Forward-Looking Statements

Forward-looking statements give our current expectations, forecasts of future events or goals. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "may," "will," "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "seek" and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. Any or all of our forward-looking statements in this Form 10-Q may turn out to be wrong. They can be affected by inaccurate assumptions we might make, or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. There are important factors that could cause actual events or results to differ materially from those expressed or implied by forward-looking statements including, without limitation, the development, regulatory approval, demand and market acceptance of our products; results of our CORTOSS pivotal clinical trial in the U.S.; the amount and sufficiency of data that the FDA will require for our CORTOSS 510(k) application; the cost to expand our manufacturing and operating facilities; our need to borrow under our debt facility; the development of our sales network; capital expenditures; future liquidity; uses of cash; sales product mix and related margins; our ability to manage our manufacturing facilities and requirements; availability of raw materials; inventory levels; development costs for existing and new products; our ability to successfully launch the VITOSS Bioactive FOAM and VITASURE Absorbable Hemostat products; equity compensation expense; changes in market interest and foreign currency exchange rates; fluctuations in our stock price; and the other risk factors addressed in ITEM 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2007, which was filed with the U.S. Securities and Exchange Commission (the "SEC"). We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our filings with the SEC. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.

OVERVIEW

Product sales for the three and six months ended June 30, 2008 increased 30% and 27% to $19,340,714 and $35,504,996, respectively, as compared to $14,851,943 and $28,002,629 for the same periods in 2007. Increased product sales principally reflect increased sales of our VITOSS® FOAM and VITAGEL® products in the U.S. We anticipate our product sales for the foreseeable future will remain insufficient to support our operations at expected spending levels. We expect to continue to incur significant operating losses for the foreseeable future as we plan to continue to expand our sales and marketing activities, pursue product development efforts, further develop our manufacturing capabilities and attempt to increase manufacturing efficiencies.

The following summarizes our principal cash and operating commitments at June 30, 2008 and as of the date of this report:

• Agreement with Kensey. Approximately 60% of our product sales during each of the three and six months ended June 30, 2008 were from products based upon our VITOSS FOAM platform co-developed with Kensey, as compared to 60% and 61% for the same periods in 2007. As of June 30, 2008, we owed Kensey $2,137,436 for manufactured product inventory and royalties, which amount is included in accounts payable and other accrued expenses on the consolidated balance sheets. See Note 10 to our consolidated interim financial statements included in this report for additional information.

• Operations - We expect to use cash, cash equivalents and investments to fund our operations until we generate sufficient cash to support our operations, if ever. See Note 10 to our consolidated interim financial statements included in this report for additional information on future minimum rental payments under operating leases. In addition, we may hire additional direct sales representatives to support not only the growth of our existing products, but to plan ahead for the possible clearance and commercial launch of CORTOSS in the U.S. While we believe that our investment in our sales force may also bring opportunities to in-license or distribute additional products, we expect to continue spending for research and development for new products.

• Allergan Agreement - In November 2007, we entered into a supply and license agreement to acquire collagen raw material, equipment and a technology license from Allergan, Inc. and its affiliate Allergan Sales, LLC for an aggregate purchase price of approximately $6,600,000 in cash. We expect to complete the acquisition of these assets and make the purchase price payment in a lump sum in the second half of 2008 from cash, cash equivalents, and investments and proceeds from the $10,000,000 note we issued in July 2008 under our debt facility with LB I Group Inc. See Notes 11 and 14 to our consolidated interim financial statements included in this report for additional information regarding the terms of our debt facility and borrowings thereunder.

• CORTOSS clinical study and 510(k) application - We expect to incur approximately $1,400,000 in external costs during the remainder of 2008 and into 2009 for the CORTOSS pivotal clinical study in the U.S. Since the completion of patient enrollment for the study in February 2007 and the filing of our CORTOSS 510(k) application with the FDA in January 2008, we have been monitoring and will continue to monitor the patients in the study in order to collect, consolidate and analyze clinical data to support our CORTOSS 510(k) filing. In response to comments received by the FDA during the end of the first quarter of 2008 to our 510(k) submission for CORTOSS, we expect to submit to the FDA in the third quarter of 2008 additional clinical and pre-clinical data, which will include further two-year follow-up patient data. We may also be required to submit additional two-year follow-up patient data and other data thereafter.

• Medafor Agreement- We expect to spend $1,000,000 during each of the twelve month periods commencing in the third quarter of 2008 and 2009 to purchase VITASURE Absorbable Hemostat product inventory under our distribution agreement with Medafor. See Note 10 to our consolidated interim financial statements included in this report for additional information.

• Debt service obligation. We expect to pay approximately $792,000 and $875,000 in quarterly interest payments during the third and fourth quarters of 2008, respectively, under the $35,000,000 aggregate principal amount of notes issued under our debt facility with LB I Group Inc.

Our existing cash, cash equivalents, and investments as of June 30, 2008 were $36,057,256. We believe our current cash, cash equivalents, and investments, together with the remaining amounts available to us under our debt facility, will be sufficient to meet our currently estimated operating and investing requirements for the foreseeable future. In addition, we received $10,000,000 in proceeds from the issuance of a note in July 2008 under our debt facility and, if certain conditions are met, we have the capacity to borrow up to an additional $10,000,000 under the terms of the facility. See Notes 11 and 14 to our consolidated interim financial statements included in this report for additional information regarding the terms of our debt facility.

CRITICAL ACCOUNTING POLICIES

The preparation of the consolidated interim financial statements requires us to make assumptions, estimates and judgments that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities as of the date of the consolidated interim financial statements, and the reported amounts of revenues and expenses during the reporting periods. By their nature, these assumptions, estimates and judgments are subject to an inherent degree of uncertainty. We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates. We have addressed our critical accounting policies in ITEM 7 of our Annual Report on Form 10-K for the year ended December 31, 2007 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies." The following discussion supplements the discussion of critical accounting policies contained in our Form 10-K. The critical accounting policies addressed below, together with those described in our Form 10-K, have been reviewed with the Audit Committee and reflect our most significant judgments and estimates used in the preparation of our consolidated interim financial statements.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. With the exception of the Texas Margin Credit described below, management believes it is more likely than not that we will not realize the deferred tax assets in excess of deferred tax liabilities. A valuation allowance is maintained against the net deferred tax assets in excess of the Texas Margin Credit.

On May 18, 2006, the Governor of the State of Texas signed into law a Texas margin tax which restructures the state business tax by replacing the taxable capital components of the current franchise tax with a new "taxable margin" component. The Texas margin tax was effective for taxable years ended on or after January 1, 2007. As a result of the Texas margin tax we recognized current state income tax expense of $28,700 for the six months ended June 30, 2008. Under the Texas Margin Tax enacted statute, we have the right to claim a temporary credit against our Texas Margin Tax liability over a 20 year period. As a result, we have reduced the deferred tax asset from $302,980 as of December 31, 2007 to $299,493 on our consolidated balance sheet as of June 30, 2008.

Liquidity and Capital Resources

We have experienced negative operating cash flows since our inception and we have funded our operations primarily from the proceeds received from sales of our stock. Cash, cash equivalents and investments were $36,057,256 and $48,407,888 at June 30, 2008 and December 31, 2007, respectively. We believe our current cash, cash equivalents, and investments, together with the remaining amounts available to us under our debt facility, will be sufficient to meet our currently estimated operating and investing requirements for the foreseeable future. In addition, we received $10,000,000 in proceeds from the issuance of a note in July 2008 under our debt facility and, if certain conditions are met, we have the capacity to borrow up to an additional $10,000,000 under the terms of the facility. See Notes 11 and 14 to our consolidated interim financial statements included in this report for additional information regarding the terms of our debt facility.

Discussion of Cash Flows

Cash Flows Used in Operating Activities

Net cash used in operating activities for the six months ended June 30, 2008 was $10,463,612, as compared to $8,782,011 for the same period in 2007. Our operating cash outflows for the six months ended June 30, 2008 primarily were used to fund our operations and include $1,451,588 for an increase in accounts receivable related to increased sales, $1,452,747 used to fund increases in inventories as well as funding for the expansion of our field sales team and sales commissions on our growing product sales. In addition, decreases in accounts payable of $721,143 and accrued expenses of $877,208 were a use of operating cash flows in the six months ended June 30, 2008.

We expect to continue to focus our efforts on sales growth under our VITOSS and VITAGEL product platforms in 2008, and launched VITOSS Bioactive FOAM in the first quarter of 2008. We may continue to add direct sales representatives to our organization for those territories in the U.S. where either we do not currently have independent distributor coverage or the territory is underserved in an effort to increase sales of our VITOSS and VITAGEL product lines and to plan ahead for the possible clearance of CORTOSS in the United States. Also, we intend to fund studies to collect and publish post-clinical data relating to the performance of VITOSS to support our marketing and sales efforts.

We expect to continue to use cash, cash equivalents and investment proceeds to fund our operations until we are profitable, if ever. We anticipate that our product sales for the foreseeable future will remain insufficient to support our present operations at expected spending levels. As a result, we expect to continue to incur significant operating losses for the foreseeable future as we continue to expand our sales and marketing activities, pursue product development efforts and further develop our manufacturing capabilities.

We expect our primary use of cash for external research and development costs in 2008 to be directed to CORTOSS. During 2008 and 2009, we expect to incur approximately $1,400,000 in external costs to complete our pivotal clinical study in the U.S. for CORTOSS. The overall level of our research and development expense in future periods will depend upon the development status and cost of products currently in our pipeline and any new products that we may determine to pursue in the future. We may also incur additional expenses to support the U.S. launch of CORTOSS if it receives FDA clearance.

Our operating cash requirements are dependent heavily upon the timing of receipt of FDA 510(k) clearance for new products, the rates at which we add new direct sales representatives and our field sales network generates sales, our product sales mix as relative increases in sales of our lower margin products tend to increase our cash needs, the amount of inventory, including raw materials and work-in-process, we maintain to support product sales and anticipated product launches, the timing of subsequent product launches and market acceptance of our new products. Accordingly, in 2008, our operating cash requirements will continue to be subject to quarterly volatility.

We also expect to use cash, cash equivalents and investments to purchase at least $1,000,000 of VITASURE product during each of the twelve month periods commencing in the third quarters of 2008 and 2009 in accordance with our distribution agreement with Medafor. We launched the VITASURE product in the third quarter of 2008.

Cash Flows Provided by Investing Activities

Net cash provided by investing activities was $11,811,737 for the six months ended June 30, 2008 compared to $1,411,852 for the six months ended June 30, 2007. The increase in cash provided by investing activities for the six months ended June 30, 2008 primarily reflects the proceeds from the sale and maturity of investments of $34,974,053, partially offset by the purchases of new investments of $20,749,070, to fund our operating activities. In addition, we spent $2,413,246, including $211,889 in capitalized interest, during the six months ended June 30, 2008 to purchase equipment and leasehold improvements to support further expansion of our product development and manufacturing capabilities for VITAGEL and VITOSS, as compared to $484,258 spent during the six months ended June 30, 2007 for equipment and leasehold improvements.

We invest our excess cash in highly liquid investment-grade marketable securities, including corporate debt securities and asset - backed securities.

We expect to spend approximately $7,000,000 during 2008 to expand our manufacturing facility and for related leasehold improvements and capital equipment. In addition, we are committed contractually to spend approximately $6,600,000, expected to be incurred in 2008, to acquire a technology license related to collagen processing for our VITAGEL product and to purchase related equipment from Allergan. See Note 10 to our consolidated interim financial statements included in this report. We plan to fund these amounts through the use of cash equivalents and investments and from the proceeds of our issuance in July 2008 of an additional $10,000,000 note under our debt facility with LB I Group Inc.

Cash Flows Provided by Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2008 was $87,511 compared to net cash used of $149,506 for the six months ended June 30, 2007.

We do not expect sales to generate cash flows in excess of operating expenses for the foreseeable future, if ever. Until we achieve sales levels to enable us to fund operating expenses, we expect to continue to use cash, cash equivalents and investment proceeds to fund operating and investing activities. As of June 30, 2008, we had cash, cash equivalents and investments of $36,057,256, and we had up to $20,000,000 available for additional borrowing under our debt facility with LB I Group Inc. We believe our existing cash, cash equivalents and investments, together with $10,000,000 borrowed in July 2008 and the remaining $10,000,000 available to us under our debt facility, will be sufficient to meet our currently estimated operating and investing requirements for the foreseeable future. The extent and timing of proceeds from future stock option and warrant exercises, if any, are primarily dependent upon future trading prices for our common stock and the expiration dates of these instruments.

Contractual Obligation and Commercial Commitments

See the "Overview" section under MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

We lease office space and equipment under non-cancelable operating leases. We entered into two leases in January 2008 for space located in the Great Valley Corporate Center in Malvern, Pennsylvania. One lease is for approximately 30,900 square feet of unfinished space for a new warehouse. The initial term of this lease is 55 months commencing January 1, 2008, and the initial annual base rent under the lease is approximately $216,125. The other lease is for approximately 4,800 square feet of additional office and laboratory space. The initial term of this lease is 55 months commencing January 1, 2008, and the initial annual base rent under the lease is approximately $43,593. We completed renovations for both the warehouse and the office/laboratory space in April 2008. In July 2008 we extended the term of our existing office space leases by a term of 60 months, until July 31, 2017. As of June 30, 2008, future minimum rental payments under operating leases, which include the additional office space leases described above, are as follows:

                         Remainder of 2008         396,654
                         2009                      812,104
                         2010                      838,278
                         2011                      864,465
                         2012                      901,244
                         2013 and thereafter     4,320,309

                                               $ 8,133,054

Results of Operations

This section should be read in conjunction with the more detailed discussion under "Liquidity and Capital Resources." As described therein, we expect to continue to incur significant operating losses in the foreseeable future as we continue our product development and sales efforts.

Product Sales. Product sales for each of the three and six months ended June 30, 2008 increased 30% and 27% to $19,340,714 and $35,504,996, respectively, as compared to $14,851,943 and $28,002,629 for the same periods in 2007. Sales growth was primarily attributable to increased sales of VITOSS FOAM and VITAGEL product portfolios in the U.S. as we further develop our U.S. field sales network. Approximately 60% of our product sales during the three and six months ended June 30, 2008 were from products based upon our VITOSS FOAM platform co-developed with Kensey (see Note 10 to our consolidated interim financial statements included in this report for additional information), as compared to 60% and 61% for the same periods in 2007. VITAGEL accounted for approximately 25% of product sales for the three and six months ended June 30, 2008 as compared to 19% and 20% for the same periods in 2007. For the three and six months ended June 30, 2008, 91% and 92% of product sales, respectively, were in the U.S., primarily from sales of VITOSS, VITAGEL and IMBIBE, as compared to 93% for each of the same periods in 2007. The remaining sales, during both periods in 2008 and 2007, were primarily the result of VITOSS, CORTOSS and ALIQUOT sales outside the U.S.

Gross Profit. The gross profit for the three and six months ended June 30, 2008 was $12,984,807 and $23,336,880, respectively, as compared to $9,778,830 and $18,220,427 for the same periods in 2007. As a percentage of sales, gross profit was 67% and 66% for the three and six months ended June 30, 2008, respectively, as compared to 66% and 65% for the same periods in 2007. The increase in the gross profit margin for the three and six months ended June 30, 2008, as compared to the gross profit margins for the corresponding periods in 2007, reflects improved manufacturing efficiencies and lower VITAGEL royalty expense as a percentage of product sales. Our gross margins may fluctuate from quarter to quarter based on the mix of products sold from period to period.

Operating Expenses. Operating expenses for the three months ended June 30, 2008 and 2007 were $16,275,624 and $12,787,589, respectively, which represents a 27% increase in operating expenses as compared to a 30% increase in product sales and a 33% increase in gross profit for the quarter. Operating expenses for the six months ended June 30, 2008 and 2007 were $30,646,013 and $24,446,454, respectively, which represents a 25% increase in operating expenses as compared to a 27% increase in product sales and a 28% increase in gross profit for the six month period. For the three months ended June 30, 2008, operating expenses were reduced by a non-cash fair value adjustment of $19,301, and increased by net non-cash charge of $111,895 for the six months ended June 30, 2008 for the exchange of non-employee consultant stock options for shares of our common stock pursuant to a tender offer, net of fair value adjustments for our fully-vested non-employee consultant stock options. For the three and six months ended June 30, 2007, operating expenses were reduced by non-cash fair value adjustments of $155,428 and $647,953, respectively, for our fully-vested non-employee consultant stock options outstanding.

General & administrative expenses for the three months ended June 30, 2008 increased 8% to $3,072,327 from $2,836,696 for the same period of 2007. General & administrative expenses for the six months ended June 30, 2008 increased 4% to $5,530,732 from $5,308,103 for the same period of 2007. The increase in general & administrative expenses for the three and six months ended June 30, 2008, as compared to the corresponding period in 2007, was primarily due to legal and consulting costs. General & administrative expenses were equivalent to 16% of product sales for each of the three and six month periods ended June 30, 2008 and 19% of product sales for the same periods in 2007.

Selling & marketing expenses were $11,070,617 and $21,278,992 for the three and six months ended June 30, 2008, respectively, a 33% and 35% increase from $8,312,483 and $15,726,623 for the three and six months ended June 30, 2007. The increase for the three and six months ended June 30, 2008 was primarily due to higher salary and benefit costs incurred by expanding our field sales team in order to support the growth of U.S product sales, as well as higher commissions paid in the U.S. as a result of increased product sales in the three and six months ended June 30, 2008. The number of our direct sales representatives increased from 80 at June 30, 2007 to 92 at June 30, 2008. Selling & marketing expenses for the three months ended June 30, 2008 were reduced by a non-cash fair value adjustment of $19,301 and increased by net non-cash charge of $97,917 for the six months ended June 30, 2008 for the exchange of non-employee consultant stock options for shares of our common stock pursuant to a tender offer, net of fair value adjustments for our fully-vested non-employee consultant stock options. Selling & marketing expenses for the three and six months ended June 30, 2007 were reduced by non-cash fair value adjustments of $154,582 and $647,107, respectively, for our fully-vested non-employee consultant stock options outstanding. Amounts for selling & marketing expenses were equivalent to 57% and 56% of product sales for the three months ended June 30, 2008 and 2007, respectively. Amounts for selling & marketing expenses were equivalent to 60% and 56% of product sales for the six months ended June 30, 2008 and 2007, respectively.

Research & development expenses increased to $2,132,680 and $3,836,289 for the three and six months ended June 30, 2008, respectively, from $1,638,410 and $3,411,728 for the same periods in 2007. The increase for each of the three and six months ended June 30, 2008 is primarily due to increased product development activity and higher costs associated with the CORTOSS 510(k) application in the U.S. Research & development expenses were equivalent to 11% of product sales for the three months ended June 30, 2008 and 2007. Research & development expenses were equivalent to 11% and 12% of product sales for the six months ended June 30, 2008 and 2007, respectively.

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