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 December 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, a non-accelerated filer or a smaller reporting company (as
defined in Rule 12b-2 of the Act). Large accelerated
filer  Accelerated filer  x  Non-accelerated
filer  Smaller reporting company
 
  As of
January 30, 2008, there were 19,421,289 shares outstanding of the issuer's
common stock, par value $.01 per share.
  
 
 TUTOGEN
MEDICAL, INC. AND SUBSIDIARIES
 
 INDEX
 
 
 
 PART
      I.
              
              PageNo.ITEM
      1.
              Financial
      Statements.Unaudited
      - Condensed Consolidated Balance Sheets – December 31, 2007 and September
      30, 2007.
              1Unaudited
      - Condensed Consolidated Statements of (Loss) Income and Comprehensive
      (Loss) Income for the three months ended December 31, 2007 and
      2006.
              2Unaudited
      - Condensed Consolidated Statements of Cash Flows for the three-months
      ended December 31, 2007 and 2006.
              3Unaudited
      - Condensed Consolidated Statement of Shareholders’ Equity for the
      three-months ended December 31, 2007.
              4Unaudited
      - Notes to Condensed Consolidated Financial Statements.
              5ITEM
      2.
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.
              11ITEM
      3.
              Quantitative
      and Qualitative Disclosures about Market Risk.
              16ITEM
      4.
              Controls
      and Procedures.
              16PART
      II.ITEM
      1.
              Legal
      Proceedings.
              17ITEM
      1A.
              Risk
      Factors.
              17ITEM
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds.
              17ITEM
      3.
              Defaults
      Upon Senior Securities.
              17ITEM
      4.
              Submission
      of Matters to a Vote of Security-Holders.
              17ITEM
      5.
              Other
      Information.
              17ITEM
      6.
              Exhibits.
              18SIGNATURES
              
              18
 
 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)
  December
      31,
                
                
                September
      30,2007
                
                
                2007ASSETSCurrent
      AssetsCash
      and cash equivalents
                
                $
                6,145
                
                
                $
                7,849Short-term
      marketable securities
                
                
                5,000
                
                
                
                5,000Accounts
      receivable - net of allowance for doubtful accountsof
      $813 at Dec. 31, 2007 and $777 at Sept. 30, 2007
                
                
                7,492
                
                
                
                6,477Inventories
      - net
                
                
                19,012
                
                
                
                17,390Deferred
      tax assets - net
                
                
                3,170
                
                
                
                3,792Prepaids
      and other current assets
                
                
                1,115
                
                
                
                1,55041,934
                
                
                
                42,058Property,
      plant, and equipment - net
                
                
                14,812
                
                
                
                14,429Other
      assets
                
                
                433
                
                
                
                387Deferred
      tax asset - net
                
                
                2,645
                
                
                
                2,376TOTAL
      ASSETS
                
                $
                59,824
                
                
                $
                59,250LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      LiabilitiesAccounts
      payable
                
                $
                3,388
                
                
                $
                1,720Accrued
      expenses and other current liabilities
                
                
                4,301
                
                
                
                5,266Accrued
      commissions
                
                
                2,799
                
                
                
                2,532Short-term
      borrowings
                
                
                351
                
                
                
                356Current
      portion of deferred distribution fees
                
                
                1,836
                
                
                
                1,817Current
      portion of long-term debt
                
                
                1,138
                
                
                
                1,28113,813
                
                
                
                12,972Noncurrent
      LiabilitiesDeferred
      distribution fees and other
                
                
                2,495
                
                
                
                2,641Long-term
      debt
                
                
                3,192
                
                
                
                3,278Total
      Liabilities
                
                
                19,500
                
                
                
                18,891Shareholders'
      EquityCommon
      stock, $0.01 par value, 30,000,000 shares authorized;19,390,289
      and 19,167,939 issued and outstanding, respectively
                
                
                194
                
                
                
                192Additional
      paid-in capital
                
                
                56,306
                
                
                
                54,812Accumulated
      other comprehensive income
                
                
                4,077
                
                
                
                3,682Accumulated
      deficit
                
                
                (20,253
                )
                
                
                (18,327
                )Total
      shareholders' equity
                
                
                40,324
                
                
                
                40,359TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
                
                $
                59,824
                
                
                $
                59,250
    See
accompanying Notes to Condensed Consolidated Financial Statements.
 1
  TUTOGEN MEDICAL, INC. AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS)
INCOME
 (IN
THOUSANDS EXCEPT PER SHARE DATA)
 (UNAUDITED)
 
  Three
      Months EndedDecember
    31,2007
                
                
                2006Revenue
                
                $
                14,955
                
                
                $
                11,463Cost
      of revenue
                
                
                6,888
                
                
                
                4,421Gross
      profit
                
                
                8,067
                
                
                
                7,042Operating
      ExpensesGeneral
      and administrative
                
                
                4,210
                
                
                
                2,362Distribution
      and marketing
                
                
                4,553
                
                
                
                3,441Research
      and development
                
                
                617
                
                
                
                527Total
      Operating Expenses
                
                
                9,380
                
                
                
                6,330Operating
      (loss) income
                
                
                (1,313
                )
                
                
                712Foreign
      exchange loss
                
                
                (3
                )
                
                
                (38
                )Interest
      and other income
                
                
                130
                
                
                
                34Interest
      and other expense
                
                
                (86
                )
                
                
                (274
                )41
                
                
                
                (278
                )(Loss)
      income before taxes
                
                
                (1,272
                )
                
                
                434Income
      tax expense
                
                
                -
                
                
                
                73Net
      (loss) income
                
                
                (1,272
                )
                
                
                361Other
      comprehensive incomeForeign
      currency translation adjustments
                
                
                395
                
                
                
                402Comprehensive
      (loss) income
                
                $
                (877
                )
                
                $
                763Average
      shares outstanding for basicearnings
      per share
                
                
                19,281,684
                
                
                
                16,390,100Basic
      (loss) earnings per share
                
                $
                (0.07
                )
                
                $
                0.02Average
      shares outstanding for dilutedearnings
      per share
                
                
                19,281,684
                
                
                
                18,025,289Diluted
      (loss) earnings per share
                
                $
                (0.07
                )
                
                $
                0.02
 
 See
accompanying Notes to Condensed Consolidated Financial Statements.
 2
  TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN
THOUSANDS)
 (UNAUDITED)
  Three
      Months EndedDecember
    31,2007
                
                
                2006Cash
      flows (used in) provided by operating activitiesNet
      (loss) income
                
                $
                (1,272
                )
                
                $
                361Adjustments
      to reconcile net income to net cash(used
      in) provided by operating activities:Depreciation
      and amortization
                
                
                489
                
                
                
                368Amortization
      of deferred distribution fees revenue
                
                
                (457
                )
                
                
                (384
                )Amortization
      of debt discount and debt issuance costs
                
                
                -
                
                
                
                69Provision
      for bad debts
                
                
                19
                
                
                
                83Provision
      for inventory write-downs
                
                
                258
                
                
                
                171Share-based
      compensation
                
                
                445
                
                
                
                414Deferred
      income taxes
                
                
                (3
                )
                
                
                73Changes
      in assets and liabilities:Accounts
      receivable
                
                
                (1,205
                )
                
                
                715Inventories
                
                
                (1,730
                )
                
                
                (2,228
                )Other
      assets
                
                
                385
                
                
                
                470Accounts
      payable and other accrued expenses
                
                
                592
                
                
                
                (276
                )Accrued
      commissions
                
                
                267
                
                
                
                247Deferred
      distribution fees
                
                
                250
                
                
                
                -Net
      cash (used in) provided by operating activities
                
                
                (1,962
                )
                
                
                83Cash
      flows used in investing activitiesPurchase
      of property and equipment
                
                
                (471
                )
                
                
                (950
                )Net
      cash used in investing activities
                
                
                (471
                )
                
                
                (950
                )Cash
      flows provided by financing activitiesExercise
      of stock warrants
                
                
                901
                
                
                
                -Exercise
      of stock options
                
                
                150
                
                
                
                829Proceeds
      from long-term borrowings
                
                
                52
                
                
                
                -Repayment
      of long-term debt
                
                
                (402
                )
                
                
                (133
                )Change
      in short-term borrowings
                
                
                (8
                )
                
                
                548Net
      cash provided by financing activities
                
                
                693
                
                
                
                1,244Effect
      of exchange rate changes on cash and cash equivalents
                
                
                36
                
                
                
                (11
                )Net
      (decrease) increase in cash and cash equivalents
                
                
                (1,704
                )
                
                
                366Cash
      and cash equivalents at beginning of period
                
                
                7,849
                
                
                
                3,463Cash
      and equivalents at end of period
                
                $
                6,145
                
                
                $
                3,829Supplemental
      cash flow disclosuresInterest
      paid
                
                $
                84
                
                
                $
                154Income
      taxes paid
                
                $
                -
                
                
                $
                8
  See
accompanying Notes to Condensed Consolidated Financial Statements.
 3
  
 TUTOGEN MEDICAL, INC. AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
 THREE-MONTHS
ENDED DECEMBER 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 OutstandingBALANCE,
      SEPTEMBER 30, 2007
                
                $
                192
                
                
                $
                54,812
                
                
                $
                3,682
                
                
                $
                (18,327
                )
                
                $
                40,359
                
                
                
                19,167,939Stock
      issued on exercise of options
                
                
                1
                
                
                
                149
                
                
                
                -
                
                
                
                -
                
                
                
                150
                
                
                
                47,350Stock
      issued on exercise of warrants
                
                
                1
                
                
                
                900
                
                
                
                -
                
                
                
                -
                
                
                
                901
                
                
                
                175,000Share-based
      compensation
                
                
                -
                
                
                
                445
                
                
                
                -
                
                
                
                -
                
                
                
                445
                
                
                
                -Cumulative
      effect of adopting newaccounting
      principal
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (654
                )
                
                
                (654
                )
                
                
                -Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,272
                )
                
                
                (1,272
                )
                
                
                -Foreign
      currency translation adjustment
                
                -
                
                
                
                -
                
                
                
                395
                
                
                
                -
                
                
                
                395
                
                
                
                -BALANCE,
      DECEMBER 31, 2007
                
                $
                194
                
                
                $
                56,306
                
                
                $
                4,077
                
                
                $
                (20,253
                )
                
                $
                40,324
                
                
                
                19,390,289(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-MONTH PERIODS ENDED DECEMBER 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 in 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 (“GAAP”) 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-month
period ended December 31, 2007 are not necessarily indicative of the results for
the fiscal year ending September 30, 2008. The unaudited condensed consolidated
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, 2007.
  3. NEW
ACCOUNTING PRONOUNCEMENTS
  In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements” (“SFAS 157”). This standard defines fair value, establishes a
framework for measuring fair value in accordance with 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 157 and has
not yet determined the impact on the Company’s financial
statements.
  In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities-Including an Amendment of FASB Statement No.
115" which is effective for fiscal years beginning after November 15,
2007. This pronouncement permits an entity to choose to measure many financial
instruments and certain other items at fair value at specified election dates.
Subsequent unrealized gains and losses on items for which the fair value option
has been elected will be reported in earnings. Management
is  currently evaluating the potential impact of this pronouncement on
our consolidated financial statements.
  In
December 2007, the FASB issued SFAS 160 "Noncontrolling Interests in Consolidated Financial
Statements - An Amendment of ARB No. 51''(``SFAS 160''). SFAS 160
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. The Company does not have any
noncontrolling interests in subsidiaries and believes that SFAS 160 will not
have a material impact on its financial statements.
  In
December 2007, the FASB issued SFAS 141 (Revised 2007) "Business Combinations''(``SFAS 141R''). SFAS
141R establishes principles and requirements for the reporting entity in a
business combination, including recognition and measurement in the financial
statements of the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree. SFAS 141R also establishes disclosure
requirements to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008, and interim periods within those fiscal years.
  4.
STOCK-BASED AWARDS
  The
Company maintains a 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 of the underlying common stock on
the date of grant. Options may be subject to a vesting schedule and expire four,
five or ten years from grant. The Plan remains in effect for all options issued
during its life.
  5
  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 of the
underlying common stock on the date of grant. Options may be subject to a
vesting schedule and expire four, five or ten years from grant.
  Presented below is a summary of the activity of
the Company's stock options for the three-month period ending December 31,
2007:
  Outstanding
      SharesOptions
                
                Shares
                
                
                Weighted-
                  Average
                  Exercise
      Price
                
                
                Weighted
                  Average
                  Remaining
                  Contractual
                  Term
                
                
                Aggregate
                  Intrinsic
      ValueOutstanding
      at October 1, 2007
                
                
                1,997,700
                
                
                $
                2.95Granted
                
                
                453,000
                
                
                
                11.60Exercised
                
                
                (47,350
                )
                
                
                2.15Forfeited
      or expired
                
                
                (5,000
                )
                
                
                10.60Outstanding
      at December 31, 2007
                
                
                2,398,350
                
                
                $
                5.43
                
                
                
                6.53
                
                
                $
                12,041Exercisable
      at December 31, 2007
                
                
                1,425,725
                
                
                $
                3.56
                
                
                
                4.79
                
                
                $
                9,828
  As of
December 31, 2007, 462,000 stock options were available for grant.As of December 31, 2007, there was $2,524 of
total unrecognized compensation cost related to nonvested stock options that is
expected to be recognized over a weighted-average period of 2.24
years.  The intrinsic value of options exercised during the
three-month period ended December 31, 2007 was $102.  The fair value
of options vested during the three-month period ended December 31, 2007 was
$457.   The weighted average fair value of options granted during
the three-month period ended December 31, 2007 was $5.00.
  During
the quarters ended December 31, 2007 and 2006, stock-based compensation expense
of $350 and $414, respectively, is included in our Condensed Consolidated
Statements of (Loss) Income and Comprehensive (Loss) Income.  The
Company also capitalized $95 of compensation expense to inventory at December
31, 2007.
  5.
INVENTORIES
  Major
classes of inventory were as follows:
   December
      31,
              
              
              September
      30,2007
              
              
              2007Raw
    materials
              
              $
              4,676
              
              
              $
              3,602Work in
      process
              
              
              9,908
              
              
              
              7,356Finished
    goods
              
              
              4,428
              
              
              
              6,432$
              19,012
              
              
              $
              17,390
   The increase in inventory from September 30, 2007 to December 31,
2007 was primarily due to higher inventory levels to support increased demand
for the Company’s products.  At December 31, 2007 and September 30,
2007, the Company had inventory reserves of $2,660 and $2,315,
respectively.  These amounts include write-downs for slow-moving,
excess and obsolete inventories based on historical experience, current product
demand, regulatory considerations, industry trends, changes and risks and the
remaining shelf life.
  6
  6. INCOME
TAXES
  The
deferred tax asset balances consist primarily of net operating loss carry
forwards, deferred distribution fees and inventory reserves.  As of
December 31, 2007, the Company had approximately $11,323 of federal net
operating loss carry forwards expiring beginning in 2012, a $79 alternative
minimum tax credit carry forward, and a $60 credit on research and development
that will begin to expire in 2013. The Company also had state net operating loss
carry forwards of approximately $4,617 that will begin to expire in
2025.
  As of
December 31, 2007, the Company had a corporate net operating loss carry forward
for German income tax purposes of approximately $3,033 (2,059 Euros), and a
trade net operating loss carry forward for German income tax purposes of
approximately $613 (416 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”.
 
 Historically,
the Company has not recorded deferred income taxes on the undistributed earnings
of its foreign subsidiaries because it was management's intent to indefinitely
reinvest such earnings. During the 2006 fiscal year, the Company reduced certain
intercompany accounts, which resulted in a taxable dividend of $82 from Germany
to the U.S.  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.
 
 In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”),
“Accounting for Uncertainty in
Income Taxes - An Interpretation of FASB Statement No. 109”. FIN 48
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. This
Interpretation also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. In
connection with the Company's adoption of FIN 48 on October 1, 2007, the Company
reported a net decrease to retained earnings of $654 related to German
taxes.  Unrecognized tax benefits were $654 at adoption.  If
these unrecognized tax benefits were recognized, approximately $654 would impact
the effective tax rate.
 
 During
the quarter ended December 31, 2007, the Company increased its FIN 48 liability
by $22.  Unrecognized tax benefits were $676 at December 31,
2007.  If these unrecognized tax benefits were recognized,
approximately $676 would impact the effective tax rate.
  The
Company’s primary tax jurisdictions are U.S. federal, the state of Florida,
Germany and France.  The Company is not currently under examination by
the U.S. federal government or the state of Florida and fiscal years ended
September 30, 2004 to September 30, 2007 remain open under the statute of
limitations.  In Germany, tax years ending September 30, 2002 to
September 30, 2007 remain open, although the Company is currently under
examination for the fiscal years ended September 30, 2002 to September 30, 2005.
The fiscal years ended September 30, 2003 to September 30, 2007 remain open in
France.  The Company’s policy is to recognize interest and/or
penalties related to income tax matters in income tax expense.  Given
the Company’s current net operating loss positions in each of the tax
jurisdictions, there has never been interest or penalties recognized for tax
matters.  The Company does not believe that its FIN 48 liability will
change materially in the next twelve-months.
  7.
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 $2,209 for
working capital needs. These renewable credit lines allow the Company to borrow
at interest rates ranging from 7.5% to 10.25%.  At December 31, 2007,
the Company had outstanding borrowings of 129 Euros or $190 in the aggregate. At
September 30, 2007, the Company had no 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 of up to 4,000 Euros or $5,892 by the Parent
Company.
  In
November 2005, the Company entered into a revolving credit facility in the U.S.
for up to $1,500, expiring on November 18, 2008. At December 31, 2007 and
September 30, 2007, the Company had no outstanding borrowings on this 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 December 31, 2007, the Company was in compliance with this
covenant. In addition, the Company maintains a lock box arrangement with the
bank.
  7
  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
bore interest at 5.0% per year, was due upon the earlier of August 1, 2007, or
upon a change of control of the Company and was convertible into common stock at
a price of $5.15 per share at any time at the election of the holder. The
warrants were 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.   In April and May of
2007, the $3,000 debenture was fully converted into common stock.  In
November 2007, the 175,000 warrants were fully exercised into common
stock.
  8.
DERIVATIVE INSTRUMENTS
  The
Company accounts for its hedging activities in accordance with SFAS No. 133,
“Accounting for Derivatives
and Hedging Activities”(“SFAS No. 133”)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 or $2,209 long-term loan is based on dealer quotes and was not
significant as of December 31, 2007. The loan is due on March 30, 2012 in
monthly installments of approximately 63 Euros or $93 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.
  9. 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 as of and for the quarters ended
December 31, 2007 and 2006 are as follows:
  December
      31, 2007
                
                International
                
                
                United
      States
                
                
                ConsolidatedGross
      revenue
                
                $
                5,611
                
                
                $
                10,553
                
                
                $
                16,164Less
      - intercompany
                
                
                (1,209
                )
                
                
                -
                
                
                
                (1,209
                )Total
      revenue - third party
                
                
                4,402
                
                
                
                10,553
                
                
                
                14,955Net
      income (loss) before taxes
                
                
                1,043
                
                
                
                (2,315
                )
                
                
                (1,272
                )Net
      income (loss)
                
                
                677
                
                
                
                (1,949
                )
                
                
                (1,272
                )Total
      assets
                
                
                20,639
                
                
                
                39,185
                
                
                
                59,824Property,
      Plant and Equipment
                
                
                11,137
                
                
                
                3,675
                
                
                
                14,812December
      31, 2006
                
                International
                
                
                United
      States
                
                
                ConsolidatedGross
      revenue
                
                $
                5,031
                
                
                $
                8,133
                
                
                $
                13,164Less
      - intercompany
                
                
                (1,701
                )
                
                
                -
                
                
                
                (1,701
                )Total
      revenue - third party
                
                
                3,330
                
                
                
                8,133
                
                
                
                11,463Net
      income before taxes
                
                
                225
                
                
                
                209
                
                
                
                434Net
      income
                
                
                152
                
                
                
                209
                
                
                
                361Total
      assets
                
                
                18,885
                
                
                
                22,539
                
                
                
                41,424Property,
      Plant and Equipment
                
                
                10,196
                
                
                
                3,803
                
                
                
                13,999
    8
  1 0. (LOSS)
EARNINGS PER SHARE
  The
following is a reconciliation of the numerators and denominators of the basic
and diluted (loss) earnings per share computations for the three-month periods
ended December 31, 2007 and 2006. The Company has excluded 1,738,964 and 423,000
of stock options for the three-month periods ended December 31, 2007 and 2006,
respectively, as such stock options are anti-dilutive to the
calculation.
   Three
      Months EndedDecember
      31,Numerator
                
                2007
                
                
                2006Net
      (loss) income used in calculation of basic and dilutedearnings
      per share
                
                $
                (1,272
                )
                
                $
                361DenominatorWeighted-average
      shares of common stock outstandingused
      in calculation of basic earnings per share
                
                
                19,281,684
                
                
                
                16,390,100Effect
      of dilutive securites - stock options, warrantsand
      convertible debentures
                
                
                -
                
                
                
                1,635,189Weighted-average
      shares of common stock outstandingused
      in calculation of diluted earnings per share
                
                
                19,281,684
                
                
                
                18,025,289Basic
      (loss) earnings per share
                
                $
                (0.07
                )
                
                $
                0.02Diluted
      (loss) earnings per share
                
                $
                (0.07
                )
                
                $
                0.02
 
 11. LEGAL
PROCEEDINGS
  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 $861 for quarantined inventory 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 December 31, 2007 and
September 30, 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 a material adverse effect on the Company’s operations, cash flows,
financial position or financial statement disclosures.
  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.
  12.
RELATED PARTY TRANSACTIONS
  As of
December 31, 2007, Zimmer CEP (formerly Centerpulse) USA Holding Co., a
subsidiary of Zimmer Holdings, Inc. (“Zimmer”) was the owner of 27% of the
Company's outstanding shares of common stock.
  The
Company has an exclusive license and distribution agreement with Zimmer Spine,
Inc., a wholly owned subsidiary of Zimmer, 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. For the three-months ended December
31, 2007 and 2006 product sales to Zimmer Spine totaled $1,150 and $1,293,
respectively.  Accounts receivable from Zimmer Spine were $171 and
$209 at December 31, 2007 and September 30, 2007.
  9
  The
Company has also engaged Zimmer Dental, Inc. (“Zimmer Dental”) a wholly owned
subsidiary of Zimmer to act as an exclusive sales and marketing representative
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.  For the three-month periods ended December 31, 2007 and
2006, Zimmer Dental was paid commissions aggregating approximately $2,532 and
$1,918 respectively.  Accounts payable to Zimmer Dental total $2,779
and $2,532 at December 31, 2007 and September 30, 2007,
respectively.  Accounts receivable from Zimmer Dental totaled $238 at
December 31, 2007 and $292 at September 30, 2007.
  In August
2007, the Company entered into an exclusive distribution agreement with Zimmer
Dental, whereby Zimmer Dental will distribute dental products
internationally.  For the three-month period ending December 31, 2007,
product sales under this new relationship totaled $61.
  13.  SUBSEQUENT EVENTS
  On
November 12, 2007, the Company entered into an Agreement and Plan of Merger
among Regeneration Technologies, Inc. (“Parent”), Rockets FL Corp. (“Merger
Sub”) and the Company.  The proposed merger transaction is structured
as a tax free stock-for-stock exchange pursuant to which the Company’s
shareholders will receive 1.22 shares of the Parent’s common stock for each
share of the Company’s common stock. As a result, the Company will become a
wholly-owned
subsidiary of the Parent. Upon completion of the proposed merger, Parent
stockholders will own approximately 55% of the combined company and the
Company’s shareholders will own approximately 45% of the combined company, on a
fully diluted basis.  The proposed merger is subject to approval by
the respective shareholders of the Parent and the Company, as well as customary
closing conditions and regulatory approvals. If the Company terminates the
Agreement and Plan of Merger, under certain limited conditions, the Company
could owe a termination fee of $6.5 million. The proposed merger is estimated to
be completed during the second quarter of the Company’s 2008 fiscal
year.  Information about the proposed merger is set forth in the joint
proxy statement/prospectus filed with the Securities and Exchange Commission on
January 23, 2008.
  10
  ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (In Thousands, except for share data).
  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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and “Risk Factors” 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 2008 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 December 31, 2007, the Company
generated $14,955 in revenues. The Company continues to experience strong growth
in U.S. dental sales, which totaled $6,720 up 27% from the same quarter last
year. The Company continued to grow the hernia market with Davol Inc., a
subsidiary of C.R. Bard, Inc., and the breast reconstruction market with Mentor
Corporation with Surgical Specialties sales (which includes urology,
ophthalmology, hernia, breast reconstruction and ear, nose and throat, or ENT)
up 73% over the same period in the prior year.  The increase was due
primarily to sales of the new hernia repair and breast reconstruction
products.
  International
sales increased 32% over the same quarter last year.
 
 In
October 2007, the Company entered into a new five year Tissue Procurement,
Processing and Supply Agreement with Allosource, Inc. whereby Allosource will
provide the Company with various human tissues used in the Company’s dental and
spinal product lines.
 
 On
November 12, 2007, the Company entered into an Agreement and Plan of Merger
among Regeneration Technologies, Inc. (“Parent”), Rockets FL Corp. (“Merger
Sub”) and the Company.  The proposed merger transaction is structured
as a tax free stock-for-stock exchange pursuant to which the Company’s
shareholders will receive 1.22 shares of the Parent’s common stock for each
share of the Company’s common stock. As a result, the Company will become a
wholly-owned
subsidiary of the Parent. Upon completion of the proposed merger, Parent
stockholders will own approximately 55% of the combined company and the
Company’s shareholders will own approximately 45% of the combined company, on a
fully diluted basis.  The proposed merger is subject to approval by
the respective shareholders of the Parent and the Company, as well as customary
closing conditions and regulatory approvals. If the Company terminates the
Agreement and Plan of Merger, under certain limited conditions, the Company
could owe a termination fee of $6.5 million. The proposed merger is estimated to
be completed during the second quarter of the Company’s 2008 fiscal
year.
 
 Statements in the following discussion
and analysis relating to the Company’s business strategies, operating plans,
planned expenditures, expected capital requirements and other forward-looking
statements regarding the Company’s business do not take into account potential
future impacts of the Company’s proposed merger with Regeneration
Technologies.
  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.
  11
  RESULTS
OF OPERATIONS
  FOR
THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006
  REVENUE
  An
analysis of revenue is as follows:
  Growth
      Rates1st Qtr
    FY
                
                
                1st Qtr
    FY
                
                
                1st Qtr FY2008
                
                
                2007
                
                
                2008Dental
                
                $
                6,720
                
                
                $
                5,286
                
                
                
                27
                %Spine
                
                
                1,150
                
                
                
                1,293
                
                
                
                -11
                %Surgical
      Specialties
                
                
                2,683
                
                
                
                1,554
                
                
                
                73
                %Total
      U.S.
                
                
                10,553
                
                
                
                8,133
                
                
                
                30
                %Gemany
                
                
                1,231
                
                
                
                891
                
                
                
                38
                %Rest
      of World
                
                
                2,608
                
                
                
                1,899
                
                
                
                37
                %France
                
                
                409
                
                
                
                403
                
                
                
                1
                %Other
      - Distribution Fees
                
                
                154
                
                
                
                137
                
                
                
                12
                %Total
      International
                
                
                4,402
                
                
                
                3,330
                
                
                
                32
                %Total
      Consolidated
                
                $
                14,955
                
                
                $
                11,463
                
                
                
                30
                %
   Revenue
for the three-month period ended December 30, 2007 totaled $14,955 compared to
$11,463 for the same period last year or a 30% increase.  U.S.
revenues for the three-month period ended December 31, 2007 increased by
$2,420  ($8,133 to $10,553) or 30%. The increase in U.S. revenues 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 sales
and marketing representative, and increased demand for the Company’s new hernia
repair and breast reconstruction products.  Dental revenues totaled
$6,720, which was a record quarter for the Company.  Spine revenues
for the quarter decreased slightly by $143 ($1,293 to $1,150) or 11% compared to
the same period last year as the Company had multiple new product stocking
orders during the first quarter of 2007.  Surgical Specialties
revenues (primarily urology, ophthalmology, hernia, breast reconstruction and
ENT) for the three-month period ended December 31, 2007 increased by $1,129
($1,554 to $2,683) or 73% compared to the same period last year due primarily to
the new hernia and breast reconstruction products. International revenues for
the three-month period ended December 31, 2007 increased $1,072 ($3,330 to
$4,402) or 32% compared to the same period last year. The increases are
primarily due to increased sales efforts by several key distributors in various
countries. In addition, international revenues received a positive impact during
the first quarter of 2008 due to the declining exchange rate of the U.S. dollar
against the Euro.
  GROSS
MARGIN
  The
Company’s gross margin for three-month period ended December 31, 2007 decreased
from 61% to 54% over the same period in the prior year.  The lower
margin was due to unfavorable product mix and yields and backorders of certain
higher margin products.
  GENERAL
AND ADMINISTRATIVE
  General
and administrative expenses for the three-month period increased over the prior
year period by $1,848 ($2,362 to $4,210).  Included in this increase
are expenses of $1,615 associated with the proposed merger.  Excluding
the merger expenses, general and administrative expenses for the three-month
period increased over the prior year period by $233. The increase was primarily
due to $227 associated with costs for the quarter related to the compliance with
the Sarbanes Oxley Act of 2002.  The Company does not expect to incur
any additional material Sarbanes Oxley costs in fiscal year
2008.  During the quarter, the Company incurred $445 in stock option
expenses under SFAS 123(R) associated with stock option grants to employees, of
which $256 was charged to general and administrative expenses or $158 lower than
the same period last year.  The decrease in stock option expense in
general and administrative expenses was offset by increased personnel costs.
Exclusive of the merger expenses, general and administrative expenses as a
percentage of sales declined from 21% to 17 % for the three months ended
December 31, 2007 compared to the same period last year.
  12
  DISTRIBUTION
AND MARKETING
  Distribution
and marketing expenses for the three-month period ended December 31, 2007
increased over the prior year period by $1,112 ($3,441 to $4,553) or 32%. The
increase was primarily due to higher marketing fees earned by Zimmer Dental of
$580 ($2,164 to $2,744) which is consistent with overall increased dental
sales.  The increase is also due to increased personnel costs of $193,
stock option expense of $77 and charges related to the declining exchange rate
of the U.S. dollar to the Euro of $142. As a percentage of sales, distribution
and marketing expenses remained at 30% for the three-months ended December 31,
2007 compared to the same period last year.
  RESEARCH
AND DEVELOPMENT
  Research
and development expenses for the three-month period ended December 31, 2007
increased over the prior year period by $90. As a percentage of revenues,
research and development expenses decreased from 5% to 4% for the three months
ended December 31, 2007 when compared to the same period last year.
  INTEREST
AND OTHER INCOME
  Interest
and other income, which primarily represents interest income, increased to $130
for the three months ended December 31, 2007 compared to $34 for the prior year
period.  This increase is related to interest income earned on the
$11,494 net proceeds from the equity financing completed in April
2007.
  INTEREST
EXPENSE
  Interest
expense for the three-month period ended December 31, 2007 decreased over the
prior year period by $188 ($274 to $86). The decrease was primarily due to full
conversion of the $3,000 convertible debenture into common shares during the
three months ended June 30, 2007 and the Company paying off substantially all
outstanding balances on the lines of credit with the U.S. and German
banks.
  FOREIGN
CURRENCY LOSS
  The
Company had nominal foreign currency exchange losses for the three-month period
ended December 31, 2007.
  INCOME
TAX EXPENSE
  Income
tax expense for the three-month period ending December 31, 2007 was
$0.  The Company did not receive a tax benefit for losses during the
quarter due primarily to certain non-deductible merger related
costs.
  NET
LOSS
  Net loss
for the three-month period ended December 31, 2007, totaled $1,272, or $.07
basic and diluted loss per share.  Exclusive of the expenses
associated with the proposed merger of $1,615, net income for the three-month
period ended December 31, 2007, totaled $343, or $.02 basic and diluted earnings
per share compared to $361 or $.02 basic and diluted earnings per share for the
same period last year.
  ACCOUNTS
RECEIVABLE
  The
accounts receivable balance increased by $1,015 from the September 30, 2007
balance of $6,477 to the December 31, 2007 balance of $7,492. The increase
relates directly to the increased growth in revenues, exclusive of the Zimmer
Dental stocking order in Germany last quarter that was paid early.
  INVENTORY
  The
inventory balance increased by $1,622 from the September 30, 2007 balance of
$17,390 to the December 31, 2007 balance of $19,012.  The increase was
primarily due to higher inventory levels to support additional increased demand
for the Company’s products.
  13
  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, 2007. However, certain of the accounting
policies are particularly important to the portrayal of the Company’s 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 SFAS No. 123(R) in the first quarter of fiscal year 2006. SFAS 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 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 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, vesting periods 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 123. Under SFAS 123(R), we use
a combination of historical and implied 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 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, with cost determined using the
first-in-first-out method. 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 determined in part through periodic meetings with
distributors, regulatory considerations, industry trends, changes and risks and
the remaining shelf life. As a result of this analysis, the Company records an
allowance 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.  The adequacy of these
inventory impairment charges is evaluated quarterly.
  Revenue Recognition and Accounts
Receivable. Revenue on product sales and tissue 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. Title
transfers at the time of shipment. Customers are provided with a limited right
of return. Revenue is recognized at shipment. Reasonable and reliable estimates
of product returns are made in accordance with SFAS No. 48 “Revenue Recognition When Right of
Return Exists” (“SFAS 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 ratably 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
Assets.  We record valuation allowances to reduce the net
deferred tax assets to the amounts estimated to be realizable. 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.
  14
 
 Valuation of Long-Lived
Assets.  Long-lived assets on our balance sheet are stated at
the lower of cost, net of depreciation and amortization, or fair
value.  The factors in this valuation which require significant
estimates and judgments are: (1) determination of the estimated useful life of
each asset, which determines expense per period, number of periods of expense,
and the carrying value of each asset at any time; and (2) determination of the
fair value of assets, which may result in other than temporary impairment
charges when fair value is lower than the carrying value of assets, which we
would recognize as a charge to earnings during the period in which we made the
determination.  If we overestimate the useful life of an asset, or
overestimate the fair value of an asset, and at some time in the future we
dispose of that asset for a lower amount than its carrying value, our
historically reported total assets and net income would have been higher than
they would have been during periods prior to our recognition of the loss on
disposal of assets, and lower during the period when we recognize the
loss.
  LIQUIDITY
AND CAPITAL RESOURCES
  At
December 31, 2007 and September 30, 2007, the Company had working capital of
$28,121 and $29,086, respectively.
  Cash and
cash equivalents decreased from $7,849 at September 30, 2007 to $6,145 at
December 31, 2007 due to $961 of fees paid related to the proposed merger, with
the remaining amount primarily due to investments in inventory to support
demand.
  The
Company used $1,962 of cash for operating activities for the three-month period
ended December 31, 2007 compared to cash flow provided by operating activities
of $83 for the comparable period last year.  Exclusive of the payments
associated with the proposed merger of $962, cash used in operating activities
was $1,000.  The primary reason for the use of cash for the three
months ended December 31, 2007 was an increase in inventory levels to support
additional increased demand for the Company’s products.
  Net cash
used in investing activities, representing purchases of capital expenditures,
was $471 for the three months ended December 31, 2007 and $950 for the
comparable prior year period. The purchases represented primarily capital
expenditures associated with the new equipment for the U.S. and German
manufacturing plants.
  Net cash
provided by financing activities was $693 for the three-month period ended
December 31, 2007 compared to $1,244 for the three-month period ended December
31, 2006.  During the three-month period ended December 31, 2007, the
Company received $901 of proceeds from the full exercise of the warrants related
to the $3,000 debenture, offset by payments on long-term debt.
  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:
  1/1/08
      - 9/30/08
                
                $
                1,1682009
                
                
                7602010
                
                
                2832011
                
                
                1862012
                
                
                121$
                2,518
  Long-term
debt consists of senior debt construction loans and capital leases. Future
minimum payments on a fiscal year basis are as follows(1):
  1/1/08
      - 9/30/08
                
                $
                1,1382009
                
                
                7982010
                
                
                7702011
                
                
                6642012
                
                
                312Thereafter
                
                
                6484,330Less
      current portion
                
                
                1,138Total
      future minimum payments
                
                $
                3,192
  (1)  does not include interest
  15
  The
Company maintains current working capital credit lines totaling 1,500 Euros or
$2,209 with two German banks and a $1,500 credit line with a U.S. bank. At
December 31, 2007, the Company had outstanding balances of $190 and $0 for the
working capital lines in Germany and the U.S.,
respectively.  Management believes that the working capital as of
December 31, 2007 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.
  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,
2007.  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 rate swap associated with $2,209 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, the Company is
subject to changes in interest rates. Based on December 31, 2007 cash and cash
equivalents and long-term debt balances, a 1% change in interest rates would
have a de-minimus impact on the Company’s 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 December 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
 The
Company maintains disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended)
that are designed to provide reasonable assurance that information required to
be disclosed by the Company in reports that it files or submits under the
Exchange Act is (i) recorded, processed, summarized and reported within the
time periods specified in SEC rules and forms and (ii) accumulated and
communicated to the Company’s management, including its principal executive
officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
  In
connection with the filing of this Form 10-Q, management evaluated, under the
supervision and with the participation of the Company’s Chief Executive Officer
and Chief Financial Officer, the effectiveness of the design and operation of
the Company’s disclosure controls and procedures as of December 31, 2007. Based
upon that evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls and procedures were
effective at the reasonable assurance level as of December 31,
2007.
  CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
  There has
not been any change in the Company's internal control over financial reporting
during the three-month period ended December 31, 2007 that has materially
affected, or is reasonably likely to materially affect, those
controls.
  16
  PART
II. OTHER INFORMATION
  ITEM
1.  LEGAL PROCEEDINGS.
  Refer
to Note 11 of the Unaudited Condensed Consolidated Interim Financial
Statements.
 ITEM
1A. RISK FACTORS.
  Refer to
the section entitled “Risk Factors” contained in the Company’s Definitive Proxy
Statement filed with the Securities and Exchange Commission on January 23,
2008.  Such section is incorporated herein by reference.
  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.
  None.
  ITEM
5. OTHER INFORMATION.
  None.
  17
  ITEM
6. EXHIBITS.
 
 
 10.1*
              Severance
      Agreement by and between Tutogen Medical, Inc. and L. Robert Johnston, Jr.
      dated January 22, 200810.2*
              Severance
      Agreement by and between Tutogen Medical, Inc. and Claude Pering dated
      January 22, 200810.3*
              Severance
      Agreement by and between Tutogen Medical, Inc. and Clifton J. Seliga dated
      January 22, 200831.1
              Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 -- Chief
      Executive Officer31.2
              Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 -- Chief
      Financial Officer32.1
              Certifications
      Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002
 
 
  *
Management contract or compensating plan or arrangement
  
  SIGNATURES
  Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
   TUTOGEN
      MEDICAL, INC.Date:
      February 7, 2008
              
              /s/
      Guy L. MayerChief
      Executive OfficerDate:  February
      7, 2008
              
              /s/
      L. Robert Johnston, Jr.Chief
      Financial Officer(Principal
      Financial and Accounting Officer)