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (5,229
            )
            
            
            
            
            
            
            (5,229
            )Balance
      at December 31, 2000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,481,835
            
            
            
            1
            
            
            
            
            
            
            
            
            
            
            
            2,502,919
            
            
            
            1
            
            
            
            25,978
            
            
            
            (3,062
            )
            
            
            (27,541
            )
            
            
            
            
            
            
            (4,623
            )Exercise
      of common stock options at $.10 per share in 2001
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            25,000
            
            
            
            —
            
            
            
            3
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            3Exercise
      of common stock options at $1.45 per share in 2001
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            125
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            —Compensation
      expense associated with stock option grants in prior years
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            935
            
            
            
            —
            
            
            
            
            
            
            
            935Compensation
      expense associated with stock option grants in current
year
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            1,010
            
            
            
            (833
            )
            
            
            —
            
            
            
            
            
            
            
            177Stock
      options cancelled during 2001
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            (161
            )
            
            
            161
            
            
            
            —
            
            
            
            
            
            
            
            —Deferred
      stock compensation associated with stock option grants to non-employees in
      2001
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            228
            
            
            
            (131
            )
            
            
            —
            
            
            
            
            
            
            
            97Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (4,330
            
            
            
            
            
            
            
            (4,330Balance
      at December 31, 2001
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,481,835
            
            
            $
            1
            
            
            
            
            
            
            
            
            
            
            
            2,528,044
            
            
            $
            1
            
            
            $
            27,058
            
            
            $
            (2,930
            )
            
            $
            (31,871
            )
            
            
            
            
            
            $
            (7,741
            )


____________





See
accompanying Notes to Condensed Consolidated Financial Statements.





7
 Index





ReGen
Biologics, Inc.


(A Development Stage
Company)


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) AND SERIES


A
AND SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)


Period
from December 21, 1989 (inception) to June 30, 2008 (unaudited)


(Dollars
in thousands, except per share data)


Series
      A
            
            
            Series
      C
            
            
            Stockholders’
      Equity (Deficit)Redeemable
              Convertible
              Preferred
            
            
            Redeemable
              Convertible
              Preferred
            
            
            Series
      A - F
              Convertible
              Preferred
            
            
            Series
      B, Series D
              and
      Series E
              Convertible
              Preferred
            
            
            
            
            
            Additional
            
            
            Deferred
            
            
            Deficit
              Accumulated
              During
            
            
            Accumulated
              Other
            
            
            Total
              Stockholders'Stock
            
            
            Stock
            
            
            Stock
            
            
            Stock
            
            
            Common
      Stock
            
            
            Paid-In
            
            
            Stock
            
            
            Development
            
            
            Comprehensive
            
            
            EquityShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Compensation
            
            
            Stage
            
            
            Loss
            
            
            (Deficit)Balance
      at December 31, 2001 (brought forward)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,481,835
            
            
            $
            1
            
            
            
            
            
            
            
            
            
            
            
            2,528,044
            
            
            $
            1
            
            
            $
            27,058
            
            
            $
            (2,930
            )
            
            $
            (31,871
            )
            
            
            
            
            
            $
            (7,741
            )Issuance
      of Common Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            301,930
            
            
            
            1
            
            
            
            104
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            105Issuance
      of Convertible Preferred Stock for cash and conversion of bridge financing
      net of issuance costs of $138
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,564,047
            
            
            
            1
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            6,716
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            6,717Deferred
      stock compensation associated with stock option grants in
    2002
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            370
            
            
            
            (370
            )
            
            
            —
            
            
            
            
            
            
            
            —Compensation
      expense associated with stock options outstanding
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            452
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            452Effect
      of reverse merger and recapitalization:
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            —Valuation
      of warrants associated with bridge financing
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            657
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            657Valuation
      of beneficial conversion associated with bridge financing
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            843
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            843Compensation
      expense associated with stock options outstanding recognized as a result
      of the reverse merger
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            2,848
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            
            2,848Conversion
      of convertible preferred shares to Redeemable Convertible Preferred Series
      A at liquidation / redemption value
            
            
            15,298,351
            
            
            $
            6,855
            
            
            
            
            
            
            
            
            
            
            (5,564,047
            )
            
            
            (1
            )
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            (6,854
            )
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            (6,855
            )Conversion
      of convertible preferred shares to Common Stock and Series B Preferred
      Shares
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            (4,481,835
            )
            
            
            (1
            )
            
            
            12,025,656
            
            
            $
            120
            
            
            
            297,146
            
            
            
            3
            
            
            
            (122
            )
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            —Conversion
      of Subsidiary Common Stock into Company Common Stock and Series B
      Preferred Shares:
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            —Elimination
      of Subsidiary Common Stock
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (2,829,974
            )
            
            
            (1
            )
            
            
            1
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            —Issuance
      of Company Common Stock
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            7,781,018
            
            
            
            78
            
            
            
            (78
            )
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            —Company
      Common Stock and related equity held by existing shareholders (net of
      18,115 shares held treasury)
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            8,966,966
            
            
            
            89
            
            
            
            2,678
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            2,767Conversion
      of Convertible Preferred Series B Stock to Company Common
      Stock
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            (12,025,656
            )
            
            
            (120
            )
            
            
            12,025,656
            
            
            
            120
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            —Minimum
      Pension Liability Adjustment
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            $
            (58
            )
            
            
            —Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (9,951
            )
            
            
            —
            
            
            
            —Net
      loss and comprehensive loss
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (10,009
            )Balance
      at December 31, 2002
            
            
            15,298,351
            
            
            
            6,855
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            29,070,786
            
            
            
            291
            
            
            
            31,373
            
            
            
            —
            
            
            
            (41,822
            )
            
            
            (58
            )
            
            
            (10,216
            )Compensation
      expense associated with stock options outstanding
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            664
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            664Issuance
      of Redeemable Convertible Preferred Series C Stock, net of issuance costs
      of $612, which include the issuance of non-cash consideration in the form
      of warrants
            
            
            —
            
            
            
            —
            
            
            
            22,246,153
            
            
            $
            9,357
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            97
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            97Issuance
      of Common Stock warrants to Series C Stockholders
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (969
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            969
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            969Valuation
      of beneficial conversion associated with Series C Stock
      financing
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (4,292
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,292
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,292Accretion
      of beneficial conversion associated with Series C Stock
      financing
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,292
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (4,292
            )
            
            
            —
            
            
            
            (4,292
            )Issuance
      of Common Stock - warrants exercised
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            230,000
            
            
            
            2
            
            
            
            113
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            115Accretion
      of Series C Stock issuance cost
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            51
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (51
            )
            
            
            —
            
            
            
            (51
            )Net
      loss and comprehensive loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (5,989
            )
            
            
            —
            
            
            
            (5,989
            )Balance
      at December 31, 2003
            
            
            15,298,351
            
            
            $
            6,855
            
            
            
            22,246,153
            
            
            $
            8,439
            
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            
            29,300,786
            
            
            $
            293
            
            
            $
            37,508
            
            
            $
            —
            
            
            $
            (52,154
            )
            
            $
            (58
            )
            
            $
            (14,411
            )


____________





See
accompanying Notes to Condensed Consolidated Financial Statements.





8
 Index





ReGen
Biologics, Inc.


(A Development Stage
Company)


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) AND SERIES


A
AND SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)


Period
from December 21, 1989 (inception) to June 30, 2008 (unaudited)


(Dollars
in thousands, except per share data)





Series
      A
            
            
            Series
      C
            
            
            Stockholders’
      Equity (Deficit)Redeemable
              Convertible
              Preferred
            
            
            Redeemable
              Convertible
              Preferred
            
            
            Series
      A - F
              Convertible
              Preferred
            
            
            Series
      B, Series D and Series E
              Convertible
              Preferred
            
            
            
            
            
            Additional
            
            
            Deferred
            
            
            Deficit
              Accumulated
              During
            
            
            Accumulated
              Other
            
            
            Total
              Stockholders'Stock
            
            
            Stock
            
            
            Stock
            
            
            Stock
            
            
            Common
      Stock
            
            
            Paid-In
            
            
            Stock
            
            
            Development
            
            
            Comprehensive
            
            
            EquityShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Compensation
            
            
            Stage
            
            
            Loss
            
            
            (Deficit)Balance
      at December 31, 2003 (brought forward)
            
            
            15,298,351
            
            
            $
            6,855
            
            
            
            22,246,153
            
            
            $
            8,439
            
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            
            29,300,786
            
            
            $
            293
            
            
            $
            37,508
            
            
            $
            —
            
            
            $
            (52,154
            )
            
            $
            (58
            )
            
            $
            (14,411
            )Compensation
      expense associated with stock options outstanding
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            684
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            684Accretion
      of Series C Stock issuance cost
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            173
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (173
            )
            
            
            —
            
            
            
            (173
            )Recognition
      of Series C Stock issuance cost upon conversion
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            589
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (589
            )
            
            
            —
            
            
            
            (589
            )Issuance
      of Common Stock - warrants exercised net of 8,901 shares held
      treasury
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            141,152
            
            
            
            1
            
            
            
            58
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            59Issuance
      of Common Stock - options exercised
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            261,109
            
            
            
            3
            
            
            
            77
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            80Issuance
      of Common Stock - common stock offering
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            12,074,595
            
            
            
            121
            
            
            
            9,745
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            9,866Conversion
      of Series A Stock to Common Stock
            
            
            (642,723
            )
            
            
            (288
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            642,723
            
            
            
            6
            
            
            
            282
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            288Conversion
      of Series C Stock to Common Stock
            
            
            —
            
            
            
            —
            
            
            
            (9,302,620
            )
            
            
            (4,168
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            9,302,620
            
            
            
            93
            
            
            
            4,075
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,168Net
      loss and comprehensive loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (7,201
            )
            
            
            —
            
            
            
            (7,201
            )Balance
      at December 31, 2004
            
            
            14,655,628
            
            
            
            6,567
            
            
            
            12,943,533
            
            
            
            5,033
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            51,722,985
            
            
            
            517
            
            
            
            52,429
            
            
            
            —
            
            
            
            (60,117
            )
            
            
            (58
            )
            
            
            (7,229
            )Stock-based
      compensation expense
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            454
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            454Accretion
      of Series C Stock issuance cost
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            109
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (109
            )
            
            
            —
            
            
            
            (109
            )Recognition
      of Series C Stock issuance cost upon conversion
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            110
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (110
            )
            
            
            —
            
            
            
            (110
            )Conversion
      of Series A Preferred Stock to Common Stock
            
            
            (1,395,603
            )
            
            
            (625
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,395,603
            
            
            
            14
            
            
            
            611
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            625Conversion
      of Series C Preferred Stock to Common Stock
            
            
            —
            
            
            
            —
            
            
            
            (1,896,896
            )
            
            
            (850
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,896,896
            
            
            
            19
            
            
            
            831
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            850Issuance
      of Common Stock - work completed
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            100,000
            
            
            
            1
            
            
            
            92
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            93Issuance
      of Common Stock - options exercised
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            20,000
            
            
            
            —
            
            
            
            3
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            3Issuance
      of Common Stock and warrants - common stock offering
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            14,011,178
            
            
            
            140
            
            
            
            11,067
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            11,207Recognition
      of expense for the minimum pension liability upon termination of defined
      benefit pension plan
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            58
            
            
            
            —Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (11,731
            )
            
            
            —
            
            
            
            —Net
      loss and comprehensive loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (11,673
            )Balance
      at December 31, 2005
            
            
            13,260,025
            
            
            $
            5,942
            
            
            
            11,046,637
            
            
            $
            4,402
            
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            
            69,146,662
            
            
            $
            691
            
            
            $
            65,487
            
            
            $
            —
            
            
            $
            (72,067
            )
            
            $
            —
            
            
            $
            (5,889
            )


____________





See
accompanying Notes to Condensed Consolidated Financial Statements.





9
 Index





ReGen
Biologics, Inc.


(A Development Stage
Company)


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) AND SERIES


A
AND SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)


Period
from December 21, 1989 (inception) to June 30, 2008 (unaudited)


(Dollars
in thousands, except per share data)








Series
      A
            
            
            Series
      C
            
            
            Stockholders’
      Equity (Deficit)Redeemable
              Convertible
              Preferred
            
            
            Redeemable
              Convertible
              Preferred
            
            
            Series
      A - F
              Convertible
              Preferred
            
            
            Series
      B, Series D and Series E
              Convertible
              Preferred
            
            
            
            
            
            Additional
            
            
            Deferred
            
            
            Deficit
              Accumulated
              During
            
            
            Accumulated
              Other
            
            
            Total
              Stockholders'Stock
            
            
            Stock
            
            
            Stock
            
            
            Stock
            
            
            Common
      Stock
            
            
            Paid-In
            
            
            Stock
            
            
            Development
            
            
            Comprehensive
            
            
            EquityShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Compensation
            
            
            Stage
            
            
            Loss
            
            
            (Deficit)Balance
      at December 31, 2005 (brought forward)
            
            
            13,260,025
            
            
            $
            5,942
            
            
            
            11,046,637
            
            
            $
            4,402
            
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            
            69,146,662
            
            
            $
            691
            
            
            $
            65,487
            
            
            $
            —
            
            
            $
            (72,067
            )
            
            $
            —
            
            
            $
            (5,889
            )Stock-based
      compensation expense
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,183
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,183Accretion
      of Series C Stock issuance cost
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            110
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (110
            )
            
            
            —
            
            
            
            (110
            )Issuance
      of Common Stock - services rendered
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            40,000
            
            
            
            —
            
            
            
            18
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            18Issuance
      of Common Stock - options exercised
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            310,178
            
            
            
            4
            
            
            
            113
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            117Issuance
      of Common Stock - conversion of warrants
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            375,967
            
            
            
            4
            
            
            
            (4
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Issuance
      of Common Stock and warrants - common stock offering
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            18,774,838
            
            
            
            188
            
            
            
            6,552
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            6,740Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (12,657
            )
            
            
            —
            
            
            
            —Net
      loss and comprehensive loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (12,657
            )Balance
      at December 31, 2006
            
            
            13,260,025
            
            
            
            5,942
            
            
            
            11,046,637
            
            
            
            4,512
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            88,647,645
            
            
            
            887
            
            
            
            73,349
            
            
            
            —
            
            
            
            (84,834
            )
            
            
            —
            
            
            
            (10,598
            )Stock-based
      compensation expense
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,262
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,262Accretion
      of Series C Stock issuance cost
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            245
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (245
            )
            
            
            —
            
            
            
            (245
            )Valuation
      of issuance of warrants and extension of options
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            115
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            115Deemed
      dividend to stockholders for issuance of warrants and extension of
      options
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (115
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (115
            )Conversion
      of Series A preferred stock
            
            
            (10,776,909
            )
            
            
            (4,829
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            10,776,909
            
            
            
            108
            
            
            
            4,721
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,829Conversion
      of Series C preferred stock
            
            
            —
            
            
            
            —
            
            
            
            (4,463,289
            )
            
            
            (2,000
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,463,289
            
            
            
            45
            
            
            
            1,955
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            2,000Issuance
      of Series D preferred stock and preferred stock options and warrants, net
      of issuance costs
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            135,715
            
            
            
            5,560
            
            
            
            —
            
            
            
            —
            
            
            
            69
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            5,629Issuance
      of Common Stock - work completed
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            188,572
            
            
            
            2
            
            
            
            84
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            86Net
      loss and comprehensive loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (10,377
            )
            
            
            —
            
            
            
            (10,377
            )Balance
      at December 31, 2007
            
            
            2,483,116
            
            
            $
            1,113
            
            
            
            6,583,348
            
            
            $
            2,757
            
            
            
            —
            
            
            $
            —
            
            
            
            135,715
            
            
            $
            5,560
            
            
            
            104,076,415
            
            
            $
            1,042
            
            
            $
            81,440
            
            
            $
            —
            
            
            $
            (95,456
            )
            
            $
            —
            
            
            $
            (7,414
            )


____________





See
accompanying Notes to Condensed Consolidated Financial Statements.





10
 Index





ReGen
Biologics, Inc.


(A Development Stage
Company)


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) AND SERIES


A
AND SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)


Period
from December 21, 1989 (inception) to June 30, 2008 (unaudited)


(Dollars
in thousands, except per share data)





Series
      A
            
            
            Series
      C
            
            
            Stockholders’
      Equity (Deficit)Redeemable
              Convertible
              Preferred
            
            
            Redeemable
              Convertible
              Preferred
            
            
            Series
      A - F
              Convertible
              Preferred
            
            
            Series
      B, Series D
              and
      Series E
              Convertible
              Preferred
            
            
            
            
            
            Additional
            
            
            Deferred
            
            
            Deficit
              Accumulated
              During
            
            
            Accumulated
              Other
            
            
            Total
              Stockholders'Stock
            
            
            Stock
            
            
            Stock
            
            
            Stock
            
            
            Common
      Stock
            
            
            Paid-In
            
            
            Stock
            
            
            Development
            
            
            Comprehensive
            
            
            EquityShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Compensation
            
            
            Stage
            
            
            Loss
            
            
            (Deficit)Balance
      at December 31, 2007 (brought forward)
            
            
            2,483,116
            
            
            $
            1,113
            
            
            
            6,583,348
            
            
            $
            2,757
            
            
            
            —
            
            
            $
            —
            
            
            
            135,715
            
            
            $
            5,560
            
            
            
            104,076,415
            
            
            $
            1,042
            
            
            $
            81,440
            
            
            $
            —
            
            
            $
            (95,456
            )
            
            $
            —
            
            
            $
            (7,414
            )Stock-based
      compensation expense
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            836
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            836Accretion
      of Series C Stock issuance cost
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            34
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (34
            )
            
            
            —
            
            
            
            (34
            )Issuance
      of Common Stock - work completed
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            166,667
            
            
            
            2
            
            
            
            (2)
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Issuance
      of Series E Preferred Stock-work completed
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            7,500
            
            
            
            114
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            114Net
      loss and comprehensive loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (4,629
            )
            
            
            —
            
            
            
            (4,629
            )Balance
      at June 30, 2008
            
            
            2,483,116
            
            
            $
            1,113
            
            
            
            6,583,348
            
            
            $
            2,791
            
            
            
            —
            
            
            $
            —
            
            
            
            143,215
            
            
            $
            5,674
            
            
            
            104,243,082
            
            
            $
            1,044
            
            
            $
            82,274
            
            
            $
            —
            
            
            $
            (100,119
            )
            
            $
            —
            
            
            $
            (11,127
            )


____________





See
accompanying Notes to Condensed Consolidated Financial
Statements.   11
 Index


REGENBIOLOGICS, INC.


(A
Development Stage Company)


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


(Dollars
in thousands)




Six Months Ended June 30,
            
            
            Period
      from
              December
      21,
              19892008
            
            
            2007
            
            
            (Inception)
      to
              June 30, 2008Operating
      ActivitiesNet
      loss
            
            $
            (4,629
            )
            
            $
            (5,826
            )
            
            $
            (94,406
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Stock-based
      compensation
            
            
            864
            
            
            
            669
            
            
            
            11,336Amortization
      of debt discount for warrant and beneficial conversion
    feature
            
            
            —
            
            
            
            —
            
            
            
            1,500Depreciation
      and amortization
            
            
            52
            
            
            
            38
            
            
            
            2,426Loss
      on disposal of property and equipment
            
            
            —
            
            
            
            —
            
            
            
            9Recognition
      of expense for the minimum pension liability upon termination of defined
      benefit pension plan
            
            
            —
            
            
            
            —
            
            
            
            58Exchange
      (gain) loss
            
            
            (46
            )
            
            
            22
            
            
            
            29Changes
      in operating assets and liabilities:Other
      current assets and receivables
            
            
            68
            
            
            
            (37
            )
            
            
            (429
            )Inventory
            
            
            19
            
            
            
            (58
            )
            
            
            (292
            )Other
      assets
            
            
            (298
            )
            
            
            27
            
            
            
            (357
            )Accounts
      payable and accrued expenses
            
            
            515
            
            
            
            279
            
            
            
            3,095Other
      liabilities
            
            
            (72
            )
            
            
            (42
            )
            
            
            53Net
      cash used in operating activities
            
            
            (3,527
            )
            
            
            (4,928
            )
            
            
            (76,978
            )Investing
      ActivitiesPurchases
      of property and equipment
            
            
            (18
            )
            
            
            (26
            )
            
            
            (2,498
            )Changes
      in investments
            
            
            100
            
            
            
            (303
            )
            
            
            2,945Net
      cash provided by (used in) investing activities
            
            
            82
            
            
            
            (329
            )
            
            
            447Financing
      ActivitiesIssuance
      of common stock to founders for contributed patents
            
            
            —
            
            
            
            —
            
            
            
            42Issuance
      of Series B preferred stock upon conversion of interest
      payable
            
            
            —
            
            
            
            —
            
            
            
            6Reduction
      in payable to stockholder
            
            
            —
            
            
            
            —
            
            
            
            (76
            )Proceeds
      from issuance of convertible preferred stock and preferred stock options
      and warrants, net of issuance costs paid in cash
            
            
            —
            
            
            
            5,560
            
            
            
            39,781Proceeds
      from issuance of common stock and warrants
            
            
            —
            
            
            
            —
            
            
            
            28,487Repayment
      of capital lease obligations
            
            
            (7
            )
            
            
            (7
            )
            
            
            (170
            )Proceeds
      from notes payable
            
            
            —
            
            
            
            —
            
            
            
            11,410Payments
      on notes payable
            
            
            —
            
            
            
            —
            
            
            
            (2,323
            )Net
      cash (used in) provided by financing activities
            
            
            (7
            )
            
            
            5,553
            
            
            
            77,157Effect
      of exchange rate changes on cash
            
            
            46
            
            
            
            (22
            )
            
            
            (25
            )Net
      (decrease) increase in cash and cash equivalents
            
            
            (3,406
            )
            
            
            274
            
            
            
            601Cash
      and cash equivalents at beginning of period
            
            
            4,008
            
            
            
            7,268
            
            
            
            1Cash
      and cash equivalents at end of period
            
            $
            602
            
            
            $
            7,542
            
            
            $
            602Supplemental
      Disclosure ofCash
      Flow InformationNon-cash
      disclosure: Issuance of Series B convertible preferred stock upon
      conversion of notes payable
            
            $
            —
            
            
            $
            —
            
            
            $
            300Equipment
      purchased pursuant to capital leases
            
            
            —
            
            
            
            —
            
            
            
            198Cancellation
      of stock options associated with deferred stock
    compensation
            
            
            —
            
            
            
            —
            
            
            
            1,250Net
      assets assumed in merger
            
            
            —
            
            
            
            —
            
            
            
            2,733Conversion
      of bridge financing to equity
            
            
            —
            
            
            
            —
            
            
            
            2,860Beneficial
      Conversion of Series C Stock
            
            
            —
            
            
            
            —
            
            
            
            4,292Warrants
      associated with Series C Stock
            
            
            —
            
            
            
            —
            
            
            
            969Warrants
      associated with Series C Stock private placement agent fee
            
            
            —
            
            
            
            —
            
            
            
            97Warrants
      associated with consulting services
            
            
            —
            
            
            
            69
            
            
            
            69Conversion
      of Series A Preferred Stock
            
            
            —
            
            
            
            4,829
            
            
            
            5,742Issuance
      of Common Stock-conversion of warrants
            
            
            —
            
            
            
            —
            
            
            
            14Conversion
      of Series C Preferred Stock
            
            
            —
            
            
            
            2,000
            
            
            
            7,018Issuance
      of Common Stock for services rendered
            
            
            —
            
            
            
            47
            
            
            
            197Issuance
      of Series E Preferred Stock for services rendered
            
            
            114
            
            
            
            —
            
            
            
            114Non-employee
      options exercised, net-share settled
            
            
            —
            
            
            
            —
            
            
            
            1Cash
      disclosure: Cash paid for interest
            
            
            4
            
            
            
            5
            
            
            
            337





See
accompanying Notes to Condensed Consolidated Financial Statements.





12
 Index





REGENBIOLOGICS, INC.


(A
Development Stage Company)


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per unit and per share data)





(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Principles
of Consolidation and Basis of Presentation





The
consolidated financial statements of ReGen Biologics, Inc. (“ReGen” or
the “Company”) include accounts of the Company and its wholly-owned
subsidiaries, RBio, Inc. (“RBio”) and ReGen BiologicsAG (“ReGen AG”).
Intercompany transactions and balances are eliminated in
consolidation.





The
consolidated financial statements have been prepared in accordance with the
instructions to Form 10-Q and include all the information and notes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, the accompanying
consolidated financial statements contain all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the financial position and
the results of operations for the periods presented.





To date,
sales of the Company’s products have been limited. ReGen will continue to
require additional capital to further develop its products and further develop
sales and distribution channels for its products around the world. Accordingly,
the Company is still considered a development stage enterprise. Management
believes that ReGen would emerge from the development stage when (a) the
Company obtains either FDA clearance of the Collagen Scaffold device or
premarket approval for the CMI® collagen meniscus implant (“CMI”), and either
product is available for sale in the U.S. and (b) the Company begins to
earn significant revenue from its principal operations.





ReGen
currently operates as an orthopedic products company that develops,
manufactures, and markets innovative tissue growth and repair products for
U.S. and global markets. As discussed below, neither the Collagen Scaffold
device nor the CMI, available for sale in certain markets outside the U.S. as
the MenaflexTM collagen meniscus implant (“Menaflex”), is available for sale in
the U.S. ReGen is managed and operated as one business segment.
Accordingly, ReGen does not prepare financial information for separate product
areas and does not have separate reportable segments as defined by Statement of
Financial Accounting Standards (SFAS) No. 131, Disclosure about Segments of
an Enterprise and
Related Information.





For
further information, refer to the consolidated financial statements and notes
included in ReGen’s Annual Report on Form 10-K for the year ended December 31,
2007.





Risks
and Going Concern Considerations





The
future operating results of the Company may be affected by a number of risks and
certain other factors. The Company’s future operating results are highly
dependent upon its ability to obtain and maintain regulatory clearance and
approvals for its products. Although Menaflex is marketed for sale and
distributed in certain markets outside the U.S., it is not approved for sale in
the U.S., and the Company makes no claim regarding its safety, effectiveness or
its potential for FDA approval.





In
December 2005 the Company submitted a 510(k) premarket notification to the U.S.
Food and Drug Administration (the “FDA”) for the ReGen Collagen Scaffold for use
in general surgical procedures for the reinforcement and repair of soft tissue
where weakness exists, including, but not limited to, general soft tissue
defects, hernias, and meniscus defects. The Collagen Scaffold reinforces soft
tissue and provides a resorbable scaffold that is replaced by the patient’s own
tissue. During the third quarter of 2006, the FDA provided the Company with a
letter indicating the FDA’s initial determination that the device is not
substantially equivalent or NSE to existing class II devices already in
receipt of FDA clearance. The Company appealed the FDA’s NSE decision.
Subsequently, the FDA provided a letter upholding the NSE decision and
indicating that the Company may submit a new 510(k) for clearance of its
Collagen Scaffold device with modified indications for use in the meniscus, as
suggested by the Company, and supported by appropriate clinical
data.




In
December 2006 the Company submitted a revised 510(k) premarket notification to
the FDA for the Collagen Scaffold. In March 2007, the Company received a letter
from the FDA requesting additional information, which the FDA stated was
necessary to complete its review of the 510(k) application. In June 2007 the
Company responded to the FDA’s request and in the third quarter of 2007 the
Company received an NSE letter from the FDA regarding the revised 510(k)
submission. The Company has been pursuing appeal of the NSE decision through FDA
administrative channels. Following discussions with the FDA, in July 2008, the
Company submitted its latest 510(k) premarket notification to the FDA for the
Collagen Scaffold.





13
 Index





The
process of obtaining regulatory clearance or approval to market a medical
device, particularly from the FDA, can be costly and time-consuming. There can
be no assurance that such clearance or approval will be granted on a timely
basis, if at all. If the 510(k) process continues to take longer than expected
or the Collagen Scaffold device is not cleared, it will substantially delay our
ability to commercialize the Collagen Scaffold and negatively impact our
business. If the Collagen Scaffold device is not cleared through the 510(k), the
Company still has the option of completing its submission to the FDA of the
premarket approval application, or PMA for the CMI, although the Company does
not foresee pursuing completion of the PMA at this time. The PMA process is
typically more costly, lengthy and uncertain than the 510(k) clearance
process.





In
addition to regulatory related hurdles, in order to approach a position of
positive operating earnings and cash flow, the Company will need to effectively
address other operating issues, including for example establishing distribution
channels and identifying third party reimbursement provisions for the surgeons
and facilities that would be responsible for implanting the Company’s products.
While the Company is actively working to address these issues, there is no
guarantee that the Company will be able to effectively address these challenges
in any given time frame.





As
discussed in ReGen’s Annual Report on Form 10-K for the year ended December 31,
2007, all of the Company’s long-term debt (balance of $8,359 at June 30, 2008)
becomes due and payable on December 31, 2009, and the Company’s Series A and
Series C redeemable convertible preferred stock (liquidation preferences of
$1,113 and $2,950, respectively) become redeemable at the option of not less
than a majority of the holders in June 2009 and September 2010,
respectively.





The
Company will need to pursue additional financing in order to support ongoing
operations, including meeting its future debt service requirements. While
the Company has been successful in the past in obtaining the necessary capital
to support its operations, there is no assurance that the Company will be able
to obtain additional equity capital or other financing under commercially
reasonable terms and conditions, or at all. In the three and six month periods
ended June 30, 2008, the Company incurred net losses of $2,316 and $4,629,
respectively and used $3,527 of cash in operating activities in the six months
ended June 30, 2008. Beginning in the fourth quarter of 2007, the Company
implemented measures to control costs that are within management’s discretion,
including (but not limited to) costs such as consulting, advertising and
promotion, personnel, other administrative costs and capital expenditures. At
June 30, 2008, the Company had cash of $602 and net working capital of $573. As
discussed in Note 6, on July 24, 2008, the Company completed a $2,539 private
placement of convertible notes. Management expects the net proceeds from the
private placement, combined with existing cash, will enable the Company to
operate through November 2008. Management’s estimate may change, however, if
actual results differ significantly from our expectations. Key assumptions that
may affect our estimate of cash needs include (i) actual sales that may vary
significantly from our expectations; (ii) the actual timeline of events with
respect to our latest 510(k) submission to the FDA; (iii) decisions we make
regarding our business objectives; and (iv) other developments in our
business.  Management anticipates that additional cash will be required to
support operations beyond November 2008. However, if unforeseen events occur, it
is possible that additional cash may be needed before November 2008 to support
operations. The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. However, if
additional capital is not obtained, the Company will not be able to continue as
a going concern. The Company’s financial statements do not include any
adjustments relating to the recoverability or classification of assets or the
amounts or classification of liabilities that might result from the outcome of
this uncertainty.





Adoption
of New Accounting Pronouncements




In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No.
157. FSP No. 157-2, was effective upon issuance and delayed the effective
date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), to fiscal years beginning
after November 15, 2008. A discussion of SFAS 157 follows.





Effective
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements. The
standard provides enhanced guidance for using fair value to measure assets and
liabilities. The standard also responds to investors’ requests for expanded
information about the extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value, and the effect of
fair value measurements on earnings. The standard applies whenever other
standards require (or permit) assets or liabilities to be measured at fair
value. The standard does not expand the use of fair value in any new
circumstances.





14
 Index





There
were no gains or losses for the period ended June 30, 2008 included in earnings
that are attributable to the change in unrealized gains or losses relating to
those assets and liabilities still held at the reporting date. The Company’s
money market funds are classified within Level 1 of the fair value hierarchy
because they are valued using quoted market prices. Adoption of the provisions
of SFAS No. 157 did not have a material effect on the Company’s consolidated
financial statements.




Effective
January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for
Financial Assets and Financial
Liabilities.The standard allows entities to voluntarily choose, at
specified election dates, to measure many financial assets and financial
liabilities (as well as certain non-financial instruments that are similar to
financial instruments) at fair value (the “fair value option”). The guidance in
SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year
that begins after November 15, 2007. The Company did not elect the fair value
option for any financial assets or liabilities and, therefore, adoption of the
provisions of SFAS No. 159 did not have a material effect on its consolidated
financial statements.





Accounting
Principles Issued But Not Yet Adopted





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. This Statement identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). The Statement is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. The Company
does not expect adoption of SFAS No. 162 to have a significant impact on its
consolidated financial statements.




Use
of Estimates





The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires the use of estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements, the reported amounts of revenues and expenses during the reporting
period and related disclosures. The Company’s consolidated financial statements
include amounts that are based on management’s best estimates and judgments.
Actual results could differ from those estimates.





Cash
and Cash Equivalents and Investments





The
Company considers all highly liquid investments purchased with a maturity of 90
days or less to be cash equivalents and as such has classified as cash
equivalents cash held in a money market account, cash held in a sweep account,
and investments in commercial paper and federal agency mortgage-backed
securities that meet the Company’s classification criteria for cash equivalents.
The Company held cash equivalents of $244 and $1,245, in a money market account
and $216 and $902 in a sweep account as of June 30, 2008 and December 31, 2007,
respectively. The Company also held cash equivalents in commercial paper of $0
and $955 at June 30, 2008 and December 31, 2007, respectively, and in federal
agency mortgage-backed securities of $0 and $495, at June 30, 2008 and December
31, 2007, respectively. At June 30, 2008 and December 31, 2007, respectively,
the Company held cash of $76 and $308 in a foreign account.





All
investments are debt securities classified as held to maturity, and,
accordingly, are carried at amortized cost, which approximates fair value. The
cost of securities sold is based on the specific identification method, when
applicable. At December 31, 2007, the Company had invested $100 in commercial
paper. The Company did not have any material realized or unrealized gains or
losses at June 30, 2008 or December 31, 2007.





Accounts
Receivable





Accounts
receivable are carried at estimated net realizable value. The Company records an
allowance for doubtful accounts for all trade receivables that are not expected
to be collected, usually those that are over 90 days past the invoice due date.
The allowance for doubtful accounts was $2 and $3 at June 30, 2008 and December
31, 2007, respectively.





15
 Index





Inventories





Inventories
are valued at the lower of actual cost or market, using the first-in, first-out
(FIFO) method. Work in process is calculated by estimating the number of units
that will be successfully converted to finished goods, based upon a build-up in
the stage of completion using estimated labor inputs for each stage and
historical yields reduced by estimated usage for quality control
testing.





Inventory
consists of the following:





June
      30,
              2008
            
            
            December
      31,
              2007(In
      thousands)Raw
      material
            
            $
            21
            
            
            $
            24Work
      in process
            
            
            100
            
            
            
            37Finished
      goods
            
            
            171
            
            
            
            250$
            292
            
            
            $
            311





Inventory
was adjusted down $7 during the three and six months ended June 30, 2008, and $0
for the same periods in 2007. At both June 30, 2008 and December 31, 2007, 1% of
total inventory is valued at below the Company’s cost. The Company estimates
market value of inventory based upon sales activity within its various
distribution channels. The Company’s production process has a high degree of
fixed costs and due to the early stage of market acceptance for its products,
sales and production volumes may vary significantly from one period to another.
Consequently, in some periods sales and production volumes may not be adequate
to provide for per unit costs that are lower than the current market price for
the Company’s products.





Other
assets





Prepaid
expenses and other current assets consist of the following:





June
      30,
              2008
            
            
            December
      31,
              2007(In
      thousands)Prepaid
      expenses
            
            $
            261
            
            
            $
            299Escrow
      deposit
            
            
            123
            
            
            
            —Interest
      and other receivables
            
            
            38
            
            
            
            32Security
      deposit
            
            
            5
            
            
            
            5$
            427
            
            
            $
            336





Other
non-current assets consist of the following:





June
      30,
              2008
            
            
            December
      31,
              2007(In
      thousands)Escrow
      deposit
            
            $
            302
            
            
            $
            —Security
      deposit
            
            
            100
            
            
            
            100Other
      assets
            
            
            5
            
            
            
            9$
            407
            
            
            $
            109





The
current escrow deposit was established to provide for payment of the retention
bonus and related payroll taxes for non-executive employees that are expected to
be paid in August 2008. The non-current escrow deposit was established to
provide for payment of six months salary and benefits and related payroll taxes
for three of the Company’s executive officers under certain termination
scenarios. In accordance with the escrow agreement, any escrow funds not
disbursed by December 31, 2009 will revert to the Company. The escrow deposits
also include amounts to cover estimated escrow administration fees. See Note 2
for further information about the escrow arrangement and related
commitments.





16
 Index





Accrued
Expenses





Accrued
expenses consist of the following:





June
      30,
              2008
            
            
            December
      31,
              2007(In
      thousands)Accrued
      professional fees
            
            $
            272
            
            
            $
            238Accrued
      wages and vacation
            
            
            208
            
            
            
            89Accrued
      printing cost
            
            
            21
            
            
            
            15Other
      accrued cost
            
            
            29
            
            
            
            10$
            530
            
            
            $
            352





Foreign
Currency Transactions





The
Company has determined the functional currency of ReGen AG to be the U.S. dollar
(USD). ReGen AG’s has cash accounts denominated in Swiss francs (CHF), euros and
USD and its books and records are maintained in CHF. The Company remeasures
ReGen AG’s nonmonetary assets and liabilities and related revenue and expenses
using historical rates, other statement of operations accounts using average
rates for the period, and monetary assets and liabilities using rates in effect
at the balance sheet date. Foreign currency transaction gains or losses for the
change in exchange rates between the USD and the foreign currency in which a
transaction is denominated, including exchange gains and losses from
remeasurement of the ReGen AG’s monetary assets and liabilities, are recognized
currently in results of operations. Foreign currency transaction (gains) or
losses included in the consolidated results of operations for the three month
and six month periods ended June 30, 2008 approximated $14 and $(10),
respectively, and $5 and $22, respectively, for the same periods in
2007.





Basic
and Diluted Loss Per Share





Basic net
loss attributable to common stockholders is calculated by dividing net loss
attributable to common stockholders by the weighted average number of common
shares outstanding during the period. Shares that would be issued upon
conversion of preferred stock or debt instruments are not included in the
calculation of weighted average number of common shares outstanding during the
period due to the Company’s net operating loss position. Dividends on preferred
stock are not added to the net loss attributable to common stockholders until
such dividends are declared. Due to the Company’s net loss position, all
options, warrants and contingently issuable shares are anti-dilutive. Therefore,
diluted and basic net loss per share are the same.





Stock-Based
Compensation





Under the
fair value recognition provisions of SFAS No. 123R, we recognize stock-based
compensation net of an estimated forfeiture rate and only recognize compensation
cost for those shares expected to vest, generally on a straight-line basis over
the requisite service period of the award, usually the option vesting term of
four years.




The
Company uses the Black-Scholes model to estimate grant date fair value. For
expected volatility, the Company uses its historical realized volatility,
calculated using historical stock prices of the Company since June 2002. The
expected term of options granted after January 1, 2006, is generally estimated
to be seven years, given the contractual term of 10 years and vesting period of
four years. The interest rate used in the pricing model is based on the U.S.
Treasury yield curve in effect at the time of the grant on issues with remaining
terms equal to the estimated expected term used in the model. In addition, the
Company has estimated a forfeiture rate based on historical data and current
assumptions. For options issued in our Series E Stock, we value these options
based upon the equivalent fair value of options in common stock into which our
Series E Stock is contingently convertible. We believe the fair value of our
Series E Stock is equivalent to the fair value of our common stock on an as
converted basis.





In the
second quarter of 2008, the Company granted employees and directors options to
purchase 109,065 shares of Series E Stock (or 10,906,500 shares of common stock
after mandatory conversion of the Series E Stock), with an estimated weighted
average grant date fair values of $13 per share (or $0.13 per share of
common stock). Included in these grants were performance-based options to
purchase 98,865 shares of Series E Stock (or 9,886,500 shares of common stock
after mandatory conversion of the Series E Stock) with vesting that is
contingent upon FDA clearance of the Company’s Collagen Scaffold device. There
was no expense recognized in the second quarter related to these performance
options. In the first quarter of 2007, the Company granted options to employees,
officers and directors to purchase an aggregate of 4,375,642 shares of the
Company’s common stock, with a per share weighted average fair value of $0.33.
The Company did not grant options during the first quarter of 2008 or the second
quarter of 2007.





17
 Index





During
the second quarter of 2008, the Company granted options to non-employee
consultants to purchase 8,445 shares of Series E Stock (or 844,500 shares of
common stock after mandatory conversion of the Series E Stock), with an
estimated weighted average grant date fair values of $12 per share (or $0.12 per
share of common stock). Included in these grants were performance-based
options for 485 shares of Series E Stock (or 48,500 shares of common stock after
mandatory conversion of the Series E Stock) with vesting that is contingent upon
FDA approval of the Company’s 510(k) for its Collagen Scaffold device. Also,
during the second quarter of 2008, the Company granted options to a non-employee
consultant to purchase 100,000 shares of common stock, with an estimated
weighted average grant date fair values of $0.12 per share. During the first
quarter of 2007, the Company granted options to non-employee consultants to
purchase 100,000 shares of the Company’s common stock with an estimated per
share fair value of $0.36 at the measurement date.





Amortization
of compensation costs recognized for the three months ended June 30, 2008 and
2007, for grants awarded to employees and directors approximated $344 and $299,
respectively. Amortization of compensation costs recognized for the six months
ended June 30, 2008 and 2007, for grants awarded to employees and directors
approximated $718 and $592, respectively. Amortization of compensation costs
recognized for the three months ended June 30, 2008 and 2007 for grants awarded
to non-employee consultants approximated $29 and $17, respectively. Amortization
of compensation costs recognized for the six months ended June 30, 2008 and 2007
for grants awarded to non-employee consultants approximated $32 and $31,
respectively. There has been no expense recognized for options with contingent
vesting.





For the
three and six month periods ended June 30, 2008, for services rendered during
2008, the Company issued to a vendor 3,750 and 7,500 shares, respectively, of
Series E Stock. Related to this issuance the Company included the estimated fair
value of $56 and $114 in its results of operations for the three and six month
periods ended June 30, 2008, respectively. In connection with services rendered
during 2007, the Company issued to a vendor 166,667 shares of restricted common
stock in February 2008. Related to this issuance, the Company included the
estimated fair value of $15 in its 2007 results of operations. On June 30, 2007,
the Company issued 120,000 shares of its restricted common stock to a vendor for
services rendered during the first six months of 2007, and recognized the
estimated fair value of $29 and $47 in the Company’s results of operations for
the three and six months ended June 30, 2007, respectively.





Effective
March 2, 2007, the Company entered into a one year consulting agreement to
retain the financial advisory services of Sanderling Ventures Management VI
(Sanderling), affiliates of whom together beneficially own in excess of five
percent of the Company’s common stock. In consideration for such services, the
Company issued to Sanderling a warrant to purchase 2,000 shares of Series D
Stock (or 200,000 common shares if the warrant is exercised after mandatory
conversion of the Series D Stock) with the warrant having a five-year term and
an exercise price of $42 per share (or $0.42 per common share if the warrant is
exercised for shares of the Company’s common stock). Using the Black-Scholes
model, the Company has estimated the fair value of the warrant to be
approximately $69, which has been included as an expense in its 2007 results of
operations. The warrants were exercisable for shares of Series D Stock upon
issuance.





(2)
COMMITMENTS AND CONTINGENCIES





From time
to time the Company may be a defendant in lawsuits incidental to the Company’s
business. Further, the nature of the Company’s operations subjects it to the
inherent business risk of financial exposure to product liability claims.
Currently, the Company is not a party to any material legal
proceedings.





In
January 2008, the Company committed to salary and benefit continuation payments
through July 31, 2008 for its remaining U.S. non-officer employees, in the event
that the Company terminates employment without cause (with “cause” defined as a
material violation of Company policy as outlined in the Company’s employee
handbook). The aggregate estimated cost for the salaries and benefits for
January 1, 2008 through July 31, 2008 approximates $540. In addition the Company
has committed to pay each U.S. non-officer employee a retention bonus equal to
15% of their respective annualized salaries, provided the employee remains
actively employed through July 31, 2008. The retention bonus is forfeited if the
employee resigns or employment is terminated for cause before July 31, 2008.
However, if employment is terminated without cause before July 31, 2008, then
the Company is obligated to pay the retention bonus. Aggregate retention bonuses
under this program and estimated payroll taxes thereon approximate $119, which
the Company expects to pay in August 2008. The Company accrued $102 at June 30,
2008 related to the retention bonus.





Effective
June 27, 2008, management entered into an escrow arrangement to provide for
payment of (i) the foregoing retention bonuses and related payroll taxes for
non-executive employees and (ii) for six months salary and benefit continuation
and related payroll taxes for three of the Company’s executive officers
(approximating $300). In accordance with the escrow agreement, any funds not
disbursed by December 31, 2009, will revert to the Company. The executive
salaries and benefits will be continued in the event employment is terminated
without cause (with “cause” defined as a material violation of Company policy as
outlined in the Company’s employee handbook) or upon the failure of the Company
to pay in full the regularly scheduled salary, withholding taxes and benefits of
the designated executives as services are rendered by such
executives.





18
 Index





In the
fourth quarter of 2007 the Company responded to inquiries from the IRS and the
state of California pertaining to options granted where the market price of the
Company’s stock was higher than the exercise price of the options. In February
2008 and June 2008, the Company received follow-up inquiries from the IRS, to
which it responded in May and June 2008, respectively. In July 2008, the Company
received another follow-up inquiry to which it is in the process of
responding.





On
November 16, 2006, following our announcement that our management voluntarily
initiated and conducted, and the Audit Committee of the Board of Directors
oversaw, a review of the Company’s historical stock option granting and
accounting practices, we received a letter from the Division of Enforcement of
the U.S. Securities and Exchange Commission (the “SEC”) requesting that the
Company preserve all documents concerning its granting of stock options to any
of our executives or employees from January 2002 through the present and stating
that the SEC intends to request production of such documents in the future.
Subsequently, on November 20, 2006, the Company amended its quarterly and annual
reports to include restated consolidated financial statements for the years
ended December 31, 2005, 2004, 2003, the period from December 21, 1989
(inception) to December 31, 2005, and the quarters ended March 31, 2006 and June
30, 2006. At this time, while we intend to cooperate with the SEC inquiry, we
cannot predict what consequences the SEC inquiry will have on the Company. The
Company may be subject to regulatory fines or penalties or other contingent
liabilities at the conclusion of the SEC’s inquiry.





The
Company’s operations are subject to rigorous regulation by the FDA and numerous
other federal, state, and foreign governmental authorities. Our manufacturing
facility and our products are subject to continual review and periodic
inspection by regulatory agencies. Failure to comply with FDA or other
governmental regulations can result in fines, unanticipated compliance
expenditures, recall or seizure of products, total or partial suspension of
production and/or distribution, enforcement actions, injunctions, criminal
prosecution, or other actions.





(3)
CONCENTRATIONS OF RISK





The
Company currently markets and sells two products. Our primary product, Menaflex
(also known as the CMI), is a type I collagen implant designed to facilitate
growth of new tissue to reinforce the existing meniscus tissue remaining after a
partial meniscectomy procedure in the human knee. We also sell the SharpShooter
Tissue Repair System (“SharpShooter”), a suturing device used to facilitate the
surgical implantation of the Company’s collagen matrix products, as well as to
perform other similar arthroscopic meniscal repair procedures.





Our
products are marketed in the European Union (the “EU”), Switzerland, Turkey, and
the Republic of South Africa, through ReGen AG. Currently, the Company has
distributorship agreements with independent orthopedic device marketing
organizations for the distribution of our products in Italy, Spain, Andorra,
Poland, Turkey, the Republic of South Africa and the United Kingdom (the
“U.K.”). SharpShooter also is marketed through a worldwide non-exclusive
distribution agreement with Linvatec Corporation (Linvatec), a subsidiary of
ConMed (NASDAQ: CNMD).





The
Company is subject to inherent risks associated with international sales, such
as changes in the economic, political, legal and business environments in the
foreign countries in which we do business. The Company does not require
collateral from its customers.





19
 Index





Concentrations
of receivables and revenue by geographic location as of and for the three and
six month periods ended June 30, 2008 and 2007 are as follows:





Three Months Ended June 30,
            
            
            Six Months Ended June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Receivables:U.S.
      (Linvatec)
            
            
            34
            %
            
            
            18
            %
            
            
            34
            %
            
            
            18
            %Germany
      (various)
            
            
            22
            %
            
            
            48
            %
            
            
            22
            %
            
            
            48
            %Italy
      (Xmedica)
            
            
            2
            %
            
            
            16
            %
            
            
            2
            %
            
            
            16
            %Spain
      (Hoscenter, Polymedic)
            
            
            0
            %
            
            
            17
            %
            
            
            0
            %
            
            
            17
            %Austria
      (various)
            
            
            7
            %
            
            
            0
            %
            
            
            7
            %
            
            
            0
            %U.K.
      (Hospital Innovations)
            
            
            17
            %
            
            
            0
            %
            
            
            17
            %
            
            
            0
            %Poland
      (Biocare)
            
            
            11
            %
            
            
            0
            %
            
            
            11
            %
            
            
            0
            %South
      Africa (Grucox)
            
            
            1
            %
            
            
            0
            %
            
            
            1
            %
            
            
            0
            %Switzerland
      (various)
            
            
            2
            %
            
            
            0
            %
            
            
            2
            %
            
            
            0
            %Belgium
      (various)
            
            
            4
            %
            
            
            1
            %
            
            
            4
            %
            
            
            1
            %Sales
      revenue:U.S.
      (Linvatec)
            
            
            28
            %
            
            
            50
            %
            
            
            14
            %
            
            
            48
            %Germany
      (various)
            
            
            21
            %
            
            
            36
            %
            
            
            42
            %
            
            
            32
            %Italy
      (Xmedica)
            
            
            15
            %
            
            
            0
            %
            
            
            11
            %
            
            
            12
            %Spain
      (Hoscenter, Polymedic)
            
            
            2
            %
            
            
            13
            %
            
            
            6
            %
            
            
            6
            %Austria
      (various)
            
            
            12
            %
            
            
            0
            %
            
            
            9
            %
            
            
            0
            %U.K.
      (Hospital Innovations)
            
            
            9
            %
            
            
            0
            %
            
            
            5
            %
            
            
            0
            %Poland
      (Biocare)
            
            
            5
            %
            
            
            0
            %
            
            
            4
            %
            
            
            0
            %South
      Africa (Grucox)
            
            
            3
            %
            
            
            0
            %
            
            
            3
            %
            
            
            0
            %Switzerland
      (various)
            
            
            3
            %
            
            
            0
            %
            
            
            5
            %
            
            
            2
            %Belgium
      (various)
            
            
            2
            %
            
            
            1
            %
            
            
            1
            %
            
            
            0
            %Royalties:U.S.
      (Linvatec)
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %





In
several cases the Company relies on a single vendor to supply critical materials
or components. Currently, all of these materials and components can be obtained
by alternative suppliers, subject to the time and other resources required to
initiate new vendor relationships.





At June
30, 2008 and December 31, 2007, 10% and 1%, respectively, of the Company’s cash
and cash equivalents balance was held in foreign currencies and 16% of current
liabilities related to unsettled obligations denominated in foreign currencies,
at each date. For the three and six month periods ended June 30, 2008, 22% and
20%, respectively, of the Company’s expenses resulted from transactions
denominated in foreign currencies. For each of the three and six month periods
ended June 30, 2007 and 2007, 18% of the Company’s expenses resulted from
transactions denominated in foreign currencies.





(4)
RELATED PARTY TRANSACTIONS





Amounts
due to related parties, $4 at both June 30, 2008 and December 31, 2007,
represent royalty payments due to an individual who is a shareholder and
director.





The
Company’s statements of operations for the three months ended June 30, 2008 and
2007 include $4 and $3, respectively, representing royalties to an individual
who is a shareholder and director of the Company, and $5 and $0, respectively,
for the payment of legal fees on behalf of a private foundation affiliated with
the Company’s CEO. The Company’s statement of operations for the six months
ended June 30, 2008, includes $6 for a contribution to the same private
foundation and $9 recognized in other income for website design services
provided to an affiliate of the Company’s CEO. The Company’s statements of
operations for the three and six months ended June 30, 2007, also include $4
representing reimbursable expenses due to a clinic owned by an individual who is
a shareholder and director of the Company.





(5) STOCKHOLDERS’ EQUITY AND
REDEEMABLE CONVERTIBLE PREFERRED STOCK





As of
June 30, 2008, the Company has 165,000,000 authorized shares of common stock, of
which 104,243,082 shares of common stock were outstanding. Also at June 30,
2008, the Company had reserved 9,066,464 shares of common stock for conversion
of outstanding Series A Redeemable Convertible Preferred Stock (“Series A
Stock”) and Series C Redeemable Convertible Preferred Stock (“Series C Stock”),
47,289,195 shares of common stock for the exercise of outstanding stock options
and warrants and 500,000 shares for issuance to vendors for services to be
rendered.





As of
June 30, 2008, the Company has 500,000 shares of authorized Series D Convertible
Preferred Stock (“Series D Stock”), of which 135,715 shares were issued and
200,939 shares were reserved for exercise of options and warrants. Each share of
Series D Stock is mandatorily convertible into 100 shares of common stock upon
the occurrence of certain events, such that a sufficient number of shares of
common stock are available to effect the conversion. The Series D Stock is
contingently convertible and was not convertible at June 30,
2008.





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 Index





As of
June 30, 2008, the Company has 500,000 shares of authorized Series E Preferred
Stock (“Series E Stock”), of which 7,500 shares were issued, 448,771 shares were
reserved for exercise of options, and 7,500 shares were reserved for issuance to
vendors for services to be rendered. Each share of Series E Stock is mandatorily
convertible into 100 shares of common stock upon the occurrence of certain
events, such that a sufficient number of shares of common stock are available to
effect the conversion. The Series E Stock is contingently convertible and was
not convertible at June 30, 2008.





Redeemable
Convertible Preferred Stock





During
the first and second quarters of 2008 there were no conversions of Preferred
Stock.  During the first quarter of 2007, holders of 10,776,909 and
4,463,289 shares of Series A Stock and Series C Stock, respectively, exercised
their right to convert their shares to an equal number of shares of common
stock. As a result of the Series C Stock conversions, $173 of unamortized
issuance cost associated with the Series C Stock was recognized in the three
months ended March 31, 2007 as deemed dividends to preferred stockholders for
purposes of determining net loss attributable to common
stockholders.  There were no conversions of Preferred Stock during the
second quarter of 2007.





Contingently
Convertible Preferred Stock





On March
2, 2007, March 30, 2007 and April 5, 2007, the Company completed the private
placement of 71,429 shares, 47,619 shares, and 16,667 shares, respectively, of
Series D Stock, resulting in aggregate proceeds net of issuance costs
approximating $5,600 (the “Series D Financing”). Each share of Series D Stock is
mandatorily convertible into 100 shares of the Company’s common stock, subject
to adjustment for splits or other changes to the Company’s common stock,
immediately upon either (i) amendment of the Company’s certificate of
incorporation to increase the number of authorized shares of common stock
sufficient to effect the conversion or (ii) the effectiveness of a reverse stock
split of the Company’s common stock such that there are a sufficient number of
shares of common stock available to effect the conversion, in both situations
after taking into account all other shares of common stock outstanding or
required to be issued upon the conversion of any preferred stock of the Company
or the exercise of any options or warrants authorized by the
Company. Either of such corporate actions is subject to the approval of our
shareholders before they may be executed. The holders of Series D Stock each
have one vote for each full share of common stock into which their shares of
preferred stock are convertible on the record date for the vote. Holders of the
Series D Stock do not have a contractual obligation to share in the losses of
the Company. In the event of any liquidation, dissolution, or winding up of the
Company, the holders of Series D Stock are entitled to receive a liquidation
preference of $42 per share, plus any declared but unpaid dividends, and subject
to adjustment for stock splits, combinations, or similar events involving the
Series D Stock. Since the Series D Stock is mandatorily convertible upon the
occurrence of certain corporate actions, the Series D Stock was issued with a
contingent beneficial conversion feature that will be recognized as a reduction
of net income attributable to common stockholders upon occurrence of the
triggering event. The aggregate fair value of the contingent beneficial
conversion feature on the dates of issue was approximately $1,480.





In
connection with the Series D Financing the Company issued to the investors
warrants to purchase 40,714 shares of the Company’s Series D Stock at an initial
exercise price of $63 per share, or after mandatory conversion of the Series D
Stock, 4,071,500 shares of the Company’s common stock at an initial exercise
price of $0.63 per share. The warrants expire five years after issuance. The
number of shares of Series D Stock or common stock to be issued upon exercise
and the respective exercise prices are subject to adjustment for changes in the
Series D Stock or common stock, such as stock dividends, stock splits, and
similar changes. Also in connection with the Series D Financing, the Company
issued to the investors options to purchase up to 135,715 shares of Series D
Stock, exercisable for cash at $42 per share, or after mandatory conversion of
the Series D Stock, 13,571,500 shares of the Company’s common stock at $0.42 per
share. The respective exercise prices are subject to adjustment for stock splits
and similar events. The options are exercisable for 15 days following public
announcement of FDA clearance of the Company’s Collagen Scaffold device as a
class II device and initially expired at the earliest of the 15th day after such
public announcement, partial exercise of the option, or December 31, 2007. In
October 2007, the Company extended the expiration date of the options to the
earliest of the 15th day after such public announcement, partial exercise of the
option, or December 31, 2008.





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As of
June 30, 2008 and December 31, 2007, both the options and warrants meet the
criteria of EITF No. 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock, for classification as equity in the Company’s consolidated balance
sheet.





Effective
March 2, 2007, the Company entered into a one year consulting agreement to
retain the financial advisory services of Sanderling Ventures Management VI
(Sanderling), affiliates of whom together beneficially own in excess of five
percent of the Company’s common stock. In consideration for such services, the
Company issued to Sanderling a warrant to purchase 2,000 shares of Series D
Stock (or 200,000 shares of common stock if the warrant is exercised after
mandatory conversion of the Series D Stock into shares of Company common stock)
with the warrant having a five-year term and an exercise price of $42 per share
(or $0.42 per common share if the warrant is exercised for shares of Company
common stock). Using the Black-Scholes model, the Company has estimated the fair
value of the warrant to be approximately $69, which has been included as an
expense in its 2007 results of operations.





On
October 18, 2007, the Company’s Board of Directors authorized the filing of a
Certificate of Designations, Preferences and Rights of Series E Convertible
Preferred Stock of the Company (the “Certificate”) with the Secretary of State
of the State of Delaware to designate and establish 500,000 shares of Series E
Convertible Preferred Stock, par value $0.01 per share (“Series E Stock”). The
Certificate was filed on October 19, 2007 and was effective upon filing. The
Certificate provides, among other things, that each share of Series E Stock is
mandatorily convertible into 100 shares of common stock of the Company
immediately upon either (i) amendment of the Company’s certificate of
incorporation to increase the number of authorized shares of common stock
sufficient to effect the conversion or (ii) the effectiveness of a reverse stock
split of the Company’s common stock such that there are a sufficient number of
shares of common stock available to effect the conversion, in both situations
after taking into account all other shares of common stock outstanding or
required to be issued upon the conversion of any preferred stock of the Company
or exercise of any options or warrants authorized by the Company. Either of such
corporate actions is subject to the approval of our shareholders before they may
be executed. The holders of Series E Stock each have one vote for each full
share of common stock into which the shares of Series E Stock are convertible on
the record date for the vote. Holders of the Series E Stock do not have a
contractual obligation to share in the losses of the Company. In the event of
any liquidation, dissolution, or winding up of the Company, the holders of
Series E Stock are entitled to receive a liquidation preference of $9 per share,
plus any declared but unpaid dividends, and subject to adjustment for stock
splits, combinations, or similar events involving the Series E
Stock.





At the
2008 annual meeting the Company’s shareholders approved an amendment to the
Company’s Amended and Restated Certificate of Incorporation to effect a
one-for-fourteen, one-for-sixteen, one-for-eighteen or one-for-twenty reverse
stock split, subject to the discretion of the Company’s Board of Directors
before November 30, 2008. To date, the Board has not effected a reverse stock
split and the Board is not obligated to effect a reverse stock split. Neither
the Series D Stock nor the Series E Stock was convertible at June 30,
2008.





On April
5, 2008 the Company granted its non-employee directors, its employees, and
certain consultants options to purchase a total of 116,550 shares of Series E
Stock at an exercise price of $16 per share (or 11,655,000 shares of common
stock at $0.16 per share, which equaled the market price of the Company’s stock
on the grant date, if exercised after mandatory conversion of the Series E
Stock). For one of the grants, to a consultant for 2,000 shares of Series E
Stock (200,000 shares of common stock if exercised after mandatory conversion of
the Series E Stock), 500 shares of Series E Stock (50,000 shares of common stock
if exercised after mandatory conversion of the Series E Stock) were immediately
vested at the grant date; the remainder vest quarterly, subject to continued
service during each such quarter, on June 30, September 30, and December 31,
2008. Options granted to employees and to a consultant to purchase an aggregate
of 15,200 shares of Series E Stock (1,520,000 shares of common stock if
exercised after mandatory conversion of the Series E Stock) vest ratably over
four years from the grant date. Options granted to employees, directors, and
consultants to purchase an aggregated of 99,350 shares of Series E Stock
(9,935,000 shares of common stock if exercised after mandatory conversion of the
Series E Stock) vest ratably over four years beginning upon FDA clearance of the
Collagen Scaffold device.





Also on
April 5, 2008, the Company granted a consultant an option to purchase 100,000
shares of common stock at an exercise price of $0.16 per share, which equaled
the market price of the Company’s stock on the grant date. One-half of the
shares were immediately vested at the grant date and the remainder vest upon FDA
clearance of the Collagen Scaffold device, provided such clearance is received
in 2008.





On May
30, 2008, the Company granted a consultant an option to purchase 960 shares of
Series E Stock at an exercise price of $17.50 per share (or 96,000 shares of
common stock at $0.175 per share, which equaled the market price of the
Company’s stock on the grant date, if exercised after mandatory conversion of
the Series E Stock). For this grant, 460 shares were immediately vested at the
grant date; the remainder vest ratably over four years from the grant
date.





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All of
the foregoing grants were made outside of the Company’s stock option plans. Upon
grant, the Company reserved 117,510 shares of Series E Stock and 100,000 shares
of common stock for issuance upon exercise of the options.





(6) SUBSEQUENT
EVENT





On July
24, 2008, the Company entered into a Subscription Agreement (the “Subscription
Agreement”) among the Company and several investors named therein for the
private placement of an aggregate principal amount not less than $2 million, but
not more than $3 million of the Company’s unsecured convertible notes (the
“Notes”).  Under the terms of the financing, the Company sold $2,539
aggregate principal amount of the Notes, which accrue interest at an annual rate
of 8% and become due and payable on July 24, 2009.  At the option of
the holders, the Notes may be converted into the Company’s Series F Convertible
Preferred Stock, par value $0.01 per share (“Series F Stock”) at a price of $15
per share or into the Company’s common stock, par value $0.01 per share (“Common
Stock”) at an initial conversion price of $0.15 per share if the Series F Stock
has previously converted into Common Stock upon a Mandatory Conversion (as
defined below).  In connection with the financing, the Company issued
five year warrants equal to 25% of the shares into which the Notes may convert
up to approximately 42,300 shares of Series F Stock, exercisable at a price of
$1.00 per share or up to approximately 4,232,000 shares of Common Stock,
exercisable at a price of $0.01 per share if the Series F Stock is converted
into Common Stock upon a Mandatory Conversion. Participants in the financing
included certain officers and directors of the Company and certain beneficial
owners of more than 10% of the Company’s voting stock.





In
connection with the financing, on July 21, 2008, the Company’s Board of
Directors authorized the filing of a Certificate of Designations, Preferences
and Rights of Series F Convertible Preferred Stock (the “Series F Certificate”)
with the Secretary of State of the State of Delaware to designate and establish
270,000 shares of Series F Stock.  The Series F Certificate was filed
on July 23, 2008 and was effective upon filing.  The Series F
Certificate provides, among other things, that each share of Series F Stock is
mandatorily convertible into 100 shares, initially, of Common Stock immediately
upon either (i) amendment of the Company’s certificate of incorporation to
increase the number of authorized shares of Common Stock sufficient to effect
the conversion or (ii) the effectiveness of a reverse stock split of the Common
Stock such that there are a sufficient number of shares of Common Stock
available to effect the conversion, in both situations after taking into account
all other shares of Common Stock outstanding or required to be issued upon the
conversion of any preferred stock of the Company or exercise of any options or
warrants authorized by the Company.  Either of such corporate actions
is subject to the approval of the Company’s shareholders before they may be
executed. At the 2008 annual meeting the Company’s shareholders approved an
amendment to the Company’s Amended and Restated Certificate of Incorporation to
effect a one-for-fourteen, one-for-sixteen, one-for-eighteen or one-for-twenty
reverse stock split, subject to the discretion of the Company’s Board of
Directors before November 30, 2008. To date, the Board has not effected a
reverse stock split and the Board is not obligated to effect a reverse stock
split. The holders of Series F Stock each have one vote for each full share of
common stock into which the shares of Series F Stock are convertible on the
record date for the vote.  Holders of the Series F Stock do not have a
contractual obligation to share in the losses of the Company.  In the
event of any liquidation, dissolution, or winding up of the Company, the holders
of Series F Stock are entitled to receive a liquidation preference of $15 per
share, plus any declared but unpaid dividends, and subject to adjustment for
stock splits, combinations or similar events involving the Series F
Stock.





The
holders of the Notes and the Series F Stock have certain terminable preemptive
rights to purchase a pro rata share in a subsequent qualified financing by the
Company.  The conversion rate of the Notes and the Series F Stock are
subject to the anti-dilution rights of the holders of each.  The
Company has agreed to register the Common Stock into which the shares of Series
F Stock and the warrants will convert on one or more registration statements to
be filed with the Securities and Exchange Commission upon request by the
investors.





Item2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations (Dollars in
thousands, except per share and per unit data)





The
following discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and related notes included elsewhere
in this Form 10-Q and the more detailed information contained in our Annual
Report on Form 10-K for the year ended December 31, 2007. This section of the
Form 10-Q contains forward-looking statements that involve risks and
uncertainties, such as statements about our plans, objectives, expectations and
intentions. We use words such as “anticipate,” “believe,” “expect,” “future” and
“intend” and similar expressions to identify forward-looking statements. Our
actual results could differ materially from those anticipated in these
forward-looking statements for many reasons. You should not place undue reliance
on these forward-looking statements, which apply only as of the date of this
Form 10-Q.





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 Index





Business





We are a
development stage orthopedic products company that develops, manufactures and
markets innovative tissue growth and repair products for U.S. and global
markets. Our proprietary collagen matrix technology includes applications in
orthopedics, general surgery, spine, cardiovascular and drug delivery. Some of
these applications are marketable currently while others are in various stages
of development. The Company’s first approved product using its collagen matrix
technology is the MenaflexTM collagen meniscus implant device (also known as the
CMI®), which is marketed
for sale in the EU, Switzerland, Turkey, and the Republic of South Africa,
through ReGenAG.





We have
submitted a 510(k) premarket notification to the FDA for market clearance in the
U.S. of the Collagen Scaffold device, which includes an application for the
reinforcement and repair of meniscus defects. The 510(k) filing is necessary to
obtain clearance to market the Collagen Scaffold as a medical device in the
United States. The FDA will clear marketing of a medical device through the
510(k) process if it is demonstrated that the new product is substantially
equivalent to other 510(k)-cleared products. The FDA has cleared for marketing,
via the 510(k) premarket notification process, several products that we believe
are similar in technology and intended use to the Collagen Scaffold and that are
used in multiple medical specialties, including general surgery and orthopedics,
for soft tissue reinforcement and repair. These devices have been cleared by the
FDA as class II devices. We believe that it is appropriate for the FDA to
regulate the Collagen Scaffold as a class II device subject to the 510(k)
pre-market notification process.





Accordingly,
relying in part on recently cleared similar devices as predicates, in December
2005 we submitted a 510(k) premarket notification to the FDA for the ReGen®
Collagen Scaffold for use in general surgical procedures for the reinforcement
and repair of soft tissue where weakness exists, including, but not limited to,
general soft tissue defects, hernias, and meniscus defects. The Collagen
Scaffold reinforces soft tissue and provides a resorbable scaffold that is
replaced by the patient’s own tissue. During the third quarter of 2006, the FDA
provided the Company with a letter indicating the FDA’s initial determination
that the device is not substantially equivalent, or NSE, to existing
class II devices already in receipt of FDA clearance. The Company appealed
the FDA’s NSE decision. Subsequently, the FDA provided a letter upholding the
NSE decision and indicating that the Company may submit a new 510(k) for
clearance of its Collagen Scaffold device with modified indications for use in
the meniscus, as suggested by the Company, and supported by appropriate clinical
data.





In
December 2006 we submitted a revised 510(k) premarket notification to the FDA
for the Collagen Scaffold. In March 2007, we received a letter from the FDA
requesting additional information, which the FDA stated was necessary to
complete its review of the 510(k) application. In June 2007 we responded to the
FDA’s request and in the third quarter of 2007 we received an NSE letter from
the FDA regarding the revised 510(k) submission. The Company has been pursuing
appeal of the NSE decision through FDA administrative channels. Following
discussions with the FDA, in July 2008, the Company submitted its latest 510(k)
premarket notification to the FDA for the Collagen Scaffold. If the revised
510(k) is unsuccessful, the Company intends to work diligently to pursue all
alternatives available to it which would result in a class II designation
for the Collagen Scaffold. We will continue to evaluate all levels of spending
throughout the organization to support our ability to operate as long as
possible, but it is likely that we will require additional financing before our
appeal efforts are completed. There is no assurance that we will be able to
raise such additional financing.





Prior to
the filing of a 510(k) premarket notification for the Collagen Scaffold, which
includes a meniscus application, we were pursuing premarket approval for the CMI
in the U.S. The CMI has been the subject of a controlled, randomized,
pivotal multicenter clinical trial, or MCT, and it is the subject of a modular
premarket approval application, or PMA. Our current regulatory priority is to
obtain FDA clearance for the Collagen Scaffold as a class II device through
the 510(k) process. If we are not successful in gaining clearance for the
Collagen Scaffold through the 510(k) process, we still have the option of
completing our submission of the PMA for the CMI, although we do not foresee
pursuing completion of the PMA at this time. We intend to continue to follow
patients in the MCT, which will provide valuable scientific data on long-term
patient outcomes in the meniscus.  If FDA clearance is obtained, we
may make the Collagen Scaffold available in a flat sheet configuration, as well
as in a semi-lunar shape designed for use in the meniscus, and potentially other
configurations specifically designed to facilitate the reinforcement and repair
of soft tissue in various sites within the body. There can be no assurance as to
the outcome of our overall efforts to obtain either the FDA’s clearance of the
Collagen Scaffold or, if we choose to pursue it, PMA approval of the CMI for
sale in the U.S.





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 Index





Our
current strategy is to focus on the following initiatives:





•
            Obtain
      FDA clearance of the Collagen Scaffold as a class II device through the
      510(k) process;





•
            Further
      develop our specialized distribution and marketing programs for the
      Menaflex and other ReGen products in Europe and certain other
      countries;





•
            Develop
      our specialized distribution, marketing, and training programs for the
      Collagen Scaffold and other ReGen products in the
      U.S.; and





•
            Conduct
      further research on selected product opportunities within our research and
      development pipeline.





Our
long-term strategy is to capitalize on our proven collagen matrix technology by
continuing to design, develop, manufacture and market our own products, as well
as partner with others to develop and market products in targeted therapeutic
areas. However, our ability to pursue this strategy is subject to the
constraints of our current liquidity position. See Liquidity and Capital
Resources.





To date,
sales of our products have been limited. Although Menaflex is marketed for sale
and distributed in certain markets outside the U.S., currently it is not cleared
for sale or marketed in the U.S., and ReGen is making no claim regarding its
safety, effectiveness or its potential for premarketing approval by the FDA.
ReGen has exclusive worldwide rights to market Menaflex subject to relevant
regulatory clearance in each market. In 2005 we created a wholly-owned
subsidiary, ReGen AG to conduct our distribution activities outside the U.S.
through local market distributors and a limited number of employees to be hired
by the Company or ReGen AG. Currently, we have distributorship agreements with
independent orthopedic device marketing organizations for distribution of our
products in the U.K., Italy, Spain, Andorra, Poland, Turkey, and the Republic of
South Africa. During 2008 our international priorities are growing sales of our
products in current markets and evaluating distribution opportunities for our
products in select new markets.





We also
sell the SharpShooter® Tissue Repair System, or SharpShooter, a suturing device
used to facilitate the surgical implantation of Menaflex, as well as to perform
other similar arthroscopic meniscus repair procedures. SharpShooter is currently
marketed through a worldwide non-exclusive distribution agreement with Linvatec
Corporation (Linvatec), a subsidiary of ConMed (NASDAQ: CNMD), and outside the
U.S., through ReGen AG.





Critical
Accounting Policies





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. For example, when we value work in process inventory we use
estimates to determine, among other factors, the number of units that will be
successfully converted to finished goods. This and other estimates we make are
often based on complex judgments, probabilities and assumptions that we believe
to be reasonable, but that are inherently uncertain and unpredictable.
Assumptions may be incomplete or inaccurate and unanticipated events and
circumstances may occur. It is also possible that other professionals, applying
reasonable judgments to the same facts and circumstances, could develop and
support a range of alternative estimated amounts. We also are subject to risks
and uncertainties that may cause actual results to differ from estimated
amounts, such as changes in the healthcare environment, competition, foreign
exchange, litigation, legislation and regulation. These and other risks and
uncertainties are discussed in the section entitled “Item 1A. Risk Factors” in
the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.
All of these could significantly and adversely affect our business, prospects,
financial condition or results of operations.





An
accounting policy is deemed to be critical if it requires an accounting estimate
to be made based on assumptions about matters that are highly uncertain at the
time the estimate is made, if different estimates reasonably could have been
used, or if changes in the estimate that are reasonably likely to occur could
materially impact the financial statements. Management believes that there have
been no significant changes during the three months ended June 30, 2008, to the
items that we disclosed as our critical accounting policies and estimates in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the year ended December 31,
2007, including our adoption effective January 1, 2008, of SFAS No. 157, Fair Value Measurements,and
SFAS No. 159,The Fair
Value Option for Financial Assets and Financial Liabilities,which
did not have a material effect on our consolidated financial statements. For
further discussion of our accounting policies see Note 3 “Summary of Significant
Accounting Policies” of the Notes to Condensed Consolidated Financial Statements
(Unaudited) and Note 3 “Summary of Significant Accounting Policies” of the Notes
to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2007.





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 Index





INCOME TAXES: We provide for
income taxes in accordance with the asset and liability method, prescribed by
SFAS No. 109, Accounting for
Income Taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax basis of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. At December
31, 2007 the Company had a net operating loss carryforward of approximately
$75,400 and a research and development tax credit carryforward of approximately
$341. These carryforwards began to expire in 2005 and 2006, respectively. The
utilization of net operating loss carryforwards may be limited due to changes in
the ownership of the Company and its subsidiaries, and the effect of the reverse
merger and recapitalization completed on June 21, 2002. A valuation allowance is
required when it is more likely than not that a deferred tax asset will not be
realized. As a result of evaluating all positive and negative evidence, we have
established a full valuation allowance for the Company’s net deferred tax
assets.





Effective
January 1, 2007, we adopted FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes. Adoption of FIN 48 did not have a significant impact on the
Company’s consolidated financial statements. The Company files income tax
returns in the U.S. federal jurisdiction and various states and foreign
jurisdictions. The Company is subject to U.S. federal, state and local, or
non-U.S. income tax examinations by tax authorities for the years 2004 to 2007.
In addition, the Company’s net operating loss carryforwards that relate to 1991
and forward are subject to adjustment by these tax authorities. At June 30,
2008, the Company has no unrecognized tax benefits requiring disclosure under
FIN 48. The Company recognizes interest accrued related to unrecognized tax
benefits in interest expense and penalties in operating expenses. During the
three and six month periods ended June 30, 2008 and 2007, the Company did not
have any income tax related interest or penalties.





STOCK-BASED COMPENSATION
EXPENSE: We account for stock based compensation in accordance with the
fair value recognition provisions of SFAS No. 123R, Share Based Payment. Under
the fair value recognition provisions of SFAS No. 123R, we recognize stock-based
compensation net of an estimated forfeiture rate and only recognize compensation
cost for those shares expected to vest, generally on a straight-line basis over
the requisite service period of the award.





For stock
issued to vendors for services, we recognize expense based on our stock price at
the earlier of the date at which a performance commitment by the vendor exists
or the date at which the vendor’s performance is complete. Expense recognized
for non-employee options and for warrants issued in connection with equity
transactions is measured based on management’s estimate of fair value and
recognized on an accelerated basis over the respective vesting
period.





Determining
the appropriate fair value model and calculating the fair value of share-based
payment awards require the input of highly subjective assumptions, including the
expected life of the share-based payment awards and stock price volatility.
Management determined that historical realized volatility calculated since the
2002 reverse merger is a reasonable indicator of expected volatility and future
stock price trends. The assumptions used in calculating the fair value of
share-based payment awards represent management’s best estimates, but these
estimates involve inherent uncertainties and the application of management’s
judgment. As a result, if factors change and we use different assumptions, our
stock-based compensation expense could be materially different in the future. In
addition, we are required to estimate the expected forfeiture rate and only
recognize expense for those shares expected to vest. If our actual forfeiture
rate is materially different from our estimate, the stock-based compensation
expense could be significantly different from what we have recorded in the
current period.





We
estimate fair value using the Black-Scholes model and the resulting values
depend upon the assumptions we input into the model, including the risk-free
interest rate, dividend yield, expected lives and expected volatility. We
estimate the foregoing factors at the respective measurement dates of the
grants. Upon examination of our historical pattern of option exercises in an
effort to identify a discernable pattern, we concluded that there was not
sufficient data on which to base an estimate of expected term. Consequently, the
expected term of options granted after January 1, 2006, is generally estimated
to be seven years, given the contractual term of 10 years and vesting period of
four years. The interest rate used in the pricing model is based on the U.S.
Treasury yield curve in effect at the time of the grant on issues with remaining
terms equal to the estimated expected term used in the model. In addition, the
Company has estimated a forfeiture rate based on historical data and current
assumptions. For grants made after the Company’s merger with RBio, we estimate
volatility using historical weekly closing prices of our stock since the merger
through the closest date before the respective grant date.





For
options issued in our Series E Stock, we value these options based upon the
equivalent fair value of options in common stock into which our Series E Stock
is contingently convertible. We believe the fair value of our Series E Stock is
equivalent to the fair value of our common stock on an as converted
basis.





26
 Index





We
believe it is difficult to accurately measure the value of an employee stock
option (see “Use of Estimates” above). The key factors used in the Black-Scholes
model rely on assumptions we make of future uncertain events. Actual events may
differ from our assumptions. Moreover, the Black-Scholes model ignores
significant characteristics of compensatory options, such as their non-traded
nature and lack of transferability. If the model permitted consideration of such
unique characteristics the resulting estimate of fair value could be
different.





INVENTORY VALUATION:Inventory is valued at the lower of cost or market. Market is based on
current sales of product to existing customers reduced by an estimate of cost to
dispose. At both June 30, 2008 and December 31, 2007, 1% of our inventory was
carried at market. Work in process is calculated by estimating the number of
units that will be successfully converted to finished goods, based upon a
build-up in the stage of completion using estimated labor inputs for each stage,
and historical yields reduced by estimated usage for quality control testing and
for research and development.





To date
commercial sales of our products have been inconsistent and our production
efforts have been directed primarily toward development. Given the inconsistent
and generally low volumes of commercial production to date, estimates and
assumptions related to factors such as labor inputs and yields are based on a
limited amount of historical data. Actual results may differ significantly from
our estimates. We continually review the assumptions and estimates we use to
value inventory and expect that our judgments regarding these estimates may
change as commercial production volumes increase and additional data are
available.





Certain
components of inventory have limited shelf lives. Our inventory control policies
include procedures to identify, evaluate, segregate and dispose of any
nonconforming inventory, including materials or components that have passed
specified expiration dates. Nonconforming inventory may be either scrapped for
immediate disposal, used for demonstration or training, or used in research and
development.





Recent
Accounting Pronouncements





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. This Statement identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). The Statement is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. The Company
does not expect adoption of SFAS No. 162 to have a significant impact on its
consolidated financial statements.





Results
of Operations





Three and Six
Months Ended June 30, 2008 Compared to Three and Six Months Ended June 30,
2007





REVENUE.Total revenue for
the six months ended June 30, 2008 increased by $227 (64%) over the same period
in 2007. The Company’s revenue from sales of our products approximated $222 and
$556 for the three months and six months ended June 30, 2008, respectively,
compared with $159 and $328, respectively, for the same periods in 2007. The
approximate net increases of $63 (40%) and $228 (70%), respectively, resulted
from increased sales of our Menaflex product, offset by decreases in
SharpShooter sales. The remainder of our revenue is derived from royalties,
which generally are due under a license agreement when our distributor,
Linvatec, sells the SharpShooter product to a third party. Royalty revenue
increased approximately $2 (17%) for the three months ended June 30, 2008
compared with the same period in 2007 and decreased approximately $1 (4%) for
the six months ended June 30, 2008 compared with the same period in 2007.
Historically, shipments of our products, and therefore our revenue, have been
inconsistent for a number of reasons, including the supply requirements of our
distributors and their anticipated rate of sales. Title of product passes to our
direct sales customers FOB origin and to our distributors either FOB origin or
FOB destination, depending upon the specific terms of the respective
distributorship agreements. Our customers do not have a right to return the
product other than for product defect issues.





For the
three months and six months ended June 30, 2008, Menaflex sales approximated
$144 and $452, respectively, compared to approximately $76 and $150,
respectively, for the same periods in 2007, increases of approximately 89% and
201%, respectively. Selling prices for the Menaflex ranged from $1,050 to $2,600
per unit. Menaflex sales approximated 65% and 81%, respectively, of total sales
for the three month and six month period ended June 30, 2008, compared with
approximately 48% and 46%, respectively, for the same periods in 2007. During
the three and six months ended June 30, 2008, we sold 87 and 280 Menaflex units,
respectively, at average selling prices of $1,561 and $1,564 per unit,
respectively, compared with 51 and 111 units, respectively, sold in the same
periods of 2007 at average selling prices of $1,220 and $1,347 per unit,
respectively.





27
 Index





SharpShooter
sales in the three and six month periods ended June 30, 2008, approximated $78
and $104, respectively, compared with $83 and $178, respectively, for the same
periods in 2007, representing decreases of $5 (6%) and $74 (42%), respectively.
For the three month and six month periods ended June 30, 2008, SharpShooter
sales to Linvatec, approximated $62 and $79, respectively, compared to $81 and
$158, respectively, for the same periods in 2007, representing decreases of $19
(23%) and $79 (50%), respectively. SharpShooter sales to ReGen AG customers for
the three and six month periods ended June 30, 2008 approximated $16 and $25,
respectively, compared with $2 and $20, respectively, for the same periods in
2007, representing increases of $14 (700%) and $5 (25%), respectively. In the
first quarter of 2008, the Company initiated a transition to a new vendor for
assembly of a component of its SharpShooter product, which has resulted in a
shortage of supply for this component. Management expects supply constraints to
continue until the transition is complete.





COST OF GOODS SOLD.For the
three and six months ended June 30, 2008, cost of goods sold approximated $137
and $280, respectively, compared with approximately $86 and $178, respectively,
for the same periods in 2007, representing increases of approximately $51 (59%)
and $102 (57%), respectively. The increases primarily relate to a higher volume
of Menaflex sales. Menaflex cost of goods sold for the three and six months
ended June 30, 2008 approximated $43 and $165 compared with approximately $21
and $43 for the same periods in 2007, increases of approximately $22 (105%) and
$122 (284%). The average per unit cost of Menaflex units sold in the first half
of 2008 approximated $433 compared with approximately $268 for the first half of
2007. The higher average per unit cost in 2008 is due to varying production
volumes and manufacturing costs in the respective periods when the units were
produced. At June 30, 2008 and 2007 all Menaflex units in inventory, as well as
the Menaflex units sold during the first half of 2008 and 2007, were valued at
cost, which was lower than market.





For the
three and six months ended June 30, 2008, approximately $89 and $108 of cost of
goods sold related to SharpShooter units sold compared with approximately $61
and $128 for the same period in 2007, representing an approximate increase of
$28 (46%) for the three months ended June 30, 2008 and approximate decrease of
approximately $20 (16%). The increase for the second quarter of 2008 is related
to the recent change in supplier for certain SharpShooter
components.  The decrease for the six month period is related to the
lower volume of SharpShooter sales in the first quarter of 2008.





Due to a
high degree of fixed costs in the production process, the early stage of market
acceptance for our products, and the variability of commercial production
volumes between periods, sales and commercial production volumes in a given
period may not be adequate to provide for per unit costs that are lower than the
current market price for our products. The positive gross margin achieved in the
first six months of 2008 may not be indicative of a future trend.





RESEARCH AND DEVELOPMENT.Research and development expenses for the three and six months ended June
30, 2008 approximated $1,005 and $2,003, respectively, compared with
approximately $1,193 and $2,256, respectively, for the same periods in 2007.
Significant factors contributing to the net decrease of $188 (16%) for the
comparative three month period include: (i) an approximate $40 decrease in
compensation expense related to salary and staff reductions; (ii) an approximate
$135 decrease in consulting, legal, and other professional fees and related
costs associated with our 510(k) submissions to the FDA; (iii) an approximate
$40 decrease in spending for maintenance of patents and other intellectual
property; partially offset by (iv) an approximate $27 increase in non-cash
compensation expense related to stock options granted to employees and non
employees. Significant factors contributing to the net decrease of $253 (11%)
for the comparative six month periods include: (i) an approximate $105 decrease
in compensation expense related to salary and staff reductions; (ii) an
approximate $96 decrease in consulting, legal, and other professional fees and
related costs associated with our 510(k) submissions to the FDA; (iii) an
approximate $78 decrease in spending for maintenance of patents and other
intellectual property; partially offset by (iv) an approximate $26 increase in
non-cash compensation expense related to stock options granted to employees and
non employees





Currently,
our research and development spending is primarily for clinical and regulatory
activities and maintenance of patents and other intellectual property. During
2007, our research and development was focused largely on the conduct of our CMI
MCT and related activities in the U.S. However, we also made progress on several
other new product development efforts. We completed development of a CMI for the
lateral meniscus and European regulatory authorities accepted an expanded CE
mark for the CMI to include both the medial and lateral configurations. Our
first sales of the lateral configuration occurred in the first quarter of 2007.
Additionally, in 2007 we made progress in the ongoing refinement of our collagen
matrix manufacturing processes focused on the increase in production yields and
capacity. Lastly, we conducted early research on potential extended applications
of our collagen matrix technology.





28
 Index





We
believe that our proprietary collagen matrix technology has the potential to be
used for the treatment of various injuries and degeneration of other tissue
structures, as well as use as a carrier matrix for therapeutic agents for hard
and soft tissue repair and new tissue growth. These applications are in various
stages of development from proof of concept to preparation for submission to the
FDA. We plan to continue to use outside resources for product research. We may,
in the future, hire additional research and development employees. However,
resource limitations have significantly curtailed our ability to conduct
research and development in 2008 and we expect those activities will continue to
be limited or further impaired if we are not successful in obtaining sufficient
additional financing. See “Liquidity and Capital Resources.”





BUSINESS DEVELOPMENT, GENERAL AND
ADMINISTRATIVE.Business development, general and administrative expenses
for the three and six months ended June 30, 2008 approximated $1,313 and $2,782,
respectively, compared with approximately $2,027 and $3,721, respectively, for
the same periods in 2007. Significant factors contributing to the approximately
$714 (35%) decrease for the comparative three month periods include: (i) an
approximate $287 decrease in costs associated with our worldwide marketing and
distribution initiatives, including consulting, advertising and promotion; (ii)
an approximate $440 decrease for legal, accounting, printing and other
professional services as a result of controls over discretionary spending; (iii)
an approximate $48 decrease in compensation expense due to staff reductions; and
(iv) an approximate $25 decrease in general and administrative costs such as
travel as a result of controls over discretionary costs; partially offset by (v)
an approximate $86 increase in non-cash compensation expense related to stock
options and restricted stock granted to employees and non employees. Significant
factors contributing to the approximately $939 (25%) decrease for the
comparative six month periods include: (i) an approximate $645 decrease in costs
associated with our worldwide marketing and distribution initiatives, including
consulting, advertising and promotion; (ii) an approximate $452 decrease for
legal, accounting, printing and other professional services as a result of
controls over discretionary spending; and (iii) an approximate $55 decrease in
general and administrative costs such as travel as a result of controls over
discretionary costs; partially offset by (iv) an approximate $169 increase in
non-cash compensation expense related to stock options and restricted stock
granted to employees and non employees; and (v) an approximate $44 increase in
compensation costs due to salary increases. We expect to continue controls over
discretionary costs to conserve cash.





NON-OPERATING INCOME (EXPENSE).Non-operating income (expense) consists of interest and other income, and
interest and other expense. Interest and other income approximated $13 and $45
for the three and six month periods ended June 30, 2008, respectively, compared
with $121 and $212, respectively, for the same periods in 2007. The approximate
decreases of $108 (89%) and $167 (79%), respectively, primarily related to lower
cash and cash equivalent balances during the first half of 2008 compared to
2007. Interest and other expense approximated $110 and $188 for the three and
six months ended June 30, 2008, respectively, compared with $121 and $235,
respectively, for the same periods in 2007. The decrease for the respective
three month periods is primarily due to lower interest rates on debt due to a
related party. The decrease for the comparative six month periods is due to
lower interest rates on debt due to a related party and to favorable foreign
exchange rates.





Liquidity
and Capital Resources





Cash
and cash equivalents





The
Company considers all highly liquid investments purchased with a maturity of 90
days or less to be cash equivalents and as such has classified as cash
equivalents cash held in money market accounts, a sweep account and investments
in commercial paper and federal agency mortgage-backed securities that meet our
classification criteria for cash and cash equivalents. During 2007, the Company
held investments in commercial paper and federal agency mortgage-backed
securities. All investments were classified as held to maturity, and,
accordingly, were carried at amortized cost, which approximates fair value. At
June 30, 2008 approximately 10% of our cash and cash equivalents balance is held
in foreign currencies. The effect on our 2008 condensed consolidated financial
statements of re-measurement of the accounts of our Swiss subsidiary is
immaterial.




Cash and
cash equivalents and investments approximated $602 as of June 30, 2008 compared
with approximately $4,108 as of December 31, 2007. The net decrease in cash and
cash equivalents and investments is a result of cash used for operations, for
equipment purchases, and for repayment of capital lease
obligations.




29
 Index




Cash flows





The
following table sets forth our sources and uses of cash for the six-month
periods ended June 30, 2008 and 2007.





June 30,2008
            
            
            2007(In
      thousands)Net
      cash used in operations
            
            $
            (3,527
            )
            
            $
            (4,928
            )Net
      cash provided by (used in) investing activities
            
            
            82
            
            
            
            (329
            )Net
      cash (used in) provided by financing activities
            
            
            (7
            )
            
            
            5,553Effect
      of exchange rate changes on cash
            
            
            46
            
            
            
            (22
            )Net
      (decrease) increase in cash and cash equivalents
            
            $
            (3,406
            )
            
            $
            274





Cash used
in operating activities during the six months ended June 30, 2008 approximated
$3,527, which resulted from the net loss of $4,629, adjusted to account for a
net increase in accounts receivable, inventory and other assets of approximately
$211, a net increase in accounts payable, accrued expenses and other liabilities
of $443, together with adjustments of $870 for non-cash items, including
depreciation, stock-based compensation and exchange loss related to
re-measurement of our Swiss subsidiary’s financial statements.





During
the six months ended June 30, 2008, we used investments in commercial paper of
approximately $100, invested approximately $18 in property and equipment and
repaid approximately $7 of our capital lease obligations.





Through
June 30, 2008, we have incurred cumulative inception to date net losses of
approximately $94,406 and used approximately $76,978 in cash for operating
activities. The future operating results of the Company may be affected by a
number of risks and certain other factors. The Company’s future operating
results are highly dependent upon its ability to obtain and maintain regulatory
clearance and approvals for its products. Although Menaflex is marketed for sale
and distributed in certain markets outside the U.S., it is not approved for sale
in the U.S., and the Company makes no claim regarding its safety, effectiveness
or its potential for FDA approval. The Company has been pursuing appeal of an
NSE decision related to its 510(k) submission to the FDA for market clearance in
the U.S. of the Collagen Scaffold, which includes an application for the
reinforcement and repair of meniscus defects. In July 2008, following its
discussions with the FDA, the Company submitted to the FDA its latest 510(k)
premarket notification for the Collagen Scaffold . The process of obtaining
regulatory clearances or approvals to market a medical device, particularly from
the FDA, can be costly and time-consuming. There can be no assurance that such
clearances or approvals will be granted on a timely basis, if at all. If the
510(k) process continues to take longer than expected or the Collagen Scaffold
device is not cleared, it will substantially delay our ability to commercialize
the Collagen Scaffold and negatively impact our business. If the Collagen
Scaffold device is not cleared through the 510(k), we still have the option to
proceed with submission to the FDA of the PMA for the CMI, although we do not
foresee pursuing completion of the PMA at this time. The PMA process is
typically more costly, lengthy and uncertain than the 510(k) clearance
process.





In
addition to regulatory related hurdles, in order to approach a position of
positive operating earnings and cash flow, the Company will need to effectively
address other operating issues, including for example, establishing distribution
channels and identifying third party reimbursement provisions for the surgeons
and facilities that would be responsible for implanting the Company’s products.
While the Company is actively working to address these issues, there is no
guarantee that the Company will be successful or able to effectively address
these challenges in any given time frame.





As
discussed in our Annual Report on Form 10-K for the year ended December 31,
2007, all of the Company’s long-term debt (balance of $8,359 at June 30, 2008)
becomes due and payable on December 31, 2009, and the Company’s Series A and
Series C redeemable convertible preferred stock (liquidation preferences of
$1,113 and $2,950, respectively) become redeemable at the option of not less
than a majority of the holders in June 2009 and September 2010,
respectively.




We will
need to pursue additional financing in order to support ongoing operations,
including meeting our future debt service requirements. While we have been
successful in the past in obtaining the necessary capital to support our
operations, there is no assurance that we will be able to obtain additional
equity capital or other financing under commercially reasonable terms and
conditions, or at all. Beginning in the fourth quarter of 2007 we implemented
measures to control costs that are within management’s discretion, including
(but not limited to) costs such as consulting, advertising and promotion,
personnel, other administrative costs and/or capital expenditures. On July 24,
2008, the Company completed a $2,539 private placement of convertible notes. We
expect the net proceeds from the private placement, combined with existing cash
balances, will enable the Company to operate through November 2008, by which
time we expect to receive a decision from the FDA regarding our latest 510(k)
submission. Our estimate may change, however, if actual results differ
significantly from our expectations. Key assumptions that may affect our
estimate of cash needs include (i) actual sales that may vary significantly from
our expectations; (ii) the actual timeline of events with respect to our 510(k)
submission to the FDA; (iii) decisions we make regarding our business
objectives; and (iv) other developments in our business. We anticipate that
additional cash will be required to support operations beyond November 2008.
However, if unforeseen events occur, it is possible that additional cash may be
needed before November 2008 to support operations. The accompanying consolidated
financial statements have been prepared assuming that the Company will continue
as a going concern. However, if additional capital is not obtained, the Company
will not be able to continue as a going concern. The Company’s financial
statements do not include any adjustments relating to the recoverability or
classification of assets or the amounts or classification of liabilities that
might result from the outcome of this uncertainty.





30
 Index





Financing
Transactions





On July
24, 2008, the Company entered into a Subscription Agreement (the “Subscription
Agreement”) among the Company and several investors named therein for the
private placement of an aggregate principal amount not less than $2 million, but
not more than $3 million of the Company’s unsecured convertible notes (the
“Notes”).  Under the terms of the financing, the Company sold $2,539
aggregate principal amount of the Notes, which accrue interest at an annual rate
of 8% and become due and payable on July 24, 2009.  At the option of
the holders, the Notes may be converted into the Company’s Series F Convertible
Preferred Stock, par value $0.01 per share (“Series F Stock”) at a price of $15
per share or into the Company’s common stock, par value $0.01 per share (“Common
Stock”) at an initial conversion price of $0.15 per share if the Series F Stock
has previously converted into Common Stock upon a Mandatory Conversion (as
defined below).  In connection with the financing, the Company issued
five year warrants equal to 25% of the shares into which the Notes may convert
for up to approximately 42,300 shares of Series F Stock, exercisable at a price
of $1.00 per share or up to approximately 4,232,000 shares of Common Stock,
exercisable at a price of $0.01 per share if the Series F Stock is converted
into Common Stock upon a Mandatory Conversion.  Participants in the
financing included certain officers and directors of the Company and certain
beneficial owners of more than 10% of the Company’s voting stock.





In
connection with the financing, on July 21, 2008, the Company’s Board of
Directors authorized the filing of a Certificate of Designations, Preferences
and Rights of Series F Convertible Preferred Stock (the “Series F Certificate”)
with the Secretary of State of the State of Delaware to designate and establish
270,000 shares of Series F Stock.  The Series F Certificate was filed
on July 23, 2008 and was effective upon filing.  The Series F
Certificate provides, among other things, that each share of Series F Stock is
mandatorily convertible into 100 shares, initially, of Common Stock immediately
upon either (i) amendment of the Company’s certificate of incorporation to
increase the number of authorized shares of Common Stock sufficient to effect
the conversion or (ii) the effectiveness of a reverse stock split of the Common
Stock such that there are a sufficient number of shares of Common Stock
available to effect the conversion, in both situations after taking into account
all other shares of Common Stock outstanding or required to be issued upon the
conversion of any preferred stock of the Company or exercise of any options or
warrants authorized by the Company.  Either of such corporate actions
is subject to the approval of the Company’s shareholders before they may be
executed. At the 2008 annual meeting the Company’s shareholders approved an
amendment to the Company’s Amended and Restated Certificate of Incorporation to
effect a one-for-fourteen, one-for-sixteen, one-for-eighteen or one-for-twenty
reverse stock split, subject to the discretion of the Company’s Board of
Directors before November 30, 2008. To date, the Board has not effected a
reverse stock split and the Board is not obligated to effect a reverse stock
split. The holders of Series F Stock each have one vote for each full share of
common stock into which the shares of Series F Stock are convertible on the
record date for the vote.  Holders of the Series F Stock do not have a
contractual obligation to share in the losses of the Company.  In the
event of any liquidation, dissolution, or winding up of the Company, the holders
of Series F Stock are entitled to receive a liquidation preference of $15 per
share, plus any declared but unpaid dividends, and subject to adjustment for
stock splits, combinations or similar events involving the Series F
Stock.





The
holders of the Notes and the Series F Stock have certain terminable preemptive
rights to purchase a pro rata share in a subsequent qualified financing by the
Company.  The conversion rate of the Notes and the Series F Stock are
subject to the anti-dilution rights of the holders of each.  The
Company has agreed to register the Common Stock into which the shares of Series
F Stock and the warrants will convert on one or more registration statements to
be filed with the Securities and Exchange Commission upon request by the
investors.





On March
2, March 30, and April 5, 2007, we completed the private placement of
approximately 71,429 shares, 47,619 shares, and 16,667 shares, respectively, of
Series D Stock, $0.01 par value per share, resulting in aggregate proceeds net
of issuance costs approximating $5,600. Each share of Series D Stock is
mandatorily convertible into 100 shares of the Company’s common stock, subject
to adjustment for splits or other changes to the Company’s common stock,
immediately upon either (i) amendment of the Company’s certificate of
incorporation to increase the number of authorized shares of common stock
sufficient to effect the conversion or (ii) the effectiveness of a reverse stock
split of the Company’s common stock such that there are a sufficient number of
shares of common stock available to effect the conversion. Either of such
corporate actions is subject to the approval of our shareholders before they may
be executed. At the 2007 annual meeting our shareholders approved an amendment
to the Company’s Amended and Restated Certificate of Incorporation to effect a
one-for-ten, one-for, twelve, one-for-fourteen, or one-for-sixteen reverse stock
split, subject to the discretion of our Board of Directors. The Board did not
effect a reverse stock split within the approved six-month timeframe and the
Board was not obligated to effect a reverse stock split. The holders of Series D
Stock each have one vote for each full share of common stock into which their
shares of preferred stock are convertible on the record date for the vote. The
holders of Series D Stock are entitled to non-cumulative dividends if and when
such dividends are declared by the Board of Directors. No dividends have been
declared to date. In the event of any liquidation, dissolution, or winding up of
the Company, the holders of Series D Stock are entitled to receive a liquidation
preference of $42 per share, plus any declared but unpaid dividends, and subject
to adjustment for stock splits, combinations, or similar events involving Series
D Stock. Since Series D Stock is mandatorily convertible upon the occurrence of
certain corporate actions, the Series D Stock was issued with a contingent
beneficial conversion feature that will be recognized upon occurrence of the
triggering event.





31
 Index





In
connection with the Series D Financing we issued to the investors warrants to
purchase 40,714 shares of Series D Stock at an initial exercise price of $63 per
share, or after mandatory conversion of the Series D Stock, 3,571,500 shares of
the Company’s common stock at an initial exercise price of $0.63 per share. The
warrants expire five years after issuance. The number of shares of Series D
Stock or common stock to be issued upon exercise and the respective exercise
prices are subject to adjustment for changes in the Series D Stock or common
stock, such as stock dividends, stock splits, and similar changes. Also in
connection with the Series D Financing, we issued to the investors options to
purchase up to 135,715 shares of Series D Stock, exercisable for cash at $42 per
share, or after mandatory conversion of the Series D Stock, 11,904,800 shares of
the Company’s common stock at $0.42 per share. The respective exercise prices
are subject to adjustment for stock splits and similar events. The options are
exercisable for 15 days following public announcement of FDA clearance of the
Company’s Collagen Scaffold device as a class II device and initially were to
expire at the earliest of the 15th day after such public announcement, partial
exercise of the option, or December 31, 2007. In October 2007, the Company
extended the expiration date of the options to the earliest of the 15th day
after such public announcement, partial exercise of the option, or December 31,
2008. On June 1, 2007 the Company registered with the SEC, the shares of common
stock into which the Series D Stock would be convertible, as well as the shares
of common stock that would be issuable upon exercise of the warrants and
options, after mandatory conversion of the Series D Stock has occurred. As of
June 30, 2008, both the options and warrants meet the criteria of EITF No.
00-19, Accounting for
Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company’s Own Stock, for classification as
equity in the Company’s consolidated balance sheet.




Effective
March 2, 2007, the Company entered into a one year consulting agreement to
retain the financial advisory services of Sanderling Ventures Management VI
(Sanderling), affiliates of whom together beneficially own in excess of five
percent of the Company’s common stock. In consideration for such services, the
Company issued to Sanderling a warrant to purchase 2,000 shares of Series D
Stock (or 200,000 shares of the Company’s common stock if the warrant is
exercised after mandatory conversion of the Series D Stock into Company common
stock) with the warrant having a five-year term and an exercise price of $42 per
share (or $0.42 per share of common stock if the warrant is exercised for shares
of the Company’s common stock). Using the Black-Scholes model, the Company has
estimated the fair value of the warrant to be approximately $69, which was
expensed in its 2007 results of operations.





During
the first quarter of 2007, holders of 10,776,909 and 4,463,289 shares of Series
A Stock and Series C Stock, respectively, exercised their right to convert their
shares to an equal number of shares of common stock.





Item3. Quantitative and Qualitative Disclosures about Market
Risk.





Not
required.





Item4T. Controls and Procedures.





We
maintain “disclosure controls and procedures” within the meaning of Rule
13a-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange
Act. Our disclosure controls and procedures are designed to provide reasonable
assurance that information required to be disclosed by the Company in the
reports filed under the Exchange Act, such as in this Quarterly Report on Form
10-Q, is recorded, processed, summarized and reported within the time periods
specified in the U.S. Securities and Exchange Commission’s rules and forms. Our
disclosure controls and procedures include controls and procedures designed to
provide reasonable assurance that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow for timely decisions regarding
required disclosure. In designing and evaluating our disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating and implementing possible controls
and procedures.





32
 Index





Evaluation of Disclosure Controls
and Procedures.As of the end of the period covered by this Quarterly
Report on the Form 10-Q, we evaluated the effectiveness of the design and
operation of the Company’s disclosure controls and procedures, which was done
under the supervision and with the participation of our management, including
our Chief Executive Officer and our Chief Financial Officer. Included as
Exhibits 32.1 and 32.2 to this Quarterly Report on Form 10-Q are certifications
of our Chief Executive Officer and Chief Financial Officer, which are required
in accordance with Rule 13a-14 of the Exchange Act. This Controls and Procedures
section includes the information concerning the controls evaluation referred to
in the certifications and it should be read in conjunction with the
certifications for a more complete understanding of the topics presented. Based
on the controls evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of June 30, 2008, our disclosure controls and
procedures were effective.





Changes in Internal Control over
Financial Reporting.There has been no change in the Company’s internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that occurred during the Company’s second
quarter of 2008 that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.





33
 Index





PART
II – OTHER INFORMATION





Item1. Legal Proceedings.





Respectively,
on October 23, 2007 and on November 2, 2007, the Company received information
requests from the United States Internal Revenue Service (the “IRS”) and the
state of California Franchise Tax Board regarding options granted where the
market price of the Company’s common stock was higher than the exercise price of
the options.  The Company responded to both inquiries in November
2007.  On February 11, 2008 and June 8, 2008 the Company received
follow-up information requests from the IRS specifically regarding Section
162(m) of the Internal Revenue Code and further inquiries regarding the option
grants, to which the Company responded in May and June 2008, respectively. On
July 21, 2008, the Company received another follow-up inquiry from the IRS, to
which it is in the process of responding.





We are a
defendant from time to time in lawsuits incidental to our business. We are not
currently subject to any material legal proceedings.





Item1A. Risk
Factors.





There
have been no material changes in the risk factors previously disclosed in Item
1A. Risk Factors of our Annual Report on Form 10-K for the year ended December
31, 2007.





Item2. Unregistered
Sales of Equity Securities and Use of Proceeds (dollars in thousands, except per share
data).





On June
30, 2008, we issued 3,750 shares of our Series E Stock to a vendor in
consideration for services rendered during the second quarter of 2008. The
estimated fair value of these services is $56. On February 8, 2008, we issued
166,667 shares of restricted common stock to a vendor in consideration for
services rendered in 2007. The estimated value of these services is $15. On
March 31, 2008, we issued 3,750 shares of our Series E Stock to a vendor in
consideration for services rendered during the first quarter of 2008. The
estimated fair value of these services is $58. The issuance of the foregoing
securities was not registered in reliance on Section 4(2) of the Securities Act
of 1933, as amended.





Item3. Defaults upon Senior Securities.





None.





Item4. Submission of Matters to a Vote of Security
Holders.





The 2008
annual meeting of stockholders was held on May 30, 2008. The matters on which
the stockholders voted, in person or by proxy, were: (i) to elect six directors
to serve until the Company’s next annual meeting of stockholders and until their
successors are duly elected and qualified; (ii) to approve a one-for-fourteen,
one-for-sixteen, one-for-eighteen, or one-for-twenty reverse stock split of all
of ReGen’s issued and outstanding Common Stock, subject to the authority of the
Board; and (iii) to ratify the appointment of Ernst & Young LLP as our
independent accountants for the current fiscal year.





The
results of the voting are shown below:





Election
of directors:





Name of
      Nominee
            
            Number
      of
              Votes For
            
            
            Number
      of
              Votes WithheldDr.
      Gerald E. Bisbee, Jr.
            
            
            99,489,127
            
            
            
            2,180,646Dr.
      Abhi Acharya
            
            
            101,462,615
            
            
            
            207,158Mr.
      Alan W. Baldwin
            
            
            101,462,615
            
            
            
            207,158Dr.
      Robert G. McNeil
            
            
            101,360,178
            
            
            
            309,595Dr.
      J. Richard Steadman
            
            
            101,359,827
            
            
            
            309,946Mr.
      William R. Timken
            
            
            101,462,615
            
            
            
            207,158





34
 Index





Approval
of a one-for-fourteen, one-for-sixteen, one-for-eighteen, or one-for-twenty
reverse stock split of all of the Company’s issued and outstanding Common Stock,
subject to the authority of the Board:





Number of Votes
      For
            
            Number of Votes Against
            
            
            Number
      of Votes
              Abstaining98,246,721
            
            
            3,342,687
            
            
            
            80,365





Ratification
of the selection of Ernst &Young LLP as independent auditors for the fiscal
year ending December 31, 2008:





Number of Votes
      For
            
            Number of Votes Against
            
            
            Number
      of Votes
              Abstaining101,507,235
            
            
            140,870
            
            
            
            21,668





Item5. Other Information.





None.





35
 Index





Item6. Exhibits.





(a)
            Exhibits.





The
following Exhibits are filed herewith and made a part hereof:





Number
            
            Description3.1
            
            Amended
      and Restated Certificate of Incorporation (as amended)
  (1)3.2
            
            Second
      Amended and Restated By-Laws (as adopted on September 21, 2007)
      (2)4.1
            
            Specimen
      Common Stock Certificate(3)4.2
            
            Certificate
      of Designations, Preferences and Rights of Series A Convertible
      Preferred Stock of the Company (21)4.3
            
            Certificate
      of Designations, Preferences and Rights of Series C Convertible
      Preferred Stock of the Company (4)4.4
            
            Certificate
      of Designations, Preferences and Rights of Series D Convertible
      Preferred Stock of the Company (5)4.5
            
            Certificate
      of Designations, Preferences and Rights of Series E Convertible Preferred
      Stock of the Company (6)4.6
            
            Certificate
      of Designations, Preferences and Rights of Series F Convertible Preferred
      Stock of the Company (7)4.7*
            
            ReGen
      Biologics, Inc.
      Employee Stock Option Plan, Amended and Restated, effective April 1,
      2004 (8)4.8*
            
            ReGen
      Biologics, Inc.
      Non-Employee Director Stock Option Plan, Amended and Restated, effective
      April 1, 2004 (8)4.9*
            
            ReGen
      Biologics, Inc.
      Non-Employee Director Supplemental Stock Option Plan Amended and Restated,
      effective January 31, 2003 (9)4.10*
            
            Form
      of Employee Incentive Stock Option Agreement for the Employee Stock Option
      Plan (1)4.11*
            
            Form
      of Nonqualified Employee, Non-Employee Director or Consultant Stock Option
      Agreement for the Employee Stock Option Plan (1)4.12*
            
            Form
      of Nonqualified Non-Employee Director Stock Option Agreement for the
      Non-Employee Director Stock Option Plan (1)4.13*
            
            Form
      of Nonqualified Non-Employee Director Stock Option Agreement for the
      Non-Employee Director Supplemental Stock Option Plan
(1)4.14*
            
            Form
      of Nonqualified Employee or Consultant Stock Option Agreement
      (21)4.15*
            
            Form
      of Nonqualified Non-Employee Director Stock Option Agreement
      (21)4.16
            
            Second
      Amended and Restated Stockholders’ Agreement by and among the Company and
      the Stockholders named therein, dated as of August 23, 2007
      (10)




36
 Index




4.17
            
            Amended
      and Restated Registration Rights Agreement between the Company and the
      Investors listed therein (4)4.18
            
            Common
      Stock Registration Rights Agreement by and among the Company and the
      Stockholders named therein, dated as of April 19, 2004
      (11)4.19
            
            Form
      of Subscription Agreement by and between the Company and the Investors
      named therein, dated as of November 30, 2006 and December 1, 2006
      (12)4.20
            
            Form
      of Subscription Agreement by and between the Company and the Investors
      named therein, dated as of March 2, March 30, and April 5 2007 (5,
      (13)4.21
            
            Form
      of Subscription Agreement by and among the Company and the Investors named
      therein, dated as of July 24, 2008 (7)4.22
            
            Form
      of Warrant Certificate by and between the Company and the Individuals
      named therein, dated as of July 14, 2005 (4)4.23
            
            Form
      of Warrant Certificate by and between the Company and the Individuals
      named therein, dated as of November 30 and December 1, 2006
      (12)4.24
            
            Form
      of Warrant Certificate by and between the Company and the Individuals
      named therein, dated as of March 2, March 30, and April 5, 2007
      (5),(13)4.25
            
            Warrant
      Certificate by and between the Company and Sanderling Ventures Management
      VI, dated as of March 2, 2007 (13)4.26
            
            Form
      of Warrant to Purchase Common Stock by and between the Company and
      Individual named therein, dated October 1, 2003
  (21)





4.27
            
            Form
      of Placement Agent Warrant to Purchase Common Stock by and between the
      Company and Harris Nesbitt Gerard, Inc. (4)4.28
            
            Form
      of Placement Agent Warrant to Purchase Common Stock by and between the
      Company and Vail Securities Investment, Inc. (4)4.29
            
            Form
      of Warrant Certificate by and between the Company and the Individuals
      named therein, dated as of October 15, 2007 (21)4.30
            
            Form
      of Warrant Certificate by and between the Company and the Individuals
      named therein, dated as of October 15, 2007 (21)4.31
            
            Form
      of Warrant Certificate by and between the Company and the Individuals
      named therein, dated as of July 24, 2008 (7)4.32
            
            Form
      of Option Agreement by and between the Company and the Individuals named
      therein, dated as of November 30, and December 1, 2006
      (12)4.33
            
            Form
      of Option Agreement by and between the Company and the Individuals named
      therein, dated as of March 2, March 30, and April 5, 2007
      (5),(13)10.1
            
            Form
      of Indemnification Agreement (15)10.2*
            
            First
      Amendment to Employment Agreement by and between Gerald E.
      Bisbee, Jr., Ph. D. and the Company, dated March 23, 2004
      (16)10.3*
            
            Employment
      Agreement by and between Brion D. Umidi and the Company, dated
      March 23, 2004 (17)




37
 Index




10.4
            
            License
      Agreement by and between the Company and Linvatec Corporation, dated
      April 7, 2000 (17)10.5
            
            Exclusive
      License Agreement by and between the Company and Dr. Shu-Tung Li,
      dated August 24, 1995 (17)10.6*
            
            Assignment
      and Royalty Agreement by and among the Company, Modified Polymer
      Components, Inc. and Dr. J. Richard Steadman, dated April 9,
      1997 (17)10.7
            
            Credit
      Agreement by and between the Company and Sulzer Medica USA Holding
      Company, dated November 30, 1998 (18)10.8
            
            Credit
      Agreement by and between the Company and Sulzer Medica USA Holding
      Company, dated March 14, 2000 (17)10.9
            
            Agreement
      by and among Sulzer Medica USA Holding Co., Sulzer Biologics Inc. Sulzer
      Orthopedics Ltd. and the Company, dated February 20, 2001
      (17)10.10
            
            Letter
      Agreement by and between the Company and Sulzer Orthopedics AG, dated
      January 18, 2002 (170)10.11
            
            Distributor
      Agreement by and between the Company and XMedica, effective as of
      October 24, 2005 (19)10.12
            
            Agreement
      by and between the Company and MedWork AG ,dated as of January 1,
      2005 (20)10.13
            
            Consulting
      Agreement by and between the Company and Sanderling Ventures Management
      VI, dated as of March 2, 2007 (13)21.1
            
            Subsidiaries
      of the Registrant (21)31.1
            
            Section
      302 Certification from Gerald E. Bisbee, Jr., dated August 8, 2008
      (22)31.2
            
            Section
      302 Certification from Brion Umidi, dated August 8, 2008
    (22)32.1
            
            Section
      906 Certification from Gerald E. Bisbee, Jr., dated August 8, 2008
      (22)32.2
            
            Section
      906 Certification from Brion Umidi, dated August 8, 2008
    (22)


____________






(1)
            Incorporated
      herein by reference to the Company’s Report on Form 10-Q for the
      quarter ended June 30, 2005 (File
  No. 000-20805).




(2)
            Incorporated
      herein by reference to the Company’s Report on Form 8-K, filed on
      September 24, 2007 (File
No. 000-20805).




(3)
            Incorporated
      herein by reference to the Company’s Registration Statement on
      Form S-3, filed on November 19, 2003 (File
      No. 333-110605).




(4)
            Incorporated
      herein by reference to the Company’s Report on Form 8-K, filed on
      September 25, 2003 (File
  No. 000-20805).




(5)
            Incorporated
      herein by reference to the Company’s Report on Form 8-K, filed on
      April 5, 2007 (File
No. 000-20805).




(6)
            Incorporated
      herein by reference to the Company’s Report on Form 8-K, filed on
      October 19, 2007 (File
No. 000-20805).





(7)
            Incorporated
      herein by reference to the Company’s Report on Form 8-K, filed on July 30,
      2008 (File No. 000-20805).





38
 Index





(8)
            Incorporated
      herein by reference to the Company’s Proxy Statement on Schedule 14A,
      filed on April 29, 2004 (File
  No. 000-20805).




(9)
            Incorporated
      herein by reference to the Company’s Registration Statement on
      Form S-1/A, filed on January 14, 2004 (File
      No. 333-110605).




(10)
            Incorporated
      herein by reference to the Company’s Report on Form 8-K, filed on
      August 24, 2007 (File
No. 000-20805).




(11)
            Incorporated
      herein by reference to the Company’s Registration Statement on
      Form S-1, filed on April 26, 2004 (File
      No. 333-114867).




(12)
            Incorporated
      herein by reference to the Company’s Report on Form 8-K, filed on
      December 6, 2006 (File
No. 000-20805).




(13)
            Incorporated
      herein by reference to the Company’s Report on Form 8-K, filed on
      March 8, 2007 (File
No. 000-20805).




(14)
            Incorporated
      herein by reference to the Company’s Report on Form 8-K, filed on
      July 18, 2005 (File
No. 000-20805).




(15)
            Incorporated
      herein by reference to the Company’s Report on Form 8-K, filed on
      March 17, 2004 (File
No. 000-20805).




(16)
            Incorporated
      herein by reference to the Company’s Report on Form 8-K/A, filed on
      September 4, 2002 (File
  No. 000-20805).




(17)
            Incorporated
      herein by reference to the Company’s Report on Form 10-K for the year
      ended December 31, 2003 (File
  No. 000-20805).




(18)
            Incorporated
      herein by reference to the Company’s Report on Form 10-Q for the
      quarter ended March 31, 2005 (File
    No. 000-20805).




(19)
            Incorporated
      herein by reference to the Company’s Report on Form 10-Q for the
      quarter ended September 30, 2005 (File
      No. 000-20805).




(20)
            Incorporated
      herein by reference to the Company’s Report on Form 10-K for the year
      ended December 31, 2004 (File
  No. 000-20805).




(21)
            Incorporated
      herein by reference to the Company’s Report on Form 10-K for the year
      ended December 31, 2007 (File
  No. 000-20805).




(22)
            Included
      with this filing.




*
            Management
      Contract or Compensatory Plan or
Arrangement




39
 Index





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized on August 8, 2008.





REGEN
      BIOLOGICS, INC.By:
            /s/
      BRION D. UMIDIBrion
      D. UmidiSenior
      Vice President andChief
      Financial Officer






40