o·

We also received upfront fees as part of the Olympus arrangements (although, unlike in the Senko agreement, these fees were non-refundable). Specifically, in exchange for an upfront fee, we granted the Joint Venture an exclusive, perpetual license to certain of our intellectual property and agreed to perform additional development activities. This upfront fee has been recorded in the liability account entitled deferred revenues, related party, on our consolidated balance sheet. Similar to the Senko agreement, we have elected an accounting policy to recognize revenues from the combined license/development accounting unit as we perform the development services, as this represents our final obligation underlying the combined accounting unit. Specifically, we ~~plan to recognize~~have recognized revenues from the license/development accounting unit using a “proportional performance” methodology, resulting in the derecognition of amounts recorded in the deferred revenues, related party account as we complete various milestones underlying the development services. For instance, we have recognized and will continue to recognize some of the deferred revenues, related party, as revenues, related party, when we complete a pre-clinical trial or obtain regulatory approval in a specific jurisdiction. Determining what portion of the deferred revenues, related party balance to recognize as each milestone is completed involves substantial judgment. In allocating the balance of the deferred revenues, related party, to various milestones, we had in-depth discussions with our operations personnel regarding the relative value of each milestone to the Joint Venture and Olympus. We also considered the cost of completing each milestone relative to the total costs we plan to incur in completing all of the development activities, since we believe that the relative cost of completing a milestone is a reasonable proxy for its fair value. The accounting policy described above could result in revenues being recorded in an earlier accounting period than had other judgments or assumptions been made by us.

·	~~Government Grants~~

We are eligible to receive grants from the NIH related to our research on adipose-derived cell therapy to treat myocardial infarctions. There are no specific standards under U.S. Generally Accepted Accounting Principles (“GAAP”) that prescribe the recognition or classification of these grants in the statement of operations. Absent such guidance, we have established an accounting policy to recognize NIH grant revenues at the lesser of:

§	~~Qualifying costs incurred (and not previously recognized), plus any allowable grant fees, for which Cytori is entitled to grant funding; or,~~

§	~~The amount determined by comparing the research outputs generated to date versus the total outputs that are expected to be achieved under the entire arrangement.~~

Our accounting policy could theoretically defer revenue recognition beyond the period in which we have earned the rights to such fees. However, we selected this accounting policy to counteract the possibility of recognizing revenues from the NIH arrangement too early. For instance, if our policy permitted revenues to be recognized solely as qualifying costs were incurred, we could alter the amount of revenue recognized by incurring more or less cost in a given period, irrespective of whether these costs correlate to the research outputs generated. On the other hand, if revenue recognition were based on output measures alone, it would be possible to recognize revenue in excess of costs actually incurred; this is not appropriate since qualifying costs remain the basis of our funding under the NIH grant. The application of our accounting policy, nonetheless, involves significant judgment, particularly in estimating the percentage of outputs realized to date versus the total outputs expected to be achieved under the grant arrangement.

~~-29-~~-27-

~~Index~~

~~Presentation~~

We have presented amounts earned under our NIH research arrangement as research grant revenue. We believe that the activities underlying the NIH agreement constituted a portion of our ongoing major or central operations. Moreover, the government obtains rights under the arrangement in the same manner (but perhaps not to the same extent) as a commercial customer that similarly contracts with us to perform research activities. For instance, the government and any authorized third parties may use our federally funded research and/or inventions without payment of royalties to us.

Goodwill Impairment Testing

In late 2002, we purchased StemSource, Inc. and recognized over $4,600,000 in goodwill associated with the acquisition, of which ~~$4,387,000~~$3,922,000 remains on our balance sheet as of ~~March 31,~~June 30, 2007. As required by Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), we must test this goodwill at least annually for impairment as well as when an event occurs or circumstances change such that it is reasonably possible that impairment may exist. Moreover, this testing must be performed at a level of the organization known as the reporting unit. A reporting unit is at least the same level as a company’s operating segments, and sometimes even one level lower. Our two reporting units are, in fact, our two operating segments.

Specifically, the process for testing goodwill for impairment under SFAS 142 involves the following steps:

·	Company assets and liabilities, including goodwill, are allocated to each reporting unit for purposes of completing the goodwill impairment test.

·	The carrying value of each reporting unit - that is, the sum of all of the net assets allocated to the reporting unit - is then compared to its fair value.

·	If the fair value of the reporting unit is lower than its carrying amount, goodwill may be impaired - additional testing is required.

When we last completed our goodwill impairment testing in 2006, the fair values of our two reporting units each exceeded their respective carrying values. Accordingly, we determined that none of our reported goodwill was impaired.

The application of the goodwill impairment test involves a substantial amount of judgment. For instance, SFAS 142 requires that assets and liabilities be assigned to a reporting unit if both of the following criteria are met:

·	The asset will be employed in or the liability relates to the operations of a reporting unit.

·	The asset or liability will be considered in determining the fair value of the reporting unit.

We developed mechanisms to assign company-wide assets like shared property and equipment, as well as company-wide obligations such as borrowings under our GE loan facility, to our two reporting units. In some cases, certain assets were not allocable to either reporting unit and were left unassigned.

The most complex and challenging asset to assign to each reporting unit was our acquired goodwill. As noted previously, all of our recorded goodwill was generated in connection with our acquisition of StemSource in 2002. However, when we first acquired StemSource, we determined that a portion of the goodwill related to the MacroPore Biosurgery reporting unit. The amount of goodwill allocated represented our best estimate of the synergies (notably future cost savings from shared research and development activities) that the MacroPore Biosurgery reporting unit would obtain by virtue of the acquisition.

Finally, with the consultation and assistance of a third party, we estimated the fair value of our reporting units by using various estimation techniques. In particular, in 2006, we estimated the fair value of our MacroPore Biosurgery reporting unit based on an equal weighting of the market values of comparable enterprises and discounted projections of estimated future cash flows. Clearly, identifying comparable companies and estimating future cash flows as well as appropriate discount rates involve judgment. On the contrary, we estimated the fair value of our regenerative cell reporting unit solely using an income approach, as we believe there are no comparable enterprises on which to base a valuation. The assumptions underlying this valuation method involve a substantial amount of judgment, particularly since our regenerative cell business has yet to generate any revenues and does not have a commercially viable product. The combined value of our goodwill is consistent with the market’s valuation.

In particular, in 2006, we estimated the fair value of our MacroPore Biosurgery reporting unit based on an equal weighting of the market values of comparable enterprises and discounted projections of estimated future cash flows. Clearly, identifying comparable companies and estimating future cash flows as well as appropriate discount rates involve judgment. The $465,000 of goodwill determined to be related to our MacroPore Biosurgery reporting unit was transferred to Kensey Nash upon the sale of our spine and orthopedic product line in 2007. Therefore, as of June 30, 2007, all of our goodwill relates to our regenerative cell business.

On the contrary, we estimated the fair value of our regenerative cell reporting unit solely using an income approach, as we believe there are no comparable enterprises on which to base a valuation. The assumptions underlying this valuation method involve a substantial amount of judgment, particularly since our regenerative cell business has yet to generate any revenues and does not have a commercially viable product. The combined value of our goodwill is consistent with the market’s valuation.

Again, the manner in which we assigned assets, liabilities, and goodwill to our reporting units, as well as how we determined the fair value of such reporting units, involves significant uncertainties and estimates. The judgments employed may have an effect on whether a goodwill impairment loss is recognized.

~~Dispositions~~

~~In 2004, we sold most of the assets and intellectual property rights in our (non-Japan) Thin Film product line to MAST.~~

As is common in the life sciences industry, the sale agreements contained provisions beyond the simple transfer of net assets to the acquiring enterprises for a fixed price. Specifically, as part of the arrangement, we also agreed to perform the following services:

·	~~Provide training to MAST personnel on production and other aspects of the Thin Film product lines, and~~

·	~~Provide a back-up supply of Thin Film products to MAST, at cost, for a specified period of time.~~

Disposing of assets and product lines is not one of our core ongoing or central activities. Accordingly, determining the appropriate accounting for these transactions involved some of our most difficult, subjective, and complex judgments. In particular, we made assumptions around the appropriate manner and timing in which to recognize the gain on disposal for each transaction in the statement of operations.

~~-30-~~-28-

~~Index~~

We initially deferred recognition of the gain related to our disposition of certain Thin Film assets, which occurred in May 2004. Again, the Asset Purchase Agreement governing the Thin Film sale obligated us to perform certain actions for the benefit of the buyer - MAST - for a defined period of time, such as serving as a back-up supplier. We concluded, due to the arbitration proceedings settled in August 2005 that we completed our remaining performance obligations during the third quarter of 2005. Accordingly, we recognized the remaining deferred gain on sale of assets as gain on sale of assets.

We also recognized a portion of the deferred gain when we sold products to MAST under the back-up supply agreement in 2004. Refer to the “Revenue Recognition” section of this Critical Accounting Policies and Significant Estimates discussion for further details.

Variable Interest Entity (Olympus-Cytori Joint Venture)

FASB Interpretation No. 46 (revised 2003), “Consolidation of Variable Interest Entities - Anan Interpretation of ARB No. 51” (“FIN 46R”) requires a variable interest entity (“VIE”) to be consolidated by its primary beneficiary. Evaluating whether an entity is a VIE and determining its primary beneficiary involves significant judgment.

In concluding that the Olympus-Cytori Joint Venture was a VIE, we considered the following factors:

Under FIN 46R, an entity is a VIE if it has insufficient equity to finance its activities. We recognized that the initial cash contributed to the Joint Venture formed by Olympus and Cytori ($30,000,000) would be completely utilized by the first quarter of 2006. Moreover, it was highly unlikely that the Joint Venture would be able to obtain the necessary financing from third-party lenders without additional subordinated financial support - such as personal guarantees by one or both of the Joint Venture stockholders. Accordingly, the Joint Venture will require additional financial support from Olympus and Cytori to finance its ongoing operations, indicating that the Joint Venture is a VIE. In fact, in the first quarter of 2006, we contributed $150,000 each to fund the Joint Venture’s ongoing operations.

Moreover, Olympus has a contingent put option that would, in specified circumstances, require Cytori to purchase Olympus’s interests in the Joint Venture for a fixed amount of $22,000,000. Accordingly, Olympus is protected in some circumstances from absorbing all expected losses in the Joint Venture. Under FIN 46R, this means that Olympus may not be an “at-risk” equity holder, although Olympus clearly has decision rights over the operations of the Joint Venture.

Because the Joint Venture is undercapitalized, and because one of the Joint Venture’s decision makers may be protected from losses, we have determined that the Joint Venture is a VIE under FIN 46R. Because of the complexities in applying FIN 46R, it is reasonable to expect that others may reach a different conclusion.

As noted previously, a VIE is consolidated by its primary beneficiary. The primary beneficiary is defined in FIN 46R as the entity that would absorb the majority of the VIE’s expected losses or be entitled to receive the majority of the VIE’s residual returns (or both).

Significant judgment was involved in determining the primary beneficiary of the Joint Venture. Under FIN 46R, we believe that Olympus and Cytori are “de facto agents” and, together, will absorb more than 50% of the Joint Venture’s expected losses and residual returns. Ultimately, we concluded that Olympus, and not Cytori, was the party most closely related with the joint venture and, hence, its primary beneficiary. Our conclusion was based on the following factors:

·	The business operations of the Joint Venture will be most closely aligned to those of Olympus (i.e., the manufacture of devices), and

·	Olympus controls the Board of Directors, as well as the day-to-day operations of the Joint Venture.

The application of FIN 46R involves substantial judgment, and others may arrive at the conclusion that Cytori should consolidate the Joint Venture. Had we consolidated the Joint Venture, though, there would be no effect on our net loss or shareholders’ equity at December 31, 2006 or for the year then ended. However, certain balance sheet and income statement captions would have been presented in a different manner. For instance, we would not have presented a single line item entitled investment in joint venture in our balance sheet, but instead would have performed a line by line consolidation of each of the Joint Venture’s accounts into our financial statements.

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Recent Accounting Pronouncements

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of prior -year uncorrected misstatements should be considered when quantifying misstatements in the current year financial statements. SAB 108 requires registrants to quantify misstatements using both an income statement (“rollover”) and balance sheet (“iron curtain”) approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial now are considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. If prior years are not restated, the cumulative effect adjustment is recorded in opening accumulated earnings (deficit) as of the beginning of the fiscal year of adoption. SAB 108 is effective for fiscal years ending on or after November 15, 2006, with earlier adoption encouraged. The adoption of SAB 108 has not had a significant effect on our financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure of fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We do not believe that the adoption of SFAS 157 will have a significant effect on our consolidated financial statements.

In March 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force on Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” (“EITF 07-3”). EITF 07-3 states that nonrefundable advance payments for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the goods are delivered or the related services are performed. The guidance is effective for all periods beginning after December 15, 2007. We are currently in the process of evaluating whether the adoption of EITF 07-3 will have a significant effect on our consolidated financial statements.

~~-31-~~

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities- including an amendment of FASB Statement No. 115” (“SFAS 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value. The provisions of SFAS 159 are effective for financial statements issued for fiscal years beginning after November 15, 2007. We do not believe that the adoption of SFAS 159 will have a significant effect on our consolidated financial statements.

~~Index~~

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk related to fluctuations in interest rates and in foreign currency exchange rates.

Interest Rate Exposure

We are not subject to market risk due to fluctuations in interest rates on our long-term obligations as they bear a fixed rate of interest. Our exposure relates primarily to short-term investments. These short-term investments, reported at an aggregate fair market value of ~~$2,761,000~~$3,795,000 as of ~~March 31,~~June 30, 2007, consist primarily of investments in debt instruments of financial institutions and corporations with strong credit ratings and United States ~~of America~~ government obligations. These securities are subject to market rate risk as their fair value will fall if market interest rates increase. If market interest rates were to increase immediately and uniformly by 100 basis points from the levels prevailing at ~~March 31,~~June 30, 2007, for example, and assuming average investment duration of seven months, the fair value of the portfolio would not decline by a material amount. We do not use derivative financial instruments to mitigate the risk inherent in these securities. However, we do attempt to reduce such risks by generally limiting the maturity date of such securities, diversifying our investments, and limiting the amount of credit exposure with any one issuer. While we do not always have the intent, we do currently have the ability to hold these investments until maturity and, therefore, believe that reductions in the value of such securities attributable to short-term fluctuations in interest rates would not materially affect our financial position, results of operations, or cash flows. Changes in interest rates would, of course, affect the interest income we earn on our cash balances after re-investment.

Foreign Currency Exchange Rate Exposure

Our exposure to market risk due to fluctuations in foreign currency exchange rates relates primarily to our cash balances in Europe and Japan. Transaction gains or losses resulting from cash balances and revenues have not been significant in the past and we are not engaged in any hedging activity in the Euro, the Yen or other currencies. Based on our cash balances and revenues derived from markets other than the United States of America for the quarter ended ~~March 31,~~June 30, 2007, a hypothetical 10% adverse change in the Euro or Yen against the U.S. dollar would not result in a material foreign currency exchange loss. Consequently, we do not expect that reductions in the value of such sales denominated in foreign currencies resulting from even a sudden or significant fluctuation in foreign exchange rates would have a direct material impact on our financial position, results of operations, or cash flows.

Notwithstanding the foregoing, the indirect effect of fluctuations in interest rates and foreign currency exchange rates could have a material adverse effect on our business, financial condition, and results of operations. For example, foreign currency exchange rate fluctuations may affect international demand for our products. In addition, interest rate fluctuations may affect our prospective customers’ buying patterns. Furthermore, interest rate and currency exchange rate fluctuations may broadly influence the United States ~~of America~~ and foreign economies, resulting in a material adverse effect on our business, financial condition, and results of operations.

Under our Japanese Thin Film agreement with Senko, we would receive payments in the nature of royalties based on Senko’s net sales, which would be Yen denominated. We expect such sales ~~or royalties~~ to begin in 2007.

Item 4. Controls and Procedures

Christopher J. Calhoun, our Chief Executive Officer, and Mark E. Saad, our Chief Financial Officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in Securities Exchange Act Rule 13a-15(e)), have concluded that as of ~~March 31,~~June 30, 2007, our disclosure controls and procedures are effective. There has been no change in our internal control over financial reporting during the quarter and six months ended June 30, 2007, that has materially affected, or is likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we have been involved in routine litigation incidental to the conduct of our business. As of ~~March 31,~~June 30, 2007, we were not a party to any material legal proceeding. We are not formally a party to the University of Pittsburgh patent litigation. However, we are responsible for reimbursing certain related litigation costs.

~~-32-~~

~~Index~~

Item 1A. Risk Factors

In analyzing our company, you should consider carefully the following risk factors together with all of the other information included in this quarterly report on Form 10-Q. Factors that could adversely affect our business, operating results, and financial condition, as well as adversely affect the value of an investment in our common stock, include those discussed below, as well as those discussed above in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere throughout this quarterly report on Form 10-Q.

We are subject to the following significant risks, among others:

We will need to raise more cash in the future

We have almost always had negative cash flows from operations. Our regenerative cell business will continue to result in a substantial requirement for research and development expenses for several years, during which it could bring in no significant cash and/or revenues. ~~Our spine and orthopedics products business has performed poorly and we are actively seeking to divest these assets.~~ There can be no guarantee that adequate funds for our operations from any additional debt or equity financing, our operating revenues, arrangements with distribution partners, or from other sources will be available when needed or on terms attractive to us. The inability to obtain sufficient funds would require us to delay, scale back, or eliminate some or all of our research or product development programs, manufacturing operations, clinical studies or regulatory activities, or to license third parties to commercialize products or technologies that we would otherwise seek to develop ourselves, thus having a substantial negative effect on our results of operations and financial condition.

We have never been profitable on an operational basis and we expect to have significant operating losses for the next few years

We have incurred net operating losses in each year since we started doing business. ~~These~~As our focus on our regenerative cell technology has increased, these losses have resulted primarily from expenses associated with our research and development activities and general and administrative expenses. Losses related to our development of regenerative cell technology are expected to keep us in a loss position on a consolidated basis for several years. We anticipate that our recurring operating expenses will be at high levels for the next few years, due to the continued need to fund our regenerative cell technology clinical research program as well as additional pre-clinical research.

Our business strategy is high-risk

We are focusing our resources and efforts primarily on our regenerative cell technology and its cash needs for research and development activities. This is a high-risk strategy because there can be no assurance that our regenerative cell technology will ever be developed into commercially viable products (commercial risk), that we will be able to preclude other companies from depriving us of market share and profit margins by selling products based on our inventions and developments (legal risk), that we will be able to successfully manage a company in a different business and on a different scale than we have operated in the past (operational risk), that we will be able to achieve the desired therapeutic results using regenerative cells (scientific risk), or that our cash resources will be adequate to develop the regenerative cell technology until it becomes profitable, if ever (financial risk). We are using our cash in one of the riskiest industries in the economy (strategic risk). This may make our stock an unsuitable investment for some investors.

The financial risk in this strategy is significant, particularly since our bioresorbable products are not currently independently cash-flow-positive. Our spine and orthopedics implants business has declined significantly nd we are actively pursuing a buyer (or buyers) for this line of business.

We must keep our joint venture with Olympus operating smoothly

Our regenerative cell business cannot succeed on the current timelines unless our joint venture collaboration with Olympus goes well. We have given Olympus-Cytori, Inc. an exclusive license to our regenerative cell therapeutic device technology for use in future generation devices. If Olympus-Cytori, Inc. does not successfully develop and manufacture future generation devices for sale to us, we may not be able to commercialize any device or any therapeutic products successfully into the market. In addition, any future disruption in or breakup of our relationship with Olympus would be extremely costly to our reputation, in addition to causing many serious practical problems.

We and Olympus must overcome contractual and cultural barriers as we work together. Our relationship is formally measured by a set of complex contracts, which have not yet been tested in practice. In addition, many aspects of the relationship will be essentially non-contractual and must be worked out between the parties and the responsible individuals over time. The Joint Venture is intended to have a long life, and it is difficult to maintain cooperative relationships over a long period of time from a far distance in the face of various kinds of change. Cultural differences, including a language barrier to some degree, may affect the efficiency of the relationship as well.

Olympus-Cytori, Inc. is 50% owned by us and 50% owned by Olympus. By contract, each side must consent before any of a wide variety of important business actions can occur. This situation possesses a risk of potentially time-consuming and difficult negotiations which could at some point delay the Joint Venture from pursuing its business strategies.

Olympus is entitled to designate the Joint Venture's chief executive officer and a majority of its board of directors, which means that day-to-day decisions which are not subject to a contractual veto will essentially be controlled by Olympus. In addition, Olympus-Cytori, Inc. will need more money than its initial capitalization in order to finalize development of and production of the future generation devices. If we are unable to help provide future financing for Olympus-Cytori, Inc., our relative equity interest in Olympus-Cytori, Inc. may decrease.

Furthermore, under a License/Joint Development Agreement among Olympus-Cytori, Inc., Olympus, and us, Olympus will have a primary role in the development of Olympus-Cytori, Inc.’s future generation devices. Although Olympus has extensive experience in developing medical devices, this arrangement will result in a reduction of our control over the development and manufacturing of the future generation devices.

~~-33-~~-31-

~~Index~~

We rely on Medtronic to distribute our spine and orthopedics biomaterials products, but Medtronic’s level of commitment to our products historically has been poor and we are not succeeding in this line of business

We have limited control over sales, marketing, and distribution of our biomaterials products. Our strategy for sales and marketing of our bioresorbable products included entering into an agreement with Medtronic, a company with a large distribution network, to market many of our current and certain future products incorporating our technology. The sale of hard-tissue-fixation bioresorbable implant products to our distribution partner, Medtronic, has constituted the majority of our revenues.

We remain significantly dependent on Medtronic to generate sales revenues for all of our spine and orthopedics bioresorbable products. The amount and timing of resources which may be devoted to the performance of Medtronic’s contractual responsibilities are not within our control. There can be no guarantee that Medtronic will perform its obligations as expected or pay us any additional option or license fees. There is also no guarantee that it will market any new products under the distribution agreements or that we will derive any significant revenue from such arrangements. Medtronic’s sale of our products to end customers in 2004 through 2007, and its rate of product orders placed with us in the same periods, disappointed our expectations.

We remain significantly disappointed with the marketing efforts of Medtronic for our non-MYSTIQUE™ products at this time. We recorded an inventory provision for slow-moving non-MYSTIQUE™ inventory in the second, third, and fourth quarters of 2005 as well as in the second and third quarters of 2006. We are also becoming concerned about Medtronic’s commitment to MYSTIQUE™.

Our dependence upon Medtronic to market and sell our bioresorbable products places us in a position where we cannot accurately predict the extent to which our products will be actively and effectively marketed, depriving us of some of the reliable data we need to make optimal operational and strategic decisions. The results of this business line in each year from 2004 through 2007 have been below our internal expectations.

Although Medtronic has exclusive distribution rights to our co-developed spinal implants, it also distributes other products that are competitive to ours. Medtronic might choose to develop and distribute existing or alternative technologies in preference to our technology in the spine, or preferentially market competitive products that can achieve higher profit margins. We suspect that this has in fact been happening.

There can be no assurance that our interests will coincide with those of Medtronic or that disagreement over rights or technology or other proprietary interests will not occur. The loss of the marketing services provided by Medtronic (or the failure of Medtronic to satisfactorily perform these marketing services), or the loss of revenues generated by Medtronic, could have a substantial negative effect on our ability or willingness to continue our spine and orthopedics biomaterials business. Indeed, it seems the problems we have already experienced with Medtronic may be intractable. Accordingly, we are actively seeking divestiture or other strategic alternatives for the business.

~~Senko has not yet begun to distribute our Thin Film products in Japan; and if and when they do, we cannot be assured that they will be successful.~~

We have a limited operating history; our operating results and stock price, like those of all emerging life science companies, can be volatile

Our prospects must be evaluated in light of the risks and difficulties frequently encountered by emerging companies and particularly by such companies in rapidly evolving and technologically advanced fields such as the biotechnology and medical device fields. Due to our limited operating history, and the development stage status of our regenerative cell business, comparisons of our year-to-year operating results are not necessarily meaningful and the results for any periods should not necessarily be relied upon as an indication of future performance. Since our limited operating history makes the prediction of future results difficult or impossible, our recent revenue results should not be taken as an indication of any future growth or of a sustainable level of revenue. Operating results will also be affected by our transition away from our revenue-generating medical device business and the focus of the vast majority of our resources into the development of the regenerative cell business. All of our recent product revenues have come from our spine and orthopedics bioresorbable implants product line, which we sold in May 2007.

Moreover, our operating results can vary substantially from our previously published financial guidance (such as occurred in the second quarter of 2004), from analyst expectations, and from previous periodic results for many reasons, including the timing of product introductions and distributor purchase orders. Also, our stock price is likely to be disproportionately affected by changes which generally affect the economy, the stock market, or the medical device and biotechnology industries.

From time to time, we have tried to influence our investors’ expectations as to our operating results by periodically announcing financial guidance. However, we have in the past been forced to revise or withdraw such guidance due to lack of visibility and predictability of product demand. ~~This lack of visibility and predictability of product demand for our bioresorbable implant products is likely to occur in the future as well.~~

~~-34-~~

~~Index~~

We are vulnerable to competition and technological change, and also to physicians’ inertia

We compete with many domestic and foreign companies in developing our technology and products, including biotechnical, medical device, pharmaceutical, and biopharmaceutical companies. Many of our competitors and potential competitors have substantially greater financial, technological, research and development, marketing, and personnel resources than we do. There can be no assurance that our competitors will not succeed in developing alternative technologies and products that are more effective, easier to use, or more economical than those which we have developed or are in the process of developing, or that would render our technology and products obsolete and non-competitive in these fields. In general, we may not be able to preclude other companies from developing and marketing competitive regenerative cell therapies ~~or bioresorbable products~~ that are similar to ours or perform similar functions.

These competitors may also have greater experience in developing therapeutic treatments, conducting clinical trials, obtaining regulatory clearances or approvals, manufacturing and commercializing therapeutic ~~or biomaterials~~ products. It is possible that certain of these competitors may obtain patent protection, approval, or clearance from the FDA or achieve commercialization earlier than we, any of which could have a substantial negative effect on our business. Finally, Olympus ~~Medtronic~~ and our other partners might pursue parallel development of other technologies or products, which may result in a partner developing additional products that will compete with our products.

We also compete with other types of regenerative cell therapies, such as bone marrow-derived cell therapies and potentially embryonic-derived therapies. ~~Our biomaterials business competes with manufacturers of traditional non-bioresorbable implants, such as titanium implants.~~ Doctors have historically been slow to adopt new technologies such as ours, whatever the merits, when older technologies continue to be supported by established providers. Overcoming such inertia often requires very significant marketing expenditures or definitive product superiority.

We expect physicians’ inertia and skepticism to also be a significant barrier as we attempt to gain market penetration with our future regenerative cell products. We believe we will need to finance lengthy time-consuming clinical studies (so as to provide convincing evidence of the medical benefit) in order to overcome this inertia and skepticism.

Our regenerative cell technology products are pre-commercialization, which subjects us to development and marketing risks

We are in a relatively early stage of the path to commercialization with many of our products. We believe that our long-term viability and growth will depend in large part on our ability to develop commercial quality cell processing devices and useful procedure-specific consumables, and to establish the safety and efficacy of our therapies through clinical trials and studies. We are presently pursuing therapies for cardiovascular disease as well as new approaches for aesthetic and reconstructive surgery, gastrointestinal disorders and spine and orthopedic conditions. There can be no assurance that our development programs will be successfully completed or that required regulatory clearances or approvals will be obtained on a timely basis, if at all.

There is no proven path for commercializing our regenerative cell technology in a way to earn a durable profit commensurate with the medical benefit. Although we ~~are working~~intend to ~~develop proprietary therapeutic products which optimize or enhance the benefit of autologous stem~~commercialize aesthetic and reconstructive surgery and our regenerative ~~cells~~cell banking platform in 2008, additional market opportunities for ~~a variety of particular indications, most of~~ our cell-related products and/or services are at least two to five years away.

Moreover, the successful development and market acceptance of our technologies and products are subject to inherent developmental risks, including failure of inventive imagination, ineffectiveness or lack of safety, unreliability, failure to receive necessary regulatory clearances or approvals, high commercial cost, and preclusion or obsolescence resulting from third parties’ proprietary rights or superior or equivalent products, and competition from copycat products, as well as general economic conditions affecting purchasing patterns. There can be no assurance that we or our partners will be able to successfully develop and commercialize our technologies or products, or that our competitors will not develop competing technologies that are less expensive or otherwise superior to ours. The failure to successfully develop and market our new regenerative cell technologies would have a substantial negative effect on our results of operations and financial condition.

The timing and amount of Thin Film revenues from Senko are uncertain

The sole remaining product line in our MacroPore Biosurgery segment is our Japan Thin Film business. Our right to receive royalties from Senko, and to recognize certain deferred revenues, depends on the timing of MHLW approval for commercialization of the product in Japan. We currently expect this to occur in 2007, but we have no control over this timing and our expectations have fallen short before. Also, even after commercialization, we will be dependent on Senko, our exclusive distributor, to increase product sales in Japan.

There is a risk that we could experience with Senko some of the same problems we experienced in our previous relationship with Medtronic, which was the exclusive distributor for our former bioresorbable spine and orthopedic implant product line.

We have limited manufacturing experience

We have no experience in manufacturing the Celution™ System at a commercial level, and although Olympus is a highly capable and experienced manufacturer of medical devices, there can be no guarantee that the Olympus-Cytori joint venture will be able to successfully develop and manufacture the Celution™ System in a manner that is cost-effective or commercially viable, or that development and manufacturing capabilities might not take much longer than currently anticipated to be ready for the market.

In the event that the Olympus-Cytori joint venture is not successful, Cytori may not have the resources or ability to self-manufacture commercially viable devices, and in any event this failure may substantially extend the time it would take for us to bring a commercial device to market. This makes us significantly dependant on the continued dedication and skill of Olympus for the successful development of the Celution™ System.

In addition, as a company we have limited experience in manufacturing the type of cell-related therapeutic products which we intend to introduce in ~~2008.~~the future.

In addition, the future of our biomaterials business success is significantly dependent on our ability to manufacture our bioresorbable implants in commercial quantities, in compliance with regulatory requirements, and in a cost-effective manner. Production of some of our products in commercial-scale quantities may involve unforeseen technical challenges and may require significant scale-up expenses for additions to facilities and personnel. There can be no guarantee that we will be able to achieve large-scale manufacturing capabilities for some of our biomaterials products or that we will be able to manufacture these products in a cost-effective manner or in quantities necessary to allow us to achieve profitability. Our 2002 sale of CMF production assets to Medtronic and our 2004 sale of the (non-Japan) Thin Film product line deprived us of some economies of scale in manufacturing. Current demand for spine and orthopedics products from Medtronic is so low that economies of scale are lacking in regard to that product line as well.

~~-35-~~-32-

~~Index~~

~~We have to maintain quality assurance certification and manufacturing approvals~~

The manufacture of our bioresorbable products is, and the manufacture of the Celution™ System for regenerative cells will be, and the manufacture of any future cell-related therapeutic products would be, subject to periodic inspection by regulatory authorities and distribution partners. The manufacture of devices and products for human use is subject to regulation and inspection from time to time by the FDA for compliance with the FDA’s Quality System Regulation (“QSR”) requirements, as well as equivalent requirements and inspections by state and non-U.S. regulatory authorities. There can be no guarantee that the FDA or other authorities will not, during the course of an inspection of existing or new facilities, identify what they consider to be deficiencies in our compliance with QSRs or other requirements and request, or seek, remedial action.

Failure to comply with such regulations or a potential delay in attaining compliance may adversely affect our manufacturing activities and could result in, among other things, injunctions, civil penalties, FDA refusal to grant pre-market approvals or clearances of future or pending product submissions, fines, recalls or seizures of products, total or partial suspensions of production, and criminal prosecution. There can be no assurance that we will be able to obtain additional necessary regulatory approvals or clearances on a timely basis, if at all. Delays in receipt of or failure to receive such approvals or clearances, or the loss of previously received approvals or clearances could have a substantial negative effect on our results of operations and financial condition.

~~We depend on a sole source supplier for our crucial raw material for our bioresorbable products~~

We currently purchase the high molecular weight, medical grade, lactic acid copolymer used in manufacturing most of our bioresorbable products from a single qualified source. Although we have a contract with B.I. Chemicals, Inc., which guarantees continuation of supply through August 15, 2008, we cannot guarantee that they will elect to continue the contract beyond that date, or that they will not elect to discontinue the manufacture of the material. They have agreed that if they discontinue manufacturing, they will either find a replacement supplier, or provide us with the necessary technology to self-manufacture the material, either of which could mean a substantial increase in material costs. Also, despite this agreement, they might fail to do these things for us. Under the terms of the contract, B.I. Chemicals, Inc. may choose to raise their prices upon six months’ prior notice, which may also result in a substantially increased material cost. Although we believe that we would be able to obtain the material from at least one other source in the event of a failure of supply, there can be no assurance that we will be able to obtain adequate increased commercial quantities of the necessary high quality within a reasonable period of time or at commercially reasonable rates. Lack of adequate commercial quantities or the inability to develop alternative sources meeting regulatory requirements at similar prices and terms within a reasonable time, or any interruptions in supply in the future could have a significant negative effect on our ability to manufacture products and, consequently, could have a material adverse effect on our results of operations and financial condition.

We may not be able to protect our proprietary rights

Our success depends in part on whether we can obtain additional patents, maintain trade secret protection, and operate without infringing on the proprietary rights of third parties.

Our recently amended regenerative cell technology license agreement with the Regents of the University of California contains certain developmental milestones, which if not achieved could result in the loss of exclusivity or loss of the license rights. The loss of such rights could impact our ability to develop certain regenerative cell technology products. Also, our power as licensee to successfully use these rights to exclude competitors from the market is untested. In addition, further legal risk arises from a lawsuit filed by the University of Pittsburgh naming all of the inventors who had not assigned their ownership interest in Patent 6,777,231 to the University of Pittsburgh, seeking a determination that its assignors, rather than the University of California’s assignors, are the true inventors of Patent 6,777,231. We are the exclusive, worldwide licensee of the University of California’s rights under this patent, which relates to adult stem cells isolated from adipose tissue that can differentiate into two or more of a variety of cell types. If the University of Pittsburgh wins the lawsuit, our license rights to this patent could be nullified or rendered non-exclusive with respect to any third party that might license rights from the University of Pittsburgh, and our regenerative cell strategy could be impacted.

We have various U.S. patents for the design of our bioresorbable plates and high torque screws and devices and we have filed applications for numerous additional U.S. patents, as well as certain corresponding patent applications outside

On August 3, 2007, the United States Patent and Trademark Office issued a “Revised Decision (Correction of ~~America, relating to our technology. However, we believe we cannot patent our use~~Inventorship)” specifying that the correct inventorship of Patent 6,777,231 is only UC’s assignees. On August 9, 2007, the United States District Court, without the benefit of the ~~lactic acid copolymer~~Patent Office Inventorship Decision, granted the University of Pittsburgh’s motion for ~~surgical implants, nor are many~~Summary Judgment in part, determining that the University of ~~our particular implants generally patentable.~~Pittsburgh’s assignees were properly named as inventors on Patent 6,777,231, and that all other inventorship issues shall be determined according to the facts presented at trial.

There can be no assurance that any of the pending patent applications will be approved or that we will develop additional proprietary products that are patentable. There is also no assurance that any patents issued to us will provide us with competitive advantages, will not be challenged by any third parties, or that the patents of others will not prevent the commercialization of products incorporating our technology. Furthermore, there can be no guarantee that others will not independently develop similar products, duplicate any of our products, or design around our patents.

Our commercial success will also depend, in part, on our ability to avoid infringing on patents issued to others. If we were judicially determined to be infringing on any third-party patent, we could be required to pay damages, alter our products or processes, obtain licenses, or cease certain activities. If we are required in the future to obtain any licenses from third parties for some of our products, there can be no guarantee that we would be able to do so on commercially favorable terms, if at all. U.S. patent applications are not immediately made public, so we might be surprised by the grant to someone else of a patent on a technology we are actively using. As noted above as to the University of Pittsburgh lawsuit, even patents issued to us or our licensors might be judicially determined to belong in full or in part to third parties.

Litigation, which would result in substantial costs to us and diversion of effort on our part, may be necessary to enforce or confirm the ownership of any patents issued or licensed to us, or to determine the scope and validity of third-party proprietary rights. If our competitors claim technology also claimed by us and prepare and file patent applications in the United States of America, we may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office or a foreign patent office to determine priority of invention, which could result in substantial costs to and diversion of effort, even if the eventual outcome is favorable to us.

~~-36-~~

~~Index~~

Any such litigation or interference proceeding, regardless of outcome, could be expensive and time-consuming. We have been incurring substantial legal costs as a result of the University of Pittsburgh lawsuit, and our president, Marc Hedrick, is a named individual defendant in that lawsuit because he is one of the inventors identified on the patent. As a named inventor on the patent, Marc Hedrick is entitled to receive from the Regents of the University of California up to 7% of royalty payments made by a licensee (us) to the Regents of the University of California. This agreement was in place prior to his employment with us.

In addition to patents, which alone may not be able to protect the fundamentals of our regenerative cell ~~and bioresorbable businesses,~~business, we also rely on unpatented trade secrets and proprietary technological expertise. Our intended future cell-related therapeutic products, such as a consumables, are likely to fall largely into this category. We rely, in part, on confidentiality agreements with our partners, employees, advisors, vendors, and consultants to protect our trade secrets and proprietary technological expertise. There can be no guarantee that these agreements will not be breached, or that we will have adequate remedies for any breach, or that our unpatented trade secrets and proprietary technological expertise will not otherwise become known or be independently discovered by competitors.

Failure to obtain or maintain patent protection, or protect trade secrets, for any reason (or third-party claims against our patents, trade secrets, or proprietary rights, or our involvement in disputes over our patents, trade secrets, or proprietary rights, including involvement in litigation), could have a substantial negative effect on our results of operations and financial condition.

We may not be able to protect our intellectual property in countries outside the United States ~~of America~~

Intellectual property law outside the United States ~~of America~~ is uncertain and in many countries is currently undergoing review and revisions. The laws of some countries do not protect our patent and other intellectual property rights to the same extent as United States ~~of America~~ laws. We currently have pending patent applications in Europe, Australia, Japan, Canada, China, Korea, and Singapore, among others.

We are, and Olympus-Cytori, Inc. will be, subject to intensive FDA regulation

As newly developed medical devices, our and Olympus-Cytori’s regenerative cell harvesting, isolation and delivery devices ~~and our bioresorbable implants~~ must receive regulatory clearances or approvals from the FDA and, in many instances, from non-U.S. and state governments prior to their sale. Our and Olympus-Cytori’s current and future regenerative cell harvesting, isolation and delivery devices ~~and bioresorbable implants~~ are subject to stringent government regulation in the United States ~~of America~~ by the FDA under the Federal Food, Drug and Cosmetic Act. The FDA regulates the design/development process, clinical testing, manufacture, safety, labeling, sale, distribution, and promotion of medical devices and drugs. Included among these regulations are pre-market clearance and pre-market approval requirements, design control requirements, and the Quality System Regulations/Good Manufacturing Practices. Other statutory and regulatory requirements govern, among other things, establishment registration and inspection, medical device listing, prohibitions against misbranding and adulteration, labeling and post-market reporting.

The regulatory process can be lengthy, expensive, and uncertain. Before any new medical device may be introduced to the United States of America market, the manufacturer generally must obtain FDA clearance or approval through either the 510(k) pre-market notification process or the lengthier pre-market approval application (“PMA”) process. It generally takes from three to 12 months from submission to obtain 510(k) pre-market clearance, although it may take longer. Approval of a PMA could take four or more years from the time the process is initiated. The 510(k) and PMA processes can be expensive, uncertain, and lengthy, and there is no guarantee of ultimate clearance or approval. We expect that some of our future products under development as well as Olympus-Cytori’s will be subject to the lengthier PMA process. Securing FDA clearances and approvals may require the submission of extensive clinical data and supporting information to the FDA, and there can be no guarantee of ultimate clearance or approval. Failure to comply with applicable requirements can result in application integrity proceedings, fines, recalls or seizures of products, injunctions, civil penalties, total or partial suspensions of production, withdrawals of existing product approvals or clearances, refusals to approve or clear new applications or notifications, and criminal prosecution.

Medical devices are also subject to post-market reporting requirements for deaths or serious injuries when the device may have caused or contributed to the death or serious injury, and for certain device malfunctions that would be likely to cause or contribute to a death or serious injury if the malfunction were to recur. If safety or effectiveness problems occur after the product reaches the market, the FDA may take steps to prevent or limit further marketing of the product. Additionally, the FDA actively enforces regulations prohibiting marketing and promotion of devices for indications or uses that have not been cleared or approved by the FDA.

There can be no guarantee that we will be able to obtain the necessary 510(k) clearances or PMA approvals to market and manufacture our other products in the United States of America for their intended use on a timely basis, if at all. Delays in receipt of or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or failure to comply with existing or future regulatory requirements could have a substantial negative effect on our results of operations and financial condition.

-33-

To sell in international markets, we will be subject to intensive regulation in foreign countries

In cooperation with our distribution partners, we intend to market our current and future products both domestically and in many foreign markets. A number of risks are inherent in international transactions. In order for us to market our products in Europe, Canada, Japan and certain other non-U.S. jurisdictions, we need to obtain and maintain required regulatory approvals or clearances and must comply with extensive regulations regarding safety, manufacturing processes and quality. For example, we still have not obtained regulatory approval for our Thin Film products in Japan. These regulations, including the requirements for approvals or clearances to market, may differ from the FDA regulatory scheme. International sales also may be limited or disrupted by political instability, price controls, trade restrictions and changes in tariffs. Additionally, fluctuations in currency exchange rates may adversely affect demand for our products by increasing the price of our products in the currency of the countries in which the products are sold.

There can be no assurance that we will obtain regulatory approvals or clearances in all of the countries where we intend to market our products, or that we will not incur significant costs in obtaining or maintaining foreign regulatory approvals or clearances, or that we will be able to successfully commercialize current or future products in various foreign markets. Delays in receipt of approvals or clearances to market our products in foreign countries, failure to receive such approvals or clearances or the future loss of previously received approvals or clearances could have a substantial negative effect on our results of operations and financial condition.

~~-37-~~We and/or the Joint Venture have to maintain quality assurance certification and manufacturing approvals

The manufacture of our Celution™ System for regenerative cells will be, and the manufacture of any future cell-related therapeutic products would be, subject to periodic inspection by regulatory authorities and distribution partners. The manufacture of devices and products for human use is subject to regulation and inspection from time to time by the FDA for compliance with the FDA’s Quality System Regulation (“QSR”) requirements, as well as equivalent requirements and inspections by state and non-U.S. regulatory authorities. There can be no guarantee that the FDA or other authorities will not, during the course of an inspection of existing or new facilities, identify what they consider to be deficiencies in our compliance with QSRs or other requirements and request, or seek, remedial action.

~~Index~~

We depend on a few key officers

Our performance is substantially dependent on the performance of our executive officers and other key scientific staff, including Christopher J. Calhoun, our Chief Executive Officer, and Marc Hedrick, MD, our President. We rely upon them for strategic business decisions and guidance. We believe that our future success in developing marketable products and achieving a competitive position will depend in large part upon whether we can attract and retain additional qualified management and scientific personnel. Competition for such personnel is intense, and there can be no assurance that we will be able to continue to attract and retain such personnel. The loss of the services of one or more of our executive officers or key scientific staff or the inability to attract and retain additional personnel and develop expertise as needed could have a substantial negative effect on our results of operations and financial condition. Two executive officers left us in 2006, one in connection with a summer 2006 reduction of our headcount by 18%.

Companies which make personnel cuts sometimes find the resulting loss of experience and lack of coverage can cause important business problems.

We may not have enough product liability insurance

The testing, manufacturing, marketing, and sale of our regenerative cell ~~and bioresorbable implant~~ products involve an inherent risk that product liability claims will be asserted against us, our distribution partners, or licensees. There can be no guarantee that our clinical trial and commercial product liability insurance is adequate or will continue to be available in sufficient amounts or at an acceptable cost, if at all. A product liability claim, product recall, or other claim, as well as any claims for uninsured liabilities or in excess of insured liabilities, could have a substantial negative effect on our results of operations and financial condition. Also, well-publicized claims could cause our stock to fall sharply, even before the merits of the claims are decided by a court.

Our charter documents contain anti-takeover provisions and we have adopted a Stockholder Rights Plan to prevent hostile takeovers

Our Amended and Restated Certificate of Incorporation and Bylaws contain certain provisions that could prevent or delay the acquisition of the Company by means of a tender offer, proxy contest, or otherwise. They could discourage a third party from attempting to acquire control of the Company, even if such events would be beneficial to the interests of our stockholders. Such provisions may have the effect of delaying, deferring, or preventing a change of control of the Company and consequently could adversely affect the market price of our shares. Also, in 2003 we adopted a Stockholder Rights Plan, of the kind often referred to as a poison pill. The purpose of the Stockholder Rights Plan is to prevent coercive takeover tactics that may otherwise be utilized in takeover attempts. The existence of such a rights plan may also prevent or delay a change in control of the Company, and this prevention or delay adversely affect the market price of our shares.

We pay no dividends

We currently do not intend to pay any cash dividends for the foreseeable future.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~None~~No further disclosure required

Item 3. Defaults Upon Senior Securities

None

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

None

~~-38-~~-34-

~~Index~~

Item 5. 5.

Other Information

Material Agreements

None

Properties

On May 24, 2005, we entered into a lease for 91,000 square feet located at 3020 and 3030 Callan Road, San Diego, California. We moved the majority of our operations to this new facility during the second half of 2005 and the first quarter of 2006. The agreement bears rent at a rate of $1.15 per square foot, with annual increases of 3%. The lease term is 57 months, commencing on October 1, 2005 and expiring on June 30, 2010.

Our lease on the facility located at 6740 Top Gun Street, San Diego, California was amended and terminated on December 31, 2006. We will continue to occupy a portion of the building and pay rent to the new lessee until ~~June 30,~~August 31, 2007. We also lease 4,027 square feet of office space located at 9-3 Otsuka 2-chome, Bunkyo-ku, Tokyo, Japan. The agreement bears rent at a rate of $3.66 per square foot, expiring on November 30, 2007.

On the properties stated above, we pay an aggregate of approximately ~~$193,000~~$149,000 in rent per month.

Staff

As of ~~March 31,~~June 30, 2007, we had ~~130~~140 full-time equivalent employees, comprised of 45 employees in manufacturing, 8388 employees in research and development, 67 employees in sales and marketing, and 3740 employees in management and finance and administration. From time to time, we also employ independent contractors to support our administrative organizations. Our employees are not represented by any collective bargaining unit and we have never experienced a work stoppage. A breakout by segment is as follows:

	Regenerative Cell Technology		MacroPore Biosurgery		Corporate		Total		Regenerative Cell Technology		MacroPore Biosurgery		Corporate		Total

Manufacturing		—		4		—		4		—		5		—		5
Research & Development		82		1		—		83		87		1		—		88
Sales and Marketing		6		—		—		6		7		—		—		7
General & Administrative		—		—		37		37		—		—		40		40
Total		88		5		37		130		94		6		40		140

Voluntary Disclosure

On August 13, 2007, we entered into an exclusive distribution and supply agreement with Green Hospital Supply, Inc.to commercialize our StemSource™ cell bank in Japan. The StemSource™ cell bank is an automated platform that incorporates the use of our Celution™ System and disposables to enable hospitals and clinics in Japan to harvest, process and store regenerative cells from a patient’s adipose tissue for potential later use. This enterprise is subject to all of the risks associated with any new business venture, including risks relating to market acceptance.

~~-39-~~-35-

Index

Item 6. Exhibits

~~10.42~~2.5	~~Placement Agency~~Asset Purchase Agreement, dated ~~August 9, 2006,~~May 30, 2007, between Cytori Therapeutics, Inc. and ~~Piper Jaffray & Co. (filed as Exhibit 10.34 to our Form 8-K Current Report as filed on August 15, 2006 and incorporated by reference herein)~~MacroPore Acquisition Sub, Inc.

~~10.43~~10.47	Financial Services Advisory Engagement Letter, between Cytori Therapeutics, Inc. and WBB Securities, LLC.(filed as Exhibit 10.2 to our Form 8-K Current Report as filed on February 26, 2007 and incorporated by reference herein)

~~10.44~~	~~Form of Subscription Agreement, between Cytori Therapeutics, Inc. and Investor (filed as part of the Free Writing Prospectus as filed on February 26, 2007 and incorporated by reference herein)~~

~~10.45~~	~~Form of Warrant (filed as part of the Free Writing Prospectus as filed on February 26, 2007 and incorporated by reference herein)~~

~~10.46~~	~~Common Stock Purchase~~Consulting Agreement, dated ~~March 28,~~May 3, 2007, between Cytori Therapeutics, Inc. and ~~Green Hospital Supply, Inc. (filed herewith)~~Marshall G. Cox

15.1	Letter re unaudited interim financial information.

31.1	Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification pursuant to 18 U.S.C. Section 1350/ Securities Exchange Act Rule 13a-14(b), as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(Mark One)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March 31,~~June 30, 2007

OR

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 0-32501

DELAWARE		33-0827593
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

3020 CALLAN ROAD, SAN DIEGO, CALIFORNIA		92121
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (858) 458-0900


	As of March 31, 2007			As of December 31, 2006			As of June 30, 2007			As of December 31, 2006
	(unaudited)						(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	21,701,000		$	8,902,000		$	22,808,000		$	8,902,000
Short-term investments, available-for-sale		2,761,000			3,976,000			3,795,000			3,976,000
Accounts receivable, net of allowance for doubtful accounts of $3,000 and $2,000 in 2007 and 2006, respectively		233,000			225,000			45,000			225,000
Inventories, net		212,000			164,000			92,000			164,000
Other current assets		742,000			711,000			564,000			711,000

Total current assets		25,649,000			13,978,000			27,304,000			13,978,000

Property and equipment held for sale, net		460,000			457,000			—			457,000
Property and equipment, net		4,028,000			4,242,000			3,897,000			4,242,000
Investment in joint venture		74,000			76,000			82,000			76,000
Other assets		417,000			428,000			417,000			428,000
Intangibles, net		1,244,000			1,300,000			1,189,000			1,300,000
Goodwill		4,387,000			4,387,000			3,922,000			4,387,000

Total assets	$	36,259,000		$	24,868,000		$	36,811,000		$	24,868,000

Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses	$	5,059,000		$	5,587,000		$	4,827,000		$	5,587,000
Current portion of long-term obligations		949,000			999,000			771,000			999,000

Total current liabilities		6,008,000			6,586,000			5,598,000			6,586,000

Deferred revenues, related party		23,906,000			23,906,000			22,110,000			23,906,000
Deferred revenues		2,389,000			2,389,000			2,379,000			2,389,000
Option liability		1,100,000			900,000			1,000,000			900,000
Long-term deferred rent		692,000			741,000			611,000			741,000
Long-term obligations, less current portion		956,000			1,159,000			613,000			1,159,000

Total liabilities		35,051,000			35,681,000			32,311,000			35,681,000

Commitments and contingencies								—			—

Stockholders’ equity (deficit):
Preferred stock, $0.001 par value; 5,000,000 shares authorized; (0) shares issued and outstanding in 2007 and 2006		—			—
Preferred stock, $0.001 par value; 5,000,000 shares authorized; (-0-) shares issued and outstanding in 2007 and 2006								—			—
Common stock, $0.001 par value; 95,000,000 shares authorized; 25,428,778 and 21,612,243 shares issued and 22,555,944 and 18,739,409 shares outstanding in 2007 and 2006, respectively		25,000			22,000			26,000			22,000
Additional paid-in capital		123,726,000			103,053,000			127,393,000			103,053,000
Accumulated deficit		(112,129,000	)		(103,460,000	)		(116,125,000	)		(103,460,000	)
Treasury stock, at cost		(10,414,000	)		(10,414,000	)		(6,794,000	)		(10,414,000	)
Accumulated other comprehensive income		—			1,000			—			1,000
Amount due from exercises of stock options		—			(15,000	)		—			(15,000	)

Total stockholders’ equity (deficit)		1,208,000			(10,813,000	)		4,500,000			(10,813,000	)

Total liabilities and stockholders’ equity (deficit)	$	36,259,000		$	24,868,000		$	36,811,000		$	24,868,000

	For the Three Months Ended March 31,						For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2007			2006			2007			2006			2007			2006

Product revenues, related party	$	280,000		$	502,000
Product revenues							$	512,000		$	453,000		$	792,000		$	955,000

Cost of product revenues		225,000			454,000			197,000			504,000			422,000			958,000

Gross profit		55,000			48,000
Gross profit (loss)								315,000			(51,000	)		370,000			(3,000	)

Development revenues:
Development, related party		—			683,000			1,796,000			—			1,796,000			683,000
Development		—			142,000			10,000			6,000			10,000			148,000
Research grants and other		45,000			5,000
		45,000			830,000
Research grant and other								8,000			57,000			53,000			63,000
								1,814,000			63,000			1,859,000			894,000
Operating expenses:
Research and development		4,996,000			5,176,000			4,393,000			6,021,000			9,390,000			11,197,000
Sales and marketing		546,000			501,000			519,000			473,000			1,065,000			974,000
General and administrative		3,166,000			3,216,000			3,433,000			3,608,000			6,599,000			6,824,000
Change in fair value of option liabilities		200,000			(475,000	)		(100,000	)		(2,665,000	)		100,000			(3,140,000	)

Total operating expenses		8,908,000			8,418,000			8,245,000			7,437,000			17,154,000			15,855,000

Operating loss		(8,808,000	)		(7,540,000	)		(6,116,000	)		(7,425,000	)		(14,925,000	)		(14,964,000	)

Other income (expense):
Gain on sale of assets								1,858,000			—			1,858,000			—
Interest income		197,000			197,000			348,000			183,000			545,000			379,000
Interest expense		(52,000	)		(58,000	)		(43,000	)		(53,000	)		(95,000	)		(111,000	)
Other expense, net		(4,000	)		(6,000	)		(52,000	)		(1,000	)		(54,000	)		(6,000	)
Equity loss from investment in joint venture		(2,000	)		(49,000	)
Equity gain (loss) from investment in joint venture								9,000			(17,000	)		6,000			(66,000	)

Total other income, net		139,000			84,000
Total other income (expense)								2,120,000			112,000			2,260,000			196,000

Net loss		(8,669,000	)		(7,456,000	)		(3,996,000	)		(7,313,000	)		(12,665,000	)		(14,768,000	)

Other comprehensive loss - unrealized loss		(1,000	)		(14,000	)
Other comprehensive loss- unrealized holding loss								—			(10,000	)		(1,000	)		(24,000	)

Comprehensive loss	$	(8,670,000	)	$	(7,470,000	)	$	(3,996,000	)	$	(7,323,000	)	$	(12,666,000	)	$	(14,792,000	)

Basic and diluted net loss per common share	$	(0.43	)	$	(0.48	)	$	(0.17	)	$	(0.47	)	$	(0.58	)	$	(0.95	)

Basic and diluted weighted average common shares		20,063,750			15,427,971			23,497,375			15,592,293			21,790,048			15,510,586

	For the Three Months Ended March 31,						For the Six Months Ended June 30,
	2007			2006			2007			2006

Cash flows from operating activities:
Net loss	$	(8,669,000	)	$	(7,456,000	)	$	(12,665,000	)	$	(14,768,000	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		397,000			508,000			843,000			1,124,000
Inventory provision								—			70,000
Warranty provision		(17,000	)		—			(43,000	)		—
Increase in allowance for doubtful accounts		1,000			—
Increase (reduction) in allowance for doubtful accounts								1,000			(5,000	)
Change in fair value of option liabilities		200,000			(475,000	)		100,000			(3,140,000	)
Share-based compensation expense		548,000			804,000
Equity loss from investment in joint venture		2,000			49,000
Stock-based compensation expense								1,155,000			1,873,000
Gain on sale of assets								(1,858,000	)		—
Equity (gain) loss from investment in joint venture								(6,000	)		66,000
Increases (decreases) in cash caused by changes in operating assets and liabilities:
Accounts receivable		(9,000	)		348,000			179,000			477,000
Inventories		(48,000	)		35,000			(22,000	)		(14,000	)
Other current assets		(16,000	)		(206,000	)		145,000			(170,000	)
Other assets		11,000			(16,000	)		11,000			(63,000	)
Accounts payable and accrued expenses		(511,000	)		(814,000	)		(913,000	)		(1,631,000	)
Deferred revenues, related party		—			10,317,000			(1,796,000	)		11,817,000
Deferred revenues		—			(142,000	)		(10,000	)		(148,000	)
Long-term deferred rent		(49,000	)		208,000			(130,000	)		324,000

Net cash (used in) provided by operating activities		(8,160,000	)		3,160,000
Net cash used in operating activities								(15,009,000	)		(4,188,000	)

Cash flows from investing activities:
Proceeds from sale and maturity of short-term investments		16,060,000			22,218,000			18,459,000			33,222,000
Purchases of short-term investments		(14,846,000	)		(24,647,000	)		(18,280,000	)		(32,372,000	)
Proceeds from sale of assets								3,175,000			—
Costs from sale of assets								(109,000	)		—
Purchases of property and equipment		(130,000	)		(1,895,000	)		(365,000	)		(2,331,000	)
Investment in joint venture		—			(150,000	)		—			(150,000	)

Net cash provided by (used in ) investing activities		1,084,000			(4,474,000	)
Net cash provided by (used in) investing activities								2,880,000			(1,631,000	)

Cash flows from financing activities:
Principal payments on long-term obligations		(253,000	)		(213,000	)		(774,000	)		(460,000	)
Proceeds from exercise of employee stock options and warrants		227,000			506,000
Proceeds from exercise of employee stock options								908,000			651,000
Proceeds from sale of common stock and warrants		19,901,000			—			21,500,000			—
Costs from sale of common stock and warrants								(1,599,000	)		—
Proceeds from sale of treasury stock								6,000,000			—

Net cash provided by financing activities		19,875,000			293,000			26,035,000			191,000

Net increase (decrease) in cash and cash equivalents		12,799,000			(1,021,000	)		13,906,000			(5,628,000	)

Cash and cash equivalents at beginning of period		8,902,000			8,007,000			8,902,000			8,007,000

Cash and cash equivalents at end of period	$	21,701,000		$	6,986,000		$	22,808,000		$	2,379,000

Supplemental disclosure of cash flow information:
Supplemental disclosure of cash flows information:
Cash paid during period for:
Interest	$	49,000		$	54,000		$	96,000		$	111,000
Taxes		2,000			1,000			2,000			1,000

Supplemental schedule of non-cash investing and financing activities:
Receivable, related party, included in deferred revenues, related party	$	—		$	1,500,000
Additions to leasehold improvements included in accounts payable and accrued expenses		—			504,000		$	—		$	287,000

PART I	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Report of Independent Registered Public Accounting Firm

		Consolidated Condensed Balance Sheets as of ~~March 31,~~June 30, 2007 and December 31, 2006 ~~(unaudited)~~(unaudited)

		Consolidated Condensed Statements of Operations and Comprehensive Loss for the three and six months ended ~~March 31,~~June 30, 2007 and 2006 (unaudited)

		Consolidated Condensed Statements of Cash Flows for the ~~three~~six months ended ~~March 31,~~June 30, 2007 and 2006 (unaudited)

		Notes to Consolidated Condensed Financial Statements (unaudited)

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

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk

	Item 4.	Controls and Procedures

PART II	OTHER INFORMATION

	Item 1.	Legal Proceedings
	Item 1A.	Risk Factors
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3.	Defaults Upon Senior Securities
	Item 4.	Submission of Matters to a Vote of Security Holders
	Item 5.	Other Information
	Item 6.	Exhibits

	As of March 31,		As of December 31,		As of June 30,		As of December 31,
	2007		2006		2007		2006
Assets:
Regenerative cell technology	$	10,131,000	$	9,792,000	$	28,757,000	$	9,792,000
MacroPore Biosurgery		1,768,000		1,758,000		92,000		1,758,000
Corporate assets		24,360,000		13,318,000		7,962,000		13,318,000
Total assets	$	36,259,000	$	24,868,000	$	36,811,000	$	24,868,000

	March 31, 2007			December 31, 2006			November 4, 2005			June 30, 2007			December 31, 2006			November 4, 2005

Expected volatility of Cytori		63.00	%		66.00	%		63.20	%		61.00	%		66.00	%		63.20	%
Expected volatility of the Joint Venture		63.00	%		56.60	%		69.10	%		61.00	%		56.60	%		69.10	%
Bankruptcy recovery rate for Cytori		21.00	%		21.00	%		21.00	%		21.00	%		21.00	%		21.00	%
Bankruptcy threshold for Cytori	$	10,660,000		$	10,110,000		$	10,780,000		$	10,460,000		$	10,110,000		$	10,780,000
Probability of a change of control event for Cytori		2.23	%		1.94	%		3.04	%		2.22	%		1.94	%		3.04	%
Expected correlation between fair values of Cytori and the Joint Venture in the future		99.00	%		99.00	%		99.00	%		99.00	%		99.00	%		99.00	%
Risk-free interest rate		4.65	%		4.71	%		4.66	%		5.03	%		4.71	%		4.66	%

	Carrying Value Prior to Disposition

Inventory	$	94,000
Other current assets		17,000
Assets held for sale		436,000
Goodwill		465,000
	$	1,012,000

	For the three months ended June 30,						For the six months ended June 30,
	2007			2006			2007			2006

Revenues	$	512,000		$	453,000		$	792,000		$	955,000
Cost of product revenues		(197,000	)		(504,000	)		(422,000	)		(958,000	)
Research & development		(31,000	)		(279,000	)		(113,000	)		(609,000	)
Sales & marketing		(8,000	)		(50,000	)		(21,000	)		(138,000	)

	March 31, 2007			December 31, 2006			November 4, 2005			June 30, 2007			December 31, 2006			November 4, 2005

Expected volatility of Cytori		63.00	%		66.00	%		63.20	%		61.00	%		66.00	%		63.20	%
Expected volatility of the Joint Venture		63.00	%		56.60	%		69.10	%		61.00	%		56.60	%		69.10	%
Bankruptcy recovery rate for Cytori		21.00	%		21.00	%		21.00	%		21.00	%		21.00	%		21.00	%
Bankruptcy threshold for Cytori	$	10,660,000		$	10,110,000		$	10,780,000		$	10,460,000		$	10,110,000		$	10,780,000
Probability of a change of control event for Cytori		2.23	%		1.94	%		3.04	%		2.22	%		1.94	%		3.04	%
Expected correlation between fair values of Cytori and the Joint Venture in the future		99.00	%		99.00	%		99.00	%		99.00	%		99.00	%		99.00	%
Risk-free interest rate		4.65	%		4.71	%		4.66	%		5.03	%		4.71	%		4.66	%

	March 31,		December 31,		$			%
	2007		2006		Differences			Differences			June 30, 2007		December 31, 2006		$ Differences			% Differences
Cash and cash equivalents	$	21,701,000	$	8,902,000	$	12,799,000			143.8	%	$	22,808,000	$	8,902,000	$	13,906,000			156.2	%
Short-term investments, available for sale		2,761,000		3,976,000		(1,215,000	)		(30.6	)%		3,795,000		3,976,000		(181,000	)		(4.6	)%
Total cash and cash equivalents and short-term investments, available for sale	$	24,462,000	$	12,878,000	$	11,584,000			90.0	%	$	26,603,000	$	12,878,000		13,725,000			106.6	%

Current assets	$	25,649,000	$	13,978,000	$	11,671,000			83.5	%	$	27,304,000	$	13,978,000	$	13,326,000			95.3	%
Current liabilities		6,008,000		6,586,000		(578,000	)		(8.8	)%		5,598,000		6,586,000		(988,000	)		(15.0	)%
Working capital	$	19,641,000	$	7,392,000	$	12,249,000			165.7	%	$	21,706,000	$	7,392,000	$	14,314,000			193.6	%

	Payments due by period										Payments due by period
Contractual Obligations	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years		Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years

Long-term obligations	$	1,905,000	$	949,000	$	956,000	$	—	$	—	$	1,384,000	$	771,000	$	613,000	$	—	$	—
Interest commitment on long-term obligations		228,000		153,000		75,000		—		—		147,000		108,000		39,000		—		—
Operating lease obligations		4,647,000		1,549,000		3,098,000		—		—		4,233,000		1,468,000		2,765,000		—		—
Pre-clinical research study obligations		382,000		382,000		—		—		—		267,000		267,000		—		—		—
Clinical research study obligations		6,411,000		5,220,000		1,191,000		—		—		6,314,000		5,458,000		856,000		—		—
Total	$	13,573,000	$	8,253,000	$	5,320,000	$	—	$	—	$	12,345,000	$	8,072,000	$	4,273,000	$	—	$	—

	CYTORI THERAPEUTICS, INC.

	By:	/s/ Christopher J. Calhoun
Dated: ~~May 11,~~August 14, 2007		Christopher J. Calhoun
		Chief Executive Officer

	By:	/s/ Mark E. Saad
Dated: ~~May 11,~~August 14, 2007		Mark E. Saad
		Chief Financial Officer