**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549




**FORM
      10-Q**




x
            Quarterly
                Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934.




For
      the
      period ended March 31, 2007




o
            Transition
                Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934.




For
      the
      transition period from ________ to _________.




*COMMISSION
      FILE NUMBER: 0-16128*




**TUTOGEN
      MEDICAL, INC.**


(Exact
      name of registrant as specified in its charter)





FLORIDA
            
            59-3100165(State
                of Incorporation)
            
            (IRS
                Employer Identification Number)





13709
      Progress Boulevard, Box 19, Alachua, Florida 32615


(Address
      of Principal Executive Offices)




Registrant's
      telephone number, including area code (386) 462-0402




Indicate
      by check mark whether the registrant: (1) filed all reports required to be
      filed
      by Section 13 or 15(d) of the Securities Exchange Act 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
o




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o No x




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
      Act).




Large
                  accelerated filer o
              Accelerated
                  filer o
              Non-accelerated
                  filer x




As
      of
      April 30, 2007 there were 18,644,897 shares outstanding of the issuer's Common
      Stock, par value $.01 per share.








**TUTOGEN
      MEDICAL, INC. AND SUBSIDIARIES**





INDEX





PART
                I.
            Page
                No.ITEM
                1.
            Financial
                Statements.Unaudited
                    - Condensed Consolidated Balance Sheets - March 31, 2007 and
                    September 30,
                    2006.
            1Unaudited
              - Condensed Consolidated Statements of Income (Loss) and Comprehensive
              Income for the three and six-monthsended
                        March 31, 2007 and March 31, 2006.
            2Unaudited
                    - Condensed ConsolidatedStatements of Cash Flows for the
                    six-months ended March 31, 2007 and 2006.
            3Unaudited
                    - Condensed ConsolidatedStatement of Shareholders’ Equity for the
                    six-months ended March 31, 2007.
            4Unaudited
                  - Notes to Condensed ConsolidatedFinancial
                  Statements.
            5ITEM
                2.
            Management's
                Discussion and Analysis of Financial Condition
                and Results of Operations.
            13ITEM
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            19ITEM
                4.
            Controls
                and Procedures
            19PART
                II.ITEM
                1.
            Legal
                Proceedings
            20ITEM
                2.
            Unregistered
                Sales of Equity Securities and Use
                of Proceeds
            20ITEM
                3.
            Defaults
                Upon Senior Securities
            20ITEM
                4.
            Submission
                of Matters to a Vote of Security-Holders
            20ITEM
                5.
            Other
                Information
            20ITEM
                6.
            Exhibits
            21SIGNATURES
            
            21  i


**PART
      I. FINANCIAL INFORMATION**




**ITEM
      1. FINANCIAL STATEMENTS.**




**TUTOGEN
      MEDICAL, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


(IN
      THOUSANDS EXCEPT FOR SHARE DATA)


(UNAUDITED)




**March
                  31**
              
              **September
                  30****2007**
              
              **2006****ASSETS****Current
                  Assets**Cash
                  and cash equivalents
              
              $
              3,626
              
              $
              3,463Accounts
                  receivable - net of allowance for doubtful accountsof
                  $625 at March 2007 and $483 at September 2006
              
              
              5,359
              
              
              6,202Inventories
                  - net
              
              
              17,132
              
              
              12,678Deferred
                  tax asset
              
              
              558
              
              
              471Prepaids
                  and other current assets
              
              
              883
              
              
              1,43627,558
              
              
              24,250**Property,
                  plant, and equipment - net**
              
              
              14,071
              
              
              12,940**Other
                  assets**
              
              
              415
              
              
              424**Deferred
                  tax asset**
              
              
              1,141
              
              
              1,303**TOTAL
                  ASSETS**
              
              $
              43,185
              
              $
              38,917**LIABILITIES
                  AND SHAREHOLDERS' EQUITY****Current
                  Liabilities**Accounts
                  payable
              
              $
              1,944
              
              $
              1,346Accrued
                  expenses and other current liabilities
              
              
              3,754
              
              
              4,314Accrued
                  commissions
              
              
              2,500
              
              
              1,918Short-term
                  borrowings
              
              
              6,760
              
              
              5,783Current
                  portion of deferred distribution fees
              
              
              1,611
              
              
              1,577Current
                  portion of long-term debt
              
              
              1,227
              
              
              1,09717,796
              
              
              16,035**Noncurrent
                  Liabilities**Other
                  noncurrent liabilities
              
              
              3,101
              
              
              3,988Long-term
                  debt
              
              
              3,290
              
              
              3,673Total
                  Liabilities
              
              
              24,187
              
              
              23,696Shareholders'
                  Equity :Common
                  stock, $0.01 par value, 30,000,000 authorized; 16,787,435
                  and16,197,235
                  issued and outstanding
              
              
              168
              
              
              162Additional
                  paid-in capital
              
              
              39,721
              
              
              37,751Accumulated
                  other comprehensive income
              
              
              2,904
              
              
              2,393Accumulated
                  deficit
              
              
              (23,795
              )
              
              (25,085
              )Total
                  shareholders' equity
              
              
              18,998
              
              
              15,221**TOTAL
                  LIABILITIES AND SHAREHOLDERS' EQUITY**
              
              $
              43,185
              
              $
              38,917





See
      accompanying Notes to Condensed Consolidated Financial Statements.





1





**TUTOGEN
      MEDICAL, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE
      INCOME**


(IN
      THOUSANDS EXCEPT PER SHARE DATA)


(UNAUDITED)




**Three
                    Months Ended**
                
                **Six
                    Months Ended****March
                    31**
                
                **March
                    31****2007**
                
                **2006**
                
                **2007**
                
                **2006**Revenue
                
                $
                13,017
                
                $
                9,115
                
                $
                24,480
                
                $
                17,149Cost
                    of revenue
                
                
                5,272
                
                
                4,017
                
                
                9,693
                
                
                7,346Gross
                    profit
                
                
                7,745
                
                
                5,098
                
                
                14,787
                
                
                9,803Operating
                    ExpensesGeneral
                    and administrative
                
                
                1,940
                
                
                1,592
                
                
                4,302
                
                
                3,254Distribution
                    and marketing
                
                
                3,963
                
                
                3,201
                
                
                7,405
                
                
                6,060Research
                    and development
                
                
                469
                
                
                443
                
                
                996
                
                
                870Total
                    Operating Expenses
                
                
                6,372
                
                
                5,236
                
                
                12,703
                
                
                10,184Operating
                    income (loss)
                
                
                1,373
                
                
                (138
                )
                
                2,084
                
                
                (381
                )Foreign
                    exchange loss
                
                
                (24
                )
                
                (146
                )
                
                (62
                )
                
                (28
                )Other
                    income (expense)
                
                
                38
                
                
                (7
                )
                
                72
                
                
                9Interest
                    (expense) income - net
                
                
                (370
                )
                
                100
                
                
                (644
                )
                
                21(356
                )
                
                (53
                )
                
                (634
                )
                
                2Income
                    (loss) before taxes
                
                
                1,017
                
                
                (191
                )
                
                1,450
                
                
                (379
                )Income
                    tax expense (benefit)
                
                
                87
                
                
                (213
                )
                
                160
                
                
                (320
                )Net
                    income (loss)
                
                $
                930
                
                $
                22
                
                $
                1,290
                
                $
                (59
                )Other
                    comprehensive incomeForeign
                    currency translation adjustments
                
                
                109
                
                
                399
                
                
                511
                
                
                196Comprehensive
                    Income
                
                $
                1,039
                
                $
                421
                
                $
                1,801
                
                $
                137Average
                    shares outstanding for basicearnings
                    per share
                
                
                16,701,082
                
                
                15,972,871
                
                
                16,543,882
                
                
                15,961,542Basic
                    earnings (loss) per share
                
                $
                0.06
                
                $
                0.00
                
                $
                0.08
                
                $
                (0.00
                )Average
                    shares outstanding for dilutedearnings
                    per share
                
                
                18,421,164
                
                
                16,538,916
                
                
                18,154,514
                
                
                15,961,542Diluted
                    earnings (loss) per share
                
                $
                0.05
                
                $
                0.00
                
                $
                0.07
                
                $
                (0.00
                )See
                    accompanying Notes to Consolidated Financial Statements


See
      accompanying Notes to Condensed Consolidated Financial Statements.




2


**TUTOGEN
      MEDICAL, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


(IN
      THOUSANDS)


(UNAUDITED)




**Six
                  Months Ended****March
                  31****2007**
              
              
              **2006**Cash
                  flows provided by (used in) operating activitiesNet
                  income (loss)
              
              $
              1,290
              
              $
              (59
              )Adjustments
                  to reconcile net income (loss) to net cashprovided
                  by (used in) operating activities:Depreciation
                  and amortization
              
              
              822
              
              
              257Amortization
                  of deferred distribution fees revenue
              
              
              (785
              )
              
              (271
              )Amortization
                  of debt discount and debt issuance costs
              
              
              289
              
              
              -Reserve
                  for bad debt
              
              
              195
              
              
              -Provision
                  for inventory write-downs
              
              
              133
              
              
              105Share-based
                  compensation
              
              
              573
              
              
              235Deferred
                  income taxes
              
              
              161
              
              
              (334
              )Changes
                  in assets and liabilities:Accounts
                  receivable
              
              
              771
              
              
              (787
              )Inventories
              
              
              (4,315
              )
              
              (1,916
              )Other
                  assets
              
              
              584
              
              
              (379
              )Accounts
                  payable and other accrued expenses
              
              
              (257
              )
              
              (455
              )Accrued
                  commissions
              
              
              582
              
              
              28Deferred
                  distribution fees
              
              
              -
              
              
              1,650Net
                  cash provided by (used in) operating activities
              
              
              43
              
              
              (1,926
              )Cash
                  flows used in investing activitiesChange
                  in restricted cash
              
              
              -
              
              
              (892
              )Deposits
                  on purchase of property and equipment
              
              
              -
              
              
              (386
              )Purchase
                  of property and equipment
              
              
              (1,454
              )
              
              (2,964
              )Net
                  cash used in investing activities
              
              
              (1,454
              )
              
              (4,242
              )Cash
                  flows provided by (used in) financing activitiesIssuance
                  of common stock
              
              
              1,403
              
              
              286Debt
                  issuance costs
              
              
              (152
              )
              
              -Proceeds
                  from long-term borrowings
              
              
              -
              
              
              3,120Change
                  in short-term borrowings
              
              
              843
              
              
              1,394Repayment
                  of long-term debt
              
              
              (519
              )
              
              (85
              )Net
                  cash provided by financing activities
              
              
              1,575
              
              
              4,715Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              (1
              )
              
              196Net
                  increase (decrease) in cash and cash equivalents
              
              
              163
              
              
              (1,257
              )Cash
                  and cash equivalents at beginning of period
              
              
              3,463
              
              
              3,562Cash
                  and equivalents at end of period
              
              $
              3,626
              
              $
              2,305Supplemental
                  cash flow disclosuresInterest
                  paid
              
              $
              295
              
              $
              147Income
                  taxes paid
              
              $
              8
              
              $
              -


See
        accompanying Notes to Condensed Consolidated Financial Statements.
  3
 **TUTOGEN
        MEDICAL, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY**
 **SIX-MONTHS
        ENDED MARCH 31, 2007**
 (Unaudited)
  (In
          Thousands, Except for Share Data)
 **Common**
                  **Stock
                    ($.01**
                  **Par)**
                
                **Additional**
                  **Paid
                    In**
                  **Capital**
                
                **Accumulated
                    Other Comprehensive Income (1)**
                
                **Accumulated**
                  **Deficit**
                
                **Total**
                
                **Common
                    Shares Issued and Outstanding**BALANCE,
                    SEPTEMBER 30, 2006
                
                $
                162
                
                $
                37,751
                
                $
                2,393
                
                $
                (25,085
                )
                $
                15,221
                
                
                16,197,235Stock
                    issued on exercise of options
                
                
                6
                
                
                1,397
                
                
                -
                
                
                -
                
                
                1,403
                
                
                590,200Share-based
                    compensation
                
                
                -
                
                
                573
                
                
                -
                
                
                -
                
                
                573
                
                
                -Net
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                1,290
                
                
                1,290
                
                
                -Foreign
                    currency translation adjustment
                
                
                -
                
                
                -
                
                
                511
                
                
                -
                
                
                511
                
                
                -BALANCE,
                    MARCH 31, 2007
                
                $
                168
                
                $
                39,721
                
                $
                2,904
                
                $
                (23,795
                )
                $
                18,998
                
                
                16,787,435(1)
                    Represents foreign currency translation
                    adjustments.





See
        accompanying Notes to Condensed Consolidated Financial
        Statements.




4




**TUTOGEN
      MEDICAL, INC. AND SUBSIDIARIES**


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      THREE AND SIX-MONTH PERIODS ENDED MARCH 31, 2007 AND 2006


(UNAUDITED)


(IN
      THOUSANDS, EXCEPT FOR SHARE DATA)






1.
      OPERATIONS AND ORGANIZATION




Tutogen
      Medical, Inc. with its consolidated subsidiaries (the "Company") processes,
      manufactures and distributes worldwide, specialty surgical products and performs
      tissue processing services for neuro, orthopedic, reconstructive and general
      surgical applications. The Company's core business is processing human donor
      tissue, utilizing its patented TUTOPLAST(R) process, for distribution to
      hospitals and surgeons. The Company processes at its two manufacturing
      facilities in Germany and the United States and distributes its products and
      services to over 20 countries worldwide.




2.
      BASIS
      OF PRESENTATION




The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in conformity with accounting principles generally accepted in the
      United States of America for interim financial reporting. In the opinion of
      management, all adjustments necessary in order to make the financial statements
      not misleading have been made. Operating results for the three and six-month
      periods ended March 31, 2007 are not necessarily indicative of the results
      which
      may be expected for the fiscal year ending September 30, 2007. The interim
      financial statements should be read in conjunction with the audited consolidated
      financial statements of the Company included in the Company's Annual Report
      on
      Form 10-K for the year ended September 30, 2006. Certain reclassifications
      have
      been made to the prior financial statements to conform to the current
      presentation, including reclassing certain insurance premium costs previously
      expensed in cost of revenue to general and administrative expenses, and
      splitting out the previous balance sheet line item accounts payable and other
      accrued expenses into separate line items of accounts payable and accrued
      expenses and other current liabilities.




3.
      NEW
      ACCOUNTING PRONOUNCEMENTS




In
      June
      2006, the FASB issued FASB Interpretation ("FIN") No. 48 “ *Accounting
      for Uncertainty in Income Taxes”.* This
      interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an enterprise's financial statements in accordance with SFAS
      No.
      109. This interpretation prescribes a recognition threshold and measurement
      attribute for the financial statement recognition and measurement of a tax
      position taken or expected to be taken in a tax return. Under this
      interpretation, the evaluation of a tax position is a two-step process. First,
      the enterprise determines whether it is more-likely-than-not that a tax position
      will be sustained upon examination, based on the technical merits of the
      position. The second step is measuring the benefit to be recorded from tax
      positions that meet the more-likely-than-not recognition threshold, whereby
      the
      enterprise determines the largest amount of tax benefit that is greater than
      50
      percent likely of being realized upon ultimate settlement, and recognizes that
      benefit in its financial statements. FIN No.
      48 also provides guidance on recognition, classification, interest and
      penalties, accounting in interim periods, disclosure and transition. FIN No.
      48
      is effective for fiscal years beginning after December 15, 2006. Management
      has
      not yet determined the impact this pronouncement will have on the Company's
      financial statements.




In
      September 2006, the FASB issued SFAS No. 157, “ *Fair
      Value Measurements”* .
      This
      standard defines fair value, establishes a framework for measuring fair value
      in
      accounting principles generally accepted in the United States ("GAAP"), and
      expands disclosures about fair value measurements. This standard is effective
      for financial statements issued for fiscal years beginning after November 15,
      2007. The Company is currently evaluating the requirements of SFAS No. 157
      and
      has not yet determined the impact on the Company's financial
      statements.




In
      September 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 108,
“ *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements”* SAB
      No.
      108 eliminates the diversity of practice surrounding how public companies
      quantify financial statement misstatements. It establishes an approach that
      requires quantification of financial statement misstatements based on the
      effects of the misstatements on each of the Company's financial statements
      and
      the related financial statement disclosures. SAB No. 108 must be applied to
      annual financial statements for their first fiscal year ending after November
      15, 2006. Management does not believe the adoption of this standard will have
      a
      material impact on the Company's financial statements.




5


In
      February 2007, the FASB issued SFAS No. 159, “ *The
      Fair Value Option for Financial Assets and Financial
      Liabilities”* (“SFAS
      159”).  SFAS 159 allows entities the option to measure eligible financial
      instruments at fair value as of specified dates.  Such election, which may
      be applied on an instrument by instrument basis, is typically irrevocable once
      elected.  SFAS 159 is effective for fiscal years beginning after November
      15, 2007, and early adoption is allowed under certain circumstances.  The
      Company is in the process of evaluating the financial impact of adopting SFAS
      159.




4.
      STOCK-BASED AWARDS




The
      Company maintains the 1996 Stock Option Plan (the "Plan") (4,000,000 shares
      authorized) under which incentive and nonqualified options have been granted
      to
      employees, directors and certain key affiliates. Under the Plan, options may
      be
      granted at not less than the fair market value on the date of grant. Options
      may
      be subject to a vesting schedule and expire four, five or ten years from grant.
      This plan remains in effect for all options issued during its life.




The
      Plan
      was superseded by the Tutogen Medical Inc. Incentive and Non-Statutory Stock
      Option Plan (the "New Plan") (1,000,000 shares authorized), adopted by the
      Board
      of Directors on December 5, 2005 and ratified by the shareholders on March
      13,
      2006. On March 19, 2007, the shareholders approved increasing the shares
      authorized under the New Plan from 1,000,000 to 1,500,000. Under the New Plan,
      options may be granted at not less than the fair market value on the date of
      grant. Options may be subject to a vesting schedule and expire four, five or
      ten
      years from grant.




Effective
      October 1, 2005, the Company adopted the provisions of SFAS No. 123(R)
“ *Share
      Based Payment”,* which
      establishes the financial accounting and reporting standards for stock-based
      compensation plans. SFAS No. 123(R) requires the measurement and recognition
      of
      compensation expense for all stock-based awards made to employees and directors.
      Under the provisions of SFAS No. 123(R), stock-based compensation cost is
      measured at the grant date, based on the calculated fair value of the award,
      and
      is recognized as an expense over the requisite service period of the entire
      award (generally the vesting period of the award).




The
      Company elected to use the modified prospective transition method as permitted
      by SFAS No. 123(R) and, therefore, financial results for prior periods have
      not
      been restated. Under this transition method, stock-based compensation expense
      for the three and six-month periods ended March 31, 2007 includes expense for
      all equity awards granted prior to, but not yet vested as of October 1, 2005,
      based on the grant date fair value estimated in accordance with the original
      provisions of SFAS No. 123, “*Accounting
      for Stock-Based Compensation”*as
      amended by SFAS No. 148, “*Accounting
      for Stock-Based Compensation - Transition and Disclosure”*.
      Since
      the adoption of SFAS No. 123(R), there have been no changes to the Company's
      stock compensation plans or modifications to outstanding stock-based awards
      which would increase the value of any awards outstanding. Compensation expense
      for all stock-based compensation awards granted subsequent to October 1, 2005
      was based on the grant-date fair value determined in accordance with the
      provisions of SFAS No. 123(R). During the three and six-month periods ended
      March 31, 2007, the Company recognized compensation expense of $159 and $573,
      respectively relating to stock options granted, in addition to the vesting
      of
      options outstanding as of October 1, 2005. All such expense was recognized
      within "General and administrative expense" in the Statement of Income (Loss)
      and Comprehensive Income. There were no significant capitalized stock-based
      compensation costs at March 31, 2007.




The
      fair
      value of each stock option grant is estimated on the grant date using the
      Black-Scholes option-pricing model with the following
      assumptions:




**Three
                  Months Ended March 31,**
              
              **Six
                  Months Ended March 31,****2007**
              
              **2006**
              
              **2007**
              
              **2006**Expected
                  volatility
              
              
              51.72%
              
              
              54.30%
              
              
              52.07%
              
              
              50.24%Risk-free
                  interest rate (range)
              
              
              4.5%
              
              
              4
                  - 4.1%
              
              
              4.5
                  - 4.7%
              
              
              4
                  -4.1%Expected
                  term (in years)
              
              
              5
              
              
              5
              
              
              5
              
              
              5




EXPECTED
      VOLATILITY. The Company's methodology for computing the expected volatility
      is
      based on the Company's historical volatility, taking into account the expected
      term of the option.




6




EXPECTED
      TERM. The expected term is based on employee exercise patterns during the
      Company's history and expectations of employee exercise behavior in the future
      giving consideration to the contractual terms of the stock-based
      awards.




RISK-FREE
      INTEREST RATE. The interest rate used in valuing awards is based on the yield
      at
      the time of grant of a U.S. Treasury security with an equivalent remaining
      term.




DIVIDEND
      YIELD. The Company has never paid cash dividends, and does not currently intend
      to pay cash dividends, and thus has assumed a 0% dividend yield.




PRE-VESTING
      FORFEITURES. Estimates of pre-vesting option forfeitures of 10% are based on
      Company experience and industry trends. The Company will adjust its estimate
      of
      forfeitures over the requisite service period based on the extent to which
      actual forfeitures differ, or are expected to differ, from such estimates.
      Changes in estimated forfeitures will be recognized through a cumulative
      catch-up adjustment in the period of change and will also impact the amount
      of
      compensation expense to be recognized in future periods.




Presented
      below is a summary of the activity of the Company's stock options for the fiscal
      year ended September 30, 2006 and the six-month period ended March 31, 2007,
      and
      related transactions for the six-month period ended:




**Number
                  of**
                **Stock
                  Options**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**
              
              **Weighted**
                **Average**
                **Remaining**
                **Contractual**
                **Term**Outstanding
                  at September 30, 2005
              
              
              2,481,368
              
              $
              2.64
              
              
              5.1Granted
              
              
              125,000
              
              
              3.34
              
              
              10.0Canceled
              
              
              (103,225
              )
              
              3.84
              
              
              -Exercised
              
              
              (264,275
              )
              
              2.45
              
              
              -Outstanding
                  at September 30, 2006
              
              
              2,238,868
              
              $
              2.64
              
              
              5.3Granted
              
              
              522,500
              
              
              6.46
              
              
              10.0Canceled
              
              
              (51,000
              )
              
              5.59
              
              
              -Exercised
              
              
              (590,200
              )
              
              2.36
              
              
              -Outstanding
                  at March 31, 2007
              
              
              2,120,168
              
              $
              3.55
              
              
              6.0Vested
                  at March 31, 2007
              
              
              1,437,418
              
              $
              2.90
              
              
              4.5Vested
                  or expected to vest at March 31, 2007
              
              
              1,908,151
              
              $
              3.55
              
              
              6.0




The
      weighted average fair value of options granted during the six-month period
      ended
      March 31, 2007 and the fiscal year ended September 30, 2006 was $3.27 and $1.62,
      respectively. The aggregate intrinsic value of options exercised during the
      six-month period ended March 31, 2007 was $2,509.




As
      of
      March 31, 2007, there were 927,500 stock options available for grant under
      the
      New Plan. The following table provides information about stock options
      outstanding and exercisable at March 31, 2007:




Options
                  Outstanding
              
              Options
                  ExercisableRange
                  of Exercise Prices
              
              
              Options
                Outstanding
              
              
              Weighted
                Average
                Remaining
                  Contractual
                Life
                  In Years
              
              
              Weighted
                Average
                Exercise
                  Price
              
              
              Aggregate
                Intrinsic
                Value
              
              
              Options
                Exercisable
              
              
              Weighted
                Average
                Exercise
                Price
              
              
              Aggregate
                Intrinsic
                Value$0.94
                  to $1.25
              
              
              234,600
              
              
              2.4
              
              $
              0.95
              
              $
              1,745
              
              
              234,600
              
              $
              0.95
              
              $
              1,745$1.56
                  to $2.22
              
              
              216,568
              
              
              1.7
              
              
              1.75
              
              
              1,439
              
              
              209,068
              
              
              1.73
              
              
              1,392$2.28
                  to $3.62
              
              
              879,200
              
              
              6.5
              
              
              2.83
              
              
              4,887
              
              
              667,950
              
              
              2.85
              
              
              3,701$3.95
                  to $5.98
              
              
              294,400
              
              
              6.0
              
              
              4.41
              
              
              1,171
              
              
              200,150
              
              
              4.47
              
              
              784$6.01
                  to $8.55
              
              
              495,400
              
              
              8.7
              
              
              6.33
              
              
              1,019
              
              
              125,650
              
              
              6.29
              
              
              264Totals
              
              
              2,120,168
              
              
              6.0
              
              $
              3.55
              
              $
              10,261
              
              
              1,437,418
              
              $
              2.90
              
              $
              7,886




As
      of
      March 31, 2007, there was $1,239 of total unrecognized compensation cost related
      to nonvested stock options that is expected to be recognized over a
      weighted-average period of 2.03 years.




7




5.
      INVENTORIES




Major
      classes of inventory were as follows:




March
                  31,
              
              September
                  30,2007
              
              2006Raw
                  materials
              
              $
              3,385
              
              $
              2,017Work
                  in process
              
              
              8,521
              
              
              5,811Finished
                  goods
              
              
              5,226
              
              
              4,850$
              17,132
              
              $
              12,678







The
      increase in inventory from September 30, 2006 to March 31, 2007 was primarily
      due to higher inventory levels to support increased demand for dental products,
      the buildup of new products introduced in the spine market and the new markets
      of hernia repair and breast reconstruction.




6.
      INCOME
      TAXES




As
      of
      March 31, 2007, the Company has approximately $10,387 of federal net operating
      loss carry forwards expiring beginning in 2008, a $29 AMT credit carry forward,
      and a $21 credit on research and development that will expire in 2013 if unused.
      The Company also has state net operating loss carry forwards of approximately
      $9,890 that will begin to expire in 2007.




As
      of
      March 31, 2007, the Company has a corporate net operating loss carry forward
      for
      German income tax purposes of approximately $3,623 (2,717 Euros), and a trade
      net operating loss carry forward for German income tax purposes of approximately
      $1,502 (1,127 Euros), both of which can be carried forward indefinitely. The
      Company continually reviews the adequacy and necessity of the valuation
      allowance in accordance with the provisions of SFAS No. 109, *“Accounting
      for Income Taxes”* .
      As of
      March 31, 2007, the Company has recorded a valuation allowance on deferred
      tax
      assets related to its U.S. operations. The Company does not maintain a valuation
      allowance on its international deferred tax assets, because management believes
      it is more likely than not that these tax benefits will be realized through
      the
      generation of future international taxable income.




Historically,
      the Company has not recorded deferred income taxes on the undistributed earnings
      of its foreign subsidiaries because it is management's intent to indefinitely
      reinvest such earnings. During the 2006 fiscal year, the Company reduced certain
      intercompany accounts, requiring the utilization of some undistributed earnings
      of its German subsidiary. The resulting tax was absorbed by the utilization
      of
      net operating loss carryforwards.




Going
      forward, the Company does not intend to record deferred income taxes on future
      undistributed earnings of its foreign subsidiaries because it is management's
      intent to indefinitely reinvest such earnings. Upon distribution of these
      earnings, the Company may be subject to U.S. income taxes and/or foreign
      withholding taxes.




7.
      SEVERANCE COSTS




During
      the year ended September 30, 2006, the Company accrued compensation expense
      of
      $437 for severance costs upon the termination of the Managing Director of the
      Company's German subsidiary. These costs are a component of general and
      administrative expenses in the accompanying Condensed Consolidated Statements
      of
      Income (Loss) and Comprehensive Income, and the accrual for these costs is
      included in Accrued expenses and other current liabilities in the accompanying
      Condensed Consolidated Balance Sheets. These severance costs are being paid
      in
      twelve monthly equal payments during the period from July 1, 2006 through June
      30, 2007. As of September 30, 2006 and March 31, 2007, the remaining accrual
      is
      $334 and $126, respectively.




8.
      REVOLVING CREDIT ARRANGEMENTS AND SHORT TERM BORROWINGS




Under
      the
      terms of revolving credit facilities with two German banks, the Company may
      borrow up to 1,500 Euros (1,000 Euros and 500 Euros, respectively) or
      approximately $2,000 for working capital needs. These renewable credit lines
      allow the Company to borrow at interest rates ranging from 8.05% to 10.0%.
      At
      March 31, 2007, the Company had outstanding borrowings of 1,448 Euros or $1,931.
      At September 30, 2006, the Company had 819 Euros or $1,039 outstanding
      borrowings under the revolving credit agreements. The 500 Euro revolving credit
      facility is secured by accounts receivable of the German subsidiary. The 1,000
      Euros revolving credit facility is collateralized by a mortgage on the Company's
      German facility and a guarantee up to 4,000 Euros or $5,334 by the Parent
      Company.




8




In
      November 2005, the Company entered into a revolving credit facility in the
      U.S.
      for up to $1,500, expiring on November 18, 2007. At March 31, 2007, the interest
      rate on this credit facility was 8.1%. At March 31, 2007, the Company had
      outstanding $1,500 on this credit facility to fund working capital needs. At
      September 30, 2006, the Company had $1,500 outstanding under this revolving
      credit facility. The U.S. accounts receivable and inventory assets collateralize
      the borrowing under the revolving credit facility. The Company is required
      to
      maintain a maximum senior debt to tangible net worth ratio of 2.0 to 1.0. As
      of
      March 31, 2007, the Company was in compliance with this covenant. In addition,
      the Company maintains a lock box arrangement with the bank.




On
      June
      30, 2006, the Company issued a $3,000 convertible debenture with detachable
      warrants to purchase up to 175,000 shares of its common stock. The debenture
      bears interest at 5.0% per year, is due upon the earlier of August 1, 2007
      or
      upon a change of control of the Company and is convertible into common stock
      at
      a price of $5.15 per share at any time at the election of the holder. The
      warrants are exercisable at $5.15 per share at any time at the election of
      the
      shareholder until the earlier of the third anniversary of the date of issuance
      or upon a change in control of the Company. On March 27, 2007, the warrant
      agreement was amended to provide that the warrant holder has no cash settlement
      rights under any circumstances. The convertible debt is included in short-term
      borrowings on the Condensed Consolidated Balance Sheet at March 31, 2007. As
      of
      March 31, 2007, the Company was in compliance with the terms and conditions
      of
      the convertible debenture. On April 19, 2007, the holder of the $3,000 of
      convertible debentures requested to convert $1,288 of the debentures into
      250,000 shares of common stock at the stated conversion price of $5.15. On
      May
      8, 2007, the holder requested to convert an additional $772 of the debentures
      into 150,000 shares of common stock at the stated conversion price of $5.15.




Under
      the
      Registration Rights Agreement, which requires common shares to be registered
      for
      the convertible debenture and warrants, the Company was required to file a
      Form
      S-1 registration statement with the United States Securities and Exchange
      Commission (“S-1”) the earlier of the day following the filing of the Company’s
      10-K or December 31, 2006. The Company was then required to have the shares
      registered within 60 days of the filing date of the S-1. In March 2007, the
      Securities and Exchange Commission approved the registration of the
      shares.




The
      relative fair value of the detachable warrants at inception of the convertible
      debenture agreement was $275 and was computed using the Black-Scholes pricing
      model under the following assumptions: (1) expected life of 3 years; (2)
      volatility of 53.5%, (3) risk free interest of 5.13% and dividend yield of
      0%.
      The proceeds of the convertible debenture were allocated to debt and warrants
      based on their relative fair values. The relative fair value of the warrants
      was
      recorded to additional paid-in capital and resulted in a discount on the
      convertible debenture, which will be amortized from debt discount to interest
      expense over the one-year term
      of
      the debenture. The remaining unamortized balance of the warrants as of March
      31,
      2007 is $69. The convertible debenture balance of $2,931 and $2,793 as of March
      31, 2007 and September 30, 2006, respectively, net of debt discount, is included
      in Short-term borrowings on the accompanying Condensed Consolidated Balance
      Sheets. In addition, $357 of direct costs incurred relating to the issuance
      of
      the convertible debenture was recorded as debt issuance costs in Other current
      assets, which is being amortized to interest expense through August 1,
      2007.




9.
      DERIVATIVE INSTRUMENTS




The
      Company accounts for its hedging activities in accordance with SFAS No. 133, *“Accounting
      for Derivatives and Hedging Activities”* as
      amended. SFAS No. 133 requires that all hedging activities be recognized in
      the
      balance sheet as assets or liabilities and be measured at fair value. Gains
      or
      losses from the change in fair value of hedging instruments that qualify for
      hedge accounting are recorded in other comprehensive income. The Company's
      policy is to specifically identify the assets, liabilities or future commitments
      being hedged and monitor the hedge to determine if it continues to be effective.
      The Company does not enter into or hold derivative instruments for trading
      or
      speculative purposes. The fair value of the Company's interest rate swap
      agreement for its 1,500 Euro ($2,000) long-term loan is based on dealer quotes
      and was not significant as of March 31, 2007. The loan is due on March 30,
      2012
      in monthly installments of approximately 63 Euros or $83 including principal
      and
      interest based on an adjustable rate as determined by one-month EURIBOR, fixed
      by a swap agreement for the life of the loan with the lender at 3.7% as a cash
      flow hedge. The proceeds were used to construct new facilities.




As
      indicated in Note 8, on June 30, 2006, the Company issued a $3,000 convertible
      debenture which contained features that qualify as embedded derivatives that
      require bifurcation, however, the value ascribed to these features was
      determined to be de-minimus to the overall financial statement presentation
      and
      accordingly, value was not allocated to these features and the carrying value
      of
      the convertible debenture was not reduced. As of March 31, 2007, the estimated
      change in the fair values of these features remained a de-minimus
      amount.




9




10.  SEGMENT
      DATA




The
      Company operates principally in one industry providing specialty surgical
      products and tissue processing services. These operations include two
      geographically determined segments: the United States and International. The
      Company evaluates performance based on the operating income of each segment.
      The
      accounting policies of these segments are consistent with prior periods. The
      Company accounts for intersegment sales and transfers at contractually
      agreed-upon prices.




The
      Company's reportable segments are strategic business units that offer products
      and services to different geographic markets. They are managed separately
      because of the differences in these markets as well as their physical
      location.




A
      summary
      of the operations and assets by segment are as follows:







**Three
                  Months Ended March 31, 2007**
              
              **Three
                  Months Ended March 31, 2006****United**
              
              
              
              
              
              **United****International**
              
              **States**
              
              **Total**
              
              **International**
              
              **States**
              
              **Total**Gross
                  revenue
              
              $
              5,103
              
              $
              9,352
              
              $
              14,455
              
              $
              3,742
              
              $
              5,973
              
              $
              9,715Less:
                  Intercompany
              
              
              (1,438
              )
              
              -
              
              
              (1,438
              )
              $
              (600
              )
              $
              -
              
              $
              (600
              )Total
                  revenue - third party
              
              $
              3,665
              
              $
              9,352
              
              $
              13,017
              
              $
              3,142
              
              $
              5,973
              
              $
              9,115Operating
                  income (loss)
              
              $
              263
              
              $
              1,110
              
              $
              1,373
              
              $
              (47
              )
              $
              (91
              )
              $
              (138
              )Interest
                  expense (income)
              
              $
              90
              
              $
              280
              
              $
              370
              
              $
              (17
              )
              $
              (83
              )
              $
              (100
              )Income
                  tax expense (benefit)
              
              $
              87
              
              $
              -
              
              $
              87
              
              $
              (213
              )
              $
              -
              
              $
              (213
              )Net
                  income (loss)
              
              $
              91
              
              $
              840
              
              $
              930
              
              $
              (5
              )
              $
              27
              
              $
              22Capital
                  expenditures
              
              $
              346
              
              $
              158
              
              $
              504
              
              $
              218
              
              $
              2,192
              
              $
              2,410Identifiable
                  assets
              
              $
              19,327
              
              $
              23,858
              
              $
              43,185
              
              $
              17,589
              
              $
              14,842
              
              $
              32,431**Six
                  Months Ended March 31, 2007**
              
              
              **Six
                  Months Ended March 31, 2006****United**
              
              
              
              
              
              
              
              
              **United****International**
              
              
              **States**
              
              
              **Total**
              
              
              **International**
              
              
              **States**
              
              
              **Total**Gross
                  Revenue
              
              $
              10,134
              
              $
              17,485
              
              $
              27,619
              
              $
              7,558
              
              $
              11,382
              
              $
              18,940Less:
                  Intercompany
              
              
              (3,139
              )
              
              -
              
              
              (3,139
              )
              
              (1,791
              )
              
              -
              
              
              (1,791
              )Total
                  Revenue - third party
              
              $
              6,995
              
              $
              17,485
              
              $
              24,480
              
              $
              5,767
              
              $
              11,382
              
              $
              17,149Operating
                  income (loss)
              
              $
              534
              
              $
              1,550
              
              $
              2,084
              
              $
              177
              
              $
              (558
              )
              $
              (381
              )Interest
                  expense (income)
              
              $
              138
              
              $
              506
              
              $
              644
              
              $
              12
              
              $
              (33
              )
              $
              (21
              )Income
                  tax expense (benefit)
              
              $
              160
              
              $
              -
              
              $
              160
              
              $
              (320
              )
              $
              -
              
              $
              (320
              )Net
                  income (loss)
              
              $
              241
              
              $
              1,049
              
              $
              1,290
              
              $
              137
              
              $
              (196
              )
              $
              (59
              )Capital
                  expenditures
              
              $
              1,123
              
              $
              331
              
              $
              1,454
              
              $
              606
              
              $
              2,358
              
              $
              2,964Identifiable
                  assets
              
              $
              19,327
              
              $
              23,858
              
              $
              43,185
              
              $
              17,589
              
              $
              14,842
              
              $
              32,431








10





11.
      EARNINGS (LOSS) PER SHARE




The
      following is a reconciliation of the numerators and denominators of the basic
      and diluted earnings (loss) per share computations for the three and six-month
      periods ended March 31, 2007 and 2006 (in thousands, except share and per share
      amounts). The Company has excluded 90,400 stock options for the three and
      six-month periods ended March 31, 2007, as such stock options are anti-dilutive
      to the calculation. The Company has excluded 387,960 and 2,485,000 stock options
      for the three and six-month periods ended March 31, 2006, respectively, as
      such
      shares are anti-dilutive to the calculation.




**Three
                  Months Ended**
              
              **Six
                  Months Ended****March
                  31,**
              
              **March
                  31,****2007**
              
              **2006**
              
              **2007**
              
              **2006**NumeratorNet
                  Income (loss)
              
              $
              930
              
              $
              22
              
              $
              1,290
              
              $
              (59
              )DenominatorWeighted-average
                  shares of common stock outstandingused
                  in calculation of basic earnings per share
              
              
              16,701,082
              
              
              15,972,871
              
              
              16,543,882
              
              
              15,961,542Effect
                  of dilutive securiitesStock
                  options, warrants and convertible debentures
              
              
              1,720,083
              
              
              566,045
              
              
              1,610,632
              
              
              -Weighted-average
                  shares of common stock outstandingused
                  in calculation of diluted earnings per share
              
              
              18,421,164
              
              
              16,538,916
              
              
              18,154,514
              
              
              15,961,542Basic
                  earnings per share
              
              $
              0.06
              
              $
              0.00
              
              $
              0.08
              
              $
              (0.00
              )Diluted
                  earnings per share
              
              $
              0.05
              
              $
              0.00
              
              $
              0.07
              
              $
              (0.00
              )





12. LEGAL
      PROCEEDINGS




The
      Company is party to various claims, legal actions, complaints and administrative
      proceedings arising in the ordinary course of business. In management's opinion,
      the ultimate disposition of these matters will not have a material adverse
      effect on its financial condition, cash flows or results of operations.




In
      2003,
      the Company received a proposed judgment in Germany as the result of a dispute
      between the Company and a former international distributor. The estimated
      settlement, including legal costs was accrued as a litigation contingency.
      In
      2004, a decision by the court of appeal in Germany has resulted in a reduction
      of the original proposed judgment received against the Company by $406 between
      the Company and a former international distributor. At September 30, 2005,
      the
      Company maintained an accrual of $476 with respect to the remaining appeal
      and
      legal costs. At September 30, 2006, the Company agreed to a settlement of $360
      resulting from a dispute between the Company and a former international
      distributor and recorded a change in estimate of approximately $91 as a
      reduction of accrued expenses, which reduced the general and administrative
      expense for the year. In the second quarter of 2007, the remaining accrual
      of
      $25 was reversed, which reduced general and administrative expenses for the
      three and six-month periods ended March 31, 2007.




On
      October 12, 2005, the Company issued a voluntary recall of all product units
      which utilized donor tissue received from BioMedical Tissue Services/BioTissue
      Recovery Services ("BioMedical"). This action was taken because the Company
      was
      unable to satisfactorily confirm that BioMedical had properly obtained donor
      consent. The Company quarantined all BioMedical products in its inventory,
      having a value of $1,035 and notified all customers and distributors of record
      regarding this action. In connection with the recall, the Company wrote off
      $174
      of inventory during 2005, and reserved $861for quarantined inventory, which
      was
      written off at September 30, 2006. Additionally, as of September 30, 2005,
      the
      Company had accrued $250 of related costs in connection with the recall. As
      of
      March 31, 2007, the accrual for these costs was $0, due in part to actual
      payments made for such costs and in part to an adjustment made by management
      during the three-months ended March 31, 2006 to reduce the accrual by
      approximately $150 as a result of a change in management's estimate of other
      related costs. The effect of this adjustment was to reduce cost of revenue
      by
      approximately $150.




In
      January 2006, the Company was named as one of several defendants in a class
      action suit related to the BioMedical recall. The Company intends to vigorously
      defend this matter and does not believe that the outcome of this class action
      will have an adverse material effect on the Company’s operations, cash flows,
      financial position or financial statement disclosures.





11







13.
      RELATED PARTY TRANSACTIONS




The
      Company has an exclusive license and distribution agreement with Zimmer Spine,
      a
      wholly owned subsidiary of Zimmer Holdings, Inc., whereby Zimmer Spine has
      been
      granted the right to act as the Company's exclusive distributor of bone tissue
      for spinal applications in the United States.




The
      Company has also engaged Zimmer Dental, a wholly owned subsidiary of Zimmer
      Holdings, Inc., to act as an exclusive distributor for the Company's bone tissue
      for dental applications in the United States and certain international markets.
      Under this distribution agreement, the Company ships directly to Zimmer Dental's
      customers.




The
      following represents a summary of the transactions with Zimmer Spine and Zimmer
      Dental during the periods:




**Three
                  Months Ended March 31,**
              
              **Six
                  Months Ended March 31,****2007**
              
              **2006**
              
              **2007**
              
              **2006**Zimmer
                  Spine - Sales
              
              $
              1,293
              
              $
              425
              
              $
              2,586
              
              $
              799Zimmer
                  Dental - Commissions Paid
              
              $
              2,160
              
              $
              1,793
              
              $
              4,077
              
              $
              3,358




As
      of
      March 31, 2007 and September 30, 2006, the net payable to Zimmer Dental was
      $2,263 and $1,918, respectively. As of March 31, 2007 and September 30, 2006,
      the receivable from Zimmer Spine was $275 and $952, respectively.




Zimmer
      CEP (formerly Centerpulse) USA Holding Co., a subsidiary of Zimmer Holdings,
      Inc., is a 32% owner of the Company's outstanding shares of common stock as
      of
      March 31, 2007.




14.
      SUBSEQUENT EVENTS




On
      April
      10, 2007, the Company entered into a Securities Purchase Agreement whereby
      the
      Company agreed to issue to three institutional investors 1,626,012 shares of
      common stock for gross proceeds of $12,000. The Company closed this transaction
      on April 19, 2007 with net proceeds of $11,500. In connection with the
      transaction, the Company entered into a Registration Rights Agreement, under
      which the Company agreed to file a Registration Statement with the Securities
      and Exchange Commission for the resale of common stock sold in the private
      placement by June 1, 2007. In the event that the registration statement is
      not
      declared effective within 90 days after April 19, 2007 (or 120 days after April
      19, 2007 if the Securities and Exchange Commission has written comments to
      the
      filed Registration Statement), the Company will be liable for cash damages
      of
      one percent (1%) of the aggregate purchase price for each monthly period or
      pro
      rata for any portion thereof following the date by when the registration
      statement should have been filed or declared effective.





12







**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF
      OPERATIONS (In Thousands)**




**CAUTIONARY
      STATEMENT REGARDING FORWARD LOOKING STATEMENTS**




The
      discussion contained in this report under Section 13 or 15(d) of the Securities
      Exchange Act of 1934, as amended (the "Exchange Act"), contains forward-looking
      statements that involve risks and uncertainties. The issuer's actual results
      could differ significantly from those discussed herein. Factors that could
      cause
      or contribute to such differences include, but are not limited to, those
      discussed in "Business" and "Management's Discussion and Analysis or Results
      of
      Operations" as well as those discussed elsewhere in this Report. Statements
      contained in this Report that are not historical facts are forward-looking
      statements that are subject to the safe harbor created by the Private Securities
      Litigation Reform Act of 1995. A number of important factors could cause the
      issuer's actual results for 2007 and beyond to differ materially from those
      expressed in any forward-looking statement made by or on behalf of the
      issuer.




**BUSINESS**




During
      the three-months ended March 31, 2007, the Company generated $13,017 in
      revenues, which represented the highest quarterly revenue in the Company's
      history. The Company continues to experience strong growth in U.S. dental sales.
      For the three-months ending March 31, 2007, U.S. dental sales totaled $6,244
      up
      44% from the same quarter last year. U.S. machined graft spine sales continued
      to grow during the quarter. The Company continued to grow the hernia market
      with
      Davol. Mentor plans to launch breast reconstruction dermis products to clinical
      sites by the second quarter. On May 9, 2007, the Company entered into an
      agreement with Coloplast Corporation to expand the urology business
      internationally. Management plans to expand the dental business internationally
      with Zimmer Dental during 2007.




The
      international operations continue to grow at double-digit growth patterns.
      In
      conjunction with this, the Company has completed the expansion of the physical
      plant in Neunkirchen, Germany in order to fully support the growing and
      important international segment.




Gross
      margins continue to improve due to further efficiencies in manufacturing and
      increased production volumes and the introduction of new products with higher
      margins.




As
      a
      result of increased revenues and improved gross margins, the Company generated
      net income for the quarter ending March 31, 2007, which represented the third
      consecutive quarterly profit .




The
      Company's ability to generate positive operational cash flow is dependent upon
      increasing revenues supported by increased tissue procurement, controlling
      costs
      and the development of additional markets and surgical applications worldwide.
      While the Company believes that it continues to make progress in these areas,
      there can be no assurances.







13





**RESULTS
      OF OPERATIONS**




**FOR
      THE THREE AND SIX-MONTHS ENDED MARCH 31, 2007 AND 2006**




**REVENUE**




An
      analysis of revenue was as follows:




**Three
                  Months Ended March 31,**
              
              **Six
                  Months Ended March 31,****2007**
              
              **2006**
              
              **Change**
              
              **2007**
              
              **2006**
              
              **Change**Dental
              
              $
              6,244
              
              $
              4,338
              
              
              44
              %
              $
              11,530
              
              $
              8,223
              
              
              40
              %Spine
              
              
              1,293
              
              
              425
              
              
              204
              %
              
              2,586
              
              
              799
              
              
              224
              %Surgical
                  Specialties
              
              
              1,816
              
              
              1,210
              
              
              50
              %
              
              3,369
              
              
              2,360
              
              
              43
              %**Total
                  U.S.**
              
              $
              9,353
              
              $
              5,973
              
              
              57
              %
              $
              17,485
              
              $
              11,382
              
              
              54
              %Germany
              
              $
              900
              
              $
              780
              
              
              15
              %
              $
              1,794
              
              $
              1,575
              
              
              14
              %France
              
              
              299
              
              
              560
              
              
              -47
              %
              
              701
              
              
              834
              
              
              -16
              %Rest
                  of World
              
              
              2,326
              
              
              1,675
              
              
              39
              %
              
              4,224
              
              
              3,105
              
              
              36
              %Other
                  - Distribution Fees
              
              
              139
              
              
              127
              
              
              9
              %
              
              276
              
              
              253
              
              
              9
              %**Total
                  International**
              
              $
              3,664
              
              $
              3,142
              
              
              17
              %
              $
              6,995
              
              $
              5,767
              
              
              21
              %**Total
                  Consolidated**
              
              $
              13,017
              
              $
              9,115
              
              
              43
              %
              $
              24,480
              
              $
              17,149
              
              
              43
              %


Revenue
      for the three and six-month periods ended March 31, 2007 increased over prior
      year periods by $3,902 and $7,331 million or 43%, respectively. U.S. revenues
      for the three and six-month periods ended March 31, 2007 increased by $3,380
      ($5,973 to $9,353) or 57% and $6,103 ($11,382 to $17,485) or 54%, respectively.
      The increase in U.S. revenues for both periods was fueled by the continuing
      increase in the demand for the Company's TUTOPLAST(R) bone products for dental
      applications sold by Zimmer Dental, the Company's distributor and increased
      demand for the Company’s new machined graft spinal products. As a result, spine
      revenues increased by $868 ($425 to $1,293) during the quarter compared to
      the
      same period last year. Surgical Specialties revenues (primarily urology,
      ophthalmology, hernia, breast reconstruction and ENT) for the three and
      six-month periods ended March 31, 2007 increased by $606 ($1,210 to $1,816)
      or
      50% and $1,009 ($2,360 to $3,369) or 43%, respectively, due to the new hernia
      and breast reconstruction products. International revenues for the three and
      six-month periods ended March 31, 2007 increased $522 ($3,142 to $3,664) or
      17%
      and $1,228 ($5,767 to $6,995) or 21%, respectively. The increases are primarily
      due to increased bovine product sales, dental sales and service processing
      in
      Germany and increased sales efforts by several key distributors in various
      countries. In addition, international revenues received a positive impact during
      the quarter due to the declining exchange rate of the U.S. dollar against the
      Euro. Sales in France were affected by a proposed change of management in
      France, which the Company is addressing **.**




**GROSS
      MARGIN**




Gross
      margins for three and six-month periods ended March 31, 2007 increased over
      prior year periods from 55.9% to 59.5% and from 57.2% to 60.4%, respectively.
      The higher margins were due to (1) efficiencies obtained from higher sales
      and
      increased production volumes; and (2) the introduction of new products with
      higher margins.




**GENERAL
      AND ADMINISTRATIVE**




General
      and administrative expenses for the three and six-month periods increased over
      prior year periods $348 ($1,592 to $1,940) and $1,048 ($3,254 to $4,302),
      respectively. The increase for the three-months ended March 31, 2007 was
      primarily due to the following: (1) an increase of $166 related to salary
      adjustments, recruiting and relocation costs necessary to attract and retain
      key
      management personnel and support overall company growth; (2) an increase of
      $64
      related to public relation expenses; (3) an increase of $58 related to product
      liability insurance due to increased sales volumes; and (4) an increase of
      $41
      related to consulting services for various projects. The increase for the
      six-months ended March 31, 2007 was primarily due to the following: (1) an
      increase of $337 in stock option expenses under the Statement of Financial
      Accounting Standards No. 123R associated with year end grants to employees
      and
      the Board of Directors for performance; (2) an increase of $167 for accounting
      and other professional costs associated with the Company’s year end 10-K filing;
      (3) an increase of $199 related to salary adjustments, recruiting and relocation
      costs necessary to attract and retain management personnel and support overall
      company growth; (4) an increase of $104 related to public relation expenses;
      (5)
      an increase of $97 related to product liability insurance due to increased
      sales
      volume; and (6) an increase of $79 related to consulting services for various
      projects. As a percentage of sales, general and administrative expenses declined
      from 17.5% to 14.9% for the three-months ended March 31, 2007 compared to the
      same period last year.




14




**DISTRIBUTION
      AND MARKETING**




Distribution
      and Marketing expenses for the three and six-month periods ended March 31,
      2007
      increased over prior year periods by $762 ($3,201 to $3.963) or 23.8% and $1,345
      ($6,060 to $7,405) or 22.2%, respectively. The increase was primarily due to
      higher marketing fees earned by Zimmer Dental of $696 ($1,798 to $2,494) for
      the
      quarter and $1,312 ($3,347 to $4,659) for the six-month period ended March
      31,
      2007. These increases are consistent with the overall increases in dental sales
      for the above referenced periods. As a percentage of sales, Distribution and
      Marketing expenses declined from 35.1% to 30.4% for the three-months ended
      March
      31, 2007 compared to the same period last year due to increased sales from
      our
      non-dental distribution partners.




**RESEARCH
      AND DEVELOPMENT**




Research
      and Development expenses for the three and six-month periods ended March 31,
      2007 increased over prior year periods by $26 or 5.9% and $126 or 14.5%,
      respectively. As a percentage of revenues, Research and Development expenses
      decreased from 5% to 4% for both periods in 2007 when compared to
      2006.




**LITIGATION
      CONTINGENCY**




In
      2004,
      a decision by the court of appeal in Germany has resulted in a reduction of
      the
      original proposed judgment received against the Company by $406 between the
      Company and a former international distributor. At September 30, 2005, the
      Company maintained an accrual of $476 with respect to the remaining appeal
      and
      legal costs. At September 30, 2006, the Company agreed to a settlement of $360
      resulting from a dispute between the Company and a former international
      distributor and recorded a change in estimate of approximately $91 as a
      reduction of accrued expenses, which reduced the general and administrative
      expense for the year. In
      the
      second quarter of 2007, the remaining accrual of $25 was reversed, which reduced
      general and administrative expenses for the three and six-month periods ended
      March 31, 2007.




**INTEREST
      EXPENSE**




Interest
      expense for the three and six-month periods ended March 31, 2007 increased
      over
      prior year periods by $470 and $665, respectively. The increases were primarily
      due to increased borrowings for capital expenditures related to the facility
      expansion programs in Florida and Germany and interest expense associated with
      a
      $3,000 convertible debenture issued in June 2006.




**FOREIGN
      CURRENCY LOSS**




The
      Company had foreign currency exchange losses for the three and six-month periods
      ended March 31, 2007 of $24 and $62, respectively, due to the declining exchange
      rate of the U.S. dollar against the Euro.




**INCOME
      TAX EXPENSE**




Income
      tax expense for the three and six-month periods ended March 31, 2007 increased
      over prior year periods by $300 and $480, respectively, due to changes to
      Germany’s deferred tax assets driven by taxable income and temporary
      adjustments. The Company continues to record a full valuation allowance on
      its
      U.S. operations.




**NET
      INCOME (LOSS)**




Net
      income for the three-month period ended March 31, 2007, totaled $930, or $0.06
      and $0.05 basic and diluted earnings per share, respectively. Net income for
      the
      three-month period ended March 31, 2006, totaled $22, or $0.00 basic and diluted
      earnings per share.




Net
      income for the six-month period ended March 31, 2007, totaled $1,290, or $0.08
      and $0.07 basic and diluted earnings per share, respectively. Net loss for
      the
      six-month period ended March 31, 2006, totaled $59, or $0.00 basic and diluted
      earnings per share.




The
      move
      to profitability between the periods is directly attributable to higher revenues
      and improved gross margins.





15







**ACCOUNTS
      RECEIVABLE**




The
      accounts receivables balance decreased by $843 from the September 30, 2006
      balance of $6,202 to the March 31, 2007 balance of $5,359. The decrease relates
      to higher credit card collections due to the recent introduction of an American
      Express program for our dental customers and improved collections.




**INVENTORY**




The
      inventory balance increased by $4,454 from the September 30, 2006 balance of
      $12,678 to the March 31, 2007 balance of $17,132. The increase was primarily
      due
      to higher inventory levels to support additional increased demand for dental
      products and new products introduced in the spine market and the new markets
      of
      hernia repair and breast reconstruction.





16







**CRITICAL
      ACCOUNTING POLICIES**




The
      Company's significant accounting policies are more fully described in Note
      2 to
      the consolidated financial statements in the annual report for the year ended
      September 30, 2006. However, certain of the accounting policies are particularly
      important to the portrayal of the financial position and results of operations
      and require the application of significant judgment by management; as a result,
      they are subject to an inherent degree of uncertainty. In applying those
      policies, management uses its judgment to determine the appropriate assumptions
      to be used in the determination of certain estimates. Those estimates are based
      on historical experience, terms of existing contracts, observance of trends
      in
      the industry, information provided by customers and information available from
      other outside sources, as appropriate. The Company's significant accounting
      policies include:




SHARE-BASED
      COMPENSATION. We adopted Statement of Financial Accounting Standards No. 123(R), *“Share-Based
      Payments”* in the
      first quarter of fiscal year 2006. SFAS No. 123(R) requires the measurement
      and
      recognition of compensation expense for all share-based payment awards including
      employee stock options based on estimated fair values. Under SFAS No. 123(R),
      we
      estimate the value of share-based payments on the date of grant using the
      Black-Scholes model, which was also used previously for the purpose of providing
      pro forma financial information as required under SFAS No. 123. The
      determination of the fair value of, and the timing of expense relating to,
      share-based payment awards on the date of grant using the Black-Scholes model
      is
      affected by our stock price as well as assumptions regarding a number of
      variables including the expected term of awards, expected stock price volatility
      and expected forfeitures.




Prior
      to
      the first quarter of fiscal year 2006, we used historical stock price volatility
      in preparing our pro forma information under SFAS No. 123. Under SFAS No.
      123(R), we use historical volatility to establish the expected volatility
      assumption based upon our assessment that such information is more reflective
      of
      current market conditions and a better indicator of expected future volatility.
      SFAS No. 123(R) also requires forfeitures to be estimated at the time of grant
      and revised, if necessary, in subsequent periods if actual forfeitures differ
      from those estimates. We estimate expected forfeitures, as well as the expected
      term of awards, based on historical experience. Future changes in these
      assumptions, our stock price or certain other factors could result in changes
      in
      our share-based compensation expense in future periods.




INVENTORIES.
      Inventories are valued at the lower of cost or market. Work in process and
      finished goods includes costs attributable to direct labor and overhead.
      Impairment charges for slow moving, excess and obsolete inventories are recorded
      based on historical experience, current product demand including meeting
      periodically with distributors, regulatory considerations, industry trends,
      changes and risks and the remaining shelf life. As a result of this analysis,
      the Company records a writedown to reduce the carrying value of any impaired
      inventory to its fair value, which becomes its new cost basis. If the actual
      product life cycles, demand or general market conditions are less favorable
      than
      those projected by management, additional inventory impairment charges may
      be
      required which would affect future operating results due to increased costs
      from
      the resulting adjustment. The adequacy of these impairment charges is evaluated
      quarterly.





REVENUE
      RECOGNITION AND ACCOUNTS RECEIVABLE. Revenue on product sales and tissue service
      processing is recognized when persuasive evidence of an arrangement exists,
      the
      price is fixed and final, delivery has occurred and there is a reasonable
      assurance of collection of the sales proceeds. Oral or written purchase
      authorizations are generally obtained from customers for a specified amount
      of
      product at a specified price. Revenue from surgical products is recognized
      upon
      the shipment of the processed tissues. The Company’s terms of sale are FOB
      shipping point. Title transfers at time of shipment. Customers are provided
      with
      a limited right of return. Reasonable and reliable estimates of product returns
      are made in accordance with SFAS No. 48 and allowances for doubtful
      accounts are based on significant historical experience. Revenue from
      distribution fees includes nonrefundable payments received as a result of
      exclusive distribution agreements between the Company and independent
      distributors. Distribution fees under these arrangements are recognized as
      revenue to approximate services provided under the contract. Recognition of
      revenue commenced over the term of the distribution agreement upon delivery
      of
      initial products.




VALUATION
      OF DEFERRED TAX ASSET. We record valuation allowances to reduce the deferred
      tax
      assets to the amounts estimated to be recognized. While we consider taxable
      income in assessing the need for a valuation allowance, in the event we
      determine it is more likely than not we would be able to realize our deferred
      tax assets in the future, an adjustment to the valuation allowance would be
      made
      and income increased in the period of such determination. Likewise, in the
      event
      we determine we would not be able to realize all or part of our deferred tax
      assets in the future, an adjustment would be made to the valuation allowance
      and
      charged to income in the period of such determination.





17





**LIQUIDITY
      AND CAPITAL RESOURCES**




At
      March
      31, 2007 and September 30, 2006, the Company had working capital of $9,762
      and
      $8,215, respectively.




Cash
      and
      cash equivalents increased from $3,463 at September 30, 2006 to $3,626 at March
      31, 2007.




The
      Company had $43 in cash provided by operating activities for the six-month
      period ended March 31, 2007 compared to a negative cash flow from operations
      of
      $1,926 for the comparable period last year. The primary reason for the positive
      cash flow was net income provided by operating activities and increased
      collection efforts in accounts receivable offset by higher inventory levels
      to
      support additional increase demand for dental products and the buildup of new
      products introduced in the spine market and the new markets of hernia repair
      and
      breast reconstruction.




Net
      cash
      used in investing activities, representing purchases of capital expenditures,
      was $1,454 for the six-months ended March 31, 2007 and $4,242 for the comparable
      prior year period. The purchases represented primarily capital expenditures
      associated with the new facility expansions for the U.S. and German
      manufacturing plants that began in early 2006 and was completed in 2007.




Net
      cash
      provided by financing activities was $1,575 for the six-month period ended
      March
      31, 2007 compared to $4,715 for the six-month periods ending March 31, 2006.
      The
      Company received proceeds from long term borrowings to finance the expansion
      of
      the U.S. and German manufacturing plants.




Future
      minimum rental payments required under the Company's operating leases that
      have
      initial or remaining non-cancelable lease terms in excess of one year on a
      fiscal year basis are as follows:




4/1/07
                  - 9/30/07
              
              $
              6752008
              
              
              9932009
              
              
              5122010
              
              
              1182011
              
              
              102$
              2,400




Long-term
      debt consists of senior debt construction loans and capital leases. Future
      minimum payments on a fiscal year basis are as follows (1):




4/1/07
                  - 9/30/07
              
              $
              8922008
              
              
              7722009
              
              
              5662010
              
              
              5782011
              
              
              512Thereafter
              
              
              1,1974,517Less
                  current portion
              
              
              1,227Total
                  future minimum payments
              
              $
              3,290




(1)
            does
                not include interest




The
      Company maintains current working capital credit lines totaling 1,500 Euros
      or
      $2,000 with two German banks and a $1,500 credit line with a U.S. bank. At
      March
      31, 2007, the Company had outstanding balances of $1,931 and $1,500 million
      for
      the working capital lines in Germany and the U.S., respectively. On April 10,
      2007, the Company entered into a Securities Purchase Agreement whereby the
      Company agreed to issue to three institutional investors 1,626,012 shares of
      common stock for net proceeds of $11,500. Management believes that the working
      capital as of March 31, 2007 and the $11,500 of net proceeds received in the
      April stock transaction will be adequate to fund ongoing operations. The Company
      may seek additional financing to meet the needs of its long-term strategic
      plan.
      The Company can provide no assurance that such additional financing will be
      available, or if available, that such funds will be available on favorable
      terms. The Company's ability to generate positive operational cash flow is
      dependent upon increasing processing revenue through increased recoveries by
      tissue banks in the U.S. and Europe, controlling costs, and the development
      of
      additional markets and surgical applications for its products worldwide. While
      the Company believes that it continues to make progress in these areas, there
      can be no assurances.





18





**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**




For
      information regarding the Company’s exposure to certain market risks, see the
      Annual Report on Form 10-K for the year ended September 30, 2006. There have
      been no significant changes to our market risk exposures.




In
      the
      United States and in Germany, the Company is exposed to interest rate risk.
      Changes in interest rates affect interest income earned on cash and cash
      equivalents and interest expense on revolving credit arrangements. Except for
      an
      interest swap associated with $2.0 million of long term debt over six years
      starting March 31, 2006, the Company does not enter into derivative transactions
      related to cash and cash equivalents or debt. Accordingly, we are subject to
      changes in interest rates. Based on March 31, 2007 cash and cash equivalents
      and
      long-term debt, a 1% change in interest rates would have a de-minimus impact
      on
      our results of operations.




The
      value
      of the U.S. dollar compared to the Euro affects our financial results. Changes
      in exchange rates may positively or negatively affect revenues, gross margins,
      operating expenses and net income. The international operation currently
      transacts business primarily in the Euro. Intercompany transactions translate
      from the Euro to the U.S. dollar. Based on March 31, 2007 outstanding
      intercompany balances, a 1% change in currency rates would have a de-minimus
      impact on our results of operations.




**ITEM
      4. CONTROLS AND PROCEDURES**




**DISCLOSURE
      CONTROLS AND PROCEDURES**




As
      of the
      end of the period covered by this Form 10-Q, the Company's management, including
      the Chief Executive Officer and the Chief Financial Officer, conducted an
      evaluation of the effectiveness of the design and operation of the Company's
      disclosure controls and procedures pursuant to Rule 13a-15 of the Securities
      Exchange Act of 1934. Any controls and procedures, no matter how well designed
      and operated, can provide only reasonable assurance of achieving the desired
      objectives. Based upon that evaluation, the Company's management, including
      the
      Company's Chief Executive Officer and Chief Financial Officer, concluded that
      the design and operation of the Company's disclosure controls and procedures
      provided reasonable assurance that the disclosure controls and procedures are
      effective to accomplish their objectives.




**CHANGES
      IN CONTROL**




There
      has
      not been any change in the Company's internal control over financial reporting
      during the six-month period ended March 31, 2007 that has materially affected,
      or is reasonably likely to materially affect, those controls.








19





**PART
      II. OTHER INFORMATION**






**ITEM 1.**
              **LEGAL
                  PROCEEDINGS**Refer
                  to Note 12 of the Unaudited Condensed Consolidated Interim Financial
                  Statements.**ITEM 2.**
              **UNREGISTERED
                  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**None.**ITEM 3.**
              **DEFAULTS
                  UPON SENIOR SECURITIES**None.**ITEM 4.**
              **SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY-HOLDERS**An
                  annual Meeting of Stockholders was held on March 19, 2007. Total
                  shares
                  represented at the meeting were 14,814,914. All nominees for director
                  as
                  listed in the Proxy Statement for the Annual Meeting were elected.
                  Listed
                  below are the matters voted on by stockholders and the number of
                  votes
                  cast at the Annual Meeting:
  (a)
              Election
                of eight members of the Board of Directors.Name
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              BrokerNon-VotesVoted
              
              
              Votes
              
              
              andVoted
                  For
              
              
              Against
              
              
              Withheld
              
              
              AbstentionsG.
                  Russell Cleveland
              14,398,388
              
              
              0
              
              
              416,526
              
              
              0Roy
                  D. Crowninshield, Ph.D.
              14,536,712
              
              
              0
              
              
              278,202
              
              
              0Neal
                  B. Freeman
              14,597,731
              
              
              0
              
              
              217,183
              
              
              0Dr.
                J.
                Harold Helderman
              14,536,762
              
              
              0
              
              
              278,152
              
              
              0Udo
                  Henseler, Ph.D.
              14,533,181
              
              
              0
              
              
              281,733
              
              
              0Guy
                  Mayer
              14,597,865
              
              
              0
              
              
              217,049
              
              
              0Adrian
                  J.R. Smith
              14,530,608
              
              
              0
              
              
              284,306
              
              
              0Dr.
                  Carlton E. Turner
              14,534,181
              
              
              0
              
              
              280,733
              
              
              0(b)
              Adopt
                an amendment to the Company's 2006 Incentive and Non-Statutory Stock
                Option Plan, increasing the number of shares covered by the Plan
                from
                1,000,000 to 1,500,000 shares of the Company's Common Stock.For:
              
              
              9,628,574Against:
              
              
              267,613Abstain:
              
              
              46,288Broker
                  Non-Votes
              
              
              4,872,439(c)
              Ratification
                of the appointment of Deloitte and Touche L.L.P. as independent auditors
                of the Company for the fiscal year ending September 30, 2007For:
              
              
              14,716,340Against:
              
              
              82,385Abstain:
              
              
              16,189
  **ITEM 5.**
              **OTHER
                  INFORMATION**None.







20


**ITEM 6.**
              **EXHIBITS**
 31.1***
              Certification pursuant to Section
                302 of the
                Sarbanes-OxleyAct
                of 2002 -- Chief Executive Officer31.2***
              Certification pursuant to Section
                302 of the
                Sarbanes-OxleyAct
                of 2002 -- Chief Financial Officer32.1***
              Certifications Pursuant to 18 U.S.C.
                Section
                1350, as adoptedpursuant
                to Section 906 of the Sarbanes-Oxley Act of 2002***
                  Filed herewith
   **SIGNATURES**


Registrant
        has duly caused this report to be signed on its behalf by the Pursuant to
        the
        requirements of the Securities and Exchange Act of 1934, the undersigned,
        thereunto duly authorized.
  **TUTOGEN
                    MEDICAL, INC.**Dated:
                    May 14, 2007
                
                /s/
                    Guy L. MayerGuy
                    L. MayerChief
                    Executive OfficerDated:
                    May 14, 2007
                
                /s/
                    L. Robert Johnston, Jr.L.
                    Robert Johnston, Jr.Chief
                    Financial Officer










21