##### 



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

Form 10-Q

|           |  |                                                                                         
|---------- |  | ----------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                         
|(X)        |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 
|           |  | For the quarterly period ended June 30, 2003                                            
|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          |  | (I.R.S. Employer   
|incorporation or organization)           |  | Identification No.)
|                                         |  |                    
|1290 Bay Dale Drive,                     |  | 21012              
|PMB 351,                                 |  | (Zip Code)         
|Arnold, Maryland                         |  |                    
|(Address of principal executive offices) |  |                    

Registrants telephone number, including area code:
(410) 349-2431

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No (   )

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (   ) No (X)

The number of shares outstanding of the registrants common stock, $.01
par value, was 29,070,786 as of August 12, 2003.





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##### 



REGEN BIOLOGICS, INC.

INDEX

|                               |  |                                                                                                                                                                                                                                                                 
|------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|PART I  Financial Information
|Item 1.                        |  | Financial Statements                                                                                                                                                                                                                                            
|                               |  | Condensed Consolidated Balance Sheets at June 30, 2003 (unaudited) and December 31, 2002                                                                                                                                                                        
|                               |  |                                                                                                                                                                                                                                                                 
|                               |  | Condensed Consolidated Statement of Operations for the Three Months Ended June 30, 2003
(unaudited) and 2002 (unaudited), the Six Months Ended June 30, 2003 (unaudited) and
2002 (unaudited) and the Period from December 21, 1989 to June 30, 2003 (unaudited)
|                               |  |                                                                                                                                                                                                                                                                 
|                               |  | Consolidated Statement of Changes in Stockholders Equity (Deficit) and Series A
Redeemable Convertible Preferred Stock for the Period from December 21, 1989
(inception) to June 30, 2003 (unaudited)                                                          
|                               |  |                                                                                                                                                                                                                                                                 
|                               |  | Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003
(unaudited) and 2002 (unaudited) and the Period from December 21, 1989 to June 30, 2003
(unaudited)                                                                      
|                               |  |                                                                                                                                                                                                                                                                 
|                               |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                                                                                                                                                                                
|Item 2.                        |  | Managements Discussion and Analysis of Financial Conditions and Results of Operations                                                                                                                                                                          
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                                                                                                                                      
|Item 4.                        |  | Controls and Procedures                                                                                                                                                                                                                                         
|PART II  Other Information   
|                               |  |                                                                                                                                                                                                                                                                 
|Item 1.                        |  | Legal Proceedings                                                                                                                                                                                                                                               
|Item 2.                        |  | Changes in Securities and Use of Proceeds                                                                                                                                                                                                                       
|Item 3.                        |  | Defaults upon Senior Securities                                                                                                                                                                                                                                 
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                                                                                                                                                                             
|Item 5.                        |  | Other Information                                                                                                                                                                                                                                               
|Item 6.                        |  | Exhibits and Reports on Form 8-K                                                                                                                                                                                                                                
|Signatures                     |  |                                                                                                                                                                                                                                                                 
|Certifications                 |  |                                                                                                                                                                                                                                                                 

2



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##### 



PART I  Financial Information

Item 1. Financial Statements

REGEN BIOLOGICS, INC.
(A Development Stage Company)

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

|                                                      |                                                      |   |         |               |   |                   |         |         |   | 
|----------------------------------------------------- | ---------------------------------------------------- | - | ------- | ------------- | - | ----------------- | ------- | ------- | - | 
|                                                      |                                                      |   |         | June 30, 2003 |   | December 31, 2002
|                                                      |                                                      |   |         |               |   |                  
|                                                      |                                                      |   |         | (unaudited)   |   |                   |         |        
|ASSETS                                                |                                                      |   |         |               |   |                   |         |        
|Current assets:                                       |                                                      |   |         |               |   |                   |         |        
|Cash                                                  |                                                      | $ | 1       |               |   | $                 | 1       |        
|Short-term investments                                |                                                      |   | 1,289   |               |   |                   | 3,473   |        
|Receivables                                           |                                                      |   | 6       |               |   |                   | 8       |        
|Receivables from related parties                      |                                                      |   | 1       |               |   |                   | 81      |        
|Inventory                                             |                                                      |   | 272     |               |   |                   | 262     |        
|Prepaid expenses and other                            |                                                      |   | 115     |               |   |                   | 91      |        
|                                                      |                                                      |   |         |               |   |                   |         |        
|                                                      | Total current assets                                 |   |         | 1,684         |   |                   |         | 3,916   |  
|                                                      |                                                      |   |         |               |   |                   |         |        
|Property and equipment, net                           |                                                      |   | 86      |               |   |                   | 129     |        
|Other assets                                          |                                                      |   | 167     |               |   |                   | 181     |        
|                                                      |                                                      |   |         |               |   |                   |         |        
|                                                      | Total assets                                         |   | $       | 1,937         |   |                   | $       | 4,226   |  
|                                                      |                                                      |   |         |               |   |                   |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)        |                                                      |   |         |               |   |                   |         |        
|Current liabilities:                                  |                                                      |   |         |               |   |                   |         |        
|Accounts payable                                      |                                                      | $ | 391     |               |   | $                 | 251     |        
|Accounts payable to related parties                   |                                                      |   | 10      |               |   |                   | 7       |        
|Accrued expenses                                      |                                                      |   | 255     |               |   |                   | 206     |        
|Accrued merger expenses                               |                                                      |   | 198     |               |   |                   | 198     |        
|Current portion of capital leases                     |                                                      |   | 3       |               |   |                   | 5       |        
|                                                      |                                                      |   |         |               |   |                   |         |        
|                                                      | Total current liabilities                            |   |         | 857           |   |                   |         | 667     |  
|                                                      |                                                      |   |         |               |   |                   |         |        
|Pension liability                                     |                                                      |   | 144     |               |   |                   | 144     |        
|Other liabilities                                     |                                                      |   | 16      |               |   |                   | 41      |        
|Long-term portion of notes payable and capital leases |                                                      |   | 6,796   |               |   |                   | 6,735   |        
|                                                      |                                                      |   |         |               |   |                   |         |        
|                                                      | Total liabilities                                    |   |         | 7,813         |   |                   |         | 7,587   |  
|                                                      |                                                      |   |         |               |   |                   |         |        
|Series A redeemable convertible preferred stock       |                                                      |   | 6,855   |               |   |                   | 6,855   |        
|Stockholders equity (deficit):                       |                                                      |   |         |               |   |                   |         |        
|Common stock                                          |                                                      |   | 291     |               |   |                   | 291     |        
|Accumulated other comprehensive loss                  |                                                      |   | (58     | )             |   |                   | (58     | )      
|Additional paid-in capital                            |                                                      |   | 31,374  |               |   |                   | 31,373  |        
|Deficit accumulated during development stage          |                                                      |   | (44,338 | )             |   |                   | (41,822 | )      
|                                                      |                                                      |   |         |               |   |                   |         |        
|                                                      | Total stockholders equity (deficit)                 |   |         | (12,731       | ) |                   |         | (10,216 | )
|                                                      |                                                      |   |         |               |   |                   |         |        
|                                                      | Total liabilities and stockholders equity (deficit) |   | $       | 1,937         |   |                   | $       | 4,226   |  
|                                                      |                                                      |   |         |               |   |                   |         |        

See accompanying Notes to Condensed Consolidated Financial Statements.

3



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##### 



REGEN BIOLOGICS, INC.
(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

|                                                                                                                                                                                        |                                                                 |                |        |                             |       |                           |        |                   |       |             |        |               |       |   |        |        |       |   |         |             |        | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------- | -------------- | ------ | --------------------------- | ----- | ------------------------- | ------ | ----------------- | ----- | ----------- | ------ | ------------- | ----- | - | ------ | ------ | ----- | - | ------- | ----------- | ------ | 
|                                                                                                                                                                                        |                                                                 |                |        |                             |       |                           |        |                   |       |             |        |               |       |   |        |        |       |   |         | Period from
|                                                                                                                                                                                        |                                                                 |                |        | Three Months Ended June 30, |       | Six Months Ended June 30, |        | December 21, 1989
|                                                                                                                                                                                        |                                                                 |                |        |                             |       |                           |        | (Inception) to   
|                                                                                                                                                                                        |                                                                 |                |        | 2003                        |       | 2002                      |        | 2003              |       | 2002        |        | June 30, 2003
|                                                                                                                                                                                        |                                                                 |                |        |                             |       |                           |        |                   |       |             |        |              
|                                                                                                                                                                                        |                                                                 |                |        | (unaudited)                 |       | (unaudited)               |        | (unaudited)       |       | (unaudited) |        | (unaudited)  
|Revenues:                                                                                                                                                                               |                                                                 |                |        |                             |       |                           |        |                   |       |             |        |               |       |   |        |        |       |   |         |            
|                                                                                                                                                                                        | Sales                                                           |                | $      | 24                          |       |                           | $      | 173               |       |             | $      | 198           |       |   | $      | 316    |       |   | $       | 2,331       |       
|                                                                                                                                                                                        | Royalties                                                       |                |        | 5                           |       |                           |        | 3                 |       |             |        | 13            |       |   |        | 31     |       |   |         | 123         |       
|                                                                                                                                                                                        | Grant and other revenue                                         |                |        |                            |       |                           |        |                  |       |             |        |              |       |   |        |       |       |   |         | 433         |       
|                                                                                                                                                                                        |                                                                 |                |        |                             |       |                           |        |                   |       |             |        |               |       |   |        |        |       |   |         |            
|                                                                                                                                                                                        |                                                                 | Total revenues |        |                             | 29    |                           |        |                   | 176   |             |        |               | 211   |   |        |        | 347   |   |         |             | 2,887  | 
|Expenses:                                                                                                                                                                               |                                                                 |                |        |                             |       |                           |        |                   |       |             |        |               |       |   |        |        |       |   |         |            
|                                                                                                                                                                                        | Costs of goods sold                                             |                |        | 25                          |       |                           |        | 304               |       |             |        | 296           |       |   |        | 579    |       |   |         | 2,878       |       
|                                                                                                                                                                                        | Research and development                                        |                |        | 765                         |       |                           |        | 715               |       |             |        | 1,203         |       |   |        | 1,289  |       |   |         | 26,379      |       
|                                                                                                                                                                                        | Business development, general
and administrative                |                |        | 695                         |       |                           |        | 420               |       |             |        | 1,251         |       |   |        | 813    |       |   |         | 12,494      |       
|                                                                                                                                                                                        | Compensation expense
associated with stock
options and warrants |                |        | 1                           |       |                           |        | 3,029             |       |             |        | 1             |       |   |        | 3,300  |       |   |         | 5,976       |       
|                                                                                                                                                                                        |                                                                 |                |        |                             |       |                           |        |                   |       |             |        |               |       |   |        |        |       |   |         |            
|                                                                                                                                                                                        |                                                                 | Total expenses |        |                             | 1,486 |                           |        |                   | 4,468 |             |        |               | 2,751 |   |        |        | 5,981 |   |         |             | 47,727 | 
|Operating loss                                                                                                                                                                          |                                                                 |                | (1,457 | )                           |       |                           | (4,292 | )                 |       |             | (2,540 | )             |       |   | (5,634 | )      |       |   | (44,840 | )          
|                                                                                                                                                                                        | Merger cost                                                     |                |        |                            |       |                           |        | (402              | )     |             |        |              |       |   |        | (402   | )     |   |         | (515        | )     
|                                                                                                                                                                                        | Interest and other income                                       |                |        | 2                           |       |                           |        | 4                 |       |             |        | 7             |       |   |        | 5      |       |   |         | 1,218       |       
|                                                                                                                                                                                        | Rental income                                                   |                |        | 30                          |       |                           |        | 47                |       |             |        | 80            |       |   |        | 91     |       |   |         | 496         |       
|                                                                                                                                                                                        | Interest expense                                                |                |        | (27                         | )     |                           |        | (1,618            | )     |             |        | (63           | )     |   |        | (1,729 | )     |   |         | (2,747      | )     
|                                                                                                                                                                                        | License fees                                                    |                |        |                            |       |                           |        |                  |       |             |        |              |       |   |        |       |       |   |         | 2,050       |       
|                                                                                                                                                                                        |                                                                 |                |        |                             |       |                           |        |                   |       |             |        |               |       |   |        |        |       |   |         |            
|Net loss                                                                                                                                                                                |                                                                 | $              | (1,452 | )                           |       | $                         | (6,261 | )                 |       | $           | (2,516 | )             |       | $ | (7,669 | )      |       | $ | (44,338 | )          
|                                                                                                                                                                                        |                                                                 |                |        |                             |       |                           |        |                   |       |             |        |               |       |   |        |        |       |   |         |            
|Basic and diluted net loss per share:                                                                                                                                                   |                                                                 | $              | (0.05  | )                           |       | $                         | (0.37  | )                 |       | $           | (0.09  | )             |       | $ | (0.45  | )      |       | $ | (2.53   | )          
|                                                                                                                                                                                        |                                                                 |                |        |                             |       |                           |        |                   |       |             |        |               |       |   |        |        |       |   |         |            
|Weighted average number of shares
used for calculation of net loss per
share (shares outstanding
immediately after reverse merger
and recapitalization used for 2002
periods presented) |                                                                 |                | 29,071 |                             |       |                           | 17,045 |                   |       |             | 29,071 |               |       |   | 17,045 |        |       |   | 17,532  |            

See accompanying Notes to Condensed Consolidated Financial Statements.

4



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##### 



ReGen Biologics, Inc.
(A DEVELOPMENT STAGE COMPANY)
Consolidated Statement of Changes in Stockholders Equity (Deficit) and Series
A Redeemable Convertible Preferred Stock
Period from December 21, 1989 (inception) to June 30, 2003 (unaudited)(In thousands, except share data)



|                             |                                                                                                                                                                                        |  |                        |  |                 |  |                       |  |              |  |                               |           |        |  |        |   |        |  |  |  |  |  |  |  |  |  |           |           |  |  |   |   | 
|---------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- |  | --------------- |  | --------------------- |  | ------------ |  | ----------------------------- | --------- | ------ |  | ------ | - | ------ |  |  |  |  |  |  |  |  |  | --------- | --------- |  |  | - | - | 
|                             |                                                                                                                                                                                        |  |                        |  |                 |  |                       |  |              |  | Stockholders Equity (Deficit)
|                             |                                                                                                                                                                                        |  |                        |  |                 |  |                       |  |              |  |                              
|                             |                                                                                                                                                                                        |  | Redeemable Convertible |  | Convertible     |  | Convertible Preferred |  |              |  |                               |           |        |  |       
|                             |                                                                                                                                                                                        |  | Preferred Series A     |  | Preferred Stock |  | Series B              |  | Common Stock
|                             |                                                                                                                                                                                        |  |                        |  |                 |  |                       |  |             
|                             |                                                                                                                                                                                        |  | Share                  |  | Amount          |  | Shares                |  | Amount       |  | Shares                        |           | Amount |  | Shares |   | Amount
|                             |                                                                                                                                                                                        |  |                        |  |                 |  |                       |  |              |  |                               |           |        |  |        |   |       
|                             | Issuance of common stock
at $0.03127 per share for
net assets contributed by
founders in May 1990                                                                                      |  |                        |  |                 |  |                       |  |              |  |                               |          |        |  | $      |  |        |  |  |  |  |  |  |  |  |  |           | 1,400,000 |  |  | $ | 1 | 
|                             | Issuance of common stock
at $0.005 per share for
cash in November 1991                                                                                                                 |  |                        |  |                 |  |                       |  |              |  |                               |          |        |  |        |  |        |  |  |  |  |  |  |  |  |  |           | 700,000   |  |  |   |  | 
|                             | Issuance of Series A
convertible preferred
stock at $1.00 per share
for cash in April 1991,
net of offering costs of
$44,281                                                           |  |                        |  |                 |  |                       |  |              |  |                               | 725,000   |        |  |        | 1 |        |  |  |  |  |  |  |  |  |  |           |          |  |  |   |  | 
|                             | Issuance 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
$28,482 |  |                        |  |                 |  |                       |  |              |  |                               | 1,226,338 |        |  |        |  |        |  |  |  |  |  |  |  |  |  |           |          |  |  |   |  | 
|                             | Net loss from inception
(December 21, 1989)
through December 31, 1992                                                                                                                  |  |                        |  |                 |  |                       |  |              |  |                               |          |        |  |        |  |        |  |  |  |  |  |  |  |  |  |           |          |  |  |   |  | 
|Balance at December 31, 1992 |                                                                                                                                                                                        |  |                        |  |                 |  |                       |  |              |  | 1,951,338                     |           |        |  | 1      |   |        |  |  |  |  |  |  |  |  |  | 2,100,000 |           |  |  | 1 |  
|                             | Issuance of Series C
convertible preferred
stock at $4.50 per share
for cash in December
1993, net of offering
costs of $29,023                                                        |  |                        |  |                 |  |                       |  |              |  |                               | 550,552   |        |  |        |  |        |  |  |  |  |  |  |  |  |  |           |          |  |  |   |  | 
|                             | Exercise of common stock
options at $0.30 per
share for cash in
February 1993                                                                                                          |  |                        |  |                 |  |                       |  |              |  |                               |          |        |  |        |  |        |  |  |  |  |  |  |  |  |  |           | 200       |  |  |   |  | 
|                             | Issuance of common stock
at $0.30 per share in
1993 in exchange for
services to a consultant                                                                                           |  |                        |  |                 |  |                       |  |              |  |                               |          |        |  |        |  |        |  |  |  |  |  |  |  |  |  |           | 5,000     |  |  |   |  | 
|                             | Net loss                                                                                                                                                                               |  |                        |  |                 |  |                       |  |              |  |                               |          |        |  |        |  |        |  |  |  |  |  |  |  |  |  |           |          |  |  |   |  | 
|Balance at December 31, 1993 |                                                                                                                                                                                        |  |                        |  |                 |  |                       |  |              |  | 2,501,890                     |           |        |  | 1      |   |        |  |  |  |  |  |  |  |  |  | 2,105,200 |           |  |  | 1 |  
|                             | Net loss                                                                                                                                                                               |  |                        |  |                 |  |                       |  |              |  |                               |          |        |  |        |  |        |  |  |  |  |  |  |  |  |  |           |          |  |  |   |  | 
|Balance at December 31, 1994 |                                                                                                                                                                                        |  |                        |  |                 |  |                       |  |              |  | 2,501,890                     |           |        |  | 1      |   |        |  |  |  |  |  |  |  |  |  | 2,105,200 |           |  |  | 1 |  
|                             | Net loss                                                                                                                                                                               |  |                        |  |                 |  |                       |  |              |  |                               |          |        |  |        |  |        |  |  |  |  |  |  |  |  |  |           |          |  |  |   |  | 
|Balance at December 31, 1995 |                                                                                                                                                                                        |  |                        |  |                 |  |                       |  |              |  | 2,501,890                     |           |        |  | 1      |   |        |  |  |  |  |  |  |  |  |  | 2,105,200 |           |  |  | 1 |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                             |                                                                                                                                                                                        |  |                               |       |              |  |             |   |               |  |                     |        |                   |  |  |  |  |  |       |        |  
|---------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ----- | ------------ |  | ----------- | - | ------------- |  | ------------------- | ------ | ----------------- |  |  |  |  |  | ----- | ------ | -
|                             |                                                                                                                                                                                        |  | Stockholders Equity (Deficit)
|                             |                                                                                                                                                                                        |  |                              
|                             |                                                                                                                                                                                        |  | Additional                    |       |              |  |             |   |               |  |                     |        | Accumulated Other |  |  |  | 
|                             |                                                                                                                                                                                        |  | Paid In                       |       | Deferred     |  | Accumulated |   | Comprehensive |  | Total Stockholders'
|                             |                                                                                                                                                                                        |  | Capital                       |       | Compensation |  | Deficit     |   | Loss          |  | Equity (Deficit)   
|                             |                                                                                                                                                                                        |  |                               |       |              |  |             |   |               |  |                    
|                             | Issuance of common stock
at $0.03127 per share for
net assets contributed by
founders in May 1990                                                                                      |  | $                             | 44    |              |  | $           |  |               |  | $                   |       |                   |  |  |  |  |  | $     | 45     |  
|                             | Issuance of common stock
at $0.005 per share for
cash in November 1991                                                                                                                 |  |                               | 3     |              |  |             |  |               |  |                     |       |                   |  |  |  |  |  |       | 3      |  
|                             | Issuance of Series A
convertible preferred
stock at $1.00 per share
for cash in April 1991,
net of offering costs of
$44,281                                                           |  |                               | 681   |              |  |             |  |               |  |                     |       |                   |  |  |  |  |  |       | 682    |  
|                             | Issuance 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
$28,482 |  |                               | 3,650 |              |  |             |  |               |  |                     |       |                   |  |  |  |  |  |       | 3,650  |  
|                             | Net loss from inception
(December 21, 1989)
through December 31, 1992                                                                                                                  |  |                               |      |              |  |             |  |               |  |                     | (2,476 | )                 |  |  |  |  |  |       | (2,476 | )
|Balance at December 31, 1992 |                                                                                                                                                                                        |  | 4,378                         |       |              |  |            |   |               |  | (2,476              | )      |                   |  |  |  |  |  | 1,904 |       
|                             | Issuance of Series C
convertible preferred
stock at $4.50 per share
for cash in December
1993, net of offering
costs of $29,023                                                        |  |                               | 2,448 |              |  |             |  |               |  |                     |       |                   |  |  |  |  |  |       | 2,448  |  
|                             | Exercise of common stock
options at $0.30 per
share for cash in
February 1993                                                                                                          |  |                               | 1     |              |  |             |  |               |  |                     |       |                   |  |  |  |  |  |       | 1      |  
|                             | Issuance of common stock
at $0.30 per share in
1993 in exchange for
services to a consultant                                                                                           |  |                               | 1     |              |  |             |  |               |  |                     |       |                   |  |  |  |  |  |       | 1      |  
|                             | Net loss                                                                                                                                                                               |  |                               |      |              |  |             |  |               |  |                     | (1,342 | )                 |  |  |  |  |  |       | (1,342 | )
|Balance at December 31, 1993 |                                                                                                                                                                                        |  | 6,828                         |       |              |  |            |   |               |  | (3,818              | )      |                   |  |  |  |  |  | 3,012 |       
|                             | Net loss                                                                                                                                                                               |  |                               |      |              |  |             |  |               |  |                     | (1,463 | )                 |  |  |  |  |  |       | (1,463 | )
|Balance at December 31, 1994 |                                                                                                                                                                                        |  | 6,828                         |       |              |  |            |   |               |  | (5,281              | )      |                   |  |  |  |  |  | 1,549 |       
|                             | Net loss                                                                                                                                                                               |  |                               |      |              |  |             |  |               |  |                     | (1,959 | )                 |  |  |  |  |  |       | (1,959 | )
|Balance at December 31, 1995 |                                                                                                                                                                                        |  | 6,828                         |       |              |  |            |   |               |  | (7,240              | )      |                   |  |  |  |  |  | (410  | )     

See accompanying Notes to Condensed Consolidated Financial Statements

5



---



##### 



ReGen Biologics, Inc.
(A DEVELOPMENT STAGE COMPANY)
Consolidated Statement of Changes in Stockholders Equity (Deficit) and Series
A Redeemable Convertible Preferred Stock
Period from December 21, 1989 (inception) to June 30, 2003 (unaudited)(In thousands, except share data)



|                                               |                                                                                                                                             |  |                        |  |                 |  |                       |  |              |  |                                |           |        |   |        |   |        |  |  |  |  |  |  |  |  |  |           |         |  |   |   |   | 
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- |  | --------------- |  | --------------------- |  | ------------ |  | ------------------------------ | --------- | ------ | - | ------ | - | ------ |  |  |  |  |  |  |  |  |  | --------- | ------- |  | - | - | - | 
|                                               |                                                                                                                                             |  |                        |  |                 |  |                       |  |              |  | Stockholders' Equity (Deficit)
|                                               |                                                                                                                                             |  |                        |  |                 |  |                       |  |              |  |                               
|                                               |                                                                                                                                             |  | Redeemable Convertible |  | Convertible     |  | Convertible Preferred |  |              |  |                                |           |        |   |       
|                                               |                                                                                                                                             |  | Preferred Series A     |  | Preferred Stock |  | Series B              |  | Common Stock
|                                               |                                                                                                                                             |  |                        |  |                 |  |                       |  |             
|                                               |                                                                                                                                             |  | Shares                 |  | Amount          |  | Shares                |  | Amount       |  | Shares                         |           | Amount |   | Shares |   | Amount
|                                               |                                                                                                                                             |  |                        |  |                 |  |                       |  |              |  |                                |           |        |   |        |   |       
|Balance at December 31, 1995 (carried forward) |                                                                                                                                             |  |                        |  |                 |  |                       |  |              |  | 2,501,890                      |           |        | $ | 1      |   |        |  |  |  |  |  |  |  |  |  | 2,105,200 |         |  | $ | 1 |  
|                                               | Issuance of Series D convertible preferred
stock at $7.25 per share for cash in March
and April 1996, net of offering costs of
$536,062     |  |                        |  |                 |  |                       |  |              |  |                                | 1,191,321 |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           |        |  |   |   |  | 
|                                               | Exercise of common stock options at $0.10,
$0.30, and $0.45 per share in August and
October 1996                                            |  |                        |  |                 |  |                       |  |              |  |                                |          |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           | 163,333 |  |   |   |  | 
|                                               | Net loss                                                                                                                                    |  |                        |  |                 |  |                       |  |              |  |                                |          |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           |        |  |   |   |  | 
|Balance at December 31, 1996                   |                                                                                                                                             |  |                        |  |                 |  |                       |  |              |  | 3,693,211                      |           |        |   | 1      |   |        |  |  |  |  |  |  |  |  |  | 2,268,533 |         |  |   | 1 |  
|                                               | Issuance of Series E convertible preferred
stock at $7.25 per share for cash in August
and September 1997, net of offering costs
of $53,220 |  |                        |  |                 |  |                       |  |              |  |                                | 335,314   |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           |        |  |   |   |  | 
|                                               | Exercise of common stock options at $0.10,
$0.30, and $0.45 per share in April,
August, and September 1997                                  |  |                        |  |                 |  |                       |  |              |  |                                |          |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           | 32,111  |  |   |   |  | 
|                                               | Net loss                                                                                                                                    |  |                        |  |                 |  |                       |  |              |  |                                |          |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           |        |  |   |   |  | 
|Balance at December 31, 1997                   |                                                                                                                                             |  |                        |  |                 |  |                       |  |              |  | 4,028,525                      |           |        |   | 1      |   |        |  |  |  |  |  |  |  |  |  | 2,300,644 |         |  |   | 1 |  
|                                               | Exercise 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 |  |   |   |  | 
|                                               | Compensation expense associated with stock
option modifications                                                                             |  |                        |  |                 |  |                       |  |              |  |                                |          |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           |        |  |   |   |  | 
|                                               | Net loss                                                                                                                                    |  |                        |  |                 |  |                       |  |              |  |                                |          |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           |        |  |   |   |  | 
|Balance at December 31, 1998                   |                                                                                                                                             |  |                        |  |                 |  |                       |  |              |  | 4,028,525                      |           |        |   | 1      |   |        |  |  |  |  |  |  |  |  |  | 2,460,523 |         |  |   | 1 |  
|                                               | Exercise of common stock options at $.725
and $1.45 per share in April, June and
August 1999                                                |  |                        |  |                 |  |                       |  |              |  |                                |          |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           | 42,396  |  |   |   |  | 
|                                               | Issuance of Series F convertible preferred
stock at $8.73 per share for cash                                                                |  |                        |  |                 |  |                       |  |              |  |                                | 453,310   |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           |        |  |   |   |  | 
|                                               | Compensation expense associated with stock
option grants                                                                                    |  |                        |  |                 |  |                       |  |              |  |                                |          |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           |        |  |   |   |  | 
|                                               | Net loss                                                                                                                                    |  |                        |  |                 |  |                       |  |              |  |                                |          |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           |        |  |   |   |  | 
|Balance at December 31, 1999                   |                                                                                                                                             |  |                        |  |                 |  |                       |  |              |  | 4,481,835                      |           |        |   | 1      |   |        |  |  |  |  |  |  |  |  |  | 2,502,919 |         |  |   | 1 |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                               |                                                                                                                                             |   |                                |       |              |   |             |        |               |   |                     |        |       |  |             |  |  |   |       |        |  
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------------------------ | ----- | ------------ | - | ----------- | ------ | ------------- | - | ------------------- | ------ | ----- |  | ----------- |  |  | - | ----- | ------ | -
|                                               |                                                                                                                                             |   | Stockholders' Equity (Deficit)
|                                               |                                                                                                                                             |   |                               
|                                               |                                                                                                                                             |   |                                |       |              |   |             |        |               |   |                     |        |       |  | Accumulated |  |  |   |      
|                                               |                                                                                                                                             |   | Additional                     |       |              |   |             |        |               |   |                     |        | Other |  |             |  | 
|                                               |                                                                                                                                             |   | Paid In                        |       | Deferred     |   | Accumulated |        | Comprehensive |   | Total Stockholders'
|                                               |                                                                                                                                             |   | Capital                        |       | Compensation |   | Deficit     |        | Loss          |   | Equity (Deficit)   
|                                               |                                                                                                                                             |   |                                |       |              |   |             |        |               |   |                    
|Balance at December 31, 1995 (carried forward) |                                                                                                                                             | $ | 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
$536,062     |   |                                | 8,101 |              |   |             |       |               |   |                     |       |       |  |             |  |  |   |       | 8,101  |  
|                                               | Exercise of common stock options at $0.10,
$0.30, and $0.45 per share in August and
October 1996                                            |   |                                | 43    |              |   |             |       |               |   |                     |       |       |  |             |  |  |   |       | 43     |  
|                                               | Net loss                                                                                                                                    |   |                                |      |              |   |             |       |               |   |                     | (1,931 | )     |  |             |  |  |   |       | (1,931 | )
|Balance at December 31, 1996                   |                                                                                                                                             |   | 14,972                         |       |              |   |            |        |               |   | (9,171              | )      |       |  |             |  |  |   | 5,803 |       
|                                               | Issuance of Series E convertible preferred
stock at $7.25 per share for cash in August
and September 1997, net of offering costs
of $53,220 |   |                                | 2,378 |              |   |             |       |               |   |                     |       |       |  |             |  |  |   |       | 2,378  |  
|                                               | Exercise of common stock options at $0.10,
$0.30, and $0.45 per share in April,
August, and September 1997                                  |   |                                | 5     |              |   |             |       |               |   |                     |       |       |  |             |  |  |   |       | 5      |  
|                                               | Net loss                                                                                                                                    |   |                                |      |              |   |             |       |               |   |                     | (3,868 | )     |  |             |  |  |   |       | (3,868 | )
|Balance at December 31, 1997                   |                                                                                                                                             |   | 17,355                         |       |              |   |            |        |               |   | (13,039             | )      |       |  |             |  |  |   | 4,318 |       
|                                               | Exercise of common stock options at $0.10,
$0.20, $1.27, and $1.45 per share in May,
July, November and December 1998,
respectively         |   |                                | 108   |              |   |             |       |               |   |                     |       |       |  |             |  |  |   |       | 108    |  
|                                               | Compensation expense associated with stock
option modifications                                                                             |   |                                | 56    |              |   |             |       |               |   |                     |       |       |  |             |  |  |   |       | 56     |  
|                                               | Net loss                                                                                                                                    |   |                                |      |              |   |             |       |               |   |                     | (3,815 | )     |  |             |  |  |   |       | (3,815 | )
|Balance at December 31, 1998                   |                                                                                                                                             |   | 17,519                         |       |              |   |            |        |               |   | (16,854             | )      |       |  |             |  |  |   | 667   |       
|                                               | Exercise of common stock options at $.725
and $1.45 per share in April, June and
August 1999                                                |   |                                | 32    |              |   |             |       |               |   |                     |       |       |  |             |  |  |   |       | 32     |  
|                                               | Issuance of Series F convertible preferred
stock at $8.73 per share for cash                                                                |   |                                | 3,956 |              |   |             |       |               |   |                     |       |       |  |             |  |  |   |       | 3,956  |  
|                                               | Compensation expense associated with stock
option grants                                                                                    |   |                                | 3,436 |              |   |             | (3,247 | )             |   |                     |       |       |  |             |  |  |   |       | 189    |  
|                                               | Net loss                                                                                                                                    |   |                                |      |              |   |             |       |               |   |                     | (5,458 | )     |  |             |  |  |   |       | (5,458 | )
|Balance at December 31, 1999                   |                                                                                                                                             |   | 24,943                         |       |              |   | (3,247      | )      |               |   | (22,312             | )      |       |  |             |  |  |   | (614  | )     

See accompanying Notes to Condensed Consolidated Financial Statements

6



---



##### 



ReGen Biologics, Inc.
(A DEVELOPMENT STAGE COMPANY)
Condensed Statement of Changes in Stockholders Equity (Deficit) and Series A
Redeemable Convertible Preferred Stock
Period from December 21, 1989 (inception) to June 30, 2003 (unaudited)(In thousands, except share data)



|                                               |                                                                                          |  |                        |  |                 |  |                    |  |              |  |                                |   |        |   |        |   |        |  |  |  |  |  |  |  |  |  |           |        |  |   |   |   | 
|---------------------------------------------- | ---------------------------------------------------------------------------------------- |  | ---------------------- |  | --------------- |  | ------------------ |  | ------------ |  | ------------------------------ | - | ------ | - | ------ | - | ------ |  |  |  |  |  |  |  |  |  | --------- | ------ |  | - | - | - | 
|                                               |                                                                                          |  |                        |  |                 |  |                    |  |              |  | Stockholders' Equity (Deficit)
|                                               |                                                                                          |  |                        |  |                 |  |                    |  |              |  |                               
|                                               |                                                                                          |  | Redeemable Convertible |  | Convertible     |  | Convertible        |  |              |  |                                |   |        |   |       
|                                               |                                                                                          |  | Preferred Series A     |  | Preferred Stock |  | Preferred Series B |  | Common Stock
|                                               |                                                                                          |  |                        |  |                 |  |                    |  |             
|                                               |                                                                                          |  | Shares                 |  | Amount          |  | Shares             |  | Amount       |  | Shares                         |   | Amount |   | Shares |   | Amount
|                                               |                                                                                          |  |                        |  |                 |  |                    |  |              |  |                                |   |        |   |        |   |       
|Balance at December 31, 1999
(carried forward) |                                                                                          |  |                        |  |                 |  |                    |  |              |  | 4,481,835                      |   |        | $ | 1      |   |        |  |  |  |  |  |  |  |  |  | 2,502,919 |        |  | $ | 1 |  
|                                               | Compensation expense associated
with stock option grants in prior
year                   |  |                        |  |                 |  |                    |  |              |  |                                |  |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           |       |  |   |   |  | 
|                                               | Compensation expense associated
with stock option grants in
current year                 |  |                        |  |                 |  |                    |  |              |  |                                |  |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           |       |  |   |   |  | 
|                                               | Stock options cancelled during 2000                                                      |  |                        |  |                 |  |                    |  |              |  |                                |  |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           |       |  |   |   |  | 
|                                               | Net loss                                                                                 |  |                        |  |                 |  |                    |  |              |  |                                |  |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           |       |  |   |   |  | 
|Balance at December 31, 2000                   |                                                                                          |  |                        |  |                 |  |                    |  |              |  | 4,481,835                      |   |        |   | 1      |   |        |  |  |  |  |  |  |  |  |  | 2,502,919 |        |  |   | 1 |  
|                                               | Exercise of common stock options
at $.10 per share in 2001                               |  |                        |  |                 |  |                    |  |              |  |                                |  |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           | 25,000 |  |   |   |  | 
|                                               | Exercise of common stock options
at $1.45 per share in 2001                              |  |                        |  |                 |  |                    |  |              |  |                                |  |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           | 125    |  |   |   |  | 
|                                               | Compensation expense associated
with stock option grants in prior
years                  |  |                        |  |                 |  |                    |  |              |  |                                |  |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           |       |  |   |   |  | 
|                                               | Compensation expense associated
with stock option grants in
current year                 |  |                        |  |                 |  |                    |  |              |  |                                |  |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           |       |  |   |   |  | 
|                                               | Stock options cancelled during 2001                                                      |  |                        |  |                 |  |                    |  |              |  |                                |  |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           |       |  |   |   |  | 
|                                               | Deferred stock compensation
associated with stock option
grants to non-employees in 2001 |  |                        |  |                 |  |                    |  |              |  |                                |  |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           |       |  |   |   |  | 
|                                               | Net loss                                                                                 |  |                        |  |                 |  |                    |  |              |  |                                |  |        |   |        |  |        |  |  |  |  |  |  |  |  |  |           |       |  |   |   |  | 
|Balance at December 31, 2001                   |                                                                                          |  |                        |  |                 |  |                    |  |              |  | 4,481,835                      |   |        |   | 1      |   |        |  |  |  |  |  |  |  |  |  | 2,528,044 |        |  |   | 1 |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                               |                                                                                          |   |                                |        |              |   |             |        |               |   |                     |        |       |  |             |  |  |   |        |        |  
|---------------------------------------------- | ---------------------------------------------------------------------------------------- | - | ------------------------------ | ------ | ------------ | - | ----------- | ------ | ------------- | - | ------------------- | ------ | ----- |  | ----------- |  |  | - | ------ | ------ | -
|                                               |                                                                                          |   | Stockholders' Equity (Deficit)
|                                               |                                                                                          |   |                               
|                                               |                                                                                          |   |                                |        |              |   |             |        |               |   |                     |        |       |  | Accumulated |  |  |   |       
|                                               |                                                                                          |   | Additional                     |        |              |   |             |        |               |   |                     |        | Other |  |             |  | 
|                                               |                                                                                          |   | Paid In                        |        | Deferred     |   | Accumulated |        | Comprehensive |   | Total Stockholders'
|                                               |                                                                                          |   | Capital                        |        | Compensation |   | Deficit     |        | Loss          |   | Equity (Deficit)   
|                                               |                                                                                          |   |                                |        |              |   |             |        |               |   |                    
|Balance at December 31, 1999
(carried forward) |                                                                                          | $ | 24,943                         |        |              | $ | (3,247      | )      |               | $ | (22,312             | )      |       |  |             |  |  | $ | (614   | )     
|                                               | Compensation expense associated
with stock option grants in prior
year                   |   |                                |       |              |   |             | 738    |               |   |                     |       |       |  |             |  |  |   |        | 738    |  
|                                               | Compensation expense associated
with stock option grants in
current year                 |   |                                | 2,124  |              |   |             | (1,642 | )             |   |                     |       |       |  |             |  |  |   |        | 482    |  
|                                               | Stock options cancelled during 2000                                                      |   |                                | (1,089 | )            |   |             | 1,089  |               |   |                     |       |       |  |             |  |  |   |        |       |  
|                                               | Net loss                                                                                 |   |                                |       |              |   |             |       |               |   |                     | (5,229 | )     |  |             |  |  |   |        | (5,229 | )
|Balance at December 31, 2000                   |                                                                                          |   | 25,978                         |        |              |   | (3,062      | )      |               |   | (27,541             | )      |       |  |             |  |  |   | (4,623 | )     
|                                               | Exercise of common stock options
at $.10 per share in 2001                               |   |                                | 3      |              |   |             |       |               |   |                     |       |       |  |             |  |  |   |        | 3      |  
|                                               | Exercise of common stock options
at $1.45 per share in 2001                              |   |                                |       |              |   |             |       |               |   |                     |       |       |  |             |  |  |   |        |       |  
|                                               | Compensation expense associated
with stock option grants in prior
years                  |   |                                |       |              |   |             | 935    |               |   |                     |       |       |  |             |  |  |   |        | 935    |  
|                                               | Compensation expense associated
with stock option grants in
current year                 |   |                                | 1,010  |              |   |             | (833   | )             |   |                     |       |       |  |             |  |  |   |        | 177    |  
|                                               | Stock options cancelled during 2001                                                      |   |                                | (161   | )            |   |             | 161    |               |   |                     |       |       |  |             |  |  |   |        |       |  
|                                               | Deferred stock compensation
associated with stock option
grants to non-employees in 2001 |   |                                | 228    |              |   |             | (131   | )             |   |                     |       |       |  |             |  |  |   |        | 97     |  
|                                               | Net loss                                                                                 |   |                                |       |              |   |             |       |               |   |                     | (4,330 | )     |  |             |  |  |   |        | (4,330 | )
|Balance at December 31, 2001                   |                                                                                          |   | 27,058                         |        |              |   | (2,930      | )      |               |   | (31,871             | )      |       |  |             |  |  |   | (7,741 | )     

See accompanying Notes to Condensed Consolidated Financial Statements

7



---



##### 



ReGen Biologics, Inc.
(A DEVELOPMENT STAGE COMPANY)
Condensed Statement of Changes in Stockholders Equity (Deficit) and Series A
Redeemable Convertible Preferred Stock
Period from December 21, 1989 (inception) to June 30, 2003 (unaudited)(In thousands, except share data)



|                                                                                                                      |                                                                                                                           |                                        |            |                        |  |                 |       |                       |  |              |           |                                |   |        |   |        |   |        |             |            |  |   |      |     |  |  |            |         |            |   |     |   |    |  
|--------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | -------------------------------------- | ---------- | ---------------------- |  | --------------- | ----- | --------------------- |  | ------------ | --------- | ------------------------------ | - | ------ | - | ------ | - | ------ | ----------- | ---------- |  | - | ---- | --- |  |  | ---------- | ------- | ---------- | - | --- | - | -- | -
|                                                                                                                      |                                                                                                                           |                                        |            |                        |  |                 |       |                       |  |              |           | Stockholders' Equity (Deficit)
|                                                                                                                      |                                                                                                                           |                                        |            |                        |  |                 |       |                       |  |              |           |                               
|                                                                                                                      |                                                                                                                           |                                        |            | Redeemable Convertible |  | Convertible     |       | Convertible Preferred |  |              |           |                                |   |        |   |       
|                                                                                                                      |                                                                                                                           |                                        |            | Preferred Series A     |  | Preferred Stock |       | Series B              |  | Common Stock
|                                                                                                                      |                                                                                                                           |                                        |            |                        |  |                 |       |                       |  |             
|                                                                                                                      |                                                                                                                           |                                        |            | Shares                 |  | Amount          |       | Shares                |  | Amount       |           | Shares                         |   | Amount |   | Shares |   | Amount
|                                                                                                                      |                                                                                                                           |                                        |            |                        |  |                 |       |                       |  |              |           |                                |   |        |   |        |   |       
|Balance at December 31, 2001 (carried forward)                                                                        |                                                                                                                           |                                        |            |                        |  |                 |       |                       |  |              | 4,481,835 |                                |   | $      | 1 |        |   |        |             |            |  |   |      |     |  |  | 2,528,044  |         |            | $ | 1   |  
|Issuance of Common Stock                                                                                              |                                                                                                                           |                                        |            |                        |  |                 |       |                       |  |              |           |                                |   |        |   |        |   |        |             |            |  |   |      |     |  |  | 301,930    |         |            |   | 1   |  
|Issuance of Convertible Preferred Stock for cash and
conversion of bridge financing net of issuance costs of
$138,070 |                                                                                                                           |                                        |            |                        |  |                 |       |                       |  |              | 5,564,047 |                                |   |        | 1 |        |   |        |             |            |  |   |      |     |  |  |            |         |            |   |     |  
|Deferred stock compensation associated with stock option
grants in 2002                                               |                                                                                                                           |                                        |            |                        |  |                 |       |                       |  |              |           |                                |   |        |   |        |   |        |             |            |  |   |      |     |  |  |            |         |            |   |     |  
|Compensation expense associated with stock options
outstanding                                                        |                                                                                                                           |                                        |            |                        |  |                 |       |                       |  |              |           |                                |   |        |   |        |   |        |             |            |  |   |      |     |  |  |            |         |            |   |     |  
|Effect of reverse merger and recapitalization:                                                                        |                                                                                                                           |                                        |            |                        |  |                 |       |                       |  |              |           |                                |   |        |   |        |   |        |             |            |  |   |      |     |  |  |            |         |            |   |     |  
|                                                                                                                      | Valuation of warrants associated with bridge financing                                                                    |                                        |            |                        |  |                 |       |                       |  |              |           |                                |   |        |   |        |   |        |             |            |  |   |      |     |  |  |            |         |            |   |     |   |   
|                                                                                                                      | Valuation of beneficial conversion associated with bridge
Financing                                                       |                                        |            |                        |  |                 |       |                       |  |              |           |                                |   |        |   |        |   |        |             |            |  |   |      |     |  |  |            |         |            |   |     |   |   
|                                                                                                                      | Compensation expense associated with stock options
outstanding recognized as a result of the reverse merger               |                                        |            |                        |  |                 |       |                       |  |              |           |                                |   |        |   |        |   |        |             |            |  |   |      |     |  |  |            |         |            |   |     |   |   
|                                                                                                                      | Conversion of convertible preferred shares to Redeemable
Convertible Preferred Series A at liquidation /
redemption value |                                        |            | 15,298,351             |  |                 | $     | 6,855                 |  |              |           | (5,564,047                     | ) |        |   | (1     | ) |        |             |            |  |   |      |     |  |  |            |         |            |   |     |   |   
|                                                                                                                      | Conversion of convertible preferred shares to Common
Stock and Series B Preferred Shares                                  |                                        |            |                        |  |                 |       |                       |  |              |           | (4,481,835                     | ) |        |   | (1     | ) |        |             | 12,025,656 |  |   |      | 120 |  |  |            | 297,146 |            |   |     | 3 |   
|Conversion of Subsidiary Common Stock into Company Common
Stock and Series B Preferred Shares:                        |                                                                                                                           |                                        |            |                        |  |                 |       |                       |  |              |           |                                |   |        |   |        |   |        |             |            |  |   |      |     |  |  |            |         |            |   |     |  
|                                                                                                                      |                                                                                                                           | Elimination of Subsidiary Common Stock |            |                        |  |                 |       |                       |  |              |           |                                |   |        |   |        |   |        |             |            |  |   |      |     |  |  |            |         | (2,829,974 | ) |     |   | (1 | )
|                                                                                                                      |                                                                                                                           | Issuance of Company Common Stock       |            |                        |  |                 |       |                       |  |              |           |                                |   |        |   |        |   |        |             |            |  |   |      |     |  |  |            |         | 7,781,018  |   |     |   | 78 |  
|Company Common Stock and related equity held by
existing shareholders (net of 18,115 shares held treasury)            |                                                                                                                           |                                        |            |                        |  |                 |       |                       |  |              |           |                                |   |        |   |        |   |        |             |            |  |   |      |     |  |  | 8,966,966  |         |            |   | 89  |  
|Minimum Pension Liability                                                                                             |                                                                                                                           |                                        |            |                        |  |                 |       |                       |  |              |           |                                |   |        |   |        |   |        |             |            |  |   |      |     |  |  |            |         |            |   |     |  
|Conversion of Convertible Preferred Series B Stock to
Company Common Stock                                            |                                                                                                                           |                                        |            |                        |  |                 |       |                       |  |              |           |                                |   |        |   |        |   |        | (12,025,656 | )          |  |   | (120 | )   |  |  | 12,025,656 |         |            |   | 120 |  
|Net loss                                                                                                              |                                                                                                                           |                                        |            |                        |  |                 |       |                       |  |              |           |                                |   |        |   |        |   |        |             |            |  |   |      |     |  |  |            |         |            |   |     |  
|Balance at December 31, 2002                                                                                          |                                                                                                                           |                                        | 15,298,351 |                        |  |                 | 6,855 |                       |  |              |          |                                |   |        |  |        |   |        |            |            |  |   |     |     |  |  | 29,070,786 |         |            |   | 291 |  
|Compensation expense associated with stock options
outstanding                                                        |                                                                                                                           |                                        |            |                        |  |                 |       |                       |  |              |           |                                |   |        |   |        |   |        |             |            |  |   |      |     |  |  |            |         |            |   |     |  
|Net loss                                                                                                              |                                                                                                                           |                                        |            |                        |  |                 |       |                       |  |              |           |                                |   |        |   |        |   |        |             |            |  |   |      |     |  |  |            |         |            |   |     |  
|Balance at June 30, 2003 (unaudited)                                                                                  |                                                                                                                           |                                        | 15,298,351 |                        |  | $               | 6,855 |                       |  |              |          |                                |   | $      |  |        |   |        |            |            |  | $ |     |     |  |  | 29,070,786 |         |            | $ | 291 |  
|                                                                                                                      |                                                                                                                           |                                        |            |                       

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                                                      |                                                                                                                           |                                        |        |                                |     |              |        |             |  |               |         |                     |  |       |     |             |  |   |         |        |   | 
|--------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | -------------------------------------- | ------ | ------------------------------ | --- | ------------ | ------ | ----------- |  | ------------- | ------- | ------------------- |  | ----- | --- | ----------- |  | - | ------- | ------ | - | 
|                                                                                                                      |                                                                                                                           |                                        |        | Stockholders' Equity (Deficit)
|                                                                                                                      |                                                                                                                           |                                        |        |                               
|                                                                                                                      |                                                                                                                           |                                        |        |                                |     |              |        |             |  |               |         |                     |  |       |     | Accumulated |  |   |         |       
|                                                                                                                      |                                                                                                                           |                                        |        | Additional                     |     |              |        |             |  |               |         |                     |  | Other |     |             |  |  
|                                                                                                                      |                                                                                                                           |                                        |        | Paid In                        |     | Deferred     |        | Accumulated |  | Comprehensive |         | Total Stockholders'
|                                                                                                                      |                                                                                                                           |                                        |        | Capital                        |     | Compensation |        | Deficit     |  | Loss          |         | Equity (Deficit)   
|                                                                                                                      |                                                                                                                           |                                        |        |                                |     |              |        |             |  |               |         |                    
|Balance at December 31, 2001 (carried forward)                                                                        |                                                                                                                           | $                                      | 27,058 |                                |     | $            | (2,930 | )           |  | $             | (31,871 | )                   |  |       |     |             |  | $ | (7,741  | )     
|Issuance of Common Stock                                                                                              |                                                                                                                           |                                        | 104    |                                |     |              |        |             |  |               |         |                     |  |       |     |             |  |   | 105     |       
|Issuance of Convertible Preferred Stock for cash and
conversion of bridge financing net of issuance costs of
$138,070 |                                                                                                                           |                                        | 6,716  |                                |     |              |        |             |  |               |         |                     |  |       |     |             |  |   | 6,717   |       
|Deferred stock compensation associated with stock option
grants in 2002                                               |                                                                                                                           |                                        | 370    |                                |     |              | (370   | )           |  |               |         |                     |  |       |     |             |  |   |         |       
|Compensation expense associated with stock options
outstanding                                                        |                                                                                                                           |                                        |        |                                |     |              | 452    |             |  |               |         |                     |  |       |     |             |  |   | 452     |       
|Effect of reverse merger and recapitalization:                                                                        |                                                                                                                           |                                        |        |                                |     |              |        |             |  |               |         |                     |  |       |     |             |  |   |         |       
|                                                                                                                      | Valuation of warrants associated with bridge financing                                                                    |                                        |        | 657                            |     |              |        |             |  |               |         |                     |  |       |     |             |  |   |         | 657    |  
|                                                                                                                      | Valuation of beneficial conversion associated with bridge
Financing                                                       |                                        |        | 843                            |     |              |        |             |  |               |         |                     |  |       |     |             |  |   |         | 843    |  
|                                                                                                                      | Compensation expense associated with stock options
outstanding recognized as a result of the reverse merger               |                                        |        |                                |     |              |        | 2,848       |  |               |         |                     |  |       |     |             |  |   |         | 2,848  |  
|                                                                                                                      | Conversion of convertible preferred shares to Redeemable
Convertible Preferred Series A at liquidation /
redemption value |                                        |        | (6,854                         | )   |              |        |             |  |               |         |                     |  |       |     |             |  |   |         | (6,855 | )
|                                                                                                                      | Conversion of convertible preferred shares to Common
Stock and Series B Preferred Shares                                  |                                        |        | (122                           | )   |              |        |             |  |               |         |                     |  |       |     |             |  |   |         |        |  
|Conversion of Subsidiary Common Stock into Company Common
Stock and Series B Preferred Shares:                        |                                                                                                                           |                                        |        |                                |     |              |        |             |  |               |         |                     |  |       |     |             |  |   |         |       
|                                                                                                                      |                                                                                                                           | Elimination of Subsidiary Common Stock |        |                                | 1   |              |        |             |  |               |         |                     |  |       |     |             |  |   |         |        |   | 
|                                                                                                                      |                                                                                                                           | Issuance of Company Common Stock       |        |                                | (78 | )            |        |             |  |               |         |                     |  |       |     |             |  |   |         |        |   | 
|Company Common Stock and related equity held by
existing shareholders (net of 18,115 shares held treasury)            |                                                                                                                           |                                        | 2,678  |                                |     |              |        |             |  |               |         |                     |  |       |     |             |  |   | 2,767   |       
|Minimum Pension Liability                                                                                             |                                                                                                                           |                                        |        |                                |     |              |        |             |  |               |         |                     |  |       | (58 | )           |  |   | (58     | )     
|Conversion of Convertible Preferred Series B Stock to
Company Common Stock                                            |                                                                                                                           |                                        |        |                                |     |              |        |             |  |               |         |                     |  |       |     |             |  |   |         |       
|Net loss                                                                                                              |                                                                                                                           |                                        |        |                                |     |              |        |             |  |               | (9,951  | )                   |  |       |     |             |  |   | (9,951  | )     
|Balance at December 31, 2002                                                                                          |                                                                                                                           |                                        | 31,373 |                                |     |              |       |             |  |               | (41,822 | )                   |  |       | (58 | )           |  |   | (10,216 | )     
|Compensation expense associated with stock options
outstanding                                                        |                                                                                                                           |                                        | 1      |                                |     |              |        |             |  |               |         |                     |  |       |     |             |  |   | 1       |       
|Net loss                                                                                                              |                                                                                                                           |                                        |        |                                |     |              |        |             |  |               | (2,516  | )                   |  |       |     |             |  |   | (2,516  | )     
|Balance at June 30, 2003 (unaudited)                                                                                  |                                                                                                                           | $                                      | 31,374 |                                |     | $            |       |             |  | $             | (44,338 | )                   |  | $     | (58 | )           |  | $ | (12,731 | )     
|                                                                                                                      |                                                                                                                           |                                        |        |                               

See accompanying Notes to Condensed Consolidated Financial Statements

8



---



##### 



REGEN BIOLOGICS, INC.
(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

|                                                                             |                                                                             |                                       |        |                           |     |                   |        |               |     |   |         |             |      |  
|---------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------- | ------ | ------------------------- | --- | ----------------- | ------ | ------------- | --- | - | ------- | ----------- | ---- | -
|                                                                             |                                                                             |                                       |        |                           |     |                   |        |               |     |   |         | Period from
|                                                                             |                                                                             |                                       |        | Six Months Ended June 30, |     | December 21, 1989
|                                                                             |                                                                             |                                       |        |                           |     | (Inception) to   
|                                                                             |                                                                             |                                       |        | 2003                      |     | 2002              |        | June 30, 2003
|                                                                             |                                                                             |                                       |        |                           |     |                   |        |              
|                                                                             |                                                                             |                                       |        | (unaudited)               |     | (unaudited)       |        | (unaudited)  
|Operating Activities                                                         |                                                                             |                                       |        |                           |     |                   |        |               |     |   |         |            
|Net loss                                                                     |                                                                             | $                                     | (2,516 | )                         |     | $                 | (7,669 | )             |     | $ | (44,338 | )          
|Adjustments to reconcile net loss to net cash used in operating activities:  |                                                                             |                                       |        |                           |     |                   |        |               |     |   |         |            
|                                                                             | Compensation expense associated with stock options                          |                                       |        | 1                         |     |                   |        | 3,300         |     |   |         | 5,976       |     
|                                                                             | Issuance of common stock to consultant for services                         |                                       |        |                          |     |                   |        |              |     |   |         | 2           |     
|                                                                             | Amortization of debt discount for warrant and beneficial
conversion feature |                                       |        |                          |     |                   |        | 1,500         |     |   |         | 1,500       |     
|                                                                             | Non-cash interest expense                                                   |                                       |        | 63                        |     |                   |        | 229           |     |   |         | 944         |     
|                                                                             | Depreciation and amortization                                               |                                       |        | 63                        |     |                   |        | 122           |     |   |         | 2,096       |     
|                                                                             | Loss on disposal of property and equipment                                  |                                       |        |                          |     |                   |        |              |     |   |         | 9           |     
|                                                                             | Changes in operating assets and liabilities:                                |                                       |        |                           |     |                   |        |               |     |   |         |             |     
|                                                                             |                                                                             | Other current assets and receivables  |        |                           | 58  |                   |        |               | 46  |   |         |             | (67  | )
|                                                                             |                                                                             | Inventory                             |        |                           | (10 | )                 |        |               | 54  |   |         |             | (272 | )
|                                                                             |                                                                             | Other assets                          |        |                           | 14  |                   |        |               |    |   |         |             | (117 | )
|                                                                             |                                                                             | Accounts payable and accrued expenses |        |                           | 192 |                   |        |               | 452 |   |         |             | 543  |  
|                                                                             |                                                                             | Other liabilities                     |        |                           | (25 | )                 |        |               |    |   |         |             | 16   |  
|                                                                             |                                                                             |                                       |        |                           |     |                   |        |               |     |   |         |            
|Net cash used in operating activities                                        |                                                                             |                                       | (2,160 | )                         |     |                   | (1,966 | )             |     |   | (33,708 | )          
|                                                                             |                                                                             |                                       |        |                           |     |                   |        |               |     |   |         |            
|Investing Activities                                                         |                                                                             |                                       |        |                           |     |                   |        |               |     |   |         |            
|Purchases of property and equipment                                          |                                                                             |                                       | (20    | )                         |     |                   |       |               |     |   | (1,959  | )          
|Changes in short-term investments                                            |                                                                             |                                       | 2,184  |                           |     |                   | (2,982 | )             |     |   | 1,656   |            
|                                                                             |                                                                             |                                       |        |                           |     |                   |        |               |     |   |         |            
|Net cash provided by (used in) investing activities                          |                                                                             |                                       | 2,164  |                           |     |                   | (2,982 | )             |     |   | (303    | )          
|                                                                             |                                                                             |                                       |        |                           |     |                   |        |               |     |   |         |            
|Financing Activities                                                         |                                                                             |                                       |        |                           |     |                   |        |               |     |   |         |            
|Issuance of common stock to founders for contributed patents                 |                                                                             |                                       |       |                           |     |                   |       |               |     |   | 42      |            
|Issuance of Series B preferred stock upon conversion of interest payable     |                                                                             |                                       |       |                           |     |                   |       |               |     |   | 6       |            
|Reduction in payable to stockholder                                          |                                                                             |                                       |       |                           |     |                   |       |               |     |   | (76     | )          
|Proceeds from issuance of convertible preferred stock, net of offering costs |                                                                             |                                       |       |                           |     |                   | 3,857  |               |     |   | 24,767  |            
|Proceeds from issuance of common stock                                       |                                                                             |                                       |       |                           |     |                   | 105    |               |     |   | 301     |            
|Repayment on capital lease obligations                                       |                                                                             |                                       | (4     | )                         |     |                   | (2     | )             |     |   | (116    | )          
|Proceeds from notes payable                                                  |                                                                             |                                       |       |                           |     |                   | 988    |               |     |   | 11,410  |            
|Payments on notes payable                                                    |                                                                             |                                       |       |                           |     |                   |       |               |     |   | (2,323  | )          
|                                                                             |                                                                             |                                       |        |                           |     |                   |        |               |     |   |         |            
|Net cash provided by (used in) financing activities                          |                                                                             |                                       | (4     | )                         |     |                   | 4,948  |               |     |   | 34,011  |            
|                                                                             |                                                                             |                                       |        |                           |     |                   |        |               |     |   |         |            
|Net (decrease) increase in cash                                              |                                                                             |                                       |       |                           |     |                   |       |               |     |   |        |            
|Cash at beginning of period                                                  |                                                                             |                                       | 1      |                           |     |                   | 1      |               |     |   | 1       |            
|                                                                             |                                                                             |                                       |        |                           |     |                   |        |               |     |   |         |            
|Cash at end of period                                                        |                                                                             | $                                     | 1      |                           |     | $                 | 1      |               |     | $ | 1       |            
|                                                                             |                                                                             |                                       |        |                           |     |                   |        |               |     |   |         |            

See accompanying Notes to Condensed Consolidated Financial Statements.

9



---



##### 



REGEN BIOLOGICS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

On June 21, 2002, ReGen Biologics, Inc (ReGen or the Company) acquired
RBio, Inc., formerly named ReGen Biologics, Inc. The acquisition was recorded
for accounting purposes as a reverse merger and recapitalization. For purposes
of this Form 10-Q, the historical financial statements of RBio, Inc., including
related notes, have replaced the prior historical financial statements of the
Company.

The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and do not
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 condensed consolidated financial
statements contain all adjustments necessary to present fairly the financial
position and the results of operations for the interim periods.

ReGen will continue to require additional capital to complete the CMI
clinical trial in the United States, 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 will emerge from the development stage when the
CMI product is available for sale in the U.S. or sales of all of its products
have reached a volume that will provide for positive gross margin.

For further information, refer to the consolidated financial statements
and notes included in ReGens Annual Report on Form 10-K/A for the year ended
December 31, 2002.

ReGen currently operates in one business segment that designs, develops,
manufactures and markets minimally invasive human implants and medical devices
for the repair and regeneration of damaged human tissue. 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.

ReGen is actively pursuing additional permanent equity capital in order to
support ongoing operations, and believes it requires one or more such
financings before it will be in a position to support itself through positive
operating earnings and cash flow. ReGen expects a financing to occur by
September 30, 2003, or before such time as current cash and short-term
investments are depleted. This financing is necessary to fund operations
through 2003 at the current level. Certain existing investors in ReGen, who
have invested in previous rounds of financing, have indicated their interest in
participating in the next financing. ReGen has received a written commitment
from one of its existing shareholders for an investment in the next financing
subject to certain conditions which are customary in such a commitment. While
ReGen has been successful in the past in obtaining the necessary capital to
support its operations, there is no guarantee that ReGen will be able to obtain
additional equity capital under commercially reasonable terms and conditions,
or at all.

Since the filing of its Form 10-Q for the period ended March 31, 2003,
ReGen has continued to meet with potential investors and undertake other
activities in preparation for the financing discussed above.

Concentrations of Risk

The Company currently has two principal customers that market and sell the
Companys two current products. The first customer has the license to sell the
Sharp Shooter product. The second customer, which is also a stockholder of the
Company, has the license to sell the CMI product outside of the United States.
Concentrations of receivables and receivables from related parties and revenues
by customer as of and for the quarters ended June 30, 2003 and 2002 are as
follows:

10



---



##### 



|                |  |            |  |  |     |                             |  |                           |     |      |  |      |     |   |  |  |     |   |  | 
|--------------- |  | ---------- |  |  | --- | --------------------------- |  | ------------------------- | --- | ---- |  | ---- | --- | - |  |  | --- | - |  | 
|                |  |            |  |  |     | Three Months Ended June 30, |  | Six Months Ended June 30,
|                |  |            |  |  |     | 2003                        |  | 2002                      |     | 2003 |  | 2002
|                |  |            |  |  |     |                             |  |                           |     |      |  |     
|Receivables:    |  |            |  |  |     |                             |  |                           |     |      |  |      |     |   |  |  |     |   |  | 
|                |  | Customer A |  |  | 83  | %                           |  |                           | 33  | %    |  |      | 83  | % |  |  | 33  | %
|                |  | Customer B |  |  | 17  | %                           |  |                           | 67  | %    |  |      | 17  | % |  |  | 67  | %
|Sales revenues: |  |            |  |  |     |                             |  |                           |     |      |  |      |     |   |  |  |     |   |  | 
|                |  | Customer A |  |  | 5   | %                           |  |                           | 58  | %    |  |      | 24  | % |  |  | 67  | %
|                |  | Customer B |  |  | 95  | %                           |  |                           | 42  | %    |  |      | 76  | % |  |  | 33  | %
|Royalties:      |  |            |  |  |     |                             |  |                           |     |      |  |      |     |   |  |  |     |   |  | 
|                |  | Customer A |  |  | 100 | %                           |  |                           | 100 | %    |  |      | 100 | % |  |  | 100 | %

Adoption of New Accounting Pronouncements

In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for
Stock-Based CompensationTransition and Disclosurean amendment of SFAS 123.
This statement amends SFAS No. 123, Accounting for Stock-Based Compensation,to
provide alternative methods of transition for voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has chosen to
continue to account for employee stock-based compensation using the intrinsic
value method prescribed in APB Opinion No. 25 and related Interpretations.
Accordingly, compensation expense for stock options issued to employees is
measured as the excess, if any, of the fair market value of the Companys stock
at the date of the grant over the exercise price of the related option.

Had compensation costs for the Companys stock options issued to employees
been determined based on SFAS No. 123, the Companys net loss and loss per
share would have been as follows:

|                                                                                                                                                           |  |                            |        |                          |  |      |        |      |  |   |        |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | ------------------------ |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                                                                                                           |  | Three Months Ended June 30 |        | Six Months Ended June 30
|                                                                                                                                                           |  |                            |        |                         
|                                                                                                                                                           |  | 2003                       |        | 2002                     |  | 2003 |        | 2002
|                                                                                                                                                           |  |                            |        |                          |  |      |        |     
|Net loss, as reported                                                                                                                                      |  | $                          | (1,452 | )                        |  | $    | (6,261 | )    |  | $ | (2,516 | ) |  | $ | (7,669  | )
|Add: Total stock-based
employee compensation expense
as reported under intrinsic
value method (APB No. 25) for
all awards, net of related tax
effects      |  |                            |       |                          |  |      | 2,889  |      |  |   |       |   |  |   | 3,128   |  
|Deduct: Total stock-based
employee compensation expense
determined under fair value
based method (SFAS No. 123)
for all awards, net of related
tax effects |  |                            | (46    | )                        |  |      | (5,563 | )    |  |   | (92    | ) |  |   | (6,037  | )
|                                                                                                                                                           |  |                            |        |                          |  |      |        |      |  |   |        |   |  |   |         |  
|Pro forma net loss                                                                                                                                         |  | $                          | (1,498 | )                        |  | $    | (8,935 | )    |  | $ | (2,608 | ) |  | $ | (10,578 | )
|                                                                                                                                                           |  |                            |        |                          |  |      |        |      |  |   |        |   |  |   |         |  
|Net loss per share:                                                                                                                                        |  |                            |        |                          |  |      |        |      |  |   |        |   |  |   |         |  
|Basic and diluted  as reported                                                                                                                            |  | $                          | (0.05  | )                        |  | $    | (0.37  | )    |  | $ | (0.09  | ) |  | $ | (0.45   | )
|                                                                                                                                                           |  |                            |        |                          |  |      |        |      |  |   |        |   |  |   |         |  
|Basic and diluted  pro forma                                                                                                                              |  | $                          | (0.05  | )                        |  | $    | (0.52  | )    |  | $ | (0.09  | ) |  | $ | (0.62   | )
|                                                                                                                                                           |  |                            |        |                          |  |      |        |      |  |   |        |   |  |   |         |  
|Shares                                                                                                                                                     |  |                            | 29,071 |                          |  |      | 17,045 |      |  |   | 29,071 |   |  |   | 17,045  |  

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with

11



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##### 



characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company does not believe there will be a material effect upon
adoption of this statement.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. Interpretation No. 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entitys activities or entitled
to receive a majority of the entitys residual returns or both. Currently,
entities are generally consolidated by a company that has a controlling
financial interest through ownership of a majority voting interest in the
entity. The Company will be required to adopt Interpretation No. 46 in the
third quarter of 2003. The Company is currently evaluating what effects, if
any, the adoption of Interpretation No. 46 will have on its financial
statements.

Reclassifications

Certain prior period and inception to June 30, 2003 balances have been
reclassified to conform to the current years presentation.

Short-term Investments

At June 30, 2003 and December 31, 2002, 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. The Company had
$1,289 and $3,473 of short-term investments invested in U.S. and foreign
government agency and corporate securities as of June 30, 2003 and December 31,
2002, respectively. The Company did not have any material realized or
unrealized gains or losses at June 30, 2003 and December 31, 2002 and for the
periods then ended.

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. Inventories consisted of the following:

|                |  |          |     |              |  |   |     | 
|--------------- |  | -------- | --- | ------------ |  | - | --- | 
|                |  | June 30, |     | December 31,
|                |  | 2003     |     | 2002        
|                |  |          |     |             
|Raw materials   |  | $        | 20  |              |  | $ | 24  | 
|Work in process |  |          | 27  |              |  |   | 146 | 
|Finished goods  |  |          | 225 |              |  |   | 92  | 
|                |  |          |     |              |  |   |     | 
|Total           |  | $        | 272 |              |  | $ | 262 | 
|                |  |          |     |              |  |   |     | 

Inventory was adjusted down approximately $51 during 2003 to reflect
values at the lower of cost or market.

Leases

The Company leases space in Redwood City, California for its manufacturing
operations, under a non-cancelable operating lease amended in May 2003. The
amendment provides for an extension of the lease term through May 2006 and
includes an option to renew for an additional three-year term. The Company
sub-leases a portion of that facility, subject to a non-cancelable
sub-lease
which was amended in May 2003 and provides for an extension of the sub-lease
term through May 2006. That portion of the facility under the sub-lease is
subject to recapture by the Company beginning in June of 2005.

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

On June 21, 2002, ReGen Biologics, Inc (ReGen) acquired RBio, Inc.,
formerly named ReGen Biologics, Inc. The acquisition was recorded for
accounting purposes as a reverse merger and recapitalization. For purposes of
this filing, the historical financial statements of RBio, Inc. including
related notes have replaced the prior historical financial statements of ReGen.

The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes included elsewhere in
this Form 10-Q. This section of the Form 10-Q contains forward-looking
statements that involve risks and

12



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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, in this Form 10-Q. You should not
place undue reliance on these forward-looking statements, which apply only as
of the date of this Form 10-Q.

Results of Operations

Three and Six Months Ended
June 30, 2003 Compared to Three and Six Months Ended
June 30, 2002

REVENUE.Total revenue decreased $147,000, or 84%, to approximately $29,000 for
the three months ended June 30, 2003 from approximately $176,000 for the same
period in 2002. Total revenue decreased $136,000, or 39%, to approximately
$211,000 for the six months ended June 30, 2003 from approximately $347,000 for
the same period in 2002.

CMI sales decreased approximately $57,000, or 100%, to $0 for the three months
ended June 30, 2003 from $57,000 during the three months ended June 30, 2002.
This decrease was due to a decrease in the CMI units shipped during the period
to Centerpulse Orthopedics Division (Centerpulse), ReGens exclusive
distributor of the CMI outside of the U.S. Unit shipments of the CMI decreased
by 119 units, or 100%, to 0 for the three months ended June 30, 2003 from 119
for the same period in 2002. CMI sales decreased approximately $19,000, or 22%,
to approximately $68,000 for the six months ended June 30, 2003 from $87,000
during the six months ended June 30, 2002. This decrease was due to a decrease
in the CMI units shipped during the period to Centerpulse. Unit shipments of
the CMI decreased by 43 units, or 24%, to 139 for the six months ended June 30,
2003 from 182 for the same period in 2002. In March 2003 the Boards of Smith &
Nephew PLC and Centerpulse announced an agreement to combine their businesses,
and in April Smith & Nephew made a formal offer to acquire Centerpulse. In May
2003, Zimmer Holdings, Inc. pre-announced an unsolicited offer, and in June
2003 Zimmer published a formal offer to acquire Centerpulse. There are now two
competing offers pending for Centerpulse. While there remain two pending
offers, in August 2003 Smith & Nephew have declined to increase the value of
its bid and therefore it appears Zimmer has emerged as the likely buyer for
Centerpulse. While shipments of the CMI, and therefore revenue to the Company
have been historically inconsistent, we believe that corporate organizational
matters have impacted activities at Centerpulse, such that recent orders of our
product have been negatively impacted.

SharpShooter sales decreased by approximately $78,000, or 76%, to approximately
$24,000 for the three months ended June 30, 2003 from approximately $102,000
for the same period in 2002, due to a decrease in the number of SharpShooter
product components shipped during the period to Linvatec Corporation
(Linvatec), ReGens primary distributor for the SharpShooter. SharpShooter
sales decreased by approximately $85,000, or 40%, to approximately $130,000 for
the six months ended June 30, 2003 from approximately $215,000 for the same
period in 2002, due to a decrease in the number of SharpShooter product
components shipped during the period to Linvatec Corporation. Sales to Linvatec
Corporation accounted for approximately 5% and 24% of revenue for the three and
six months ended June 30, 2003 and approximately 58% and 67% for the three and
six months ended June 30, 2002, respectively.

Royalties received from Linvatec increased approximately $2,000, or 67%, to
approximately $5,000 for the three months ended June 30, 2003 from $3,000
during the three months ended June 30, 2002. Royalties received decreased
approximately $18,000, or 58%, to approximately $13,000 for the six months
ended June 30, 2003 from $31,000 during the six months ended June 30, 2002.

In March and April 2003, Conmed Corporation (Conmed), parent company to
Linvatec announced that it had completed the acquisition of Bionx Implants,
Inc. (Bionx) and that it would be integrating the sale of the Bionx products
with its orthopdedic subsidiary, Linvatec. As part of this integration, Conmed
announced that it would be reorganizing its 90 direct orthopdedic sales
representatives into 18 exclusive sales agent groups that would eventually
manage 230 sales professionals in the U.S. While shipments of the SharpShooter
products have been historically inconsistent, we believe that these corporate
and operating organizational matters have impacted activities at Linvatec, such
that recent orders of our products have been negatively impacted.
Representatives of Linvatec have stated that they believe that sales of the
SharpShooter will begin to regain momentum in the fourth quarter of this year.

COST OF GOODS SOLD.Cost of goods sold decreased by approximately $279,000, or
92%, to approximately $25,000 for the three months ended June 30, 2003 from
approximately $304,000 for the three months ended June 30, 2002. Cost of goods
sold decreased by approximately $283,000, or 49%, to approximately $296,000 for
the six months ended June 30, 2003 from approximately $579,000 for the six
months ended June 30, 2002. The decreases in cost of goods sold are directly
correlated to the decrease in sales. For the three months ended June 30, 2003
and 2002 respectively, CMI costs accounted for approximately $0 and $99,000 and
SharpShooter costs accounted for approximately $25,000 and $205,000. For the
six months ended June 30, 2003 and 2002 respectively, CMI costs accounted for
approximately $89,000 and $143,000 and SharpShooter costs accounted for
approximately $199,000 and $348,000. At June 30, 2003, 15% of our inventory is
being carried at market. Due to a high degree of fixed costs in the production
process, and the

13



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early stage of market acceptance for our products, current sales and production
volumes are not adequate to provide for per unit costs that are lower than the
current market price for certain of our products.

RESEARCH AND DEVELOPMENT.Research and development expenses increased by
approximately $50,000, or 7%, to approximately $765,000 for the three months
ended June 30, 2003 from approximately $715,000 for the three months ended June
30, 2002. This increase was due to an increased amount of CMI lots produced for
testing purposes thus being expensed during the second quarter. Research and
development expenses decreased by approximately $86,000, or 7%, to
approximately $1.2 million for the six months ended June 30, 2003 from
approximately $1.3 million for the six months ended June 30, 2002. Research and
development expenses have decreased due to an intentional reduction in research
and development spending associated with new products for cash management
purposes.

BUSINESS DEVELOPMENT, GENERAL AND ADMINISTRATIVE.Business development, general
and administrative expenses increased by approximately $275,000, or 65%, to
approximately $695,000 for the three months ended June 30, 2003, compared with
$420,000 for the three months ended June 30, 2002. Business development,
general and administrative expenses increased by approximately $438,000, or
54%, to approximately $1.3 million for the six months ended June 30, 2003,
compared with $813,000 for the six months ended June 30, 2002. These costs
include the costs of marketing, business development, corporate operations,
finance and accounting, and other general expenses, and have increased
primarily as a result of the merger and the costs associated with periodic
reporting and other necessary activities of being a public company, which would
not have been reflected in the first and second quarter of 2002 operating
results. Approximately $158,000 of the second quarter increase to the business
development, general and administrative expenses are related to the current
pursuit of additional permanent equity capital in order to support ongoing
operations.

COMPENSATION EXPENSE ASSOCIATED WITH STOCK OPTIONS AND WARRANTS.Compensation
expense associated with stock options and warrants was $1,000 for the three
months ended June 30, 2003, compared to approximately $3.0 million for the
three months ended June 30, 2002. Compensation expense associated with stock
options and warrants was $1,000 for the six months ended June 30, 2003,
compared to approximately $3.3 million for the six months ended June 30, 2002.
ReGen made no stock option grants in the first or second quarter of 2003 and
all deferred compensation was expensed in the second quarter of 2002 at the
time of the reverse merger and recapitalization.

NON-OPERATING INCOME (EXPENSE).Non-operating income (expense) consists of
merger cost, interest and other income, rental income and interest expense.
Merger cost decreased to $0 for the three and six months ended June 30, 2003
from $402,000 for the same periods in 2002 due to the reverse merger and
recapitalization being a one time event in 2002. Interest and other income
decreased to approximately $2,000 for the three months ended June 30, 2003 from
$4,000 for the three months ended June 30, 2002. Interest and other income
increased to approximately $7,000 for the six months ended June 30, 2003 from
$5,000 for the six months ended June 30, 2002. The decrease and increase were
primarily the result of fluctuations in the amount of short term investments
during those periods. Rental income decreased by approximately $17,000 to
approximately $30,000 for the three months ended June 30, 2003 from
approximately $47,000 for the three months ended June 30, 2002. Rental income
decreased by approximately $11,000 to approximately $80,000 for the six months
ended June 30, 2003 from approximately $91,000 for the six months ended June
30, 2002. The decreases were due to a decrease in the sub-lease rent starting
June 1, 2003. Interest expense decreased approximately $1.6 million for the
three and six months ended June 30, 2003 from $1.6 million and $1.7 million for
the three and six months ended June 30, 2002, respectively. The decrease was
primarily due to the elimination of interest expense on the bridge loan
financing which was converted to equity in the second quarter of 2002.

Liquidity and Capital
Resources

Cash and short-term investments were $1.3 million as of June 30, 2003
compared with $3.5 million as of December 31, 2002. The decrease in cash and
short-term investments is primarily the result of cash used to support the
Companys normal operations.

Cash used in operating activities of approximately $2.2 million resulted
from the net loss of approximately $2.5 million, adjusted to account for an
increase in other current assets, receivables and inventory of approximately
$45,000, a decrease in other assets of approximately $14,000 and an increase in
accounts payable, accrued expenses and other liabilities of $167,000 together
with non-cash items of $126,000.

During the six months ended June 30, 2003, ReGen used approximately $2.2
million in short-term investments, purchased $20,000 of property and equipment
and paid down $4,000 of capital lease obligations.

14



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ReGen anticipates that it will continue to incur net losses that will
require additional financing until, at the earliest, ReGen receives FDA
approval for its CMI product and is able to market the CMI product in the
United States. In the fourth quarter of 2002 ReGen completed the required
enrollment and related surgical procedures for its CMI clinical trial in the
U.S. All patients are expected to complete two years of follow-up prior to
ReGens submission of the results in its Pre-market Approval Application, or
PMA, to the FDA. ReGen expects the last of these two-year clinical follow-up
exams will be completed in the fourth quarter of 2004, with submission of the
completed PMA to the FDA shortly thereafter. The process of review by the FDA
is uncertain, but ReGen expects that the FDA will issue its ruling in 2005.
Should the FDA approve the CMI for sale in the U.S., sales of the CMI in the
U.S. will not occur until, at the earliest, in late 2005.

Although the CMI is approved and distributed in Europe, Australia and
Chile, it is not approved for sale in the U.S., and ReGen is making no claim
regarding its safety, effectiveness or its potential for FDA approval.

In addition to regulatory related hurdles, in order to approach a position
of positive operating earnings and cash flow, ReGen will need to effectively
address various other operating issues, including special reimbursement
provisions for the surgeons and facilities that will be responsible for
implanting ReGens CMI or other future products. While ReGen is actively
working to address these issues, there is no guarantee that ReGen will be able
to obtain special reimbursement provisions, or obtain them in any given time
frame.

ReGen is actively pursuing additional permanent equity capital in order to
support ongoing operations, and believes it requires one or more such
financings before it will be in a position to support itself through positive
operating earnings and cash flow. ReGen expects a financing to occur by
September 30, 2003, or before such time as current cash reserves are depleted.
This financing is necessary to fund operations through 2003 at the current
level. Certain existing investors in ReGen, who have invested in previous
rounds of financing, have indicated their interest in participating in the next
financing. ReGen has received a written commitment from one of its existing
shareholders for an investment in the next financing subject to certain
conditions which are customary in such a commitment. While ReGen has been
successful in the past in obtaining the necessary capital to support its
operations, there is no guarantee that ReGen will be able to obtain additional
equity capital under commercially reasonable terms and conditions, or at all.

Since the filing of its Form 10-Q for the period ended March 31, 2003,
ReGen has continued to meet with potential investors and undertake other
activities in preparation for the financing discussed above.

Business

We are an orthopedic products company that designs, develops, manufactures
and markets minimally invasive human implants and medical devices for the
repair, regrowth and remodeling of damaged human tissue.

Our flagship product, the Collagen Meniscus Implant, or CMI, is an implant
for the meniscus of the human knee. A damaged meniscus is frequently repaired
by an arthroscopic surgical procedure known as a partial meniscectomy. During
this procedure, surgeons remove damaged meniscus tissue leaving less meniscus
tissue to support the knee and protect the patient from further degeneration or
injury. Implantation of the CMI represents the only procedure with the
potential to re-grow much of the tissue otherwise lost in partial meniscectomy
procedures, allowing a return to a more active lifestyle. In November 2002 we
completed enrollment and surgeries in a large-scale clinical trial of the CMI,
the results of which will comprise our Pre-Market Approval Application, or PMA.
The CMI is currently approved for sale in Europe, Australia, Chile, and will
selectively be available in Canada during 2003. The CMI is distributed outside
the U.S. by Centerpulse Orthopedics, Ltd.

We also sell the SharpShooter Tissue Repair System, or SharpShooter, a
suturing device used to facilitate the surgical implantation of the CMI, as
well as to perform other similar arthroscopic meniscal repair procedures. The
SharpShooter is currently marketed through a distribution agreement with
Linvatec Corporation, a subsidiary of ConMed, in the U.S., Europe, Canada,
Australia, Chile, and Japan.

Our current strategy is to focus on the following initiatives:



| |  |  | Obtaining FDA approval of the CMI;                       
| | - |  | ---------------------------------------------------------
|
| |  |  | Finding a suitable partner to market the CMI in the U.S.;
|
| |  |  | Launching the CMI in the U.S.; and                       

15



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| |  |  | Conducting further research on select product opportunities within our research and development pipeline.
| | - |  | ---------------------------------------------------------------------------------------------------------

Our long-term strategy is to capitalize on our proven collagen scaffold
technology by continuing to design, develop, manufacture, and market our own
products, as well as partner with key market leaders to develop and market
products in other targeted therapeutic areas.

Our Core Technology

Our core technology focuses on guided tissue regeneration: the concept is
that if the body is provided with a suitable environment for cellular ingrowth,
the body has the ability to regenerate missing tissue. We have developed a
proprietary biologically active porous bovine type I collagen scaffold material
and various tissue matrix engineering processes as the basis of our tissue
re-growth product offerings. Our proprietary processes are capable of
producing implants with the various physical properties required for remodeling
each specific target tissue. Our initial application is a resorbable, collagen
matrix that guides the regeneration of medial meniscus cartilage in the knee,
the CMI.

Collagen is a multifunctional family of proteins with unique structural
characteristics. To date, 19 different proteins can be classified as collagen,
making collagen the most abundant protein in the human body. Among the various
collagens, type I collagen is the most abundant and is the major constituent of
bone, skin, and tendon.

The structure of animal type I collagen is highly similar to the structure
of human type I collagen. This finding is supported by data from our current
U.S. clinical trial. Based on the important functions of type I collagen in the
body and the biocompatibility of the animal type I collagen, this material has
become increasingly popular as a biomaterial for clinical applications,
particularly in the repair and regeneration of damaged or diseased tissue.

Meniscus Injury and Treatment

The meniscus is a crescent-shaped wedge of rubbery, fibrous tissue located
in the knee joint between the lower end of the thigh bone, or femur, and the
top of the shin bone, or tibia. There are two menisci within the knee, the
outer, or lateral meniscus, and the inner, or medial meniscus. The meniscus
acts as a shock absorber protecting the articular cartilage that covers the
ends of both the femur and the tibia.

Figure 1. Human Knee

[Graphic of human knee with labels of various parts, including the medial and lateral meniscus]

In the last 50 years, the concepts of meniscus function and meniscus
repair have changed dramatically. Previously, it was generally believed that
menisci were structures that served no particular function and could be removed
without causing any adverse effects to the patient. However, it has been shown
in laboratory investigations of biomechanical function that the meniscus is an
important structure in lubrication and stabilization of the knee joint,
protection of joint surfaces and proper weight distribution across the knee.

Injury to the knee frequently results in a tear of the meniscus tissue.
Damage to the meniscus can occur by sudden twisting of the knee or by blunt
forces which impact the joint. As part of the aging process, the deterioration
of the meniscus makes it more likely that everyday physical exertion may result
in meniscus injury. Injury to meniscus cartilage can result in pain and
swelling or may cause the knee to give way or lock. According to MedMarket
Diligence LLC, each year, nearly one million Americans undergo a meniscus
surgery. Orthopedic surgeons are currently presented with three alternatives
for treatment of a torn meniscus:



| |  |  | Partial Meniscus Removal
| | - |  | ------------------------



|The procedure by which part of the meniscus is removed is called a partial
meniscectomy. We estimate that in 2002 alone, there were approximately
1.1 million partial meniscectomy procedures performed worldwide, of which
approximately 783,000 were in the U.S. We believe that approximately 40%
of these patients would be eligible for implantation of the CMI (if
approved). A partial meniscectomy is considered the current standard of
care when a meniscus repair is not possible. The meniscus, however, will
not regenerate on its own and thus, no new tissue fills the void left by
the partial meniscectomy. According to orthopedic researchers, without
the adequate protection and support provided by the meniscus, the knee
joint can become unstable and the articular cartilage covering the femur
and the tibia may begin to deteriorate or degenerate. Over time, the
degenerative process can be one of persistent and increasing knee pain and
may lead to osteoarthritis
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|There are approximately 6.8 million patients who have had a partial
meniscectomy procedure performed in the U.S. in the last 10 years.
Patients who have had a partial mensicectomy frequently require one or
more partial meniscectomies in the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

16



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|future, creating a large, unmet market need. We believe that certain of
these partial meniscectomy patients would proactively seek CMI surgery if
it becomes available.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Meniscus Preservation
| | - |  | ---------------------



|For approximately the last 30 years, surgeons have been able to preserve a damaged meniscus, in certain cases, by performing a meniscus repair
procedure. We estimate that in the U.S. there were approximately 140,000
repairs in 2002. A meniscus repair entails suturing the torn edges of the
meniscus, allowing it to mend itself. Once healed, the meniscus can
resume its normal function. However, when the injury is in the avascular
region (containing little or no blood supply) or when the meniscus is
damaged to the extent that repair is not feasible, the only other current
option is the partial meniscectomy procedure.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|We estimate that approximately 15% of meniscus tears are repairable using
the current meniscus repair techniques described above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



| |  |  | Meniscus Replacement (Allograft)
| | - |  | --------------------------------



|The least performed of the three treatments is meniscus replacement. When
a patient sustains substantial meniscus damage that requires a total
meniscectomy, a surgeon may consider implanting a meniscus removed from a
cadaver, or an allograft, as a replacement for a patients damaged
meniscus. We estimate that fewer than 1,000 allografts are implanted in
the U.S. annually. Two factors limit the number of meniscus replacement
surgeries. First, this procedure is only performed when the entire
natural meniscus is removed. Therefore, if the implant fails to survive,
the patient has no remaining meniscus tissue to protect the joint.
Second, a limited number of menisci are available from cadavers
annually.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|CMI Alternative                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

Implantation of the CMI represents the only procedure with the potential
to regenerate lost meniscus tissue. The CMI is sutured into the area where
torn or damaged meniscus tissue has been removed. Once sutured in place, the
CMI provides a matrix into which the bodys own cells begin to move or migrate.
New meniscus-like tissue forms and the CMI is absorbed by the body.

Meniscus Market Overview

The financial consequence of meniscal damage and surgeries is pronounced.
According to industry data, we estimate there were 926,000 arthroscopic
meniscal procedures performed in the U.S. in 2002, which will account for
approximately $9 billion in physician and hospital (or other facility) charges.
ReGen estimates that the average charges for a partial meniscectomy procedure
are approximately $9,500, with the surgeon and facility each charging about
one-half. A patient with a torn or damaged meniscus might undergo several
partial meniscectomy procedures followed by a joint replacement, which can
result in charges of $50,000 to $100,000 or more.

According to industry data, we estimate that in 2002 there were
approximately 783,000 partial meniscectomy procedures (See Table 1) and
approximately 140,000 meniscal repair procedures in the U.S. The market is
expected to grow by approximately 5% per year for the foreseeable future due to
the aging population, the growing proportion of weekend warriors and the lack
of viable alternatives. The number of patients eligible for a CMI implant in
the U.S. is expected to increase to over 40% of all meniscectomy procedures, or
approximately 476,000 patients, by 2010.

17



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Table 1. Selected U.S. Orthopedic Procedure Volumes (thousands)

[Bar graph of selected U.S. Orthopedic Procedure Volumes in which X axis
represents type of orthopedic procedure and Y axis represents number of
procedures. The graph shows there were 783 partial meniscectomies, 402 hip
replacements, 378 knee replacements, 425 spine lamenectomies and 485 spine
fusions]

Our Products

Our principal product offerings are the CMI and the SharpShooter.

The CMI

The CMI is a type I collagen implant designed for patients with an
irreparable meniscus tear or loss of meniscus tissue, typically through an
arthroscopic partial meniscectomy procedure. The surgeon sutures the CMI into
the area where the meniscus tissue is missing. Once implanted, the CMIs
highly porous matrix allows cellular ingrowth from the patients own cells.
This process regenerates meniscus-like tissue which provides the potential for
restoring function, reducing pain and possibly arresting the degenerative
process that begins with the loss of meniscus tissue. According to an article
by Drs. W. G. Rodkey and J. R. Steadman published in Clinical Orthopedic &
Related Research,1 the CMI has been clinically proven to support new tissue
generation in the meniscus. The purpose of the CMI is to assist patients in
regaining mobility and returning to a more vigorous lifestyle, while
forestalling or minimizing degenerative joint disease.

Figure 2. The CMI

[Photo of CMI Implant, which is a U-shaped object]

We believe the CMI offers a number of potential benefits, including:



| |  |  | Support of natural regeneration of tissue;
| | - |  | ------------------------------------------
|
| |  |  | Minimized degenerative changes;           
|
| |  |  | Increased patient activity levels; and    
|
| |  |  | Maintenance of joint stability.           

U.S. Clinical Results

The MCT is a 288 patient, two-arm, controlled, randomized study comparing
the CMI to the current standard of care, the partial meniscectomy. One arm of
the trial consists of patients with no prior surgery to the meniscus and the
other arm consists of patients with one to three prior surgeries. Patients are
followed clinically at pre-op, post-op, 6 weeks, 3 months, 6 months, 12 months
and 24 months following surgery. The study includes follow-up questionnaires
submitted annually through five years post-op. All patients are required to
complete a two-year follow-up prior to the submission of clinical results in
our PMA to the FDA. In the fourth quarter of 2002, we completed the required
enrollment and related surgical procedures for our CMI clinical trial in the
U.S. As of February 2003, approximately 70% and 80% of the 288 patients have
reached their two year and one year follow-up time points, respectively. We
expect that the two year clinical follow-up exams will be completed in the
fourth quarter of 2004, with submission of the PMA to the FDA shortly
thereafter. The current data analysis is based on a review of data from
approximately 60% of the patients, all of whom have completed their two year
follow-up exam.



---

|1 |  | Rodkey W.G., Steadman J.R., Li S.T. 1999. A clinical study of collagen
meniscus implants to restore the injured meniscus. Clin. Orthop. Rel. Res.
367:S281-S292. Dr. Rodkey is an officer of ReGen and Dr. Steadman is a director
of ReGen; both are shareholders of the Company.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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A preliminary analysis of the MCT patients has been conducted and is
summarized as follows:



| |  |  | Clinical evidence indicates that the CMI successfully supports
meniscus-like tissue regeneration;                                                                                                   
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | CMI prior surgery patients exhibited regrowth of more than 60% of
their meniscus, doubling the amount of tissue that the patient would
have had if only the partial meniscectomy had been performed;
|
| |  |  | CMI prior surgery patients achieved a significantly higher activity level than the controls;                                                                                                        
|
| |  |  | There are no apparent safety issues;                                                                                                                                                                
|
| |  |  | The histologic and immunologic analyses show that there have been no immune reactions to the implant material; and                                                                                  
|
| |  |  | Among patients with greater tissue loss, the pain and function
endpoints of CMI patients show significant improvement over those in the
control group.                                              

Prior to beginning the MCT, we conducted a Feasibility Study of the CMI.
The eight patients who participated in the study are now five years or more
post CMI surgery. Highlights of the Feasibility Study include patients having
twice as much meniscus-like tissue as they had following the partial
meniscectomy (Table 2) and a steady increase in patient activity levels over
five years (Table 3).

Table 2: Tissue Re-Growth

These two diagrams represent the medial meniscus of the human knee. The
upper diagram (Post Partial Meniscectomy) shows the average amount of meniscus
loss for the eight Feasibility Study CMI patients. These patients had lost, on
average, 62% of their medial meniscus leaving them with 38% of their original
meniscus remaining. The CMI was implanted in the area of meniscus loss. The
lower diagram (Post CMI (1 & 5 years)) shows that one year after the CMI was
implanted these patients had gained almost double (38% vs. 75%) the amount of
meniscus tissue. A follow-up five-year re-look surgery on the eight CMI
Feasibility Study patients showed that they had maintained their 75% tissue
volume through five years.

Table 2. Tissue Re-Growth

[Reflects the numbers described above and which is a representation of the additional meniscus tissue]

Table 3: Patient Activity Level

The Tegner Activity Score is a validated method for assessing patient
activity levels. A Tegner score of 0 means that the patient is disabled, while
a score of 10 means that the patient is performing sports at a professional
level. The graph below shows the Tegner Activity scores for the CMI and control
patients in the MCT and for the eight CMI patients in the Feasibility Study.
Patient activity levels were measured pre-injury, pre-surgery and at one, two
and five years post surgery. The solid line shows that the CMI prior surgery
patients in the MCT almost returned to their pre-injury activity level by two
years post surgery, while the dashed line shows that the control patients had a
significantly lower activity level than the CMI patients at that same time
point. The dotted line shows that the Feasibility Study patients continued to
improve their activity levels through five years.

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Table 3. Patient Activity Level

[Line graph reflecting patient activity level in which X axis represents
patient activity level as described above and Y axis represents point in time
at which activity levels were measured. The lines represent three categories
of patients: MCT CMI, feasibility patients and MCT control. The graph shows
that before injury, the activity level was approximately 7.5 among feasibility
patients, approximately 6.75 among MCT control and approximately 6.5 amount MCT
CMI; before index surgery, the activity level was approximately 3.5 among
feasibility patients, approximately 3.0 among MCT control and approximately 3.0
among MCT CMI; 12 months (post-surgery) the activity level was approximately
4.5 among feasibility patients, approximately 4.0 among MCT control and
approximately 4.0 among MCT CMI; 24 months (post-surgery) the activity level
was approximately 5.25 among feasibility patients, approximately 4.5 among MCT
control and approximately 5.75 among MCT CI; 36 months (post-surgery) the
activity level was approximately 5.5 among feasibility patients; 48 months
(post-surgery) the activity level was approximately 5.75 among feasibility
patients; and 5+ years (post surgery) the activity level was approximately 6.0
among feasibility patents.]

Important Disclosure about Clinical Results: The graphs provided above
reflect data from an ongoing U.S. clinical trial and these data have not been
reviewed by the U.S. Food and Drug Administration. These results represent a
limited data set regarding selected measurements being gathered in the trial.
Although the CMI is approved and distributed in Europe, Australia and Chile, it
is not approved for sale in the U.S., and the Company is making no claim
regarding its safety, effectiveness or its potential for FDA approval.

The SharpShooter

As our research and development program generates new core products, we
may develop supportive products that facilitate surgery. The SharpShooter is a
surgical tool initially designed for use with the CMI. The SharpShooter is a
needle-advancing instrument that allows the surgeon to accurately place needles
in hard-to-reach locations. The system includes a unique method to deliver
sutures using a patented delivery handle and a series of six anatomic cannulae
that are able to reach all areas of the meniscus. The SharpShooter allows the
surgeon more control over the placement of sutures and increases the efficiency
and effectiveness of meniscus procedures. While traditional manual suturing
techniques are plagued by problems such as lack of access, consistency and
speed, the SharpShooter allows the surgeon more control over the placement of
sutures and increases the efficiency and effectiveness of meniscus procedures.

Although initially developed in connection with suturing the CMI, the
SharpShooter is also suited for use in the industry-estimated 140,000 meniscal
repair procedures performed in the U.S. in 2002, and an additional 60,000
meniscal repair procedures performed in the rest of the world. In 2000, the
Sharpshooter received marketing clearance from the FDA for sale in the U.S.

Figure 3. The SharpShooter

[Photo of SharpShooter device.]

We believe the SharpShooter offers a number of benefits, including the
following:



| |  |  | Single-handed operation, provided by patented delivery handle, which
allows a surgeon complete control over targeting sutures;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Better viewing and access to all areas of the meniscus, provided by cannulae options;                                         
|
| |  |  | Easier and safer passage of suture needles;                                                                                   
|
| |  |  | Simple loading and pre-attached sutures reducing surgery time; and                                                            
|
| |  |  | More accurate repair of meniscus tears by surgeons with less assistance in the operating room.                                

Customers, Sales and Marketing

The CMI

The CMI is distributed by Centerpulse Orthopedics Ltd. (NYSE: CEP) under a
distribution agreement that allows Centerpulse to exclusively distribute the
CMI outside the U.S. as long as certain minimum sales are realized. At least
90 days prior to each subsequent calendar year, we have the right to re-assess
the reasonable minimum sales requirement. In the event that Centerpulse does
not meet its minimum sales, we may adjust the terms of the agreement, or, upon
payment of a fee, terminate the

20



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agreement. In March 2003 the Boards of Smith & Nephew PLC and Centerpulse
announced an agreement to combine their businesses, and in April Smith & Nephew
made a formal offer to acquire Centerpulse. In May 2003, Zimmer Holdings, Inc.
pre-announced an unsolicited offer, and in June 2003 Zimmer published a formal
offer to acquire Centerpulse. There are now two competing offers pending for
Centerpulse. While there remain two pending offers, in August 2003 Smith &
Nephew have declined to increase the value of its bid and therefore it appears
Zimmer has emerged as the likely buyer for Centerpulse.

In addition to the distribution arrangements described above, Centerpulse
has provided us debt financing pursuant to two Credit Agreements. To secure
our obligations under the Credit Agreements, we have granted Centerpulse a
security interest in certain of our intellectual property and have agreed not
to license or sell such intellectual property, other than in the ordinary
course of our business. In the event we, without the written consent of
Centerpulse, enter into an agreement with a competitor of Centerpulse involving
either the licensing of our intellectual property or the co-development of
intellectual property, in each case relating to future generations of the CMI,
Centerpulse may, at its option, accelerate the maturity of the debt. As of
June 30, 2003, we owed approximately $6.8 million under these credit
facilities. The Credit Agreements provide that the debt will mature on the
earlier of 36 months from the date we receive FDA approval for the CMI or
December 31, 2009. On the due date, we may, at our option and subject to
certain conditions, require any unpaid debt to be converted to equity at a
price per share equal to 75% of the then current market price of our stock.

The CMI is currently approved for sale in Europe, Australia and Chile and
will be sold selectively in Canada during 2003. We intend to build on the
approach we have used in supporting sales of the CMI outside of the U.S.

We intend to enter into an exclusive agreement with a major orthopedics
company to distribute the CMI in the U.S. If we are not able to identify a
partner, we may choose to market the CMI in the U.S. directly. In that event,
we would phase in a direct sales force of approximately 10 sales persons to
sell to the 3,000 arthroscopic surgeons who perform the largest number of
procedures and we would likely use distributors for smaller markets and
surgeons performing fewer procedures. Initial estimates are that the ReGen
direct sales force would sell approximately 60% of the CMIs. We anticipate a
transfer price of 40% for sales through the distributors.

We have begun to test the following marketing initiatives in Europe and we
expect to apply them to the U.S. as soon as appropriate:



| |  |  | ReGen Exchange Program.Selected surgeon leaders visit a
fellow U.S. surgeon and observe a CMI surgery. The ReGen Exchange
Program will also schedule U.S. and international surgeons to visit
each other and assist in CMI training.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | CMI Learning Series. ReGen will videotape and Webcast CMI
procedures and use them for surgeon training in the basic CMI
procedure and new surgical techniques.                                                                      
|
| |  |  | Training Strategies. Developing current and attractive training
materials and strategies is necessary to train surgeons for the first
time and to continue the training and familiarization process.                                
|
| |  |  | Surgical Technique.Several ideas have been proposed to make
the surgical procedure more efficient. We will concentrate on
developing and introducing new refinements in surgical technique.                                         

Management expects to receive a decision from the FDA regarding approval
of the CMI for sale in the U.S. late in 2005. As a result, sales of the CMI in
the U.S. would not occur until late 2005 at the earliest. Until such time, and
perhaps later, management expects that our expenses will be greater than our
revenues and that we will operate at a net loss and with negative cash flow.

The SharpShooter

The Sharpshooter is cleared for sale in the U.S., Europe, Canada,
Australia, Chile and Japan. It is distributed by Linvatec Corporation, a
subsidiary of ConMed (Nasdaq: CNMD), an industry leader in the arthroscopy
marketplace, under a worldwide distribution agreement, which remains exclusive
as long as minimum sales are realized.

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Our Strategy

Our current strategy is to focus on the following initiatives:



| |  |  | Obtaining FDA approval of the CMI;                                                               
| | - |  | -------------------------------------------------------------------------------------------------
|
| |  |  | Finding a suitable partner to market the CMI in the U.S.;                                        
|
| |  |  | Launching the CMI in the U.S.; and                                                               
|
| |  |  | Conducting further research on select opportunities within our research and development pipeline.

Our long-term strategy is to capitalize on our proven collagen scaffold
technology by continuing to design, develop, manufacture, and market our own
products, as well as partner with key market leaders to develop and market
products in other targeted therapeutic areas.

Research and Development

Our research and development activities are conducted through the use of
internal and external resources. We engage outside consultants and academic
research facilities for assistance with new product development and we may
license technology from third parties. We may, in the future, hire additional
research and development employees. We plan to continue to use outside
resources for product research, and have relationships with prominent
researchers and clinicians, some of whom have assisted in the development of
our technology.

We believe that our proprietary collagen scaffold and related technologies
have the potential to be used for the treatment of various injuries and
degeneration of other tissue structures such as the intervertebral disc of the
spine and articular cartilage of degenerated joints. This technology may also
be used as a carrier matrix for therapeutic agents for hard and soft tissue
repair and regeneration applications, for introduction of growth or
differentiation factors and genetic materials. These applications are in
various stages of development from proof of concept to preparation for
submission to the FDA.

As advances in tissue regeneration and genetic engineering converge, we
foresee opportunities to develop additional uses for our technologies. At this
time, our collagen scaffold technology acts as a matrix for cell regeneration.
In the future, however, it is quite possible that our collagen scaffold will be
used in conjunction with advanced forms of cellular, genetic and molecular
technology.



| |                                            
| | -------------------------------------------
| | Research is underway to design and develop:



| |  |  | The next generation of the CMI;                                                                                                                
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Additional orthopedic applications using ReGens collagen scaffold technology; and                                                             
|
| |  |  | Opportunities to use our collagen scaffold technology to
deliver cells to other anatomic structures, such as the spine or
particular cartilage.

The following table sets forth our current research and development
pipeline:

Table 4. Research and Development Pipeline

[Bar graph of research and development pipeline in which X axis represents
research and development phases: research, in-vitro testing, pre-clinical
clinical and market and Y axis represents ReGen products and potential
products: Medical Meniscus Implant (approved for sale in Europe and Australia,
clinical trial enrollment currently complete in U.S.), Lateral Meniscus Implant
(prototype development, cadaver testing initiated), Invertebral Disc Repair
(prototype development, large animal model testing initiated) Hand Bone
Augmentation Device, (patents issued, primate testing complete, 510K submission
expected), Ligament Augmentation Devices (prototype development, large animal
model testing initiated), CMI and Growth Factors (prototype developed, animal
studies initiated), CMI Improvements (patents filed, lab testing), Rotator Cuff
Repair Device (prototype development), Articular Cartilage Repair (patents
issued, prototype development ).]

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With limited funding available for longer-term projects, we are currently
focusing on potential 510k product submissions that have the potential for a
positive financial impact within the next few years. We believe that
substantial opportunity exists for several longer-term projects once more
substantial funding is available.

Intellectual Property

As part of our ongoing research, development and manufacturing activities,
we have a policy of seeking patent protection. Although patents often are
necessary to protect our technology and products, we believe that the lengthy
FDA approval process and certain manufacturing processes are additional
barriers to entry. Moreover, much of the proprietary technology and
manufacturing processes developed by us reside in our key scientific and
technical personnel and such technology and processes are not easily
transferable to other scientific and technical personnel.

We require our employees, consultants and advisors to execute
nondisclosure agreements in connection with their employment, consulting or
advisory relationships with us. We also require our employees, and some
consultants and advisors to agree to disclose and assign to us all inventions
conceived during the work day, using our property or which relate to our
business.

We own 21 U.S., 74 international, and 13 pending patents. Of these 104
relate to the composition of our collagen scaffold technology and 4 relate to
the SharpShooter device. In addition to our patents, we also own various
trademarks protecting our corporate identity and product names.

Third-Party Reimbursement

We expect that sales volumes and prices of our products will continue to
be dependent in large part on the availability of reimbursement from
third-party payors. Obtaining U.S. reimbursement approval at the desired price
is often a complicated and political process. In the U.S., our products will
be purchased by hospitals that are reimbursed by third-party payors for the
devices provided to their patients. Such payors include governmental programs
(e.g., Medicare and Medicaid), private insurance plans and managed care
programs.

Particularly in the U.S., third-party payors carefully review, and
increasingly challenge, the prices charged for procedures and medical products.
In addition, an increasing percentage of insured individuals are receiving
their medical care through managed care programs, which monitor and often
require pre-approval of the services that a member will receive.

Three aspects of the CMI procedure increase the likelihood that insurance
companies will provide favorable reimbursement:



| |  |  | Patients appear to receive a measurable clinical benefit within
the 12 to 18 month timeframe desired by the insurers;                                                                             
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The expected price point of the CMI procedure will require less
payment by the insurer than two or more partial meniscectomies or a
joint replacement; and                                        
|
| |  |  | We expect surgeons and patients to demand the CMI because the
clinical results appear positive, there are no apparent safety
issues, and there is no alternative for regenerating meniscus tissue.

We have commissioned a first-stage study from a national firm specializing
in reimbursement, and we have initiated a phased, three-year plan designed to
obtain reimbursement in the U.S. which includes:



| |  |  | Economic and financing models. We plan to demonstrate the
economic rationale for why the patient will be better off in the
12-18 month timeframe, which is of immediate concern to the insurer.
In the case of the CMI, clear benefit can be established in the 12-18
month timeframe. The models will demonstrate the benefits for the
insurer when the patients receive the CMI.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Classification Codes. We are considering applying for both CPT
and HCPCS codes, as well as other classification codes, with the goal
of receiving these codes concurrently with FDA approval.                                                                                                                                                                                       

23



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| |  |  | Training and Awareness of Intermediary Staff. Young surgeons,
who are willing to conduct training sessions for pay, will be
scheduled to meet with large intermediaries in large markets. These
surgeons will teach the intermediaries about our implants and why
they are preferable to existing procedures.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Facilities

Our corporate management, clinical and regulatory affairs, marketing and
research operations are located in our headquarters in Franklin Lakes, New
Jersey. We also operate an ISO 9001 certified production facility in Redwood
City, California, where our CMI product is manufactured.

Manufacturing

We use bovine tendon as a primary raw material for production of our
collagen scaffold technology. The Company obtains its tendon material through
a specialized supplier which sources that material based upon specifications
defined by the Company. The bovine material is readily available through
U.S.-based slaughterhouses.

The SharpShooter includes several components, all of which are
manufactured by third parties. We oversee the manufacturing and coordinate the
supply of these components from our Redwood City, California production
facility. Given the resources available to us, we have historically relied
upon a limited number of third party manufacturers. Following the receipt of
products at our facility, we conduct inspection, packaging and labeling
operations. For products distributed in a sterile package, sterilization is
performed by contract vendors.

Competition

The CMI is not competitive with products which patch or re-grow articular
cartilage or with meniscal allografts. Several companies are currently
developing an approach to repairing articular cartilage which has a different
function and location than the meniscus. Additionally, we believe that as
companies develop these products for the articular cartilage, they will find it
increasingly more important for the surgeon to repair the damaged meniscus in
order for their articular cartilage products to have successful long term
outcomes. We believe that this will further enhance the adoption of the CMI.

The Company is not aware of any human clinical trial, other than its own,
focused on the meniscus. Furthermore, due to the high load capacity of the
meniscus, no other biomaterial of which we are aware has the adequate physical
or mechanical properties to be used for this application. Historically, there
have been a number of attempts to develop a meniscus implant. We are currently
aware of several technologies being applied for use as a meniscus implant.
Based on our analysis of these technologies, we do not believe that they will
represent an effective alternative to the CMI.

Government Regulation

U.S.

The Premarket Approval process is lengthier and more burdensome than the
510k premarket notification process. The Premarket Approval process generally
requires detailed animal and clinical studies, as well as manufacturing data
and other information. If clinical studies are required by the FDA, an
Investigational Device Exemption is also required. An Investigational Device
Exemption restricts the investigational use of the device to a limited number
of investigational sites, investigators and patients. Its purpose is to prove
safety and efficacy of the device. FDA approval of a Premarket Approval
application indicates that the FDA concurs that a device has been
scientifically proven, through the completion and submission of animal data, a
completed Investigational Device Exemption and other pertinent information, to
be safe and effective for its intended use.

We have analyzed the products considered by the FDAs Orthopedic Panel in
the last five years. Of the 13 products considered, 11 were approved. Based on
our analysis of the Panels decisions, it appears that the Panel emphasized:

24



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| |  |  | Safety;                         
| | - |  | --------------------------------
| |  |  | Potential patient benefit; and  
| |  |  | Options provided to the surgeon.

We believe that the CMI fits the Panels considerations. Further, the
quantity, quality, completeness and direction of the MCT data compares
favorably with data of the 11 products that were approved.

International

We obtain required regulatory approvals and comply with extensive
regulations governing product safety, quality, manufacturing and reimbursement
processes in order to market our products in foreign markets. These regulations
vary significantly from country to country and with respect to the nature of
the particular medical device. The time required to obtain these foreign
approvals to market its products may be longer or shorter than that required in
the U.S., and requirements for such approval may differ from FDA requirements.

All of the Companys products sold internationally are subject to
appropriate foreign regulatory approvals. In order to market our devices in the
member countries of the European Union, we are required to comply with the
Medical Device Directive and obtain CE Mark Certification. CE Mark
Certification is an international symbol of adherence to quality assurance
standards and compliance with applicable European Medical Device Directives.
Under the Medical Device Directive, all medical devices must qualify for CE
Marking.

The Companys products are manufactured in compliance with ISO 9001, EN
46001 and U.S. Quality System Regulations.

Employees

As of August 14, 2003, we had 16 employees, of whom 2 were part-time.
None of these employees is represented by a union, and we do not have any
collective bargaining agreements. We consider our relations with our employees
to be good.

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. ReGen believes, given current facts and
circumstances, its estimates and assumptions are reasonable, adhere to
accounting principles generally accepted in the United States, and are
consistently applied. Actual results could differ from those estimates.

We have identified below some of the more significant accounting policies
we follow in preparing the accompanying condensed consolidated financial
statements.

Revenue Recognition

We recognize revenue in accordance with the provisions of Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements, whereby revenue
is not recognized until it is realized or realizable and earned. Revenue is
recognized when all of the following criteria are met: persuasive evidence of
an arrangement exists, delivery has occurred, the sellers price to the buyer
is fixed or determinable and collection of such revenue is reasonably assured.
We generally recognize revenue from product sales upon the shipment of such
products to our distributors. Title of product passes to the customers F.O.B
origin.

We receive royalties from our licensees. Royalties are generally due under
the license agreements when the licensee sells the product to a third party. If
determinable at the time we publish our results, royalties are recognized when
the licensee has sold the product to the end user and we have fulfilled our
obligations under the applicable agreement. If not determinable at the time
results are published, royalties are recognized in the period they become
determinable.

License fees represent payments received from distributors for exclusive
perpetual licenses to sell our products in various geographic areas. These fees
are recognized as other income when all performance criteria in the underlying
agreement have been met. Generally, license fees for existing license
arrangements are not recurring.

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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. 15% of our inventory is being 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.

During 2001 and 2002, the Company shipped certain components of the
SharpShooter that were later identified to have the potential to become
non-sterile. The Company instituted a recall of such product components during
2002. Ultimately, in the fourth quarter of 2002 the Company agreed to take
title of the returned product rather than issuing a credit to the customer. The
Company received and included in inventory the reworked product at a net
carrying amount equal to the original carrying amount of the returned inventory
less a reserve representing the estimated cost to rework the product. Costs
incurred and paid to rework the returned inventory will be included in
inventory to the extent of the original carrying amount. Completion of the
rework and FDA approval of the reworked packaging may involve additional costs
which can not currently be anticipated. Any such additional costs would be
recorded when management becomes aware of the factors which may require the
additional costs. Outside of the returns associated with the product recall
described above, the Companys history of product returns has been
insignificant.

Research and Development Costs

Research and development costs are expensed as incurred. We will continue
to incur research and development costs as we continue our product development
activities and pursue regulatory approval to market our products. Research and
development costs have, and will continue to include expenses for internal
development, personnel, clinical trials, regulatory compliance and filings,
validation of processes, start up costs to establish commercial manufacturing
capabilities and related facilities, supplies and other expenses.

Stock Based Compensation

We have accounted for our employee stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. No expense is recognized for options issued to employees where the
exercise price is equal to or greater than the market value of the underlying
security. Expense is recognized in the financial statements for options issued
to employees where the option price is below the fair value of the underlying
security, for options issued to non-employees and for options and warrants
issued in connection with financing and equity transactions (collectively
referred to as compensatory options).

If ReGen had elected to recognize compensation based on the fair value of
options granted to employees as prescribed by Statement of Financial Account
Standards (SFAS) No. 123, net loss and net loss per share would have been
$(1,498,000) and $(0.05), and $(8,935,000) and $(0.52) for the three months
ended June 30, 2003 and 2002, respectively and $(2,608,000) and $(0.09) and
$(10,578,000) and $(0.62) for the six months ended June 30 2003 and 2002,
respectively.

For periods prior to the merger of the Company with RBio, expense
associated with compensatory options and warrants has been measured based on
managements estimate of the fair value of the underlying security (which in
turn is based on managements estimate of the fair value of RBio.)

Income Taxes

The Company had a net operating loss carryforwards at December 31, 2002 of
approximately $33.4 million and a research and development tax credit of
approximately $410,000. The federal net operating loss and credit carryforwards
will begin to expire in 2006, if not utilized. The state net operating loss and
credit carryforwards started to expire in 2000, and will continue to expire if
not utilized. The utilization of net operating loss carryforwards may be
limited due to changes in the ownership of the Company, and the effect of the
reverse merger and recapitalization completed on June 21, 2002.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

We caution you that certain statements contained in or incorporated by
reference into this Form 10-Q, or which are otherwise made by us or on our
behalf are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements include
statements that are predictive in nature, which depend upon or refer to future
events or conditions,

26



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which include words such as believe, plan, anticipate, estimate,
expect, intend, seek or similar expressions. In addition, any statements
concerning future financial performance, ongoing business strategies or
prospects, and possible future actions, which may be provided by our
management, are also forward-looking statements. Forward-looking statements are
based on current expectations and projections about future events and are
subject to risks, uncertainties, and assumptions about our company, economic
and market factors and the industry in which we do business, among other
things. These statements are not guaranties of future performance and we
undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise.

Actual events and results may differ materially from those expressed or
forecasted in forward-looking statements due to a number of factors. Important
factors that could cause actual results to differ materially include, but are
not limited to, our ability to complete the CMI clinical trial and obtain FDA
approval, our ability to obtain additional financing, the ability of our
distribution partners to effectively market and sell our products, our ability
to procure product components and effectively produce products for resale, our
ability to control production quantities and inventory in order to avoid
unanticipated costs such as outdated inventory, the timely collection of our
accounts receivable, our ability to attract and retain key employees, our
ability to timely develop new products and enhance existing products, the
occurrence of certain operating hazards and uninsured risks, our ability to
protect proprietary information and to obtain necessary licenses on
commercially reasonable terms, the impact of governmental regulations, changes
in technology, marketing risks, other unforeseen events that may impact our
business and our ability to adapt to economic, political and regulatory
conditions affecting the healthcare industry.

Our filings with the SEC are available to the public from commercial
document retrieval services and at the Web site maintained by the SEC at
http://www.sec.gov.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For information regarding ReGens exposure to certain market risks, see
Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the
Companys Annual Report on Form 10-K/A for the year ended December 31, 2002.
Except as described in the Managements Discussion and Analysis of Financial
Condition and Results of Operations, there have been no significant changes in
our financial instrument portfolio or market risk exposures since December 31,
2002.

Item 4. Controls and Procedures

We have established and maintain disclosure controls and procedures that
are designed to ensure that material information required to be disclosed by
ReGen in the reports that it files under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commissions rules and forms, and that such
information is accumulated and communicated to the Companys management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.

Within the 90 days prior to the date of this quarterly report, under the
supervision and with the participation of ReGens Chief Executive Officer and
Chief Financial Officer, our management carried out an evaluation of the
effectiveness of the design and operation of disclosure controls and
procedures. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective as of the date of such evaluation in time to alert them to material
information relating to ReGen (including its consolidated subsidiaries)
required to be included in ReGens periodic SEC filings.

There have been no significant changes to our internal controls or in
other factors that could significantly affect internal controls subsequent to
the date we carried out our evaluation.

27



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PART II

Item 1. Legal Proceedings

None.

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

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

None.

Item 5. Other Information

RISK FACTORS

Our business faces significant risks. The risks and uncertainties
described below may not be the only risks we face. Additional risks that we do
not yet know of or that we currently think are immaterial may also impair our
business operations. Any of the risks described below could significantly and
aversely affect our business, prospects, financial condition or results of
operations. You should carefully consider and evaluate the risks and
uncertainties listed below, as well as the other information set forth in this
Quarterly Report on Form 10-Q.

Product introductions or modifications may be delayed or canceled as a result
of the FDA regulatory process, which could cause our sales to decline.

The medical devices we manufacture and market are subject to rigorous
regulation by the FDA and numerous other federal, state and foreign
governmental authorities. Our failure to comply with such regulations could
lead to the imposition of injunctions, suspensions or loss of regulatory
approvals, product recalls, termination of distribution, or product seizures.
In the most egregious cases, criminal sanctions or closure of our manufacturing
facility are possible. The process of obtaining regulatory approvals to market
a medical device, particularly from the FDA, can be costly and time-consuming,
and there can be no assurance that such approvals will be granted on a timely
basis, if at all. In particular, the CMI has not yet been approved by the FDA
and there is no guarantee that such approval will be obtained. Should the FDA
approve the CMI for sale in the U.S., sales will not occur until, at the
earliest, late 2005.

The regulatory process may delay the marketing of new products for lengthy
periods and impose substantial additional costs or it may prevent the
introduction of new products altogether. In particular, the FDA permits
commercial distribution of a new medical device only after it has met the
established regulatory compliance guidelines. The FDA will clear marketing of
a medical device through the 510k process if it is demonstrated that the new
product is substantially equivalent to other 510k-cleared products. The PMA
approval process is more costly, lengthy and uncertain than the 510k premarket
notification process. There can be no assurance that any new products we
develop will be subject to the shorter 510k clearance process and therefore
significant delays in the introduction of any new products that we develop may
occur. If we choose to go through the PMA approval process, there will be
significant costs and delays in the introduction of our new products, if they
are approved at all.

Moreover, foreign governmental authorities have become increasingly
stringent and we may be subject to more rigorous regulation by foreign
governmental authorities in the future. Any inability or failure of our
foreign independent distributors to comply with the varying regulations or the
imposition of new regulations could restrict such distributors ability to sell
our products internationally and thereby adversely affect our business. All
products and manufacturing facilities are subject to continual review and
periodic inspection by regulatory agencies. The discovery of previously
unknown problems with our company or our products or facilities may result in
product labeling restrictions, recall, or withdrawal of the products from the
market. In addition, the FDA actively enforces

28



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regulations prohibiting the promotion of medical devices for unapproved
indications. If the FDA determines that we have marketed our products for off-
label use, we could be subject to fines, injunctions or other penalties.

Sales of our products are largely dependent upon third party reimbursement and
our performance may be harmed by health care cost containment initiatives.

In the U.S. and other markets, health care providers, such as hospitals
and physicians, that purchase health care products, such as our products,
generally rely on third party payers, including Medicare, Medicaid and other
health insurance and managed care plans, to reimburse all or part of the cost
of the health care product. Reimbursement by third party payers may depend on
a number of factors, including the payers determination that the use of our
products is clinically useful and cost-effective, medically necessary and not
experimental or investigational. Also, third party payers are increasingly
challenging the prices charged for medical products and services. Since
reimbursement approval is required from each payer individually, seeking such
approvals can be a time consuming and costly process which, in the future,
could require us or our marketing partners to provide supporting scientific,
clinical and cost-effectiveness data for the use of our products to each payer
separately. Significant uncertainty exists as to the reimbursement status of
newly approved health care products, and third party payers are increasingly
attempting to contain the costs of health care products and services by
limiting both coverage and the level of reimbursement for new therapeutic
products and by refusing, in some cases, to provide coverage for uses of
approved products for disease indications for which the FDA has not granted
marketing approval. There can be no assurance that third party reimbursement
coverage will be available or adequate for any products or services developed
by us.

We may be subject to product liability claims and our limited product liability
insurance may not be sufficient to cover the claims, or we may be required to
recall our products.

We manufacture medical devices that are used on patients in surgical
procedures and we may be subject to product liability claims. During 2002 we
instituted a recall of certain components of the SharpShooter that were later
identified to have the potential to become non-sterile. There is no guarantee
that we will not be subject to other product recalls in the future. The
medical device industry has been historically litigious and we face an inherent
business risk of financial exposure to product liability claims. Since our
products are often implanted in the human body, manufacturing errors or design
defects could result in injury or death to the patient, and could result in a
recall of our products and substantial monetary damages. Any product liability
claim brought against us, with or without merit, could result in diversion of
our resources, an increase to our product liability insurance premiums and/or
our inability to secure coverage in the future. We would also have to pay any
amount awarded by a court in excess of our policy limits. In addition, any
recall of our products, whether initiated by us or by a regulatory agency, may
result in adverse publicity for us that could have a material adverse effect on
our business, financial condition and results of operations. Our product
liability insurance policies have various exclusions, and we may be subject to
a product liability claim or recall for which we have no insurance coverage, in
which case we may have to pay the entire amount of the award or costs of the
recall. Finally, product liability insurance is expensive and may not be
available in the future on acceptable terms, or at all.

We are a development stage company and have no significant operating history
with which investors can evaluate our business and prospects.

We are a development stage company and have no significant operating
history and are operating in a new, specialized and highly competitive field.
Our ability to successfully provide the guidance and management needed to
continue and grow the business on an ongoing basis has not yet been established
and cannot be assured. Our business is subject to all of the risks inherent in
our business, including, but not limited to potential delays in the development
of products, the need for regulatory approvals of certain of its products and
devices, uncertainties of the healthcare marketplace and reimbursement levels
of insurers and similar governmental programs, unanticipated costs and other
uncertain market conditions.

To be commercially successful, we will have to convince physicians that using
our products to repair damaged menisci is an effective alternative to existing
therapies and treatments.

We believe that physicians will not widely adopt our products unless they
determine, based on experience, clinical data and published peer reviewed
journal articles, that the use of the CMI, the Sharpshooter or any future
products provides an effective alternative to conventional means of treating a
damaged meniscus or other injury. To date, we have completed only limited
clinical studies of the CMI and the Sharpshooter. Clinical experience may not
indicate that the treatment with our products provides patients with sustained
benefits. In addition, we believe that continued recommendations and support
for the use of the CMI and the Sharpshooter by influential physicians are
essential for widespread market acceptance of these products. If our products
do not

29



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continue to receive support from these physicians or from long-term data,
surgeons may not use, and the facilities may not purchase, our products.
Moreover, our competitors may develop and successfully commercialize medical
devices that directly or indirectly accomplish what our products are designed
to accomplish in a superior and less expensive manner. If our competitors
products prove to be more successful than ours, our products could be rendered
obsolete. As a result, we may not be able to produce sufficient sales to
obtain or maintain profitability.

We are dependent on a few products.

We anticipate that most of our revenue growth in the future, if any, will
come from our tissue re-growth technology products including the Collagen
Meniscus Implant, or CMI, and other supporting products, including the
SharpShooter. There can be no assurance that we will be successful in
increasing sales of our current product offering. Additionally, there can be
no assurance that our efforts to develop new products, including enhancements
to our existing products, will be successful. If our development efforts are
successful, there can be no assurance that we will be successful in marketing
and selling our new products.

We will need to obtain financing in the future, which may be difficult.

In the future, we will need to raise additional funds through equity or
debt financing, collaborative relationships or otherwise. Our future capital
requirements depend upon many factors, including:



| |  |  | Our ability to increase revenues, which primarily relies upon the ability of our distribution
partners to increase sales of our products;         
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our ability to complete the CMI clinical trial and obtain FDA approval;                                                                           
|
| |  |  | Our ability to effectively produce our products, and to adequately control the cost of production;                                                
|
| |  |  | The extent to which we allocate resources toward development of our existing or new products;                                                     
|
| |  |  | The timing of, and extent to which we are faced with, unanticipated marketing or medical
challenges or competitive pressures;                     
|
| |  |  | Our ability to successfully transfer liability for or restructure long-term facility leases for
facilities that exceed our present capacity needs;
|
| |  |  | The amount and timing of leasehold improvements and capital equipment purchases; and                                                              
|
| |  |  | The response of competitors to our products.                                                                                                      

Moreover, because of our potential long-term capital requirements, we may
access the public or private equity markets whenever conditions appear to us to
be favorable, even if we do not have an immediate need for additional capital
at that time. There can be no assurance that any such additional funding will
be available when needed or on terms favorable to us, if at all.

We may face challenges to our patents and proprietary rights.

Our ability to develop and maintain proprietary aspects of our business is
critical for our future success. We rely on a combination of confidentiality
protections, contractual requirements, trade secret protections, patents,
trademarks and copyrights to protect our proprietary intellectual property.
Our patent positions and those of other medical device companies are uncertain
and involve complex and evolving legal and factual questions. There can be no
assurance that pending patent applications will result in issued patents, that
patents issued to or licensed by us will not be challenged or circumvented by
competitors or that such patents will be found to be valid or sufficiently
broad to protect our technology or to provide us with any competitive
advantage. Any future litigation, regardless of the outcome, could result in
substantial expense and significant diversion of the efforts of our technical
and management personnel.

While we attempt to ensure that our products do not infringe other
parties patents and proprietary rights, our competitors may assert that our
products and the methods they employ may be covered by patents held by them.
Furthermore, third parties could obtain patents that may require licensing for
the conduct of our business, and there can be no assurance that the required
licenses would be

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available. We also rely on nondisclosure agreements with certain employees,
consultants and other parties to protect, in part, trade secrets and other
proprietary technology. Litigation may be necessary to enforce our patents
and license agreements, to protect our trade secrets or know-how or to
determine the enforceability, scope and validity of the proprietary rights of
others. An adverse determination in any such proceeding could subject us to
significant liabilities to third parties, or require us to seek licenses from
third parties or pay royalties that may be substantial. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent us from manufacturing or selling
certain of our products which in turn would have a material adverse effect on
our business, financial condition and results of operations.

We are dependent on our suppliers and the loss of any of these suppliers could
adversely affect our business.

We rely upon our vendors for the supply of raw materials and product
components used in the manufacture of our CMI and Sharpshooter products.
Furthermore, in several cases we rely on a single vendor to supply critical
materials or components. In the event that we are unable to obtain components
for any of our products, or obtain such components on commercially reasonable
terms, we may not be able to manufacture or distribute our products on a timely
and competitive basis, or at all. Any delays in product availability or costs
incurred in locating alternative suppliers could have a material adverse effect
on our operations.

Our reliance on third parties to distribute our products may increase our
operating costs and reduce our operating margins.

We rely on third parties to distribute our products. The inability of any
of these third parties to deliver or perform for us in a timely or
cost-effective manner could cause our operating costs to rise and our margins
to fall. We are subject to the risk that outside factors may prevent such
third parties from meeting our distribution needs. In March 2003 the Boards of
Smith & Nephew PLC and Centerpulse announced an agreement to combine their
businesses, and in April Smith & Nephew made a formal offer to acquire
Centerpulse. In May 2003, Zimmer Holdings, Inc. pre-announced an unsolicited
offer, and in June 2003 Zimmer published a formal offer to acquire Centerpulse.
There are now two competing offers pending for Centerpulse. It is unclear
whether this acquisition will affect distribution of the CMI. Further, we do
not have a distributor for the CMI in the U.S. and there is no guarantee that
we will be able to find a suitable third party to effectively distribute the
CMI in the U.S. If we are unable to obtain a satisfactory distributor, we may
distribute the CMI ourselves, which would force us to invest in sales and
marketing personnel. Failure to distribute products to our customers in a
timely and cost effective manner would cause our operating costs to increase
and our margins to fall.

Disruption of our manufacturing could adversely affect our business, financial
condition and results of operations.

Our results of operations are dependent upon the continued operation of
our manufacturing facility in Redwood City, California. The operation of
biomedical manufacturing plants involves many risks, including the risks of
breakdown, failure or substandard performance of equipment, the occurrence of
natural and other disasters, and the need to comply with the requirements of
directives of government agencies, including the FDA. The occurrence of
material operational problems could have a material adverse effect on our
business, financial condition, and results of operations during the period of
such operational difficulties.

Our success depends upon our ability to recruit and retain key personnel.

Our success depends, in part, upon our ability to attract and retain
qualified operating personnel. Competition for skilled personnel in the areas
of research and development, manufacturing, marketing and other areas is highly
competitive. In addition, we believe that our success will depend on the
continued employment of our Chairman, President and CEO, Dr. Gerald Bisbee with
whom we have entered into an employment agreement, and our Senior Vice
President, Clinical and Regulatory Affairs, John Dichiara with whom we have no
formal employment agreement. To the extent we are unable to recruit or retain
qualified personnel, our business may be adversely affected.

Our business could be materially adversely impacted by risks inherent in
international markets.

In 2002, approximately 73% of our sales were generated outside the U.S.
We expect that such sales will continue to account for a significant portion of
our revenue in the future, at least until we are able to market the CMI (or
other new products) in the U.S. Our international sales subject us to other
inherent risks related to changes in the economic, political, legal and
business environments in the foreign countries in which we do business,
including the following:



| |  |  | Fluctuations in currency exchange rates;                    
| | - |  | ------------------------------------------------------------
|
| |  |  | Regulatory, product approval and reimbursement requirements;

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| |  |  | Tariffs and other trade barriers;                                                  
| | - |  | -----------------------------------------------------------------------------------
|
| |  |  | Greater difficulty in accounts receivable collection and longer collection periods;
|
| |  |  | Difficulties and costs of managing foreign distributors;                           
|
| |  |  | Reduced protection for intellectual property rights in some countries;             
|
| |  |  | Burdens of complying with a wide variety of foreign laws;                          
|
| |  |  | The impact of recessions in economies outside the U.S.; and                        
|
| |  |  | Political and economic instability.                                                

If we fail to successfully market and sell our products in international
markets, our business, financial condition, results of operations, and cash
flows could be materially and adversely affected.

Future acquisitions could adversely affect our operations or financial results.

From time to time, we consider acquisition of technology product lines or
businesses to supplement our current product offering. Any such future
acquisitions involve risks such as the following:



| |  |  | We may be exposed to unknown liabilities of acquired companies;                                                                                                                             
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our acquisition and integration costs may be higher than we
anticipated and may cause our quarterly and annual operating results to
fluctuate;                                              
|
| |  |  | We may experience difficulty and expense in assimilating the
operations and personnel of the acquired businesses, disrupting our
business and diverting managements time and attention; and
|
| |  |  | Our relationships with key customers of acquired businesses may be
impaired, due to changes in management and ownership of the acquired
businesses.                                         

The lack of an independent audit committee may affect our ability to be
listed on a national securities exchange or quotation system.

We are not subject to the listing requirements of any national securities
exchange or quotation system. Currently, the members of our audit committee do
not meet the definition of an independent director as defined by the
Sarbanes-Oxley Act of 2002 or as defined by the NYSE or Nasdaq corporate
governance proposals. There is no guarantee that we will be able to appoint
directors that will satisfy these requirements. If we are unable to appoint
independent directors to the audit committee we will be precluded from listing
any of our capital stock on a national securities exchange or quotation system.

Unanticipated fluctuations in quarterly operating results could affect our
stock price.

Our quarterly revenues and operating results have varied significantly in
the past and are likely to vary from quarter to quarter in the future.
Quarterly revenues and operating results may fluctuate as a result of a variety
of factors, including the ability of our distribution partners to market and
sell our products, variable customer demand for our products and services, our
investments in research and development or other corporate resources, our
ability to effectively and consistently manufacture our products, and avoid
costs associated with the recall of defective or potentially defective
products, the ability of our vendors to effectively and timely deliver
necessary materials and product components, acquisitions of other companies or
assets, the timing of new product introductions, changes in distribution
channels, sales and marketing promotional activities and trade shows and
general economic conditions. Further, due to the relatively fixed nature of
most of our costs, which primarily include personnel costs as well as
facilities costs, any unanticipated shortfall in revenue in any fiscal quarter
would have an adverse effect on our results of operations in that

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quarter. Accordingly, our operating results for any particular quarterly
period may not necessarily be indicative of results for future periods and
should not be relied upon as an indication of its future performance. These
fluctuations could cause the trading price of our stock to be negatively
affected. Our quarterly operating results have varied substantially in the
past and may vary substantially in the future. In addition, the stock market
has been very volatile, particularly on the OTC Bulletin Board, where our stock
is quoted. This volatility is often not related to the operating
performance of companies listed thereon and will probably continue in the
foreseeable future.

Ownership of our stock is concentrated and this small group of stockholders may
exercise substantial control over our actions.

Based on shares outstanding as of June 1, 2003, Sanderling Ventures and
Centerpulse USA Holding Co. own approximately 34.7% and 11.9%, respectively, of
our outstanding common stock on an as-converted basis. These stockholders, if
acting together, have the ability to exert substantial control on the outcome
of corporate actions requiring stockholder approval. This concentration of
ownership may also have the effect of delaying or preventing a change in our
control. Additionally, the holders of approximately 52% of our issued and
outstanding capital stock are parties to a stockholders agreement by which
these stockholders agreed to vote their shares in favor of certain matters.
The parties to the stockholders agreement will, by virtue of their majority
interest, be able to pass all proposals on which they have agreed to vote.

A substantial number of shares of our common stock are eligible for sale in the
near future, which could cause our common stock price to decline significantly.

All of the shares of common stock issued in connection with the merger of
Aros Corporation and ReGen Biologics became eligible for sale pursuant to Rule
144 on June 21, 2003. If our stockholders sell, or the market perceives that
our stockholders intend to sell, substantial amounts of our common stock in the
public market, the market price of our common stock could decline
significantly. These sales may also make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. As restrictions on resale end, the market price of our common
stock could drop significantly if the holders of restricted shares sell them or
are perceived by the market as intending to sell them.

We have established several anti-takeover measures which could delay or prevent
a change of our control.

Under the terms of our amended and restated certificate of incorporation,
the board of directors will be authorized, without any need for action by our
stockholders, but subject to any limitations prescribed by law, to issue shares
of our preferred stock in one or more series. Each series may consist of such
number of shares and have the rights, preferences, privileges and restrictions,
such as dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the right
to increase or decrease the number of shares of any series, as the board of
directors shall determine. The board of directors may issue preferred stock
with voting or conversion rights that may have the effect of delaying,
deferring or preventing a change in control of our company and that could
adversely affect the market price of the common stock and the voting and other
rights of the holders of common stock. Additionally, our board of directors
adopted a stockholder rights plan and declared a dividend distribution of one
right for each outstanding share of our common stock. Each right, when
exercisable, entitles the registered holder to purchase securities at a
specified purchase price, subject to adjustment. The rights plan may have the
anti-takeover effect of causing substantial dilution to the person or group
that attempts to acquire our company on terms not approved by the board of
directors. The existence of the rights plan could limit the price that certain
investors might be willing to pay in the future for shares of our capital stock
and could delay, defer or prevent a merger or acquisition of our company that
stockholders may consider favorable.

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits.

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

|            |  |                                                                                                                                                                              
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                  
|            |  |                                                                                                                                                                              
|2.1         |  | Agreement and Plan of Merger by and among ReGen Biologics, Inc., Aros Corporation and Aros Acquisition
Corporation dated as of June 7, 2002(12)                              
|2.2         |  | Agreement and Plan of Merger among the Company, NHA Acquisition Corporation, National Health Advisors,
Ltd., Scott A. Mason and Donald W. Seymour dated as of June 2, 1997(5)
|2.3         |  | Agreement and Plan of Merger among the Company and MetaContent, Inc. dated as of March 21, 2001(2)                                                                           

33



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|     |  |                                                                                                                                                           
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|2.4  |  | Asset Purchase Agreement between Cerner Corporation and the Company dated as of April 7, 2001(3)                                                          
|2.5  |  | Amendment No. 1 to Asset Purchase Agreement by and between Cerner Corporation and the Company dated as of
June 11, 2001(3)                                
|3.1  |  | Amended and Restated Certificate of Incorporation(1)                                                                                                      
|3.2  |  | Certificate of Amendment to the Certificate of Incorporation(5)                                                                                           
|3.3  |  | Certificate of Ownership and Merger(13)                                                                                                                   
|3.4  |  | Certificate of Amendment to the Certificate of Incorporation(13)                                                                                          
|3.5  |  | Amended and Restated By-Laws(4)                                                                                                                           
|4.1  |  | Specimen Common Stock Certificate(6)                                                                                                                      
|4.2  |  | Rights Agreement between the Company and First Chicago Trust Company of New York, dated as of May 6, 1997(7)                                              
|4.3  |  | ReGen Biologics, Inc. Non-Employee Director Option Plan(1)                                                                                                
|4.4  |  | ReGen Biologics, Inc. Non-Employee Director Supplemental Stock Option Plan Amended and Restated Effective
December 9, 2000(4)                             
|4.5  |  | Registration Agreement between the Company and Certain Stockholders, dated December 28, 1995(6)                                                           
|4.6  |  | Amendment No. 1 to Rights Agreement between the Company and Equiserve Trust Company, N.A., dated as of June
7, 2002(12)                                   
|4.7  |  | Form of Nonqualified Director Stock Option Agreement(11)                                                                                                  
|4.8  |  | ReGen Biologics, Inc. Employee Stock Option Plan, Amended and
Restated Effective January 31, 2003(15)                                                     
|4.9  |  | ReGen Biologics, Inc. Non-Employee Director Stock Option Plan,
Amended January 31, 2003(15)                                                               
|10.1 |  | Employment agreement by and between Gerald E. Bisbee, Jr., Ph. D. and ReGen Biologics, Inc. dated September
22, 1998 and amended on September 12, 2000(16)
|31.1 |  | Rule 13(a)  14(a) Certification of Chief Executive Officer                                                                                               
|31.2 |  | Rule 13(a)  14(a) Certification of Chief Financial Officer                                                                                               
|32.1 |  | Section 1350 Certification of Chief Executive Officer                                                                                                     
|32.2 |  | Section 1350 Certification of Chief Financial Officer                                                                                                     

|     |  |                                                                                                                                                                                                                                                                                                                   
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)  |  | Incorporated herein by reference to the Companys Report on Form 10-Q for the quarter ended June 30, 1997
(File No. 0-20805)                                                                                                                                                                                      
|(2)  |  | Incorporated herein by reference to the Companys Report on Form 10-Q/ A for the quarter ended March 31,
2001 (File No. 0-20805)                                                                                                                                                                                  
|(3)  |  | Incorporated herein by reference to the Companys Report on Form 8-K dated April 12, 2001 (File No. 0-20805)                                                                                                                                                                                                      
|(4)  |  | Incorporated herein by reference to the Companys Report on Form 10-K for the year ended December 31, 2000
(File No. 0-20805)                                                                                                                                                                                     
|(5)  |  | Incorporated herein by reference to the Companys Report on Form 10-Q for the quarter ended June 30, 2001
(File No. 000-20805)                                                                                                                                                                                    
|(6)  |  | Incorporated herein by reference to the Companys Registration Statement on Form S-1 (File No. 333-04106)                                                                                                                                                                                                         
|(7)  |  | Incorporated herein by reference to the Companys Current Report on Form 8-K filed on June 4, 1997 (File
No. 0-20805)                                                                                                                                                                                             
|(8)  |  | Incorporated herein by reference to the Companys Report on Form 10-Q for the quarter ended March 31, 1999
(File No. 0-20805)                                                                                                                                                                                     
|(9)  |  | Incorporated herein by reference to the Companys Current Report on Form 8-K filed on January 14, 1997
(File No. 0-20805)                                                                                                                                                                                         
|(10) |  | Incorporated herein by reference to the Companys Report on Form 10-Q for the quarter ended March 31, 1997
(File No. 0-20805)                                                                                                                                                                                     
|(11) |  | Incorporated herein by reference to the Companys Report on Form 10-K for the year ended December 31, 1997
(File No. 0-20805)                                                                                                                                                                                     
|(12) |  | Incorporated herein by reference to the Companys Report on Form 10-Q/A for the quarter ended June 30, 2002
(File No. 0-20805)                                                                                                                                                                                    
|(13) |  | Incorporated herein by reference to the Companys Current Report on Form 8-K filed on January 6, 2003
setting forth the Certificate of Ownership and Merger, Certificate of Amendment of the Amended and Restated
Certificate of Incorporation and letter to Shareholders dated January 6, 2003 (File No. 0-20805)
|(14) |  | Incorporated herein by reference to the Companys Report on Form 10-K/A for the year ended December 31,
2002 (File No. 0-20805)                                                                                                                                                                                   

34



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##### 



|     |  |                                                                                                                               
|---- |  | ------------------------------------------------------------------------------------------------------------------------------
|(15) |  | Incorporated herein by reference to the Companys Proxy
Statement on Schedule 14A filed on April 14, 2003
(File No. 000-20805)
|(16) |  | Incorporated herein by reference to the Companys Current Report on Form 8-K filed on September 4, 2002
(File No. 000-20805)  

(b)  Reports on Form 8-K.

Current Report on Form 8-K on July 3, 2003.

35



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##### 



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 14, 2003.

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


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