UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: June 30, 2007

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission File Number 0-23678

BIOSPHERE MEDICAL, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware		04-3216867
(State or Other Jurisdiction of Organization or Incorporation)		(I.R.S. Employer Identification No.)

1050 Hingham Street, Rockland, Massachusetts 02370
(Address of Principal Executive Offices) (Zip Code)

(781) 681-7900
(Registrant’s Telephone Number, Including Area Code)

Indicate by a check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b 2 of the Exchange Act. (check one):

Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer x

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

The number of shares outstanding of the Registrant’s common stock as of August 1, 2007 was 18,033,310 shares.

BioSphere Medical, Inc.
INDEX

Part I—Financial Information
Item 1.		Consolidated Balance Sheets as of June 30, 2007 (unaudited) and December 31, 2006
		Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2007 and 2006 (unaudited)
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006 (unaudited)
		Notes to Consolidated Financial Statements
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 4.		Submission of Matters to a Vote of Security Holders
Item 6.		Exhibits
Signatures
Exhibit Index

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BIOSPHERE MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)	June 30, 2007			December 31, 2006
	(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	12,054		$	8,913
Marketable securities	8,358			13,206
Accounts receivable, net of allowance for doubtful accounts of $205 and $218 as of June 30, 2007 and December 31, 2006, respectively	4,451			4,082
Inventories	3,144			2,830
Prepaid expenses and other current assets	1,058			612
Total current assets	29,065			29,643
Property and equipment, net	936			929
Goodwill	1,443			1,443
Other assets	65			64
Total Assets	$	31,509		$	32,079
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	1,617		$	1,366
Accrued compensation	1,659			1,935
Other accrued expenses	1,139			1,483
Current portion of capital lease obligations	47			57
Current portion of deferred licensing revenue	83			83
Total current liabilities	4,545			4,924
Long-term portion of capital lease obligations	22			44
Long-term portion of deferred licensing revenue	104			146
Total Liabilities	4,671			5,114

Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized: 6% series A convertible preferred stock, 12,000 shares authorized, 9,218 and 8,950 shares issued and outstanding, as of June 30, 2007 and December 31, 2006, respectively (aggregate liquidation preference including accrued dividends of $9,356 at June 30, 2007)	8,242			7,970
Common stock, $.01 par value, 50,000,000 shares authorized; 18,033,310 and 17,957,964 shares issued and outstanding as of June 30, 2007 and December 31, 2006, respectively	180			180
Additional paid-in capital	101,350			100,275
Accumulated deficit	(83,226		)	(81,648		)
Accumulated other comprehensive income	292			188
Total Stockholders’ Equity	26,838			26,965
Total Liabilities and Stockholders’ Equity	$	31,509		$	32,079

The accompanying notes are an integral part of these consolidated financial statements.

BIOSPHERE MEDICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands, except per share data)	2007			2006			2007			2006
Product sales	$	6,870		$	5,637		$	13,351		$	10,906
Licensing revenues	104			—			208			—
Total revenues	6,974			5,637			13,559			10,906
Costs and expenses:
Costs of product sales	1,922			1,669			4,017			3,359
Research and development	564			691			1,226			1,143
Sales	1,880			1,820			3,930			3,755
Marketing	1,339			1,059			2,729			1,789
General, administrative and patent	1,768			1,612			3,424			2,994
Total Costs and Expenses	7,473			6,851			15,326			13,040
Loss from operations	(499		)	(1,214		)	(1,767		)	(2,134		)
Interest income	247			251			506			398
Interest expense	(5		)	(3		)	(7		)	(7		)
Foreign exchange loss, net	(9		)	(19		)	(34		)	(31		)
Realized loss on investments	(1		)	—			(1		)	—
Other income, net	—			—			—			18
Net loss	(267		)	(985		)	(1,303		)	(1,756		)
Preferred stock dividends	(138		)	(130		)	(275		)	(259		)
Net loss applicable to common stockholders	$	(405	)	$	(1,115	)	$	(1,578	)	$	(2,015	)
Net loss per common share applicable to common stockholders
Basic and diluted	$	(0.02	)	$	(0.06	)	$	(0.09	)	$	(0.12	)
Weighted average number of common shares outstanding
Basic and diluted	17,571			17,318			17,555			16,640

The accompanying notes are an integral part of these consolidated financial statements.

BIOSPHERE MEDICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

	For the Six Months Ended June 30,
(in thousands)	2007			2006
Cash flows from operating activities:
Net loss	$	(1,303	)	$	(1,756	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts	2			—
Provision for inventory obsolescence	199			41
Depreciation	235			234
Stock-based compensation	883			719
Changes in operating assets and liabilities:
Accounts receivable	(342		)	84
Inventories	(474		)	(44		)
Prepaid expenses and other current assets	(434		)	(153		)
Accounts payable	237			112
Accrued compensation	(290		)	(67		)
Other accrued expenses	(404		)	(317		)
Net cash used in operating activities	(1,691		)	(1,147		)
Cash flows from investing activities:
Purchase of property and equipment	(229		)	(130		)
Purchase of marketable securities	(6,266		)	—
Proceeds from the sale and maturity of marketable securities	11,129			—
Net cash provided by (used in) investing activities	4,634			(130		)
Cash flows from financing activities:
Proceeds from issuance of common stock, net	—			13,498
Proceeds from issuance of common stock under employee benefit and incentive plans	194			678
Payment of preferred stock cash dividends in lieu of partial shares	(3		)	—
Principal payments under long-term capital lease obligations	(33		)	(73		)
Net cash provided by financing activities	158			14,103
Effect of exchange rate changes on cash and cash equivalents	40			82
Net increase in cash and cash equivalents	3,141			12,908
Cash and cash equivalents at beginning of period	8,913			8,774
Cash and cash equivalents at end of period	$	12,054		$	21,682

The accompanying notes are an integral part of these consolidated financial statements.

BIOSPHERE MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business

BioSphere Medical, Inc. (the “Company”) was incorporated in Delaware in December 1993. The Company is focused on commercializing minimally invasive diagnostic and therapeutic products based on its proprietary bioengineered microsphere technology, as well as other ancillary embolotherapy products, for use in treating hypervascularized tumors, including uterine fibroids, and arteriovenous malformations. The Company’s principal focus is the application of its Embosphere® Microspheres for the treatment of uterine fibroids using a procedure called uterine fibroid embolization, or UFE. The Company’s wholly owned subsidiary Biosphere Medical SA (“BMSA”), a French société anonyme, holds the license to the embolotherapy technology that is the main focus of the Company’s business.

2. Summary of Significant Accounting Policies

A) Basis of Presentation

The accompanying consolidated financial statements are unaudited and have been prepared on a basis consistent with the Company’s annual audited financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2006. The consolidated financial statements include the accounts of the Company’s three wholly owned subsidiaries, BMSA, BioSphere Medical Japan, Inc., and BSMD Ventures, Inc. All material intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in its annual audited financial statements have been condensed or omitted. The consolidated financial statements, in the opinion of management, reflect all adjustments (including normal recurring adjustments) necessary for a fair presentation of the results for the three and six months ended June 30, 2007 and 2006. The results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire fiscal year. These consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, which has been filed with the Securities and Exchange Commission.

Certain reclassifications have been made to the prior year’s consolidated statement of operations to conform to the current period presentation. However, these reclassifications have no impact on net loss.

B) Cash, Cash Equivalents and Marketable Securities

The Company considers all highly liquid investments with an original maturity of ninety days or less, as of the date of purchase, to be cash equivalents. In accordance with its investment policy, surplus cash is invested in investment grade corporate and U.S. government debt as well as certain asset-backed securities. The Company determines the appropriate classification of marketable securities at each balance sheet date. Available-for-sale marketable securities are carried at their fair value, with unrealized gains and losses included in accumulated other comprehensive loss in the accompanying balance sheet.

For the three and six months ended June 30, 2007 and 2006, the Company did not record significant realized gains or realized losses on marketable securities.

C) Comprehensive Loss

Comprehensive loss comprises net loss and other comprehensive income (loss). Other comprehensive income (loss) includes certain changes in equity that are excluded from net loss; specifically, the effects of foreign currency translation adjustments and unrealized gains or losses on available-for-sale marketable securities. For the three and six months ended June 30, 2007 and 2006, the Company’s comprehensive loss was as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2007			2006			2007			2006
Net loss	$	(267	)	$	(985	)	$	(1,303	)	$	(1,756	)
Cumulative translation adjustment	28			113			89			167
Unrealized gain on investments	3			—			15			—
Total comprehensive loss	$	(236	)	$	(872	)	$	(1,199	)	$	(1,589	)

D) Net Loss Per Share

Basic net loss per share is calculated based on the weighted average number of common shares outstanding during the period. Diluted net loss per share incorporates the dilutive effect of common stock equivalent options, warrants and other convertible securities. Shares used to compute dilutive net loss per share exclude the following common share equivalents as their inclusion would have an antidilutive effect:

	As of June 30,
(in thousands)	2007	2006
Shares issuable upon exercise of stock options	2,810	2,741
Shares issuable upon conversion of convertible securities	2,339	2,172
Shares issuable upon exercise of outstanding warrants	400	400
Unvested restricted stock awards	433	430
	5,982	5,743

E) Stock-Based Compensation

The Company adopted the provisions of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”), beginning January 1, 2006, using the modified prospective transition method.

Prior to January 1, 2006, the Company used the intrinsic value method to account for stock-based employee compensation under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and, therefore, the Company did not recognize compensation expense in association with employee options granted at or above the market price of the Company’s common stock at the date of grant.

The following table presents the stock-based compensation expense for the three and six months ended June 30, 2007 and 2006:

	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2007		2006		2007		2006
Cost of product sales	$	62	$	58	$	140	$	88
Research and development	19		19		46		32
Sales	24		94		101		151
Marketing	13		3		24		7
General, administrative and patent	363		355		572		441
	$	481	$	529	$	883	$	719

The following table presents the weighted average fair value of options granted during the three and six months ended June 30, 2007 and 2006 which are estimated on the date of the grant using the Black-Scholes option-pricing model utilizing the following weighted average assumptions:

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Options granted (in thousands)	44			230			399			506
Weighted average exercise price	$	6.84		$	7.12		$	7.16		$	7.12
Weighted average grant date fair value	$	4.61		$	5.35		$	4.63		$	5.40
Assumptions:
Dividend yield	0		%	0		%	0		%	0		%
Expected volatility	69		%	84		%	69		%	86		%
Risk-free interest rate	4.58		%	5.10		%	4.55		%	4.90		%
Expected term (years)	6.43			6.32			5.90			6.31

At June 30, 2007, there was $2.93 million and $581,000 of unrecognized compensation cost, net of estimated forfeitures, related to non-vested options and restricted stock awards, respectively, which the Company expects to recognize over weighted-average periods of 3.50 years and 2.81 years, respectively. However, the amount of stock compensation expense recognized in any future period cannot be predicted at this time because it will depend on levels of share-based payments granted in the future.

3. Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following as of:

(in thousands)	June 30, 2007		December 31, 2006
Finished goods	$	2,067	$	1,793
Work in process	792		793
Raw material	285		244
Total inventory	$	3,144	$	2,830

4. Segment Information

The Company develops microspheres and other ancillary embolotherapy products for use in the treatment of hypervascularized tumors, including uterine fibroids, and arteriovenous malformations. The Company operates exclusively in the medical device business, which the Company considers as one business segment pursuant to SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information.” Financial information by geographic area, attributed to countries according to the location of customers and equipment, is as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2007		2006		2007		2006
Revenues:
United States	$	5,012	$	4,142	$	9,625	$	7,773
France	948		863		2,004		1,822
Other European Union countries	609		462		1,245		935
Other foreign countries	405		170		685		376
Total revenues	$	6,974	$	5,637	$	13,559	$	10,906

(in thousands)	June 30, 2007		December 31, 2006
Long-lived assets:
United States	$	366	$	385
France	570		544
Total long-lived assets	$	936	$	929

5. Stock Plans

Changes in outstanding stock options for the six months ended June 30, 2007, were as follows:

(in thousands, except exercise price and term)	Number of Stock Options		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Outstanding at December 31, 2006	2,627		$	5.04
Granted	399		$	7.16
Exercised	(48	)	$	2.84
Forfeited and expired	(168	)	$	6.98
Outstanding at June 30, 2007	2,810		$	5.26	6.87	$	6,552

Exercisable at June 30, 2007	1,181		$	5.65	4.98	$	3,086
Vested or expected to vest at June 30, 2007	2,045		$	5.37	6.36	$	4,909

Changes in non-vested restricted stock awards for the six months ended June 30, 2007, were as follows:

(in thousands, except fair value)	Number of Restricted Shares		Weighted Average Grant Date Fair Value
Non-vested at December 31, 2006	430		$	1.73
Awarded	18		6.84
Vested	(15	)	3.90
Non-vested at June 30, 2007	433		$	1.86

6. Contingencies

On August 17, 2005, a lawsuit commenced in the Circuit Court, Twenty-Second Judicial Circuit, St. Louis, Missouri, captioned Brett Pingel by next friend Dawn LaRose vs. BioSphere Medical, Inc., Bruce Kirke Bieneman, M.D., St. Louis University Hospital, John Stith, M.D. and St. Louis University. The lawsuit alleges, among other things, that a patient suffered permanent bilateral blindness as a result of the use of the Company’s Embosphere Microspheres or the negligence of the healthcare providers or both factors combined. All defendants have denied the allegations against them. Plaintiffs seek compensatory and punitive damages. The Company carries product liability insurance and this case is currently being defended by the Company’s insurer under reservation of rights with respect to the claim of punitive damages, for which an exclusion from coverage exists. The Company has filed an answer to this lawsuit in which it has denied the claims being made. The Company intends to defend against the claims vigorously. However, the Company cannot give any assurance that it will prevail or that all or any part of its liability, if any, would be covered by its product liability insurance. Accordingly, the Company is currently unable to predict the financial impact of this product liability litigation.

7. Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” or SFAS 157. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles in the United States, or GAAP, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with earlier adoption permitted. The provisions of SFAS 157 should be applied prospectively as of the beginning of the fiscal year in which it is initially applied, with limited exceptions. The Company does not believe the adoption of SFAS 157 will have a material impact on its results of operations, financial position or cash flows.

items for which the fair value option has been elected in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company has not completed its evaluation of the Interpretation, but does not currently believe the adoption of SFAS 159 will have a material impact on its results of operation, financial position or cash flows.

In June 2007, the FASB ratified Emerging Task Force Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities,” or EITF 07-3. The EITF concluded that nonrefundable advance payments for goods or services to be received in the future for use in research and development activities should be deferred and capitalized. The capitalized amounts should be expensed as the related goods are delivered or the services are performed. If an entity’s expectations change such that it does not expected it will need the goods to be delivered or the services to be rendered, capitalized nonrefundable advance payments should be charged to expense. EITF 07-3 is effective for fiscal years beginning after December 15, 2007, including interim periods within those years. The Company has not completed its evaluation of the EITF, but does not currently believe the adoption will have a material impact on its results of operation, financial position or cash flows.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes included elsewhere in this report. Some of the information contained in this discussion and analysis and set forth elsewhere in this report, including information with respect to our plans, strategy and expectations for our business, financial condition and operations, includes forward-looking statements that involve risks and uncertainties. You should review the section titled “Risk Factors” for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We develop, manufacture and market products for medical procedures using embolotherapy techniques. Embolotherapy is the therapeutic introduction of various biocompatible substances into a patient’s circulatory system to occlude a blood vessel, either to arrest or prevent hemorrhaging, or to devitalize the structure or organ by occluding its blood supply. Our core technologies consist of patented bioengineered polymers, which are chemical compounds that we create through the application to medical science of engineering principles and manufacturing methods. These core technologies are used to produce miniature spherical embolic particles with uniquely beneficial properties for a variety of medical applications. By selectively blocking the target tissue’s blood supply, the deprived tissue will either become destroyed or devitalized, resulting in therapeutic benefit.

We currently market and sell four microsphere products:

· Embosphere® Microspheres, which are marketed for hypervascularized tumors, including uterine fibroids, and arteriovenous malformations in the United States, the European Union and several other foreign markets;

· EmboGold® Microspheres, which are marketed for hypervascularized tumors and arteriovenous malformations in the United States, the European Union and several other foreign markets;

· QuadraSphere™ Microspheres, which are marketed for the treatment of hypervascularized tumors and arteriovenous malformations in the United States; and

· HepaSphere™ Microspheres, which are marketed in the European Union for primary and metastatic liver cancer and are also sold in limited quantities in Japan to Dr. Shinichi Hori for clinical evaluation and use in treating liver cancer pursuant to Japanese private import regulations. Our QuadraSphere Microspheres are identical in all respects to our HepaSphere Microspheres. However, the clearance from the United States Food and Drug Administration, or FDA, for QuadraSphere Microspheres does not include specific indications for the treatment of primary and metastatic liver cancer. FDA regulations require that we conduct clinical trials prior to submitting an application to claim the use of QuadraSphere Microspheres for the treatment of a specific disease or condition, such as primary and metastatic liver cancer, while European Union regulations do not require pre-clearance clinical trials for this class of medical device on an indication-by-indication basis. Accordingly, in order for us to seek FDA clearance to promote the use of QuadraSphere Microspheres for the embolization of primary and metastatic liver cancer, we must conduct clinical trials.

In the first six months of 2007, and during the year ended December 31, 2006, we primarily recognized revenues from product sales of our embolic products in North America and the European Union. We also recognized revenues from product sales in other geographic territories, including the Middle East, Africa, South America and Asia. Product revenues also include the sale of accessory embolotherapy devices such as our EmboCath® Plus and EmboCath® hydrophilic Infusion Catheters, Sequitor® Guidewire and Segway® Guidewire, as well as our barium delivery kits and other ancillary medical devices sold exclusively in Europe. We currently derive a majority of our revenues in the United States and the European Union from the sale of Embosphere Microspheres for use in the treatment of uterine fibroids using a procedure called uterine fibroid embolization, or UFE.

Our principal focus is on growing our embolotherapy business worldwide through increases in UFE and hypervascularized tumor embolization procedures. Our marketing strategy is to promote the UFE procedure for patients suffering with uterine fibroids through our ask4UFE.com® awareness and education program and also to specifically promote our Embosphere Microspheres as the product of choice for the UFE procedure. Our success will depend upon the continued acceptance by the medical community, patients and third-party payers of the UFE procedure, and acceptance of our Embosphere Microsphere product and our other products, as safe, medically therapeutic and cost effective.

We have experienced operating losses in each period since our inception. As of June 30, 2007, we had approximately $20.41 million in cash, cash equivalents and marketable securities, and an accumulated deficit of approximately $83.23 million. We expect to continue to incur operating losses in 2007 as we seek to execute on our business plan, including continuing to establish sales and marketing capabilities and conducting research and development activities.

Research and Development

The following table identifies each of the programs for which we have incurred research and development expenses in the six months ended June 30, 2007 and 2006, respectively, and the current development phase of each.

Product / Product Candidate		Development Status
Embosphere® Microspheres		Marketed for uterine fibroids, hypervascularized tumors and other arteriovenous malformations in the United States, Canada, European Union, Argentina, Brazil, Colombia, Costa Rica, Ecuador, Norway, Panama, Peru, Uruguay, Australia, Hong Kong, and Taiwan; clinical evaluation in China

EmboGold® Microspheres		Marketed for hypervascularized tumors and arteriovenous malformations in the United States, Canada, European Union, Argentina, Brazil, Colombia, Costa Rica, Ecuador, Norway, Panama, Peru, Uruguay, Australia, Hong Kong, and Taiwan

HepaSphere™ Microspheres(1)		Marketed in the European Union, Australia and Brazil for primary and metastatic liver cancer

QuadraSphere™ Microspheres(2)		Marketed for embolization of hypervascularized tumors and peripheral arteriovenous malformations in the United States

EmboCath® Plus Infusion Microcatheter		Marketed for infusion of various diagnostic, embolic and therapeutic agents and super-selective angiography within the peripheral vasculature in the United States, Canada, and in the European Union

EmboCath® Infusion Catheter		Marketed for infusion of various diagnostic, embolic and therapeutic agents and super-selective angiography within the peripheral and coronary vasculature in the United States, Canada, European Union, Argentina, Brazil, Colombia, Costa Rica, Ecuador, Panama, Peru, Uruguay and China

Sequitor® Steerable Guidewire		Marketed for various diagnostic and interventional procedures within the peripheral vasculature in the United States, Canada, and in the European Union

Segway® Guidewire		Marketed for placement of catheters within the peripheral and coronary vasculature in the United States, Canada, European Union, Argentina, Brazil, Colombia, Costa Rica, Ecuador, Panama, Peru, Uruguay and China

MR Microspheres (magnetic resonance visible)		Preclinical research—animal studies

Resorbable Microspheres		Preclinical research—feasibility stage

(1) Pursuant to our CE Mark approval in the European Union, HepaSphere Microspheres are indicated for use in the embolization of blood vessels for therapeutic or preoperative purposes in the following procedures: embolization of hepato-cellular carcinoma and the embolization of hepatic metastasis. Hepato-cellular carcinoma refers to cancer which originates in the liver and hepatic metastasis refers to cancer which has spread to the liver from other sites in the body. We have exclusive worldwide rights to the HepaSphere Microsphere technology under a license from Dr. Shinichi Hori, subject only to Dr. Hori’s right to conduct clinical trials on our behalf in Japan, treat patients at Rinku Medical Center and Osaka Medical Center in Japan, and engage in research at Osaka University.

(2) In November 2006, we received marketing clearance in the United States from the FDA for our QuadraSphere Microsphere product candidate for the treatment of hypervascularized tumors and peripheral arteriovenous malformations. Although our QuadraSphere Microspheres are identical in all technical respects to our HepaSphere Microspheres, our QuadraSphere Microspheres are not specifically indicated for use in hepato-cellular carcinoma and hepatic metastasis. FDA requires that we conduct clinical trials prior to submitting an application for the use of the QuadraSphere Microspheres for the treatment of a specific disease or condition, such as hepato-cellular cancer or hepatic metastasis, while European Union regulations do not require it for this class of medical devices. Accordingly, in order for us to seek FDA clearance to promote the use of QuadraSphere Microspheres for the embolization of hepato-cellular carcinoma and hepatic metastasis in the United States, we will be required to undertake clinical trials. However, the use of QuadraSphere Microspheres for any of the hypervascularized tumors, including hepato-cellular carcinoma is not contraindicated, and it can be used for these indications per physician choice.

Research and development expenses for the three and six months ended June 30, 2007 relate primarily to:

· research to identify and evaluate new and innovative embolotherapy products based on our platform microsphere technology, such as our MR Microspheres;

· preclinical testing and clinical trials of our HepaSphere Microsphere, Sequitor Steerable Guidewire, EmboCath Plus Infusion Microcatheter, and our QuadraSphere Microsphere products;

· development related to improving manufacturing processes; and

· product and production facilities validation processes under FDA Good Manufacturing Practices.

Our research and development functions typically work on a number of projects concurrently. In addition, except for clinical expenses, a substantial amount of fixed research and development costs such as salary and salary-related benefits, rent, equipment depreciation, utilities, insurance and maintenance are shared among various programs. Accordingly, we have not historically tracked specific costs for each of our research and development projects.

The successful development of our product candidates is highly uncertain. We cannot reasonably estimate or know the nature, timing and estimated costs of the efforts necessary to complete the development of, or the period in which material net cash inflows are expected to commence from, any of our product candidates due to the numerous risks and uncertainties associated with developing medical devices, including the uncertainty of:

· the scope, rate of progress and cost of clinical trials and other research and development activities undertaken by us;

· future clinical trial results;

· the cost, timing and success of regulatory approvals;

· the cost, timing and success of establishing sales, marketing and distribution capabilities;

· the cost of establishing clinical and commercial supplies of our product candidates and any products that we may develop;

· the effect of competing technological and market developments; and

· the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.

Any failure to complete the development of our product candidates in a timely manner, or at all, could have a material adverse effect on our operations, financial position and liquidity. A discussion of the risks and uncertainties associated with completing our projects on schedule, or at all, and some consequences of failing to do so, are set forth in “Risk Factors.”

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure at the date of our financial statements. The significant accounting policies, which we believe are most critical in gaining an understanding of our financial statements, include policies and judgments relating to revenue recognition, stock-based compensation, accounts receivable and inventories. Actual results could differ materially from these estimates. For a more detailed explanation of the judgments made in these areas, refer to Note 2 of the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2006, which is on file with the Securities and Exchange Commission, or SEC.

In our 2006 Annual Report on Form 10-K, we identified the critical accounting policies upon which the consolidated financial statements were prepared. We reviewed our policies and determined that these remain the critical accounting policies for the quarter ended June 30, 2007. We did not make any significant changes to these policies during the quarter.

Results of Operations

Three and Six Months Ended June 30, 2007

Revenue and Margin Overview

	For the Three Months Ended,						Increase/			Increase/
	June 30,						(Decrease)			(Decrease)
(in thousands)	2007			2006			($)			(%)
Total revenues	$	6,974		$	5,637		$	1,337		24	%
Costs of product sales	1,922			1,669			253			15	%
Gross margin	$	5,052		$	3,968		$	1,084		27	%
Gross margin%	72		%	70		%	2		%

	For the Six Months Ended,						Increase/			Increase/
	June 30,						(Decrease)			(Decrease)
(in thousands)	2007			2006			($)			(%)
Total revenues	$	13,559		$	10,906		$	2,653		24	%
Costs of product sales	4,017			3,359			658			20	%
Gross margin	$	9,542		$	7,547		$	1,995		26	%
Gross margin%	70		%	69		%	1		%

Revenues. Total revenues increased for the three- and six-month periods ended June 30, 2007, respectively, as compared to the three- and six-month periods ended June 30, 2006, primarily due to the increase in microsphere sales used in interventional gynecology and interventional oncology.

· product revenues from sales of microspheres used in interventional gynecology for UFE increased approximately $719,000 and $1.40 million, or 18%, from the three- and six-month periods ended June 30, 2006, on increased demand for Embosphere Microspheres across all regions. During the three- and six-months ended June 30, 2007, sales in the United States increased $531,000 and $1.02 million, or 15% and 16%, respectively, and sales outside the United States increased $188,000 and $381,000, or 32% and 31%, respectively, from the three- and six- months ended June 30, 2006, respectively. We believe the increase in product revenues from microsphere sales used in interventional gynecology for UFE is due to product differentiation and increased awareness of the UFE procedure resulting from our additional local marketing activities.

· product revenues from microsphere sales used in interventional oncology, primarily for use in treating liver cancer, increased approximately $371,000 and $832,000, or 49% and 56%, respectively, from the three- and six-month period ended June 30, 2007, respectively, on increased demand for our Embosphere Microspheres and our expandable microsphere products, which were released during 2006. During the three and six months ended June 30, 2007, sales of our EmboSphere Microspheres for use in interventional oncology increased $155,000 and $439,000, or 20% and 30%, respectively, and sales of our recently-approved new QuadraSphere Microspheres product and our HepaSphere Microspheres product for use in interventional oncology increased $216,000 and $393,000 from the three- and six-months ended June 30, 2006, respectively.

Additional increases in revenues during the three- and six-month periods ended June 30, 2007 were due to licensing revenue and changes in foreign exchange rates.

· In the fourth quarter of 2006, we licensed non-strategic intellectual property to a third party. Revenue from this licensing agreement totaled $104,000 and $208,000 in the three- and six-month periods ended June 30, 2007.

· During the three- and six-month periods ended June 30, 2007 as compared to the same periods in 2006, revenues increased $102,000 and $239,000, respectively, as sales from our French operations increased due to the weakening of the U.S. dollar versus the Euro. The U.S. dollar averaged 1.33 dollars to the Euro during the six months ended June 30, 2007, compared to 1.23 dollars to the Euro during the six months ended June 30, 2006.

Offsetting these increases were decreasing revenues from the sale of non-strategic gastric products, which include, among other things, the distribution of barium and drainage kits, in Europe of $40,000 and $55,000, or 7 % and 4%, respectively. Although we received approximately 9% of our revenues for the six-month period ended June 30, 2006 from this product category, we believe that the levels of our resources consumed by this product category do not justify the return. We are currently finalizing a plan to fully phase out of this non-core business.

Costs of Product Sales. The increase in costs of product sales in the three- and six-month periods ended June 30, 2007, as compared to the same period in 2006, was primarily due to higher microsphere sales volume and, to a lesser extent, costs associated with charges for excess inventory of $95,000 and $162,000, respectively.

The gross margin as a percentage of revenues for the three- and six-month periods ended June 30, 2007 increased to 72% and 70%, respectively, from 70% and 69% in the three- and six-month periods ended June 30, 2007, primarily attributable to the increase in microsphere sales offset by the increase in inventory reserves.

Expense Overview

	For the Three Months Ended				Increase/			Increase/
	June 30,				(Decrease)			(Decrease)
(in thousands)	2007		2006		($)			(%)
Research and development	$	564	$	691	$	(127	)	(18	)%
Sales	1,880		1,820		60			3	%
Marketing	1,339		1,059		280			26	%
General, administrative and patent	1,768		1,612		156			10	%
Total operating expenses	$	5,551	$	5,182	$	369

	For the Six Months Ended				Increase/		Increase/
	June 30,				(Decrease)		(Decrease)
(in thousands)	2007		2006		($)		(%)
Research and development	$	1,226	$	1,143	$	83	7	%
Sales	3,930		3,755		175		5	%
Marketing	2,729		1,789		940		53	%
General, administrative and patent	3,424		2,994		430		14	%
Total operating expenses	$	11,309	$	9,681	$	1,628

Research and Development Expense. Total research and development expense in the three-month period ended June 30, 2007 decreased from 2006 primarily due to development spending on our next generation delivery systems, which were released in the second half of 2006, and lower employee expenses in the 2007 period related to open positions. Total research and development expense in the six-month period ended June 30, 2007 increased from 2006 as higher employee severance costs and higher clinical activities, which occurred in the first quarter of 2007, more than offset the decreases in the three-month period ended June 30 2007 noted above.

Sales Expense. Sales expense for the three- and six-month periods ended June 30, 2007 increased over the comparable periods in 2006 primarily due to the addition of two new sales territories in the second half of 2006 as we continued our expansion in the United States.

Marketing Expense. Marketing expense for the three- and six-month periods ended June 30, 2007, increased over the comparable periods in 2006, primarily due to increased local marketing programs in the U.S., which represented $170,000 and $715,000 of the increase, respectively, and salary and other compensation expenses related to the expansion of the employee base during the latter half of 2006 to manage this increase in marketing activities. These local marketing activities, which included, among other channels, targeted print, radio, television, and public transit advertising, are designed to build physician and patient awareness and demand for UFE in the United States.

General, Administrative and Patent Expense. General, administrative and patent expense for the three- and six-month periods ended June 30, 2007 increased over the comparable period in 2006, primarily due to an increase in salary and related compensation and consulting costs. During the three- and six- month periods ended June 30, 2007, we incurred approximately $84,000 and $ 173,000, respectively, of expense associated with headcount expansion and costs related to our preparation for planned compliance with Section 404 of the Sarbanes- Oxley Act of 2002 In addition, for the six-month periods ended June 30, 2007, equity compensation included in general, administrative and patent expense increased $131,000, over the comparable period in 2006 as a result of equity awards granted under the prior year’s equity incentive compensation programs.

Changes in foreign exchange rates during the three and six month periods ended June 30, 2007 as compared to the same period in 2006, increased total operating expenses by approximately $70,000 and $140,000, respectively, as the research, selling and administrative costs from our French operations increased due to the weakness of the U.S. dollar versus the Euro.

Interest Income. Interest income in the three- and six- month periods ended June 30, 2007 was $247,000 and $506,000, respectively, compared to $251,000 and $398,000 in the comparable periods of 2006. The increase of $108,000 in the six-month period ended June 30, 2007 was primarily due to higher average daily invested cash balances and higher interest rates on available investment-grade assets as compared to the prior year period resulting from the net proceeds of our private placement of common stock in February of 2006.

Foreign Exchange Loss, Net. Foreign exchange gains and losses primarily resulted from Euro-to-U.S. dollar foreign currency fluctuations on Euro-denominated short-term intercompany trade accounts. The foreign exchange losses during the three- and six-month periods ended June 30, 2007 totaled approximately $9,000 and $34,000, respectively, compared to a loss of $19,000 and $31,000 in the same periods of 2006. The decrease during the three-month period was primarily due to a lower rate of exchange rate change during the respective periods, while the increase during the six-month period was primarily due to higher intercompany trade payable and receivable balances, which are denominated in Euros, during the first six months of 2007 as compared to the first six months of 2006.

Liquidity and Capital Resources

As of June 30, 2007, we had $20.41 million of cash, cash equivalents and marketable securities, a decrease of $1.71 million from $22.12 million at December 31, 2006. This decrease was primarily the result of operating losses and changes in working capital. We have historically funded our operations from the net proceeds provided by public and private equity offerings, net revenues, bank financing, equipment financing leases and, to a lesser extent, the exercise of stock options.

Net cash used in operating activities was $1.69 million and includes a net loss of $1.30 million and $1.70 million in working capital changes, offset by non-cash charges primarily related to stock-based compensation. Accounts receivable decreased $342,000 on higher sales offset by a one-day improvement in days sales outstanding, which decreased to 57 days from 58 days at December 31, 2006. Consistent with prior years, during the first half of 2007, we made significant annual payments associated with royalties on intellectual property and incentive compensation costs incurred during 2006.

In the first half of 2007, we spent $229,000 to purchase manufacturing equipment to support the expansion of our manufacturing capabilities, additional laboratory equipment and other equipment to support our sales and marketing expansion and to support our existing infrastructure. We anticipate the level of capital expenditures in the remaining quarters of 2007 to increase as we continue to invest in manufacturing equipment, research and development equipment and our infrastructure.

Net cash provided by financing activities was $158,000 for the six months ended June 30, 2007, which included $194,000 from the exercise of common stock options, offset by scheduled principal payments on existing capital leases.

We believe that the approximately $20.41 million in cash, cash equivalents and marketable securities that we have as of June 30, 2007, together with anticipated proceeds from sales of our microspheres, delivery systems and other products, will be sufficient to fund our operating and capital requirements as currently planned through at least the next twelve months. In the longer term, we expect to fund our operations and capital requirements through a combination of expected proceeds from product sales and capital equipment financings. However, our cash requirements may vary materially from those now planned due to a number of factors, including, without limitation, our failure to achieve expected product sales, costs associated with changes in our UFE marketing programs, unanticipated research and development expenses, the scope and results of preclinical testing, changes in the focus and direction of our research and development programs, competitive and technological advances, the success of product liability challenges, the timing and results of FDA regulatory review, and the market’s acceptance of any approved products, including our embolic microspheres used for interventional gynecology and interventional oncology.

We may incur additional costs, including without limitation costs related to ongoing research and development activities, preclinical studies, clinical trials, the expansion of our manufacturing, laboratory and administrative functions, as well as costs relating to further market development and commercialization efforts. We may also need additional funds for such activities and for possible strategic acquisitions of synergistic businesses, products and/or technologies. These additional funds may be substantial and raised from time to time through additional public or private sales of equity, through borrowings or through other financings. There are no assurances that we will be able to obtain any additional funding that may be required, or that any such funding will be on acceptable terms.

Borrowing Arrangements

In June 2007, we entered into an agreement to extend until June 2009 the credit facility with a bank that we originally entered into for an initial period of two years in May 2002. Under the terms of the credit facility, we may borrow up to $3.00 million. We may use amounts borrowed under the agreement for general working capital and corporate purposes, subject to limitations defined in the agreement. There were no borrowings outstanding under this agreement as of June 30, 2007.

Other Contractual Obligations

There have been no additional significant changes to our contractual obligations and commercial commitments included in our Form 10-K as of December 31, 2006.

Off Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements.

Inflation

We believe that the effects of inflation generally do not have a material adverse impact on our operations or financial condition.

New Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” or SFAS 157. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles in the United States, or GAAP, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with earlier adoption permitted. The provisions of SFAS 157 should be applied prospectively as of the beginning of the fiscal year in which it is initially applied, with limited exceptions. We do not believe the adoption of SFAS 157 will have a material impact on our results of operations, financial position or cash flows.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115,” or SFAS 159. SFAS 159 permits entities to choose to measure eligible financial assets or liabilities, which include marketable securities available-for-sale and equity method investments, at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We have not completed our evaluation of the Interpretation, but we do not currently believe the adoption of SFAS 159 will have a material impact on our results of operation, financial position or cash flows.

In June 2007, the FASB ratified Emerging Task Force Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities,” or EITF 07-3. The EITF concluded that nonrefundable advance payments for goods or services to be received in the future for use in research and development activities should be deferred and capitalized. The capitalized amounts should be expensed as the related goods are delivered or the services are performed. If an entity’s expectations change such that it does not expected it will need the goods to be delivered or the services to be rendered, capitalized nonrefundable advance payments should be charged to expense. EITF 07-3 is effective for fiscal years beginning after December 15, 2007, including interim periods within those years. We have not completed our evaluation of the EITF, but we do not currently believe the adoption will have a material impact on our results of operation, financial position or cash flows.

Forward Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements that involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including:

· any projections of revenues, expenses, earnings or losses from operations, or other financial items;

· any statements of the plans, strategies and objectives of management for future operations;

· any statements concerning product research, development, regulatory approval and commercialization timelines;

· any statements about our expectations regarding market acceptance and market penetration for our products and product liability challenges with respect to our products;

· any statements of expectation or belief; and

· any statements of assumptions underlying any of the foregoing.

The risks, uncertainties and assumptions referred to above include risks that are described below in “Risk Factors” and elsewhere in this quarterly report on Form 10-Q and that are otherwise described from time to time in our Securities and Exchange Commission reports filed after this report.

The forward-looking statements included in this quarterly report on Form 10-Q represent our estimates as of the date of this quarterly report on Form 10-Q. We specifically disclaim any obligation to update these forward-looking statements in the future. These forward-looking statements should not be relied upon as representing our estimates or views as of any date subsequent to the date of this quarterly report on Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments

As of June 30, 2007, we did not participate in any derivative financial instruments or other financial and commodity instruments. However, in the future we may consider certain financing instruments, including foreign currency forward contracts or alternative instruments, which may be considered derivative in nature.

Primary Market Risk Exposures

Our primary market risk exposure is in the area of foreign currency exchange rate fluctuations. We are exposed to currency exchange rate fluctuations related to our operations in France. Operations in France are denominated in the Euro, and as of June 30, 2007 approximately Euro 1.11 million or $1.49 million, remained outstanding within the intercompany trade accounts. We have not engaged in formal currency hedging activities to date, but we do have a limited natural hedge in that both our revenues and expenses in France are primarily denominated in the Euro. We also attempt to minimize exchange rate risk by converting non-U.S. currency to U.S. dollars as often as practicable. We generally view our investment in foreign subsidiaries operating under a functional currency (the Euro) other than our reporting currency (the U.S. dollar) as long term. Our investment in foreign subsidiaries is sensitive to fluctuations in foreign currency exchange rates. The effect of a change in foreign exchange rates on our net investment in foreign subsidiaries is reflected in the “Other accumulated comprehensive loss” component of stockholders’ equity. Because our foreign currency exchange rate risk is not material, no quantitative tabular disclosure has been provided.

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. We maintain our portfolio of cash equivalents and short-term investments in money market funds, asset-backed and corporate obligations. Due to the conservative nature of our investments, the relatively short duration of their maturities, our ability to convert some or all of our long-term investments to less interest rate-sensitive holdings and our general intent to hold most securities until maturity, we believe interest rate risk is mitigated. A hypothetical 100 basis point increase or decrease in interest rates would not have a material impact on the fair value of our short-term investments as of June 30, 2007. As of June 30, 2007, approximately 51% of the $8.36 million classified as available-for-sale marketable securities will mature within one year.

ITEM 4. CONTROLS AND PROCEDURES

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2007. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2007, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d — 15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On August 17, 2005, a lawsuit commenced in the Circuit Court, Twenty-Second Judicial Circuit, St. Louis, Missouri, captioned Brett Pingel by next friend Dawn LaRose vs. BioSphere Medical, Inc., Bruce Kirke Bieneman, M.D., St. Louis University Hospital, John Stith, M.D and St. Louis University. The lawsuit alleges, among other things, that a patient suffered permanent bilateral blindness as a result of the use of our Embosphere Microspheres or the negligence of the healthcare providers or both factors combined. All defendants have denied the allegations against them. Plaintiffs seek compensatory and punitive damages. We carry product liability insurance and this case is currently being defended by our insurer under reservation of rights with respect to the claim of punitive damages, for which an exclusion from coverage exists. We have filed an answer to this lawsuit in which we have denied the claims being made. We intend to defend against the claims vigorously. However, we cannot give any assurance that we will prevail, or that all or any part of our liability, if any, would be covered by our product liability insurance. Accordingly, we are currently unable to predict the financial impact of this product liability litigation.

ITEM 1A. RISK FACTORS

Investing in our common stock involves a high degree of risk. The risks described below are not the only ones facing our company. Additional risks not presently known to us or that we deem immaterial may also impair our business operations. Any of the following risks could materially adversely affect our business, operating results and financial condition and could result in a complete loss of your investment.

The following risk factors restate and supersede the risk factors previously disclosed in Item 1A of our Annual Report of Form 10-K for the fiscal year ended December 31, 2006.

Risks Relating to Our Future Profitability, Our Financial Results and Need For Financing

Because we have a history of losses and our future profitability is uncertain, our common stock is a speculative investment.

We have incurred operating losses since our inception and, as of June 30, 2007, had an accumulated deficit of approximately $83.23 million. We expect to spend substantial funds to continue research and product testing, to maintain sales, marketing, quality control, regulatory, manufacturing and administrative capabilities and for other general corporate purposes. We expect to continue to incur operating losses in 2007 as we seek to execute on our business plan, including continuing to establish sales and marketing capabilities and conducting research and development activities.

We may never become profitable. If we do become profitable, we may not remain profitable on a continuing basis. Our failure to become and remain profitable would depress the market price of our common stock and impair our ability to raise capital and expand, diversify or continue our operations.

We will continue to need additional funds, and if additional capital is not available, we may have to limit or scale back our operations.

We believe that our existing cash and other working capital, together with anticipated proceeds from sales of our products, will be sufficient to fund our operating and capital requirements, as currently planned through at least the next twelve months.

Our currently planned operating and capital requirements primarily include the need for working capital to:

· produce and manufacture our products;

· support our sales and marketing efforts for our Embosphere Microsphere products for UFE and other indications, as well as our other products for sale;

· support our research and development activities; and

· fund our general and administrative costs and expenses.

However, our cash requirements may vary materially from those now planned due to a number of factors, including, without limitation, the amount of revenues we generate from sales of our products, in particular from the use of our Embosphere Microspheres for UFE; changes in our UFE regulatory and marketing programs; anticipated research and development efforts; cost and time involved in preclinical and clinical testing; the success of product liabilities challenges all or a portion of which are not covered by product liability insurance, costs resulting from changes in the focus and direction of our research and development programs; competitive advances that make it harder for us to market and sell our products; the timing and cost of FDA regulatory review; and the market’s acceptance of any approved products. We also expect to incur additional costs related to ongoing research and development activities, preclinical studies, clinical trials, and the expansion of our manufacturing, laboratory and administrative capabilities, as well as costs relating to further market development and commercialization efforts. We may also need additional funds for possible strategic acquisitions of synergistic businesses, products and/or technologies.

We will require substantial additional cash to fund our planned, and any unplanned, near and long-term expenses. If adequate funds are not available, we could be required to reduce our capital expenditures, scale back or eliminate some or all of our research, development, sales and marketing initiatives, reduce our workforce and license to others products or technologies that we otherwise would seek to commercialize ourselves. Although we may seek additional funding through collaborative arrangements, borrowing money or the sale of additional equity securities, we may not receive additional funding on reasonable terms, or at all. Any sales of additional shares of our capital stock are likely to dilute our existing stockholders. Further, if we issue additional equity securities, the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. Alternatively, we may borrow money from commercial lenders, possibly at high interest rates, which will increase the risk of your investment in us.

If our operating results fluctuate significantly from quarter to quarter, then our stock price may decline.

Our operating results could fluctuate significantly from quarter to quarter. These fluctuations may be due to a number of factors, including:

· the timing and volume of customer orders for our products;

· procedure cancellations;

· introduction or announcement of competitive products;

· regulatory approvals;

· product recalls;

· successful product liability challenges against our products;

· turnover in our direct sales force;

· timing and amount of expenses;

· reductions in orders by our distributors;

· effectiveness of new marketing and sales programs;

· changes in management;

· negative publicity; and

· general economic conditions.

Due to these fluctuations, our operating results in some quarters may not meet the expectations of our investors. In that case, our stock price may decline.

In addition, a large portion of our expenses, including expenses for facilities, equipment and personnel, are relatively fixed. Accordingly, if our revenues decline or do not grow as much as we anticipate, we might not be able to improve our operating margins.

Failure to achieve anticipated levels of revenues could therefore significantly harm our operating results for a particular fiscal period.

Compliance with the Sarbanes-Oxley Act of 2002 will result in increased expenditures.

We are exposed to significant costs and risks associated with complying with increasingly stringent and complex regulation of corporate governance and disclosure standards. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and new SEC regulations require a growing expenditure of management time and external resources. In particular, Section 404 of the Sarbanes-Oxley Act of 2002 requires management’s annual review and evaluation of our internal controls, and attestations of the effectiveness of our internal controls by our independent auditors. Under the current law, the internal controls certification requirements of Section 404 of the Sarbanes-Oxley Act will apply to us for the fiscal year ended December 31, 2007, with the attestation requirements applicable for the fiscal year ended December 31, 2008. Accordingly, management has begun reviewing our internal control procedures to facilitate compliance with those requirements when they become applicable. This process could result in our needing to implement measures to improve our internal controls. Any failure by us to maintain effective internal controls could have a material adverse effect on our business, operating results and stock price. This process may also require us to hire additional personnel and outside advisory services and will result in significant accounting and legal expenses. We expect to incur significant expense in future periods to comply with regulations pertaining to corporate governance and internal controls as described above.

Risks Relating to Our Industry, Business and Strategy

If we do not achieve widespread market acceptance of our microsphere products, our business prospects will be seriously harmed.

Our microspheres are based on new technologies and therapeutic approaches. In the United States, we began selling our first microsphere product in the first half of 2000. In November 2002, we received FDA clearance to market our Embosphere Microspheres in the United States for specific use in the embolization of uterine fibroids. We have only begun to market and sell our HepaSphere Microspheres in the European Union in the fourth quarter of 2005 and received marketing clearance for our QuadraSphere Microspheres in November 2006. For the fiscal years ended December 31, 2006 and 2005, and for the quarter ended June 30, 2007, we generated revenues primarily from the sales of our Embosphere Microspheres in North America and the European Union. Our success will depend upon increasing acceptance by the medical community, patients and third-party payers that our Embosphere Microspheres and other products are medically therapeutic and cost effective. Our embolotherapy techniques are administered by interventional radiologists. To date we have not achieved widespread market acceptance of our Embosphere Microspheres or other products. In the treatment of uterine fibroids using UFE, we believe that we have not yet achieved widespread acceptance primarily because obstetrics and gynecology physicians may elect to offer and provide other forms of treatment to their patients with uterine fibroids that do not require a referral to another specialist, such as an interventional radiologist. The majority of our revenues are from the sale of our Embosphere Microspheres for UFE. Accordingly, our future success will depend upon obstetrics and gynecology physicians referring patients to interventional radiologists to receive treatment using our Embosphere Microspheres in lieu of, or in addition to, receiving other forms of treatment that the obstetrics and gynecology physicians can otherwise provide directly.

Negative publicity associated with any adverse medical effects attributed to embolization treatments generally, or our products specifically, may create the market perception that our products are unsafe. For example, in UFE procedures patients commonly experience a day or two of post-procedure abdominal pain or cramping. Other infrequently occurring complications may include allergic reactions, rashes, early onset of menopause, infertility and infection that may, in some cases, require a hysterectomy. We are also aware that a small number of the patient population, which we believe constitutes approximately 2% of those receiving the UFE procedure using EmboGold Microspheres, reported a delayed onset of rash and/or pain.

If our microsphere products are not properly used or if the market concludes that our products are not safe or effective, our business could be adversely affected.

Our microspheres are designed to permanently occlude targeted blood vessels. There is some risk that some or all of the microspheres used in a medical procedure may travel in the blood system to sites other than the intended surgical site and occlude, or block, other blood vessels, resulting in the potential for significant adverse health effects on the patient or, in a worst case, even death. Moreover, to use our microspheres correctly for a particular medical procedure, trained physicians must correctly evaluate the subject vasculature, select and use the proper size and quantity of the product and carry out appropriate placement of the product. Physician error could potentially have significant adverse health effects on the patient, including death. We offer information to educate physicians about the selection and use of the proper size and quantity of microspheres in patient therapy, as do a variety of medical programs. In addition, there is only limited data concerning the long-term health effects on persons receiving embolotherapy using our microspheres. For example, the effect of UFE on continued fertility has not yet been specifically studied, and our FDA clearance for Embosphere Microspheres currently does not include women who desire future pregnancy.

If physicians do not use our product correctly, or if the market determines or concludes that any of our products are not safe or effective for any reason, we may be exposed to product liability claims, product recalls, fines or other penalties or enforcement actions by regulatory agencies and associated adverse publicity. For example, in August 2005 we were named as a defendant in a product liability lawsuit in which the plaintiff, claims that he was rendered blind in both eyes as a result of the use of our Embosphere Microspheres or the negligence of the healthcare providers or both factors combined. See “We may be exposed to product liability claims, and if we are unable to obtain or maintain adequate product liability insurance, then we may have to pay significant monetary damages in a successful product liability claim against us.” While we have product liability insurance, we may not be able to maintain such insurance at favorable rates, or at all, and any successful judgments against us may not be covered under the policy or could exceed our coverage. The policy contains an exclusion for punitive damages, for example. In addition, we have provided to our customers a satisfaction guarantee that requires us to accept the return of any inventory and credit the entire amount of the original order if a properly trained customer is not satisfied with the performance of our microspheres or our delivery system products.

If we experience adverse publicity or are subject to product liability claims, excessive guarantee claims, recalls, fines and the like, we will be unable to achieve widespread market acceptance of our microsphere products and achieve profitability. For example, in March 2006 we instituted a voluntary recall of our HepaSphere Microspheres in Europe and Japan to correct a packaging defect that we identified while conducting aging studies routinely performed on all of our product packaging. HepaSphere Microspheres are contained in a prefilled vial that was in turn initially packaged inside a paper pouch. We determined that a defect in the paper pouch may compromise the sterility of the outside of the vial. If the sterility of the outside of the vial is not maintained, there was the risk that a physician’s hands could become contaminated when handling the vial. Although we are not aware of any adverse events resulting from the defects in the paper packaging, our voluntary recall of this product could result in reputational harm or a perception that the product is not safe, either of which could adversely affect market acceptance of our microsphere products.

If we do not successfully market and promote our Embosphere Microspheres for use in uterine fibroid embolization, our product revenues will not increase.

In the first quarter of 2003, we launched our ask4UFE campaign to increase awareness among patients, referring physicians, interventional radiologists and third-party payers of UFE as an alternative treatment for fibroids. We believe the majority of our revenues in the United States for the two years ended December 31, 2006, and for the six months ended June 30, 2007, were derived from the sale of Embosphere Microspheres for use in UFE. Although we believe that EmboGold Microspheres accounted for a portion of revenue, we currently do not intend to seek 510(k) clearance for use of EmboGold Microspheres in UFE. We are continuing to market EmboGold Microspheres for use in hypervascularized tumors (other than uterine fibroids) and arteriovenous malformations. Because we do not intend to seek 510(k) clearance of EmboGold Microspheres in UFE, we believe that our future product revenues are substantially dependent on our ability to achieve widespread acceptance of the use of Embosphere Microspheres for the treatment of UFE, and if we do not achieve increased market acceptance, our product revenues, profitability and success will be adversely affected.

If gynecologists, obstetricians, interventional radiologists and other healthcare providers do not recommend and endorse our products, our sales may decline or we may be unable to increase our sales and profits.

Our relationships with gynecologists, obstetricians, interventional radiologists and other healthcare providers are critical to our continued growth. We believe that these relationships are based on the quality of our products, our long-standing commitment to embolotherapy treatments, our marketing efforts and our presence at medical society and trade association meetings. Any actual or perceived diminution in our reputation or the quality of our products, or our failure or inability to maintain these other efforts could damage our current relationships, or prevent us from forming new relationships, with healthcare professionals and cause our growth to be limited and our business to be harmed.

In order for us to sell our products, healthcare professionals must recommend and endorse them. We may not obtain the necessary recommendations or endorsements from this community. Acceptance of our products depends on educating the medical community as to the distinctive characteristics, perceived benefits, safety, clinical efficacy and cost-effectiveness of our products compared to traditional methods of treatment and the products of our competitors, and on training healthcare professionals in the proper application of our products. If we are not successful in obtaining the recommendations or endorsements of gynecologists, obstetricians, interventional radiologists and other healthcare professionals for our products, our sales may decline or we may be unable to increase our sales and profits.

If we experience delays, difficulties or unanticipated costs in establishing and growing the sales, distribution and marketing capabilities necessary to successfully commercialize our products, we will have difficulty maintaining and seeking to increase our sales.

We are continuing to develop sales, distribution and marketing capabilities in the United States, the European Union, Asia and in South America. In 2003 we began a marketing strategy to promote UFE awareness and the benefits of our product for the treatment of uterine fibroids. It will be expensive and time-consuming for us to develop a global marketing and sales force. Moreover, we may choose, or find it necessary, to enter into strategic collaborations to sell, market and distribute our products. At June 30, 2007, we had a sales force of 24 persons located principally in the United States. Competition for skilled salespersons in the medical device industry is intense, and we may not be able to provide adequate incentive to maintain our sales force or to attract new sales personnel or to establish and maintain favorable distribution and marketing collaborations with other companies to promote our products. We have only limited sales and marketing resources both in the United States and internationally and may not be successful in developing and implementing our strategy. Among other things, we need to:

· provide or assure that distributors provide the technical and educational support customers need to use our products successfully;

· establish and implement successful sales and marketing and education programs that encourage our customers to purchase our products;

· manage geographically dispersed operations; and

· modify our products and marketing and sales programs for foreign markets.

We currently have distribution agreements with approximately 40 third-party distributors. Any third party with whom we have established a marketing and distribution relationship may not devote sufficient time to the marketing and sales of our products, thereby exposing us to potential expenses in terminating such distribution agreements. For example, in 2002 our subsidiary, BMSA, ended a distribution agreement with a third party, in part because of such party’s failure to achieve sales forecasts agreed upon by the parties. As a result of subsequent litigation, BMSA was required to pay approximately $800,000 in damages arising from such termination and incurred additional legal and administrative expenses incident to the legal proceeding. We and any of our third-party collaborators must also market our products in compliance with federal, state and local laws relating to the providing of incentives and inducements. Violation of these laws can result in substantial penalties. If we are unable to successfully motivate and expand our marketing and sales force and further develop our sales and marketing capabilities, or if our distributors fail to promote our products, we will have difficulty maintaining and increasing our sales.

We will be required to expend significant resources for research, development, testing and regulatory approval of our products under development, and these products may not be developed successfully.

We are developing and commercializing products for medical applications using embolotherapy techniques, including without limitation our MR Microspheres and Resorbable Microspheres, both of which are still in preclinical development. Our products under development may not provide greater benefits than current treatments or products, or alternative treatments or products under development. All of our products under development will require significant additional research, development, engineering, preclinical and/or clinical testing, as well as regulatory approval and a commitment of significant additional resources prior to their commercialization. Our potential products may not:

· be developed successfully;

· be proven safe and effective in clinical trials;

· offer therapeutic or other improvements over current treatments and products;

· meet applicable regulatory standards or receive regulatory approvals;

· be capable of production in commercial quantities at acceptable costs; or

· be successfully marketed.

We may be unable to grow revenues for certain of our products, and if we do not develop and introduce new products, we may not achieve additional revenue opportunities.

We derived approximately 9% of our revenues for the period ended June 30, 2007 from the sale of nonstrategic medical products that we expect will constitute a less significant portion of our revenues on an ongoing basis. These nonstrategic medical products include barium delivery kits sold by us in the European Union, as well as other ancillary devices for hospital and physician use. In addition, we estimate that a portion of our revenues for the six-months ended June 30, 2007 were derived from the sale of EmboGold Microspheres for UFE, an indication for which we do not have, and do not presently intend to seek, clearance from the FDA to market. We made the decision not to seek FDA clearance for our EmboGold Microsphere product because of reports that a small number of patients treated with UFE using EmboGold Microspheres, which we believe constitute approximately 2% of the total number of patients receiving the procedure, reported a delayed onset of rash and/or pain. Accordingly, we need to develop and introduce new applications for our embolotherapy technology and pursue opportunities for microsphere technology in other medical applications. Any such new application for our embolotherapy technology or microsphere technology will be subject to a number of risks inherent in the development and commercialization of a medical device product, including uncertainties with respect to the successful completion of clinical trials, our ability to achieve and maintain, and our willingness to seek, required regulatory approvals and our ability to successfully commercialize, market and sell these new applications, assuming FDA approval is achieved. If, as a result of these or other risks, we are not successful in developing new applications and products, we will not achieve new revenue opportunities.

We are a defendant in a product liability lawsuit, the outcome of which is uncertain and could harm our business.

In August 2005 we were named as a defendant in a lawsuit commenced in the Circuit Court, Twenty-Second Judicial Circuit, St. Louis, Missouri, which we refer to as the Pingel Claim. The lawsuit alleges, among other things, that a patient suffered permanent bilateral blindness as a result of the use of our Embosphere Microspheres or the negligence of the healthcare providers or both factors combined. Plaintiffs seek compensatory and punitive damages. Although we currently maintain product liability insurance coverage for our Embosphere Microsphere product that is the subject of the Pingel claim, certain claims asserting medical product liability have in the past resulted in substantial damages awards for plaintiffs and, as such, our insurance may not cover, or provide us with adequate coverage against, a judgment against us. For example, although our product liability insurer has agreed to vigorously defend us with regard to all of the counts set forth against us in the Pingel Claim, the insurer has advised us in writing that any verdict against us for punitive damages is specifically excluded from coverage. The insurer has also advised us that it does not waive any other defenses to coverage that may apply. Moreover, the insurance is subject to a cap on the maximum amount our insurer is required to pay.

If we do not prevail in this matter, we could be required to pay substantially more in damages than the amount we may seek to recover from our product liability insurer, which could have a material adverse affect on our financial condition and results of operations. Moreover, an adverse outcome could harm our reputation and market acceptance of our products.

We may be exposed to future product liability claims, and if we are unable to obtain or maintain adequate product liability insurance, then we may have to pay significant monetary damages in a successful product liability claim against us.

The development and sale of medical devices entails an inherent risk of product liability. For example, if physicians do not use our products properly, if patients experience adverse side effects in procedures in which our products are used, or if the market determines or concludes that any of our products are not safe or effective for any reason, we may be exposed to product liability claims such as the Pingel Claim described above. Although we maintain insurance, including product liability insurance, we cannot provide assurance that any claim that may be brought against us will not result in court judgments or settlements in amounts that are not covered in whole or in part by our insurance or are in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance.

Any product liability claim brought against us, with or without merit, could result in the increase of our product liability insurance rates or the inability to secure additional insurance coverage in the future. A product liability claim, whether meritorious or not, could be time consuming, distracting and expensive to defend, could be harmful to our reputation, could result in a diversion of management and financial resources away from our primary business and could result in product recalls. In any such case, our business may suffer.

We instituted a voluntary recall of our HepaSphere Microspheres product in the European Union and Japan, which may result in decreased market acceptance of this product and reputational harm, as well as hindering our ability to generate revenue from sales of the product.

In March 2006, we instituted a voluntary recall of our HepaSphere Microspheres in Europe and Japan to correct a packaging defect that we identified while conducting aging studies routinely performed on all of our product packaging. We received CE mark approval to sell HepaSphere Microspheres in the European Union in 2004 and commercial launch began in late 2005. We also have had limited sales of HepaSphere Microspheres to Dr. Shinichi Hori, the inventor and licensor of HepaSphere Microspheres, in Japan under private import restrictions. HepaSphere Microspheres are contained in a prefilled vial that was in turn initially packaged inside a paper pouch. We determined that a defect in the paper pouch may compromise the sterility of the outside of the vial. If the sterility of the outside of the vial is not maintained, there is the risk that a physician’s hands can become contaminated when handling the vial. Although we are not aware of any adverse events resulting from the defects in the paper packaging, our voluntary recall of this product could result in reputational harm or a perception that the product is not safe, either of which could adversely affect market acceptance of our microsphere products and result in decreased sales. In the third quarter of 2006 we launched a new plastic packaging configuration for our HepaShere Microsphere product designed to correct this defect.

If we are not able to compete effectively, we may experience decreased demand for our products, which may result in price reductions.

We have many competitors in the United States and abroad, including medical device, biotechnology and other alternative therapeutic companies, universities and other private and public research institutions. We have experienced increased competition since receiving FDA approval for use of our Embosphere Microspheres for UFE. Our success depends upon our ability to develop and maintain a competitive position in both the embolotherapy and related delivery systems markets. Our key competitors in both the fields of embolotherapy and the delivery systems used in the UFE procedure are Angiodynamics Incorporated, Biocompatibles, Ltd., Boston Scientific Corporation, Cook Incorporated, Cordis Corporation, a Johnson and Johnson Company, Pfizer, Inc., Terumo Corporation and CeloNova BioSciences, Inc. These and many of our other competitors have greater capabilities, experience and financial resources than we do. As a result, they may develop products more quickly or at less cost, that compete with our microsphere products and related delivery systems. In addition, we may experience decreased demand for our products if these or other competitors announce that they have begun to develop products that compete with our products. For example, in 2004, some of our competitors provided free or reduced-price samples of competing forms of microspheres for the treatment of medical procedures for which our Embosphere Microspheres are indicated. The availability of these free or reduced-price samples has had, and may continue to have, a

material adverse effect on our product revenues, primarily due to a loss of market share for the sale of our products. Currently, the primary products with which our microspheres compete for some of our applications are spherical PVA sold by Boston Scientific, Terumo and Biocompatibles, and gel foam sold by Pfizer and non-spherical PVA sold by Angiodynamics, Boston Scientific and Cook. In addition, our competitors may develop technologies that render our products obsolete or otherwise noncompetitive.

We may not be able to improve our products or develop new products or technologies quickly enough to maintain a competitive position in our market and continue to commercially develop our business. Moreover, we may not be able to compete effectively, and competitive pressures may result in less demand for our products and impair our ability to become profitable.

In the treatment of symptomatic uterine fibroids, we also compete with obstetrics and gynecology physicians who elect to offer and provide other forms of treatment to their patients with uterine fibroids that do not require referral to another specialist.

If we fail to maintain, or in some instances obtain, an adequate level of reimbursement for our products by third-party payers, there may be no commercially viable markets for our products.

The availability and levels of reimbursement by governmental and other third-party payers affects the market for any medical device. We may not be able to sell our products profitably if reimbursement is unavailable or limited in scope or amount. Some insurance companies do not fully reimburse for embolization procedures. These third-party payers may attempt to contain or reduce the costs of healthcare by lowering the rate at which providers are reimbursed for embolization procedures or challenging the prices that companies such as ours charge for medical products. For example, on January 1, 2007, the Centers for Medicare and Medicaid Services, or CMS, issued a rule providing for a single all-inclusive reimbursement code for UFE. This new code is inclusive of all services occurring on the day of the procedure. This new physician reimbursement rate is lower than the rate generally historically received by physicians. We believe that some physicians have shifted their procedural mix away from UFE in response to this change in reimbursement, which has negatively affected our sales growth. In some foreign countries, particularly the countries of the European Union where our microsphere products are currently marketed and sold, the pricing of medical devices is subject to governmental control, and the prices charged for our products have in some instances been reduced as a result of these controls.

Initiatives to limit the growth of healthcare costs, including price regulation, are underway in the United States and other major healthcare markets. For example, these proposals include prescription drug benefit legislation recently enacted in the United States, and healthcare reform initiatives proposed in certain state and local jurisdictions and other countries. While these initiatives have in many cases related to pharmaceutical pricing, implementation of more sweeping healthcare reforms in significant markets may limit the price of, or the level at which reimbursement is provided for, our products and may influence a physician’s selection of products used to treat patients.

If we do not recruit and retain senior management and other key employees we may not be able to successfully implement our business strategy.

Our success is substantially dependent upon our ability to recruit and retain members of our senior management and other key employees. In July 2007, Gary M. Saxton resigned as Executive Vice President and Chief Operating Officer. Disruptions in our business could result in the near term as a result of such departure. All of the agreements with our officers provide that their employment may be terminated either by the employee or by us at any time and without notice. Although we do not have any reason to believe that we may lose the services of any of these persons in the foreseeable future, the loss of the services of any of these persons might impede the achievement of our research, development, and commercialization objectives. We do not carry key man life insurance on any of our executive officers or other personnel.

If we make any acquisitions, we will incur a variety of costs and may never successfully integrate the acquired business into ours.

We may attempt to acquire businesses, technologies, services or products that we believe are a strategic complement to our business model. We may encounter operating difficulties and expenditures relating to integrating an acquired business, technology, service or product. These acquisitions may also absorb significant management attention that would otherwise be available for ongoing development of our business. Moreover, we may never realize the anticipated benefits of any

acquisition. We may also make dilutive issuances of equity securities, incur debt or experience a decrease in the cash available for our operations, or incur contingent liabilities in connection with any future acquisitions.

Because key stockholders beneficially own a significant amount of our common stock, they may be able to exert control over us.

As of June 30, 2007, we believe that Sepracor Inc., or Sepracor, and funds affiliated with Cerberus Capital Management, L.P., or Cerberus, beneficially owned approximately 22% and 14% of our outstanding common stock, respectively, including shares of common stock issuable upon the exercise of warrants and series A preferred stock held by these stockholders. Moreover, two of our directors are executive officers of Sepracor, and we have granted board observation rights to Cerberus. Accordingly, Sepracor and Cerberus may have significant influence over corporate actions requiring stockholder approval, such as the election of directors, amendment of our charter documents and the approval of merger or significant asset sale transactions. In addition, the shares of our series A preferred stock held by Sepracor and Cerberus entitled them to certain voting rights in accordance with the terms and conditions of the series A preferred stock. Specifically, we will need the consent of holders of at least 50% of the series A preferred stock initially purchased by Sepracor and Cerberus to undertake certain key corporate actions, including the following:

· amending our charter or bylaws in a manner that adversely affects the holders of series A preferred stock;

· authorizing or issuing any equity security that is senior to or pari passu with the series A preferred stock; and

· declaring or paying any dividends on, or redeeming or repurchasing any shares of, our capital stock, subject to customary exceptions.

The ownership concentration of Sepracor and Cerberus could cause the market price of our common stock to decline. In addition, conflicts of interest between these key stockholders and us may arise, including with respect to competitive business activities and control of our management and our affairs.

The holders of shares of our series A preferred stock have rights that could adversely affect an investment in our common stock.

The holders of our series A preferred stock have the right to an adjustment in the conversion rate of the series A preferred stock if we issue securities at a price below the purchase price paid by these holders. These provisions could substantially dilute stockholders’ interest in BioSphere in the event of future financing transactions. The holders of series A preferred stock also have the right to receive a 6% dividend per annum which, at our election, may be paid in cash or additional shares of series A preferred stock. To date all such dividend payments have been made in additional shares of series A preferred stock. If such dividends continue to be paid in stock, this dividend could also further dilute stockholders’ ownership interest. In addition, the holders of our series A preferred stock have the right to participate in future capital-raising transactions by BioSphere. The existence of this right may reduce our ability to establish terms with respect to, or enter into, any financing with parties other than the investors.

In the event that we enter into an acquisition or business combination in which we sell all or substantially all of our assets, or if there occurs a change of control of a majority of our common stock outstanding prior to such transaction, the holders of our series A preferred stock will have the right to receive, before any distributions or payments to the holders of our common stock, an amount in cash equal to their initial purchase price, $8,000,000, plus an amount equal to any accrued but unpaid dividends, and will then participate with the holders of the common stock on a pro rata basis with respect to the distribution of any remaining assets. The existence of this right may make it difficult for us to raise capital in financing transactions with third parties and will also result in holders of our common stock receiving less distributions or payments upon a change of control or asset sale than they would be entitled to receive if no preferential payments were required to be made to holders of our series A preferred stock.

Risks Relating to Regulatory Matters

If we do not obtain and maintain the regulatory approvals or clearances required to market and sell our products, then our business may be unsuccessful and the market price of our stock may decline.

We are subject to regulation by government agencies in the United States and abroad with respect to the design, manufacture, packaging, labeling, advertising, promotion, distribution and sale of our products. For example, our products are subject to approval or clearance by the FDA prior to commercial marketing in the United States. Similar regulations exist in most major foreign markets, including the European Union, Latin America and Asia. The process of obtaining necessary regulatory approvals and clearances will be time-consuming and expensive for us. If we do not receive required regulatory approval or clearance to market our products, or if any approvals or clearances we have received are revoked or terminated, we may not be able to commercialize our products and become profitable, and the value of our common stock may decline.

We are also subject to numerous U.S. and foreign regulatory requirements governing the conduct of clinical trials, obtaining marketing authorization, pricing and third-party reimbursement. The foreign regulatory approval process includes all of the risks associated with FDA approval described above, as well as risks attributable to the satisfaction of local regulations in foreign jurisdictions. Approval or clearance by the FDA does not assure approval by regulatory authorities of some countries outside the United States. Many foreign regulatory authorities, including those in major markets such as Japan and China, have different approval procedures than those required by the FDA and may impose additional testing requirements for our medical device candidates.

If the FDA or other regulatory agencies place restrictions on, or impose additional approval requirements with respect to, products we are then marketing, we may incur substantial additional costs and experience delays or difficulties in continuing to market and sell these products.

Even if the FDA grants us clearance with respect to marketing any product, such products will be subject to ongoing regulatory review and restrictions, including the review of adverse events or malfunctions which are reported after such products are made commercially available, and restrictions on the indications for which we can market the product. The FDA can propose to withdraw approval if new clinical data or experience shows that a product is not safe for use under the approved conditions of use. The marketing claims we are permitted to make in labeling or advertising regarding our microspheres are limited to those consistent with any FDA clearance or approval. For example, because our EmboGold Microspheres are not cleared for specific use in UFE, we may not promote them for this specific use. Although our QuadraSphere Microspheres are identical in all respects to our HepaSphere Microspheres, which are currently marketed in the European Union for use in the embolization of hepato-cellular carcinoma and hepatic metastasis, our QuadraSphere Microspheres are not specifically indicated for use in hepato-cellular carcinoma and hepatic metastasis. FDA requires that we conduct clinical trials prior to submitting an application to claim the use of the QuadraSphere Microspheres for the treatment of a specific disease or condition, such as hepato-cellular cancer or hepatic metastasis, while European Union regulations do not require it for this class of medical devices. Accordingly, in order for us to seek FDA clearance to promote the use of QuadraSphere Microspheres for the embolization of hepato-cellular carcinoma and hepatic metastasis, we will be required to undertake clinical trials.

If the FDA believes our advertisements or labeling, or statements made by our sales representatives or other company officials, improperly promote our products for unapproved indications, the FDA could allege that our promotional activities misbrand or adulterate our products. Specifically, the FDA could issue an untitled letter or warning letter, which requests, among other things, that we cease such promotional activities, including disseminating the advertisements and promotional labeling, and that we issue corrective advertisements and labeling, including sending letters to healthcare providers. The FDA also could take enforcement action, including seizure of product, injunction or criminal prosecution against us and our officers or employees or seek civil penalties.

We may in the future make modifications to our microspheres or their labeling which we determine do not necessitate the filing of a new 510(k) notification. However, if the FDA does not agree with our determination, it may require us to make additional 510(k) filings for the modification, and we may be prohibited from marketing the modified product or the new claims until we obtain FDA clearance. Similarly, if we obtain premarket approval, we may not be able to make product or labeling changes until we get further FDA approval.

If we fail to comply with applicable federal, state or foreign laws or regulations, we could be subject to enforcement actions that could affect our ability to develop, market and sell our products and product candidates successfully and could harm our reputation and lead to decreased acceptance of our products by the market.

Even if we obtain the necessary FDA clearances or approvals, if we or our suppliers fail to comply with ongoing regulatory requirements, our products could be subject to corrections, removals or recalls from the market or other enforcement action.

We are subject to the Medical Device Reporting, or MDR, regulations that require us to report to the FDA if our products may have caused or contributed to patient death or serious injury, or if our device malfunctioned and a recurrence of the malfunction would be likely to result in a death or serious injury. We must also file reports of device corrections and removals and adhere to the FDA’s rules on labeling and promotion. We must also comply with the FDA’s Good Manufacturing Practice regulations. Our failure to comply with these or other applicable regulatory requirements could result in enforcement action by the FDA, which may include any of the following:

· untitled letters, warning letters, fines, product seizures, injunctions and civil penalties;

· administrative detention, which is the detention by the FDA of medical devices believed to be adulterated or misbranded;

· customer notification, or FDA orders for repair, replacement or refund;

· voluntary or mandatory recall of our products;

· operating restrictions, partial suspension or total shutdown of production;

· refusal to review premarket notification or premarket approval submissions;

· rescission of a substantial equivalence order or suspension or withdrawal of a premarket approval; and

· criminal prosecution.

If we are subject to an enforcement action, our ability to develop, market and sell our products successfully would be adversely affected, our reputation could be harmed, and we may experience decreased market acceptance of our products.

We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and regulations and, if we are unable to fully comply with such laws, could face substantial penalties.

Our operations may be directly or indirectly affected by various broad state and federal healthcare fraud and abuse laws, including the federal Anti-Kickback Statute, which prohibit any person from knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, to induce or reward either the referral of an individual, or the furnishing or arranging for an item or service, for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs. If our past or present operations are found to be in violation of these laws, we and our officers may be subject to civil or criminal penalties, including large monetary penalties, damages, fines, imprisonment and exclusion from Medicare and Medicaid program participation. If enforcement action were to occur, our business and financial condition would be harmed.

Risks Relating to Our Intellectual Property

If we are unable to obtain patent protection for our products, their competitive value could decline.

We may not obtain meaningful protection for our technology and products with the patents and patent applications that we own or license relating to our microsphere technology or other ancillary products. In particular, the patent rights we possess or are pursuing generally cover our technologies to varying degrees, and these rights may not prevent others from designing products similar to or otherwise competitive with our Embosphere Microspheres and other products we commercialize. To the extent that our competitors are able to design products competitive with ours, we may experience less

market penetration with our products and, consequently, we may have decreased revenues. The patent laws involving medical devices and life sciences technologies such as our microspheres are complex and vary from country to country. Thus, we cannot predict whether we will secure patent protection from any of our existing patent applications in the United States or abroad, although we have a current policy of pursuing patent protection wherever possible for our new technologies. Nor can we predict whether such coverage will be meaningful.

We do not know whether competitors have similar U.S. patent applications on file, since U.S. patent applications filed before November 28, 2000, or for which no foreign patents will be sought are secret until issued, and applications filed after November 28, 2000 are published approximately 18 months after their earliest priority date. Consequently, the United States Patent and Trademark Office could initiate interference proceedings involving our owned or licensed U.S. patent applications or issued patents. Further, there is a substantial backlog of patent applications at the United States Patent and Trademark Office, and the approval or rejection of patent applications may take several years.

We require our employees, consultants and advisors to execute confidentiality agreements. However, we cannot guarantee that these agreements will provide us with adequate protection against improper use or disclosure of confidential information. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisors have prior employment or consulting relationships. Further, others may independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to our trade secrets. Our failure to protect our proprietary information and techniques may inhibit or limit our ability to exclude certain competitors from the market.

If we become involved in expensive patent litigation or other proceedings to enforce or defend our patent rights, we could incur substantial costs and expenses or substantial liability for damages or be required to stop our product development and commercialization efforts.

On January 13, 2005, we were notified of a Notice of Oppositions filed by Biocompatibles UK Limited on December 23, 2004 challenging the patentability of the claims in our granted European Patent 1128816, which relates to certain PVA microspheres, their use in embolization and methods of manufacture related to such PVA microspheres. We will continue defending our European PVA patent in this proceeding. While we are not able to predict the outcome of this patent opposition proceeding, it will not impact our ability to sell our Embosphere Microsphere, HepaSphere Microsphere or QuadraSphere Microsphere products.

With the exception of the European Opposition proceeding just described, we are not currently involved in any other litigation or actions with third parties to enforce or defend our patent rights. However, in order to protect or enforce our patent rights, we may have to initiate legal proceedings against third parties, such as infringement suits, opposition proceedings or interference proceedings. By initiating legal proceedings to enforce or defend our intellectual property rights, we may also provoke these third parties to assert claims against us and, as a result, our patents could be narrowed, invalidated or rendered unenforceable by a court. Furthermore, we may be sued for infringing on the intellectual property rights of others. We may find it necessary, if threatened, to initiate a lawsuit seeking a declaration from a court regarding the proprietary rights of others. As we introduce new products into the market, we may be accused of infringing the patent rights of third parties. If we do not prevail in such a patent litigation brought against one of our products or its use, we may be required to pay damages, stop selling our product or obtain a royalty-bearing license if one is obtainable. Intellectual property litigation is costly and, even if we prevail, could divert management attention and significant financial and human resources away from our business.

The patent position of companies like ours generally is highly uncertain, involves complex legal and factual questions, and has recently been the subject of much litigation. We may not prevail in any patent-related proceeding. If we do not prevail in any litigation, we could be required to pay damages, stop the infringing activity, or obtain a license. Any required license might not be available to us on acceptable terms, or at all. In addition, some licenses may be nonexclusive, and therefore our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around a patent, we may be prevented from selling some of our products, which could decrease our revenues.

If any of our licenses to use third-party technologies in our products are terminated, we may be unable to develop, market or sell our products.

We are dependent on various license agreements relating to each of our current and proposed products that give us rights under intellectual property rights of third parties. In particular, we have an agreement with L’Assistance Publique-Hopitaux De Paris, pursuant to which L’Assistance Publique-Hopitaux De Paris has granted us exclusive rights to use two United States patents and their foreign counterparts that we jointly own with L’Assistance Publique-Hopitaux De Paris relating to Embosphere Microspheres. We also have an agreement with Dr. Shinichi Hori pursuant to which we have an exclusive royalty-bearing license to Japanese patent rights for our HepaSphere Microsphere product. We also have an agreement with Archimmed SARL pursuant to which we have an exclusive royalty-bearing license to patent rights for our MR Microsphere product, which is in development. Each of these agreements can be terminated on short notice by the licensor if we default on our obligations under the license and fail to cure such default after notice is provided. These licenses impose commercialization, sublicensing, royalty, insurance and other obligations on us. Our failure, or any third party’s failure, to comply with the terms of any of these licenses could result in our losing our rights to the license, which could result in our being unable to develop, manufacture or sell products which contain the licensed technology.

Risks Relating to the Production and Supply of Our Products

If we experience manufacturing delays or interruptions in production, then we may experience customer dissatisfaction and our reputation could suffer.

If we fail to produce enough products at our own manufacturing facility or at a third-party manufacturing facility, we may be unable to deliver products to our customers on a timely basis, which could lead to customer dissatisfaction and could harm our reputation and ability to compete. We currently produce and package all of our microsphere products in one manufacturing facility in France. We have contracted with Brivant Medical Engineering and Radius Medical Technologies, Inc. to supply our guidewire products, and with Accellent, Inc. and Concert Medical to supply and package our catheter products. Either we or any third-party manufacturer would likely experience significant delays or cessation in producing our products if we or they experience a failure in any process critical equipment or if a labor strike, natural disaster, local or regional conflict or other facility or supply disruption were to occur. If we are unable to manufacture and package our products at our facility in France, we may be required to enter into arrangements with one or more alternative contract manufacturing companies.

Even if we are able to identify alternative facilities to manufacture our products, if necessary, we may experience disruption in the supply of our products until such facilities are available. Although we believe we possess adequate insurance for damage to our property and the disruption of our business from casualties, such insurance may not be sufficient to cover all of our potential losses and may not be available to us on acceptable terms or at all. Our failure to deliver products on a timely basis could lead to customer dissatisfaction and damage our reputation. In addition, if we are required to depend on third-party manufacturers, our profit margins may be lower, which will make it more difficult for us to achieve profitability.

Medical device manufacturers must adhere to current Good Manufacturing Practices and Quality System Regulations which are enforced by the FDA through its inspection program. We and other third party manufacturers must comply with various quality system requirements pertaining to all aspects of our product design and manufacturing process, including requirements for packaging, labeling and record keeping, complaint handling, corrective and preventive actions and internal auditing. In addition, medical device-manufacturing laws are also in effect in the many countries outside of the U.S. We or our third party manufacturers may not be able to comply or maintain compliance. If we or any third-party manufacturers we engage fail to comply, such noncompliance could significantly delay our receipt of new product premarket approvals, result in FDA enforcement action, including an embargo on imported devices or otherwise cause delays and disruptions in the manufacture and supply of our products, any of which would harm our reputation and could materially adversely affect our operating results.

Because we rely on a limited number of suppliers, we may experience difficulty in meeting our customers’ demands for our products in a timely manner or within budget.

We currently purchase key components and services with respect to our microspheres, catheters and guidewires from approximately ten third-party vendors, including Radius Medical, from whom we purchase guidewires for our Segway Guidewire product; Concert Medical and Accelent, from whom we purchase catheters for our EmboCath Infusion Catheters

and EmboCath Plus Infusion Microcatheter products; and Brivant Medical Engineering, from whom we purchase guidewires for our Sequitor Steerable Guidewire product. Our reliance on our suppliers exposes us to risks, including:

· the possibility that one or more of our suppliers could terminate their services at any time without penalty;

· the potential inability of our suppliers to obtain required components;

· the potential delays and expenses of seeking alternative sources of supply;

· reduced control over pricing, quality and timely delivery due to difficulties in switching to alternative suppliers; and

· the possibility that one or more of our suppliers could fail to be compliant with Quality System Regulations, 21 CFR Part 820.

Consequently, in the event that our suppliers delay or interrupt the supply of components for any reason, our ability to produce and supply our products could be impaired, which could lead to customer dissatisfaction and be harmful to our reputation.

Risks Relating to Our Foreign Operations

If we are unable to meet the operational, legal and financial challenges that we encounter in our international operations, we may not be able to grow our business.

Our worldwide manufacturing and European sales operations are currently conducted primarily through our French subsidiary. Furthermore, we currently derive a portion of our revenues from the sale of our microspheres and other products in the European Union. For the six months ended June 30, 2007 and the year ended December 31, 2006, approximately 24% of our revenues were derived from sales of our microspheres and other products in the European Union. We are increasingly subject to a number of challenges that specifically relate to our international business activities. Our international operations may not be successful if we are unable to meet and overcome these challenges, which would limit the growth of our business. These challenges include:

· failure of local laws to provide the same degree of protection against infringement of our intellectual property;

· protectionist laws and business practices that favor local competitors, which could slow our growth in international markets;

· the requirement that we obtain regulatory approval or clearance in each country in which we choose to offer and sell our products;

· in some jurisdictions, strict government-regulated price controls;

· complex reimbursement procedures;

· potentially longer sales cycles to sell products, which could slow our revenue growth from international sales; and

· potentially longer accounts receivable payment cycles and difficulties in collecting accounts receivable.

Because we translate foreign currency from international sales into U.S. dollars and are required to make foreign currency payments, we may incur losses due to fluctuations in foreign currency exchange rates.

A significant portion of our business is conducted in the European Union Euro. We recognize foreign currency gains or losses arising from our operations in the period incurred. As a result, currency fluctuations between the U.S. dollar and the currencies in which we do business will cause foreign currency translation gains and losses, which may cause fluctuations in our future operating results. We do not currently engage in foreign exchange hedging transactions to manage our foreign currency exposure.

Risk Relating to Our Stock Price

Because the market price of our stock is highly volatile, investments in our stock could rapidly lose their value and we may incur significant costs from class action litigation.

The market price of our stock is highly volatile. From January 1, 2005 through August 1, 2007, the price of our common stock has ranged from a low of $3.51 to a high of $8.94. As a result of this volatility, investments in our stock could rapidly lose their value. In addition, the stock market often experiences extreme price and volume fluctuations, which affect the market price of many medical device companies and which are often unrelated to the operating performance of these companies.

When the market price of a stock has been as volatile as our stock price has been, holders of that stock may institute securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit of this type against us, even if the lawsuit is without merit, we could incur substantial costs in defending the lawsuit. The lawsuit could also divert the time and attention of our management.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our Annual Meeting of Stockholders was held on May 10, 2007. At the meeting, the following matters were voted upon by holders of our common stock:

1. To elect the following seven directors:

	Votes For	Votes Withheld

Timothy J. Barberich	17,698,385	248,167
William M. Cousins, Jr.	17,607,573	338,979
Richard J. Falaschini	17,838,560	107,992
Marian L. Heard	15,560,257	2,386,295
Alexander M. Klibanov, Ph.D.	17,831,308	115,244
John H. MacKinnon	17,838,525	108,027
Riccardo Pigliucci	17,832,233	114,319
David P. Southwell	17,938,760	107,792

Each of the above-named individuals was elected as a director.

ITEM 6. EXHIBITS

The exhibits listed in the accompanying exhibit index are filed as part of this Quarterly Report on Form 10-Q.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 13, 2007		BIOSPHERE MEDICAL, INC.


		/s/ RICHARD J. FALESCHINI
		Richard J. Faleschini
		Chief Executive Officer
		(principal executive officer)

Date: August 13, 2007		/s/ MARTIN J. JOYCE
		Martin J. Joyce
		Chief Financial Officer
		(principal financial and accounting officer)

EXHIBIT INDEX

Exhibit Number		Description
10.1*		Fourth Modification to Credit Agreement and Promissory Note, dated as of June 29, 2007, between BioSphere Medical, Inc. and Brown Brothers Harriman & Co.

31.1**		Certification of the principal executive officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2**		Certification of the principal financial officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of the principal executive officer pursuant to pursuant to Rule 13a-14(b) and 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Certification of the principal financial officer pursuant to pursuant to Rule 13a-14(b) and 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on July 3, 2007.

** Filed herewith.