This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. For a detailed discussion of these risks and uncertainties, see the "Risk Factors" section in Item 1A of Part II of this Form 10-Q. We caution the reader not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this Form 10-Q. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-Q.

Overview

We are a medical aesthetics company focused on developing and marketing products that are used by physicians to enhance the appearance of their patients. We were incorporated in Delaware in 1999 and commenced operations in 2000. From 2001 to 2003 we received certain U.S. and international regulatory clearances and approvals for, and engaged in commercial sales of, RADIESSE® and COAPTITE®. We obtained FDA pre-market approval, or PMA, for our key commercial application of RADIESSE® in December 2006. Our core product is RADIESSE® injectable dermal filler which is designed to provide long-lasting, cost-effective and safe aesthetic benefits for patients. We have also developed and commercialized COAPTITE® tissue-bulking agent which is FDA approved and marketed through our distribution agreement with Boston Scientific for use in the treatment of stress urinary incontinence in adult females. We manufacture RADIESSE® and COAPTITE ® at our facilities in Wisconsin, though we depend upon suppliers to manufacture components used in our products.

We currently market our products through over 100 direct sales and clinical training representatives in the United States and Europe and a complementary network of third party distributors in more than 30 countries. Our primary customers are dermatologists, plastic surgeons and facial plastic surgeons. RADIESSE ® is generally used for the treatment of facial wrinkles and folds. Medical aesthetics procedures such as these are generally not covered by health insurance; instead, consumers pay for these treatments with personal funds. COAPTITE® is used to treat stress urinary incontinence in adult females, which is generally covered by health plans in the United States. Reimbursement coverage of COAPTITE® procedures is generally not provided internationally, which we believe has been primarily responsible for limiting sales of COAPTITE ® outside the United States.

In addition to our existing RADIESSE® and COAPTITE® products on the market, we have development programs and distribution rights to additional products and their applications that are in various stages of development.

• RADIESSE®-We have a number of ongoing programs evaluating new forms, applications and indications of our patent protected RADIESSE® technology. The first new commercial product derived from these efforts is expected to be a form of RADIESSE® with Lidocaine which may improve comfort for patients and flow characteristics for physicians, and is expected to be launched in the United States and Europe in calendar year 2009.

• Polidocanol-In May 2007, we entered into an exclusive licensing and distribution agreement in the United States for Polidocanol, a leading sclerotherapy treatment in Europe for varicose veins (sold in Europe under the trade name Aethoxysklerol®). According to the terms of this agreement, the manufacturer of Polidocanol, Chemische Fabrik KREUSSLER & Co. GmbH ("Kreussler"), is responsible for conducting the clinical trial and submitting regulatory filings for approval of Polidocanol to the FDA, and, assuming approval is received, will exclusively manufacture the product for us. We will be the exclusive distributor of the product in the United States and be responsible for all sales, marketing, and clinical training. In July 2008 Kreussler submitted data to the FDA demonstrating that Polidocanol met the primary endpoint of its Phase III clinical trial. Kreussler plans to submit the manufacturing documentation related to the New Drug Application ("NDA") for Polidocanol by the end of calendar year 2008.

• RELAXED EXPRESSIONS™-In April 2008, we acquired substantially all of the assets of Advanced Cosmetic Intervention ("ACI"), and its licensor, related to a device that is currently cleared via a 510(k) by FDA to create radiofrequency ("RF") heat lesions in nerve tissue. We expect to conduct clinical studies specifically intended to support an FDA application and other foreign applications seeking clearance to market this product (tradename RELAXED EXPRESSIONS™) for the treatment of frown lines.

• BIOGLUE AESTHETIC™-In October 2006, we licensed the exclusive United States, Canadian and European distribution rights for medical aesthetic applications of BIOGLUE®, a Class III medical device manufactured by CryoLife. Under the terms of our development, distribution and supply agreement, we are responsible for all clinical trials and regulatory filings for cosmetic and plastic surgery applications and will be responsible for sales and marketing of BIOGLUE AESTHETIC™ in these applications. BIOGLUE AESTHETIC™ is currently in early feasibility stage human trials for use as a less invasive alternative for tissue fixation in browplasty, or forehead lift procedures, and recently received a CE Mark for browplasty procedures in Europe. CryoLife will remain the exclusive manufacturer of BIOGLUE AESTHETIC™.

Contingent payments totaling $3.2 million under the agreement with Kreussler and $0.5 million under the agreement with CryoLife will become due upon success in reaching specified clinical and regulatory milestones. Under the agreement with ACI for the purchase of the RELAXED EXPRESSIONS™ product and technology we are required to pay contingent consideration based on a percentage of future sales plus a one-time payment of $7.5 million in the event sales exceed $60 million in any calendar year from 2011 to 2014. Due to the uncertainties inherent in medical clinical trials and regulatory review by the FDA, as well as future sales, we are unable to predict if or when the contingent payments under these agreements will become payable except for a $0.7 million payment to Kreussler that we believe will likely become payable during fiscal 2009. We expect that our future revenue may grow materially as a result of these product candidates and any other future products or indications, if and when we introduce them.

As is common with many companies in the aesthetics sector, we experience the effects of seasonality on our revenues. The first quarter of our fiscal year, which runs from July through September, is typically the slowest quarter of the year due, we believe, to summer vacations by doctors and patients. We also generally observe a modest slowness in our third quarter, which runs from January through March. Our second and fourth quarters, which run from October to December and April to June, respectively, are typically the stronger quarters of our fiscal year. The effects of this seasonal pattern were adversely impacted during fiscal 2008 and may be similarly affected in future quarters by macroeconomic factors.

Sales of RADIESSE® generated more than 90% of our revenue in the first quarter of both fiscal 2009 and fiscal 2008. Other revenue consists primarily of the sale of COAPTITE ®. Sales increased modestly in the first quarter of fiscal 2009 over fiscal 2008 due to growth in sales in both the United States and international markets.

We expect that the key factors influencing our revenue in the future will include:

• patient satisfaction with our products, particularly RADIESSE ®;

• the strength of our direct sales and clinical training teams in the United States and Europe and our international distribution arrangements;

• timing and scope of regulatory approvals that we have and may receive in the future;

• The strength or weakness of consumers' confidence and economic activity in the countries in which we sell our products; and

• competitive dynamics in the marketplace.

We believe that tight credit markets, weak economies, and low consumer confidence in the US and our major international markets will impact spending on certain cosmetic procedures, including treatment with RADIESSE®, in fiscal 2009. We anticipate that adverse conditions in our markets will continue through at least the end of fiscal 2009 and that recovery thereafter by consumers and the economy will be slow. Our expectations regarding the nature or timing of any macroeconomic recovery are highly uncertain and extended macroeconomic weakness and low consumer discretionary spending may impact our future sales and alter seasonal patterns in our revenue.

To reach our goal of sustained profitability we will need to increase revenues while carefully managing our operating expenses. We have recently begun implementing actions designed to reduce our annual rate of operating expenses by up to $20 million per year by the fourth quarter of fiscal 2009 through savings in program activity and personnel reductions in all functions. To increase revenues we will depend on growth in sales of RADIESSE® in the United States and international markets as well as success in gaining approval from the FDA and regulatory bodies in other countries to market the other products that we have in various stages of development and clinical trials. Competition in the markets for aesthetic medical products is very active. Many dermal filler products are already approved and sold throughout the world and we anticipate that other new fillers will be brought to market in future years. Some competing products are marketed by companies that are considerably larger and have greater resources than we do. Our industry is also characterized by pricing pressure in the form of volume discounting and, in some cases, price reductions and bundling discounts. In addition, we offer customers the opportunity to purchase product at lower unit prices if they purchase more units of RADIESSE®. These factors have contributed to a decline in the average selling price for RADIESSE ® and may continue to do so in the future.

Results of Operations

Comparison of the three months ended September 30, 2008 and 2007

The following table sets forth certain data as a percentage of net sales for the
periods indicated. Dollars are in thousands.



                                              Three months ended September 30,
                                      2008       % (a)       2007       % (a)   % Change
      Net sales                     $ 15,671     100.0     $ 15,201     100.0        3.1
      Cost of sales                    2,724      17.4        2,792      18.4       (2.4 )

      Gross profit                    12,947      82.6       12,409      81.6        4.3

      Operating expenses
      Sales and marketing             15,230      97.2       11,754      77.3       29.6
      Research and development         2,362      15.1        2,181      14.3        8.3
      General and administrative       3,077      19.6        2,024      13.3       52.0
      Other income (expense), net        (30 )    (0.2 )        192       1.3     (115.6 )
      Provision for income taxes          42       0.3           58       0.4      (27.6 )

      Net loss                      $ (7,794 )             $ (3,416 )              128.2

(a) Expressed as a percentage of net sales Net Sales

Net sales were $15.7 million for the first three months of fiscal 2009 as compared to $15.2 million for the first three months of fiscal 2008, an increase of $0.5 million or 3%. Domestic sales were $12.8 million for the first three months of fiscal 2009 compared to $12.6 million for the first three months of fiscal 2008, an increase of $0.2 million or 2%. International sales were $2.9 million for the first three months of fiscal 2009 compared to $2.6 million for the first three months of fiscal 2008, an increase of $0.3 million or 12%. The increase in net sales was due primarily to an increase in the volume of units sold. Our average selling price was modestly lower due primarily to customers achieving pricing discounts through higher purchase volumes. We believe sales in the United States benefited from growing appreciation by doctors of the benefits provided by RADIESSE®, and the hiring of additional direct sales and clinical training personnel in fiscal 2008, partially offset by significant weakness in consumer confidence and the economy. Sales in international markets increased mainly due to improvements in our network of international distributors.

Cost of Sales

Cost of sales was $2.7 million for the first three months of fiscal 2009 and $2.8 million for the first three months of fiscal 2008.

Gross Profit

Our gross margin increased from 81.6% to 82.6% due principally to sales promotion costs incurred in the first quarter of fiscal 2008 that we did not incur in the first quarter of fiscal 2009, which was partially offset by lower average selling prices. We anticipate that our gross margin will be approximately 80% to 83% for the balance of fiscal 2009.

Sales and Marketing Expenses

Our sales and marketing expenses were $15.2 million for the first three months of fiscal 2009 as compared to $11.8 million for the first three months of fiscal 2008, an increase of $3.4 million or 29%. As a percentage of sales, sales and marketing expenses were 97% of sales for the first three months of fiscal 2009 compared to 77% for the same period in fiscal 2008. The dollar increase was primarily due to increases in employee related expenses ($2.0 million) and marketing and promotional activities ($1.4 million). In the United States during fiscal 2008 we expanded the number of our direct sales staff (first quarter of fiscal 2008) and our field clinical training staff (throughout fiscal 2008). In Europe, we increased the number of our direct sales staff (first half of fiscal 2008).

Research and Development Expenses

Our research and development expenses were $2.4 million for the first three months of fiscal 2009 as compared to $2.2 million for the first three months of fiscal 2008, an increase of $0.2 million or 9%. As a percentage of sales, research and development expenses were 15% for the first three months of fiscal 2009 compared to 14% for the first three months of fiscal 2008. The dollar increase in research and development was due primarily to higher employee related expenses.

General and Administrative Expenses

Our general and administrative expenses were $3.1 million for the first three months of fiscal 2009 as compared to $2.0 million for the first three months of fiscal 2008, an increase of $1.1 million, or 55%. As a percentage of sales, general and administrative expenses were 20% in the first three months of fiscal 2009 compared to 13% in the first three months of fiscal 2008. The dollar increase was primarily due to higher employee related expenses ($0.6 million) and additional legal, insurance, and other costs ($0.5 million) related to being a publicly traded company.

Other Income/(Expense), Net

Other income/(expense), net for the first three months of fiscal 2009 decreased from the first three months of fiscal 2008. Interest income increased due to the funds raised in our IPO in November 2007, but this was offset by a foreign exchange loss due to the decline in the value of the Euro in the first quarter of fiscal 2009.

Provision for income taxes

Our provision for income taxes for the first three months of fiscal 2009 decreased slightly when compared to the first three months of fiscal 2008 due to a reduction in income tax expense in our foreign subsidiary.

Net Loss

Our net loss increased during the first three months of fiscal 2009 when compared to the first three months of fiscal 2008 due to the factors discussed above.

Liquidity and Capital Resources

The following table highlights selected cash flow components for the first three
months of fiscal 2009 and 2008 (amounts are in thousands).



                                      Fiscal 2009                Fiscal 2008
   Cash provided by (used in):    (first three months)       (first three months)
   Operating activities          $               (8,773 )   $               (6,264 )
   Investing activities                            (470 )                   (1,046 )
   Financing activities                              32                        104

We have incurred losses and generated negative annual cash flows from operating activities in all but one year since inception and had an accumulated deficit of $84.8 million as of September 30, 2008. Our primary source of liquidity has been through private placements of shares of our preferred stock and the sale of common stock in association with our initial public offering in November 2007. Cumulative net proceeds from the issuance of preferred and common stock totals $159.7 million. We anticipate that our primary source of liquidity through approximately the end of fiscal 2010 will be our cash and cash equivalents and thereafter, it will be cash provided by operations assuming we reach our goal of sustained profitable operations.

Operating Activities

In the first three months of fiscal 2009, we used $8.8 million in cash in operating activities as compared to $6.3 million in the comparable period of fiscal 2008. Losses from operations were primarily responsible for the cash used in fiscal 2009. In fiscal 2008 cash was used primarily to fund losses from operations and to reduce accrued liabilities.

Investing Activities

Net cash used in investing activity was $0.5 million in the first three months of fiscal 2009 as compared to $1.0 million in the comparable period of fiscal 2008. Our primary investing activities related to purchases of equipment, computers, furniture and installed leasehold improvements for use in production, research, selling and general and administrative activities.

Financing Activities

In the first three months of fiscal 2009 net cash provided from financing activities was less than $0.1 million compared to net cash provided from financing activities of approximately $0.1 million during the first three months of fiscal 2008. Our primary financing activity in the first three months of both fiscal years related to cash received from exercises of stock options.

Sufficiency of Current Cash and Cash Equivalents

Our cash and cash equivalents ("cash") were $50.3 million as of September 30, 2008. We believe that our current cash balance will be sufficient to meet our anticipated cash needs, including for working capital purposes, capital expenditures, and contractual obligations for at least the next 12 months. In addition we may require additional cash resources due to changes in business conditions or other future developments, including any investments or acquisitions we may decide to pursue. In any of these cases, we may seek to sell equity or debt securities or to obtain a credit facility. It is uncertain whether equity or debt financing may be available to us when needed on terms that are acceptable to us or at all. The sale of convertible debt securities or additional equity securities could result in additional dilution to our stockholders. The incurrence of indebtedness would result in debt service obligations and could result in operating and financial covenants that would restrict our operations. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all. We anticipate that, from time to time, we may evaluate acquisitions of complementary businesses, technologies or assets. However, there are no current understandings, commitments or agreements with respect to any acquisitions.

Contractual Obligations

The following table summarizes our significant contractual obligations as of
September 30, 2008 (amounts in thousands):



                                                  Payments Due By Periods
                                          Less Than                                More Than
                                Total      1 Year       1-3 Years     3-5 Years     5 Years
 Capital lease obligations     $    95   $        40   $        49   $         6   $       -
 Operating lease obligations     2,386           721         1,182           483           -
 Purchase obligations            1,998         1,998            -             -            -
 Royalty obligations               543           543            -             -            -

 Total                         $ 5,022   $     3,302   $     1,231   $       489   $       -

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not have any undisclosed borrowings or debt, and we have not entered into any synthetic leases. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Recent Accounting Pronouncements

Information with respect to Recent Accounting Pronouncements may be found in Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements in this quarterly report, which information is incorporate herein by reference.

Critical Accounting Policies

We have made no material changes to the disclosures regarding critical accounting policies made in our Annual Report on Form 10-K for the year ended June 30, 2008, which was filed with the Securities and Exchange Commission on September 26, 2008.